The gold in the new personal CC rules

Most of the 1 July 2017 superannuation reforms placed yet more restrictions on an individual’s ability to add to their superannuation.

One positive change that has been greatly underplayed is the removal of the so-called ’10 per cent test’ that traditionally limited who was able to claim a personal tax deduction for superannuation contributions.

From 1 July 2017, anyone over 18 who is allowed to make a personal contribution to their superannuation can potentially choose to claim a tax deduction for some or all of it – effectively allowing them to make personal concessional contributions.

Until this year, very few individuals could do so. Those who could were typically people running a business in their own name or not working at all – it was rarely possible for a traditional salary earner. Salary earners generally had only one way of increasing their concessional contributions – salary sacrifice.

That’s all changed.

These days, anyone can claim a tax deduction for contributions they make to superannuation from their own money. Unfortunately, the usual limit of $25,000 on concessional contributions (from all sources, combined) applies, but the new rule does open up some new opportunities.

Perhaps one of the hardest things about salary sacrifice arrangements is that they must be prospective. The new ability to make personal concessional contributions removes this need. An individual might make contributions at several points throughout the year, but not decide whether or not a tax deduction will be claimed until just before the fund’s income tax return is prepared. By then they’ve had time to verify their other assessable income and decide whether or not it’s worthwhile.

Some other common scenarios where this ability to decide late will be incredibly useful are:

• A client who really should be salary sacrificing as much as possible, but only sought advice late in the year. Previously they would have simply missed the opportunity to maximise their superannuation opportunities until the following year. Now they can make a contribution in (say) May and claim a personal tax deduction for ‘whatever is left’ of their $25,000 concessional contributions limit after allowing for other concessional contributions.

• Someone receiving extra income such as a bonus where there was no opportunity to salary sacrifice some or all of the additional income.

The new rule also has some practical benefits for those who have difficulties with salary sacrifice arrangements for other reasons. For example:

• Some employers reduce other benefits if an individual reduces their cash salary to increase their salary sacrifice contributions – the new rules mean it is possible to make a concessional contribution personally without having to make any changes to the cash salary that drives employee benefits.

• A poorly run payroll function can mean it is sometimes difficult to quickly implement changes to salary sacrifice arrangements or even to find out how much of an individual’s $25,000 limit has been used for the year to date. The new rule allowing anyone to make a concessional contribution puts control firmly back in the hands of the individual. Even if it is unclear exactly how much of the $25,000 concessional contribution limit remains, there is nothing to prevent an individual from contributing more than they expect to claim as a personal tax deduction and deciding on the exact amount later. The rest will simply be treated as a normal non-concessional contribution (although bear in mind this might in turn create a separate problem – an excess non-concessional contribution).

• Sometimes an individual reaches the end of the financial year with a little more cash than expected. In retrospect, they could have saved more if only they had better predicted their income needs for the year. The new rules mean this is not a lost opportunity – one possibility for this money is an extra, tax-deductible superannuation contribution.

Finally, salary sacrifice contributions only allow salary to be diverted to superannuation as a concessional contribution. What about those who earn most of their income from a salary, but receive an unexpected income injection later in the year (when it is too late to reach their $25,000 limit by increasing their salary sacrifice contributions)? A great example here would be selling an investment property in April and realising a large taxable capital gain or receiving a trust distribution. This is exactly the scenario where a last-minute superannuation contribution in June could have a significant impact on the individual’s personal tax position.

It’s definitely time to think differently in 2017/18 when it comes to this second path for concessional contributions.

There are some issues to watch:

• Remember the $25,000 annual limit includes any superannuation provided by an employer such as compulsory (superannuation guarantee) or salary sacrifice contributions. For some funds this amount is not immediately obvious and it is important to check carefully with the employer and fund before making the extra contribution.

• Just like an employer contribution, this extra contribution will be taxed in the fund. For most people the rate is 15 per cent, but for some it is as high as 30 per cent (generally only for those earning salary, superannuation and other income of more than $250,000 a year).

• There is paperwork to do. Unlike salary sacrifice contributions, which are automatically tax deductible to an employer, personal contributions are only tax deductible if the contributor specifically asks their fund to treat them that way within certain time frames and the fund agrees to do so.

• The usual age and work tests apply for those over 65.

• Claiming a tax deduction for personal contributions obviously means they will be concessional contributions and therefore form part of an individual’s taxable component rather than their tax-free component. This might result in extra taxes in the future.

• It won’t be worthwhile for anyone paying very little personal income tax (particularly those whose personal tax rates are less than or similar to the normal superannuation rate of 15 per cent).

• When tax deductions for superannuation contributions are claimed under these circumstances, there are rules preventing the size of the deduction being high enough to create a tax loss. Any amount that is not claimed as a tax deduction (either because it can’t be or because the individual decides they don’t want to) will be a non-concessional contribution. Since these too are limited, misjudging the amount that will be a non-concessional contribution risks creating an excess of these contributions.

Of course, some people will still choose to use a salary sacrifice arrangement with their employer and make these contributions regularly. There is something simple and comforting about knowing one’s superannuation balance is being augmented every fortnight/month without having to do anything to make it happen.

But effectively this new rule allows everyone to have the tax benefits of salary sacrifice contributions with the flexibility of non-concessional contributions.

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