The 1 July 2017 super reforms and the proposals announced in the 2018 Federal Budget impose several important changes advisers need to be aware of if they recommend clients make personal super contributions and claim a tax deduction on those contributions.
1 July 2017 super reforms
The 1 July 2017 super reforms mean advisers should consider the following when recommending clients make personal super contributions:
- the client’s total super balance (TSB)
- the removal of the fund-capped rules
- the removal of the 10 per cent test
- the reduction on the client’s income threshold for Div 293 tax
- reduced concessional and non-concessional contributions caps
- the phase out of the anti-detriment payment
- catch-up concessional contributions from 1 July 2018; and
- contributions to defined benefit super fund and untaxed funds.
Total super balance
If a client’s TSB is $1.6 million or over, as at 30 June of the prior financial year, the client’s non-concessional contributions (NCC) cap is zero and all non-concessional contributions become excessive non-concessional contributions.
The client must then either remove the excess and 85 per cent of the associated earnings amounts from super or retain these amounts in super and pay excess non-concessional contributions tax at the top marginal tax rate (including the Medicare levy).
While concessional contributions are not restricted by a client’s level of TSB, the TSB does restrict access to catch-up concessional contributions, as explained in the ‘catch-up concessional contribution’ section.
Fund capped contributions
The fund capped rules have been abolished, which means that super funds are not responsible for returning contributions for larger non-concessional contributions (NCCs) to the client and clients can’t rely on their super fund to monitor their personal contributions against the fund capped rules.
Removal of the 10 per cent test
The requirement that employed clients must derive less than 10 per cent of their income from employment sources was abolished effective 1 July 2017.
Regardless of their employment arrangements, clients may be able to claim a tax deduction. However, people aged 65 to 74 will still need to meet the work test to be eligible to make a contribution and claim a tax deduction. For more information please refer to the section below entitled ‘Work test exemption’.
Reduction in the income threshold DIV 293 tax
From 1 July 2017, the reduction in income threshold for Div 293 tax (from $300,000 to $250,000) means more clients may have to pay an extra 15 per cent contribution tax when making deductible super contributions.
Reduced concessional and non-concessional contribution caps
From 1 July 2017, the reduced concessional cap (to $25,000) and non-concessional contributions cap (to $100,000) could mean that disallowed deductible contributions might inadvertently breach the lower non-concessional contributions cap.
Re-contribution becomes more important
The anti-detriment payment (which enabled a super fund to claim a tax deduction for a portion of the death benefits paid to eligible dependants) was phased out on 1 July 2017 and is not available if a person died after 1 July 2017. However, if the deceased passed away before 1 July 2017, the anti-detriment payment may be paid by the fund before 1 July 2019.
Previously, undertaking a re-contribution strategy reduced the taxable component of a member’s benefit and therefore reduced the anti-detriment amount payable on death. With the anti-detriment benefit no longer available, the re-contribution strategy has become even more important to clients.
Catch-up concessional contributions
Since 1 July 2018, clients can carry forward any unused concessional contributions for a period of up to five years if their total super balance, as at 30 June in the prior financial year, is below $500,000.
If clients want to make larger concessional contributions under the catch-up provisions, it requires future planning and careful monitoring of their TSB.
Defined benefits and untaxed super funds
Since 1 July 2017, clients are not eligible to claim a deduction for personal superannuation contributions made to certain funds, including:
- Commonwealth public sector superannuation schemes which have a defined benefit interest
- constitutionally protected funds; and
- super funds that have elected not to accept deductible contributions.
Case study for post-30 June 2017 - issues to consider
Dan, age 65, is employed full-time, has met the work test and makes a $120,000 personal super contribution into his super fund during the 2018/19 financial year.
At the time of making the contribution, he did not lodge a ‘Notice of intent to claim a tax deduction’ with respect to this contribution.
Also, at the time of making the contribution, Dan was unaware that his TSB was over $1.6 million (as at 30 June 2018), but with the fund capped rule now abolished, it means that his personal contribution, would be accepted by the fund and his fund is not required to reject any of his contribution.
By making the personal super contribution when his TSB is over $1.6 million, Dan has inadvertently, triggered excess non-concessional contributions on his full contribution, as he is not entitled to the NCC cap of $100,000. Please note that exceeding the TSB of $1.6 million doesn’t actually stop a person from making non-concessional contributions, but simply reduces the NCC cap to nil.
Subsequently, Dan finds out that his total super balance is greater than $1.6 million and one option to reduce his excessive NCC is to have part of his contributions treated as concessional contributions.
Presuming Dan meets all the conditions to claim a tax deduction and the timing rules as required for the Notice of intent, which is explained later in this article, he lodges a Notice of intent with the fund for $20,000 in relation to his personal contribution of $120,000 and claims a tax deduction in his 2018/19 tax return. In this case study we assume Dan’s super guarantee (SG) contribution is $5,000.
Note that due to the removal of the 10 per cent test, although Dan is still employed for the year, he may still qualify to claim a tax deduction.
How are Dan’s contributions taxed?
$20,000 of the $120,000 would be treated as a concessional contribution and the remaining balance of $100,000 will be treated as excess NCCs.
In relation to the excess NCCs, associated earnings begin to accumulate from 1 July 2018 (which is the start of the financial year when the contribution is made) and are counted towards assessable income and taxed at the client’s marginal tax rate in the year the cap was exceeded (unless the client chooses to leave the excess non concessional contribution in the super fund, in which case, the excess NCC will be taxed at the top marginal tax rate).
Before 1 July 2017, the position would have been very different because it would be unlikely that Dan could claim a tax deduction on his super contributions due to the 10 per cent test being applicable as he was still employed. Having said that, before 1 July 2017, there would not be any excess non-concessional contributions as the TSB rules did not exist and his $120,000 contribution would have been within the non-concessional cap of $180,000 in the 2016/17 tax year.
Useful tips for claiming a tax deduction for personal super contributions:
- Ensure clients consider their concessional contributions cap when claiming a deduction for personal super contributions.
- Client must meet the following age restrictions:
- clients who are age 75 years or older, can only claim a deduction for contributions they made before the 28th day of the month following the month in which they turned 75.
- children who are under age 18 at the end of the income year in which the contribution is made, can only claim a deduction for personal super contributions if they also earned income as an employee or a business operator during the year.
- Ensure clients claim the correct amount, as there may be restrictions if they need to notify the Australian Taxation Office (ATO) of a change.
- Notify the fund of the amount the client is intending to claim as a deduction and ensure an acknowledgement is received from the fund
- Clients must complete and return their Notice of intent to their super fund or to vary a deduction by the earlier of:
- the day they lodge their income tax return for the relevant year in which the contribution is made, or
- the end of the income year following the one in which they made the contributions (ie 30 June 2020 for contributions made in 2018/19).
- Many clients will need to notify their super fund prior to the above date as their ability to claim a tax deduction will cease on the day that:
- they cease to be a member of the fund
- the super fund trustee no longer holds all of the contributions (for example, this may occur after a partial withdrawal or an automated rollover to fund insurance premiums)
- the super fund trustee begins to pay an income stream based in whole or part on the contribution, or
- the super fund trustee is provided with a request from the member to split taxable contributions with their spouse.
- There are important rules to consider when intending to vary the Notice of intent:
- A client cannot revoke a valid Notice of intent, but they can vary the notice to reduce (but not to increase) the amount stated in relation to the contribution (including to nil) as long as it is within the required timeframes.
- After this time, the Notice of intent cannot be varied unless all or part of the deduction is disallowed by the Commissioner of Taxation. When this has occurred, clients may reduce the amount stated in the Notice of intent by the amount not allowed.
- To increase the amount the client intends to claim as a deduction, they do not have to give their fund a variation notice. Instead, they can give a second Notice of intent specifying the additional amount they wish to claim. This second Notice of intent is subject to the same due dates for lodging as the original Notice of intent.
Clients are often dissatisfied when they find out that they can’t claim a deduction as intended because they have not complied with the above eligibility rules for lodging a Notice of intent.
With the relaxation of the 10 per cent rule, more individuals will want to claim a deduction on their personal super contributions, so advisers will need to guide their clients through this claim process.
Federal Budget proposals
The 2018 Federal Budget proposed some important announcements, which if passed, present opportunities for those who may want to make personal deductible contributions.
Super guarantee opt-out
This proposal is to allow clients with multiple employers and whose total income exceeds $263,157 pa (that is their superannuation guarantee (SG) contributions are greater than $25,000) to opt-out of receiving SG contributions that would result in them exceeding their concession contribution cap. However, clients still need to receive SG contributions from at least one employer.
While the take-up of this arrangement and any changes to remuneration would need to be negotiated between the employees and their employers, it's important to ensure that clients continue to receive their full entitlements from employers. Clients who use this measure could negotiate to receive additional income, instead of receiving SG contributions.
Clients who opt-out of receiving SG contributions and have not reached their concessional contributions cap could make personal deductible contributions in the same financial year or could carry forward any unused concessional contributions and make future contributions (as per the catch-up concessional contribution rules).
Extra step for claiming a tax deduction on personal super contributions
From 1 July 2018, clients will be required to tick a box on their personal income tax return to confirm that the ‘Notice of intent’ documentation sent to their super fund has been received and acknowledged by the super fund.
Work test exemption
From 1 July 2019, it is proposed that members aged 65 to 74 who have TSB of less than $300,000 will be able to make voluntary concessional and non-concessional contributions to super in the first year that they do not meet the work test requirements.
This proposal could assist clients in the above age range who have modest super balances and may:
- have deferred retirement and the sale of their business
- be receiving an inheritance
- be receiving work bonuses from work performed in the prior year and have now retired
- be receiving a termination lump sum in a new financial year, or
- be selling CGT assets in the year after they retire.
This rule may also work to complement existing rules, such as the:
- catch-up concessional contributions, or
- downsizer super contributions.
Case study – downsizers who want to make extra concessional contributions
Fred, age 66, plans to retire from full-time work on 1 June 2020.
When he retires, he plans to sell the family home that he has lived in for 20 years for approximately $1.3 million and downsize to a smaller apartment costing $800,000.
Under the downsizer rules, assuming he meets all of the eligibility conditions, he may contribute $300,000 of the sale proceeds to super. Please note, that clients can’t claim a tax deduction on their downsizer contribution and any downsizer contribution does not require them to meet the work test.
Under existing rules, because Fred would not meet the work test in the 2020/21 year, he would be prevented from making any voluntary super contributions after 30 June 2020.
However, if the work test exemption rule is passed into law and if his TSB is less than $300,000 on 30 June 2020, Fred would be eligible to make personal contributions under the work test exemption during 2020/21 using the net sale proceeds from downsizing his home as well as also making his downsizer contribution.
If Fred does not reach his concessional contributions cap during the two years before 2020/21, he can make further concessional contributions. Fred is expecting to contribute $15,000 in 2018/19 (and carry forward $10,000), which is the first year concessional contributions can be carried forward, and then $17,000 in 2019/20 (a carry forward amount of $8,000).
Assuming Fred has assessable income in 2020/21, he may use the existing carry forward arrangements and the work test exemption to make personal deductible contributions of up to $43,000 during the 2020/21 year to reduce his assessable income. This amount is comprised of: $10,000 + $8,000 + $25,000 which is equal to the concessional cap in the 2020/21 financial year. This assumes his total super balance is below $500,000 as at 30 June 2020.
In addition, if the work test exemption is available, Fred can contribute up to $100,000 in NCCs in 2020/21, assuming his TSB is under $1.6 million as at 30 June 2020.
Please note that this case study is based on the assumption that the Federal Budget proposal will go ahead as intended.
Super reforms have introduced new opportunities as well as some restrictions for clients who wish to claim a tax deduction on their super contributions. Similarly, the Federal Budget proposals are likely to introduce additional opportunities which will complement existing super contribution rules.
William Truong is IOOF’s technical services manager.