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The removal of the ‘under 10 per cent’ employment income rule from 1 July 2017, provides investors with potential new superannuation contribution opportunities and planners with advice opportunities.
This article is for educational purposes only and is no longer available for CPD hours.
Before 1 July 2017, a tax deduction for personal superannuation contributions was typically not available to a person who was regarded as an ‘employee’ as defined for Superannuation Guarantee (SG) purposes.
If the person was regarded as an employee at any time in the financial year, a tax deduction for personal superannuation contributions made in that year was only available where less than 10 per cent of their assessable income (plus reportable fringe benefits and reportable superannuation contributions) was from employment sources.
Entering into an effective salary sacrifice arrangement, where offered by the employer, was accordingly the only way an employed person who did not satisfy this ‘under 10 per cent’ rule could voluntarily top up their superannuation using concessional contributions above those they received through the SG system.
One of the more welcome superannuation reform changes relevant to these employed persons is the removal of this ‘under 10 per cent’ employment income rule from 1 July 2017.
With few exceptions, a person able to make personal superannuation contributions can now potentially qualify for a tax deduction for these contributions. This should increase contribution flexibility, and will likely encourage many employed people to consider taking more advantage of their pre-tax concessional contributions cap, which is $25,000 for eligible contributors of all ages in 2017/18.
Outlined below are details relevant to the removal of the under 10 per cent rule, and some thoughts as to the potential new contribution and advice opportunities likely to arise.
What has changed?
A number of rules need to be satisfied before a person is allowed a tax deduction for personal superannuation contributions.
However, from 1 July 2017, the above mentioned under 10 per cent rule no longer applies. This means most people up to age 75 can claim a tax deduction for personal superannuation contributions (but those aged 65 or over must also meet the contribution work test).
A person can accordingly claim a deduction for personal superannuation contributions made on or after 1 July 2017 provided:
* the contribution is made to a complying superannuation fund that is not a:
– Commonwealth public sector superannuation scheme in which they have a defined benefit interest;
– Constitutionally Protected Fund (CPF) or other untaxed fund that would not include the contribution in its assessable income; or
– superannuation fund that notified the ATO before the start of the income year that it elected to treat all member contributions to: the superannuation fund as non-deductible, or the defined benefit interest within the fund as non-deductible.
* the person meets the age restrictions;
* they validly notify their fund in writing of the amount intended to be claimed as a deduction in accordance with the Notice of Intent (NOI) rules; and
their fund acknowledges their valid NOI in writing all within the time limits allowed.
If the person is under 18 at the end of the income year in which they made the contribution, they can only claim a deduction for personal superannuation contributions if they earned income as an employee or a business operator.
If the person is aged 65 up to age 75, to make the personal contribution they need to have satisfied the work test by having worked at least 40 hours during a consecutive 30-day period in that financial year.
Having satisfied this work test, they can only claim a deduction for personal contributions made on or before the 28th day of the month following the month in which they turned 75.
NOI paperwork process
Once it’s determined that the individual is an eligible person, and can therefore potentially claim a tax deduction for the personal superannuation contributions, there are additional requirements. The eligible person must provide the fund with a valid NOI form within a standard timeframe (discussed below). This NOI must be in an ATO approved form.
After the fund acknowledges (in writing) receipt of the valid NOI, the eligible person will be allowed to claim the tax deduction in the tax return they subsequently lodge for the income year in which the contribution was made. Importantly, the tax deduction is only allowed to the extent that it doesn’t exceed their taxable income, which means it cannot create or increase a tax loss.
The paperwork requirements surrounding the correct submitting of a valid NOI have been a common area for mistakes.
Close attention to these rules is required, particularly in the situation where a member makes an intended tax-deductible personal contribution but before providing the NOI to the fund including:
either fully or partially exiting the fund (e.g. by partial rollover or lump sum withdrawal);
commencing a pension from the fund; or
making an application to split contributions to a spouse.
Where these types of benefit withdrawal transactions occur before submitting the NOI, they will often make the NOI invalid, even though the NOI was otherwise submitted within the required timeframe.
Accordingly, to avoid invalid NOI situations, it’s important that submitting an NOI is considered before a member makes any such benefit withdrawal/pension commencement or contribution splitting transaction – even if after the transaction, the member leaves a sufficient account balance in the super fund to cover the amount claimed in the NOI.
As long as no benefit withdrawal (including rollover/pension commencement or contribution splitting) transaction has occurred subsequent to making the contribution, the NOI will be valid and must be submitted to the fund, with the fund acknowledging its receipt in writing, by the earlier of:
the day the member lodges their income tax return for the financial year in which the contribution was made; or
the end of the following financial year.
Where instead the person is contemplating rollover or withdrawal from the fund, or commencing an income stream, or making a contribution splitting to spouse application, the NOI needs to be submitted before the earlier of these benefit withdrawal transactions and the above standard timeframe, to ensure that the NOI is not invalid and the full tax deduction can remain available.
The legislation doesn’t provide super funds with any discretion to acknowledge or vary notices that don’t comply with these rules.
An NOI submitted in respect of a personal superannuation contribution made in a financial year will typically be invalid in the following circumstances:
The person is no longer a member of the fund at the time the NOI is submitted; e.g. benefits have been entirely paid out to them or rolled over to another fund.
The trustee no longer holds the entire contribution; e.g. the person hasn’t made an entire withdrawal from the fund, but has been paid a partial lump sum superannuation benefit, or had part of their benefit rolled over to another superannuation fund.
In such situations, a notice can generally be given to the trustee to claim a partial deduction for the contribution.
* The trustee has commenced an income stream by the time the NOI is submitted in respect of the contribution made earlier in the financial year.
It is the ATO’s view that any income stream commenced from a super fund account will be based in whole or in part on a contribution made to the account. This is the case even if after commencing the income stream there is an amount remaining in the account that received the contribution that exceeds the amount sought to be claimed as a deduction. This means the NOI cannot be accepted in respect of this contribution and the deduction will therefore be disallowed.
* The fund trustee was provided with a request from the person to split contributions with their spouse before the NOI being submitted.
Other relevant issues
Contribution caps and tax-free thresholds
When considering how much of a personal super contribution to claim as a tax deduction, clients should consider their concessional contributions cap and also their effective tax-free thresholds.
* Clients have a tax-free threshold of $18,200 or $20,542, including the Low Income Tax
* Those who have reached their Age Pension age (or Department of Veterans’ Affairs [DVA] Service Pension age) and are eligible for the Seniors and Pensioners Tax Offset (SAPTO), have effective tax-free thresholds of $32,279 for a single or $28,974 for each member of a couple, with the unused offset amount of one member of the couple being transferable to the other member.
Clients shouldn’t claim a tax deduction for a personal super contribution if it brings their taxable income below these levels, as they would be incurring contributions tax (15 per cent) on the contribution, where income below these levels would otherwise not be taxed.
Deducting contributions in excess of taxable income
An eligible individual cannot claim a tax deduction for a personal contribution that is in excess of their taxable income for the financial year. This means a personal deductible contribution cannot lead to or increase a tax loss.
Any deduction for a contribution amount in excess of their taxable income will be denied by the ATO. As a result:
* the ATO will generally classify that part of the contribution as a non-concessional contribution; and
* the disallowed amount will be included under the non-concessional contributions cap.
Concessional contributions cap
The contributions allowed as a deduction will count towards the concessional contributions cap.
If the cap is exceeded, the excess is effectively taxed at the individual’s marginal tax rate (less a 15 per cent offset to compensate for the tax payable by the fund on the contribution) and an additional tax charge also applies.
The excess concessional contributions will also count towards the person’s non-concessional
contributions cap, unless elected to be withdrawn from the fund.
Carry forward of unused concessional contributions cap
Beginning in 2018/19, a person can accrue unused amounts of concessional contributions cap and ‘carry-forward’ these unused cap amounts. A person may be able to access their unused concessional contributions cap beginning in 2019/20 and on a rolling basis for five years. Amounts carried forward that have not been used after five years will expire.
The first financial year in which unused concessional contributions that are being carried forward can actually be contributed (in addition to the standard $25,000 cap) is 2019/20, but only if the person’s total superannuation balance at the end of 30 June of the previous financial year (i.e. on 30 June 2019, in this instance) is less than $500,000. This $500,000 limit will not be indexed.
The removal of the less than 10 per cent employment income rule will be particularly welcomed by employed persons who have employers that do not offer salary sacrifice arrangements.
These people can now effectively make voluntary personal contributions to maximise their concessional contribution cap on a pre-tax basis by claiming the personal superannuation contributions as a tax deduction in their tax return.
Its removal may even cause some employed persons who are engaged in superannuation salary sacrifice to review their existing arrangements. Depending on individual circumstances, some may in future consider making personal deductible superannuation contributions, instead of maintaining their salary sacrifice arrangements with their employer.
Reasons for reviewing salary sacrifice arrangements may, depending on ‘case by case’ analysis, involve considerations including:
the need for an effective agreement to be in place prior to the salary being earned, which reduces flexibility, and can make it difficult to sacrifice bonuses.
the salary sacrifice contribution is classified as an employer contribution, and accordingly, careful structuring of the agreement is required to make sure the SG contributions and other benefits payable, such as termination entitlements, are not based on the reduced income level.
Note: At the time of writing, the Government is proposing to legislate to ban the practice of some employers who use salary sacrifice contributions to reduce or eliminate their SG obligation.
control, including timing of the salary sacrifice contributions, is effectively in the hands of the employer. Delays in actually making the salary sacrifice contributions to the fund will potentially disadvantage the employee.
Unlike SG contributions, which must be remitted to the employee’s super fund no later than 28 days after the end of the relevant quarter in which they were deducted, no such time frame exists for salary sacrifice contributions, and the employee is reliant on the employer to do this in a timely fashion.
In contrast, making regular personal contributions or one-off contributions towards the end of the financial year, and choosing whether or not to claim a tax deduction at that time, may allow people to take greater control and flexibility of their superannuation contribution strategy. Clients who wish to make deductible super contributions in this way will have to be disciplined savers. For some clients, it may be difficult to save the after-tax salary amount needed to get the same effective tax deduction as provided by salary sacrifice, which is on a pre-tax basis.
Jack, age 49 with a salary of $90,000, is looking to increase his savings for retirement.
He has been considering a salary sacrifice arrangement with his employer for 2017/18, but his financial adviser has alerted him to also consider whether the reduction in the cash component of his salary might impact other employment benefits, such as redundancy entitlements.
His cash flow situation is tight, but Jack has also regularly received a healthy bonus late in March each financial year.
In this financial year, he is looking to use the bonus to help boost his superannuation savings, but at this stage he is not in a position to work out how much the bonus payable in March 2018 may be.
If he enters into a salary sacrifice arrangement involving regular contributions, he needs to plan how much to contribute at the start of the arrangement. Plus, if he also wants to sacrifice the bonus, he will at some point need to advise the employer how much to contribute before knowing how much he is entitled to. This makes it difficult to plan and may even cause the concessional contribution cap to be exceeded.
Alternatively, Jack now has the option of waiting until the bonus is paid, and to make personal super contributions before the end of the financial year. In this way, he can more easily determine how much to contribute and claim it as a tax deduction within the concessional contributions cap.
1. The removal of the under 10 per cent rule will allow personal super contributions made by which of the following persons to be tax deductible from 1 July 2017:
A person under 18 years at the end of the financial year who derives no income from employment or self-employment.
A person, aged 66, who ceased working two years ago.
A person, aged 71, who is employed on a full-time basis.
None of the above are allowed a tax deduction for personal super contributions.
2. Which of the following rules relevant to personal super contributions do not apply from 1 July 2017 onwards?
Under 10 per cent employment income.
Work test from age 65-74.
Notice of Intent.
All of the above continue to apply from 1 July 2017.
3. Your client intends to claim a tax deduction for personal contributions made in the 2017/18 financial year. Which of the following should they not do before submitting their NOI to their super fund?
Rollover their benefit to an SMSF.
Commence an account based pension with part of their super accumulation.
Lodge their tax return for 2017/18.
All of the above.
4. Salary sacrifice contributions must, by superannuation law, be remitted to the employee’s super fund no later than 28 days after the end of the relevant quarter in which they were deducted. True or false?
5. Which of the following statements is false?
Personal deductible super contributions will count toward an individual’s non concessional contribution (NCC) cap.
Personal deductible super contributions in excess of the concessional contribution (CC) cap will be taxed at the top MTR.
Personal deductible super contributions in excess of an individual’s taxable income will result in a tax loss being created.
All of the above.
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