By Monica Rule

Regardless of the proposed changes to superannuation announced in the May 2016 Budget, the Government provides various incentives to encourage people to save for their retirement. Some of the proposed superannuation changes have made some of the incentives more attractive. So if you are not aware of the incentives, you could be missing out on receiving bonuses as well as the ability to reduce the tax payable on your superannuation contributions and your income.

Tax deductions on personal superannuation contributions

If you are under the age of 75 and self-employed, or you do not receive any superannuation support from anyone (e.g. you are a retiree), or you receive employment income which is less than ten per cent (10%) of your total income, then you can claim an income tax deduction on your superannuation contributions. 

Unfortunately, under the current law, full time employees are unable to claim a tax deduction on their superannuation contribution unless their employment income is less than ten per cent (10%) of their total income.  This is commonly referred to as “the 10% rule”.

However, the Government proposes to remove the ten per cent rule so that from 1 July 2017 everyone will be able to claim a tax deduction on their superannuation contributions.  If the proposed change becomes law, it means from 1 July 2017 everyone will be able to make concessional contributions of up to $25,000 per year and claim a tax deduction on their contributions.

To claim the tax deduction, the individual will need to lodge a notice of their intention to claim the tax deduction with their superannuation fund.  They will also need to receive an acknowledgement from their fund trustee of their intention to claim the tax deduction prior to lodging their income tax return with the Tax Office.  The Tax Office provides a form (NAT 71121) to do this.  https://www.ato.gov.au/uploadedFiles/Content/SPR/downloads/n71121-11-2014_js33406_w.pdf

It is not mandatory to use this form as long as a written notice containing the relevant information is provided to the fund trustee by the individual member. It is important, however, that the individual receives the trustee’s written acknowledgement prior to claiming the tax deduction in their income tax return.

If the individual is audited by the ATO, the ATO will request to see the member’s letter of acknowledgement from the fund trustee. If the acknowledgement was not received, the tax deduction may be disallowed by the ATO.  

The Government also proposes that from 1 July 2018, people will be able to use the “catch-up” concessional contributions cap.  Under the “catch-up” rules, superannuation fund members will be able to contribute more than the annual concessional contributions cap of $25,000, if they haven’t fully used the cap in the previous five consecutive years, and their superannuation balance does not exceed $500,000.

This means, an individual can make concessional contributions in a single year of up to the $25,000 plus any carried forward amount they have available from the past five years, starting from 1 July 2018.  The carried forward amounts will expire if they remain unused after five years.

Example 1: John has a superannuation balance of $400,000.  In 2018/19, John makes concessional contributions of $10,000.  John has, therefore, unused concessional contributions of $15,000 from the 2018/19 financial year (i.e. $25,000 concessional contributions cap - $10,000 contributed).  In 2019/20, John has the ability to contribute $40,000 (i.e. $15,000 left from 2018/19 + $25,000 annual cap for 2019/20) if he wishes to.

Tax offsets on superannuation contributions (i.e. Low Income Superannuation Contributions)

Individuals with an adjusted taxable income of up to $37,000 per year who have contributed, or their employer has contributed, concessional contributions into their superannuation fund will receive a tax offset of up to $500.  The tax offset represents a refund of the tax paid on concessional contributions made into the superannuation fund.  To claim the tax offset, the individual does not need to do anything as the refund is paid directly into their superannuation fund by the ATO.  The tax offset is calculated at fifteen per cent (15%) of the concessional contributions made into the fund.  The maximum payment an individual can claim in a financial year is limited to $500 and the minimum amount is rounded to $10.

To qualify, the person must receive at least ten per cent (10%) of their total income from employment or from running a business and they must not hold a temporary residence visa.

The tax offset was to cease on 30 June 2017.  However, the Government proposes to maintain the tax offset under the new name “Low Income Superannuation Tax Offset (LISTO)” from 1 July 2017.

Example 2: Sue works part time and earns $35,000 in the 2017/18 financial year.  Her employer makes concessional contributions of $3,325 into her SMSF.  Sue will receive a $498.75 tax offset in her superannuation account (i.e. $3,325 x 15% tax = $498.75 tax offset).

Tax offsets on contributions made for spouses

An individual can claim a tax offset of up to $540 for making superannuation contributions for their low income spouse.  The tax offset is calculated at eighteen per cent (18%) of the maximum $3,000 non-concessional contributions.  To be eligible for the full tax offset, the low income spouse’s annual income must not exceed $10,800. The tax offset gradually reduces once the spouse’s income exceeds $10,800 and cuts out altogether once the income reaches $13,800.

To be eligible, the spouse receiving the contribution must be under the age of 70 and if they are aged 65 to 69, they must meet the work test (i.e. 40 hours over 30 consecutive days).  Both the contributing spouse and the low income spouse must be Australian residents for income tax purposes and not be living separately and apart on a permanent basis at the time the contribution is made.  Contributions made on behalf of the spouse will count towards the receiving spouse’s non-concessional contributions cap. Contributions that are split into a spouse’s superannuation account do not qualify for the tax offset. 

From 1 July 2017, the Government proposes to increase the receiving spouse’s income threshold from $10,800 to $37,000 and increase the cut off threshold from $13,800 to $40,000.

Example 3:  Mary earns $11,300 per year.  Her husband, John, makes $3,000 in non-concessional contributions into Mary’s superannuation account.  John will not receive the full tax offset of $540 because Mary’s income is $500 above the lower threshold of $10,800.  Instead John will receive a tax offset calculated as eighteen per cent of the lesser of: $3,000 reduced by every dollar over $10,800 that Mary earns (i.e. $3,000 - $500 = $2,500), or The value of the spouse contribution (i.e. $3,000). John will receive a tax offset of $450 (i.e. $2,500 x 18%). If Mary were to earn more than $13,800, John would not be able to claim a tax offset.

Bonuses on personal superannuation contributions (i.e. Government Super Co-contributions)

Individuals up to the age of 70, who have made non-concessional contributions into their superannuation fund, will receive up to a $500 bonus superannuation contribution if their income does not exceed $51,021 per annum.  This is because the Government will contribute fifty cents for each dollar an individual contributes in non-concessional contributions up to $1,000.  The bonus is referred to as a “Government superannuation co-contribution”.

The full bonus of $500 will be paid into the individual’s superannuation fund if their annual income is less than $36,021.  The maximum entitlement decreases as income exceeds $36,021 and cuts out all-together once income reaches $51,021.

To be eligible, the individual must receive ten per cent of their annual income from employment or from running a business and must not hold a temporary residence visa.

Example 4:  Jason’s total income for the 2015/2016 financial year is $40,000 which consisted of assessable income of $50,000 and deductions of $10,000.  Jason made non-concessional contributions into his SMSF of $1,000.  Jason will be entitled to receive Government superannuation co-contributions of $367 calculated as follows: $500 – [(Assessable Income less allowable deductions) - $36,021 x 0.03333] $500 – [($50,000 - $10,000) - $36,021 x 0.03333] = $367 Government co-contribution

Gold and Platinum members read on for information regarding the income tests for deductions and tax offsets.

Monica Rule is an SMSF Specialist and author of “The Self Managed Super Handbook – Superannuation Law for SMSFs in plain English” – www.monicarule.com.au

Disclaimer: The content of this Bulletin is general information only. It is not legal advice. The statements and opinions are the expression of the author, not Law Central, and have not been checked for their accuracy, completeness or changes in the law. Law Central recommends you seek professional advice before taking any action based on the content of this Bulletin.

Related documents:

• Self Managed Superannuation Fund Deed
• SMSF - Deed Update
• Pension Pack for Self Managed Super
• Investment Strategy for Self Managed Super 16/17

Related webinars:

• Webinar Recording - Investment Restrictions For Self Managed Superannuation Funds 
• Webinar Recording - Pitfalls That SMSF Trustees Should Avoid 
• Webinar Recording - How Does The 2016 Budget Affect SMSF Trustees?
• Webinar Recording - Demise Of The Accountants’ Exemption - Walking The Line, Post 1 July 2016