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Self Managed Super Fund (SMSF) Article
Last months to tax advantage of retirement rules
By Tony Negline.
This article may be out of date.
22nd April 2009
On 30 June an important tax planning strategy will come to an end.
The strategy involves people who are principally self employed but also have other sources of income from part-time employment. Investors use the tax system to make larger super contributions than might ordinarily the case.
Typically this has benefited doctors and other medical specialists who work one or two days per week in a public hospital and the rest of their time is spent in their private practice.
This might also apply to teachers or musicians who work part-time at a school and then run a private tuition practice.
It's important that the business income is from self-employment, such as sole proprietorship or partnership) and not via a company or trust structure.
For the last 15 years the strategy has run along the following lines. Typically these people have diverted their remuneration from employment into salary sacrifice employer superannuation contributions. They have done this to satisfy what is sometimes called the "ten per cent personal super tax deduction rule".
The eligibility to this tax deduction has changed over the years but since 1 July 2007, a tax deduction for personal super contributions has been available when, during a financial year, less than 10% of the investor's total assessable income for income tax purposes and reportable fringe benefits have been provided by an employer who would have to make compulsory Super Guarantee contributions.
Lets look at a simple example. Suppose Dr. Dave, aged 54, spends every Monday working in the emergency ward at a local public hospital and earns $60,000 per year for this job. For the rest of his working week he runs his own medical practise which pays him $150,000 per year after all reasonable business expenses.
Dr. Dave salary sacrifices his entire salary from the public hospital into his super fund. By doing this he no longer has any salary on his tax return from an employer and hence is still considered to be eligible to claim his own super contributions as a tax deduction.
Before July 2007 Dr. Dave would have been free to claim maximum super deductions with his employer and via his small business. The Better Super reforms removed this loophole and now Dr. Dave would probably only want to contribute $40,000 in personal deductible super contributions.
The personal contribution of $40,000 is designed to make Dr. Dave's total concessional super contributions no more than the $100,000 threshold that applies until June 2012 for those over 50. Amounts under the $100,000 threshold are taxed at 15% in the super fund. Contributions above this amount are taxed at 46.5%.
As might be apparent this rule means that if you are not employed then you will automatically satisfy this rule. This tax deduction is therefore available to semi-retirees not in formal employment arrangements. (This is another story which we won't talk about here.)
It is possible to be an employee for Super Guarantee purposes but the employer does not have to make compulsory super contributions for you. Two examples are typical here. Firstly employers do not have to make SG contributions for any employees who earn less than $450 in a month. Secondly employees aged 70 or over also do not receive SG contributions.
Just because an employer has not made SG contributions for you does not mean you can claim your personal contributions as a tax deduction.
One important point about Dr Dave's example is that because he salary sacrificed his entire salary, his public sector employer might not have to pay any super contributions for him. If Dave's employer has still made super contributions for him then these contributions will be included in his $100,000 cap mentioned above.
Salary sacrifice is often a great strategy but employers sometimes use it as an excuse to base their own super contributions, holiday pay, long service leave benefits, sick leave payments, etc on the actual take-home salary.
Now we come to the rule change which will apply from 1 July 2009. The 10% rule will only allow a tax deduction for personal super contributions if during a financial year less than 10% of the investor's total assessable income for income tax purposes, employer provided reportable fringe benefits and salary sacrifice contributions have been made by an employer who would have to make compulsory Super Guarantee contributions for an investor.
What are salary sacrifice contributions defined as? They are employer super contributions which an employee influenced, or could reasonably have been expected to influence, the actual amount of contributions.
Let's consider how Dr. Dave might be impacted by this new rule next financial year. Assuming the same income numbers as above then from July 2009 if he salary sacrificed his whole salary into super he would fail the new 10% test.
More than 10% of his entire remuneration (practise income plus reportable fringe benefits plus the salary sacrifice contributions) would be paid by his employer.
This current tax year is the last tax year when investors, such as Dr. Dave, will be able to take advantage of the existing rules.
Finally taxpayers claiming a personal super contribution as a tax deduction cannot create or add to a tax loss with their personal contributions. They must also make sure that before they claim the contributions as a tax deduction that an official paperwork has been completed between them and their super fund.
Who is eligible?
Before July 2009: Person has received less than 10% of their total assessable income and reportable fringe benefits from employers and the person is an employee for Superannuation Guarantee purposes
After June 2009: Person has received less than 10% of their total assessable income, reportable fringe benefits and salary sacrifice contributions from employers and the person is an employee for Superannuation Guarantee purposes
Complying super fund
Person must lodge a notice with fund indicating the contributions to be claimed as a deduction. Fund must acknowledge this notice before deduction can be claimed.
This email is general in nature only and does not constitute or convey specific or professional advice. Legislation changes may occur quickly. Formal advice should be sought before acting in any of the areas discussed. Be aware that the information in these articles may become innaccurate with time. Responsibility is disclaimed for any inaccuracies, errors or omissions. Particular investments are neither invited nor recommended and hence this publication is not "financial product advice" as defined in Section 766B of the above legislation. All expressions of opinion by contributors are published on the basis that they are not to be regarded as expressing the official opinion of any other person or entity unless expressly stated. No responsibility for the accuracy of the opinions or information contained in the contributor's articles is accepted by any other person or entity. Copyright: This publication is copyright. If you wish to reproduce this article you require a license, which can be purchased here, to do so.