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Self Managed Super Fund (SMSF) Article
Personal Super Contributions

By Tony Negline.

This article may be out of date.

5th April 2006

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As we head towards the end of the financial year, now is a good time to be thinking about tax breaks.

There are lots of ways to reduce an income tax bill but we will look at one way in particular – namely, tax deduction for personal super contributions.

There are many misconceptions about this tax concession.  The effect of these misconceptions is found in statistics published by the ATO.  In 1993/94 about 672,000 people made use of this tax concession.  By 2002/03, less than 91,000 taxpayers claimed their personal contributions as a tax deduction.

One common misconception is that this deduction is only available to people who are self-employed.  That is, people who are sole proprietors or in partnerships.  This is wrong.  Personal super deductions are potentially available to every taxpayer.  To take advantage of this concession, taxpayers have to know the rules.

In order to claim a personal super contribution as a deduction, a taxpayer must have satisfied at least one test out of two.

The first rule says that you can get the tax deduction if you haven't received, or can reasonably expect not to receive, super support from someone else such as an employer.  This means that if your employer makes Super Guarantee contributions for you, you will fail this first test and will not be allowed the deduction.

But just because you have failed the first test doesn't mean you won't satisfy the second one.  The second test checks to see if your assessable income for income tax purposes plus any tax-free income you earned plus fringe benefits that your employer(s) has to report on your annual PAYG Statement is less than 10% of your total assessable income for income tax purposes plus reportable fringe benefits.  If you pass this test then you are allowed a tax deduction for personal super contributions.

This test is designed to cater for people who spend most of their working lives in their own businesses and also work part-time for an employer.  For example a medical doctor might work one day per week in a public hospital and the rest of his time might be spent in his own surgery.  As long as that doctor's remuneration from his employer is less than the total income he declares for tax purposes then the doctor may be eligible to claim a personal super tax deduction.

There are other ways to satisfy this rule.  Suppose Jim Wilson needs $40,000 per year to live.  He earns $50,000 per year from investments and $50,000 from an employer.  Jim decides to enter into a salary sacrifice agreement with his employer which says that the employer will contribute $45,000  to Jim's super fund.  The balance of his remuneration ($5000) will be paid as salary.  This means that his total assessable income for tax purposes is $55,000.  Only 9% of this has actually been paid by his employer and as a result Jim is allowed to claim a deduction for any personal contributions he might decide to make.

There are three important points to make about Jim's strategy.  Firstly, aged based limits.  The maximum deduction that Jim's employer can claim is based on his age.  His employer would only be allowed to claim $45,000 as a contribution if he were over 50.  Also the maximum that Jim can claim for his personal super contributions is based on the same aged based limits plus a formula.  The formula says you can claim the first $5000 plus 75% of any amount above $5000.  Suppose Jim contributes $15,000 to super this means that he could claim $12,500 as a deduction.  The balance of the contribution ($2,500) is classed as an undeducted contribution.

Secondly, Jim needs to carefully review his employer's remuneration policy.  His employer might base his other benefits – such as holiday pay and long service leave – on the actual salary paid ($5000) not on his total remuneration.

Let's now look at another example, Mary and Bill bought an investment property 10 years ago for $150,000 in joint names.  They have just sold it for $500,000 after deducting all costs of buying and selling the property.  Their capital gain is therefore $175,000 each.  If they decide to use the 50% discount method for working out their Capital Gains Tax liability they will pay tax on $87,500 of the gain.  It is not commonly known that this capital gain once it is declared on a tax return can be reduced by tax deductions.

Suppose Mary and Bill are under 65 and have not worked this financial year.  Under current rules they are allowed to contribute to super and because an employer has not made a contribution for them they will be allowed a deduction for their personal super contributions.  If they contributed at least $79,000 they could claim $60,500 as a tax deduction ($5000 plus 75% of the balance).  This would mean that $27,000 of the capital gain would remain to be taxed.  This level of income has an average tax rate of 15% which is the same rate as the super fund tax rate.

One final point, if you claim a deduction for personal super contributions you automatically become ineligible for the Government's Co-Contribution.  Additionally investors who are over 70 may not be able to access this concession.

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