If you have additional cash and want to boost your retirement savings, you can make a tax-deductible superannuation contribution. This is one of the best ways to get a big return on your investment.
You read right. With tax-deductible superannuation contributions, you’ll be able to increase your super while sweetening the deal with a tax deduction. However, like any financial activities related to your super, there are rules and limits to how generous the government is.
First, if your employer makes a super contribution on your behalf, you won’t be able to claim a tax deduction. Included is your employer’s compulsory 10% super guarantee and any contributions that are reportable above this amount—including any arrangements you’ve made regarding salary sacrifice.
Additionally, you can't claim deductions if you have rollover payments from another fund. This includes foreign funds.
What Tax-Deductible Superannuation Contributions Are
You may be wondering: “What are tax-deductible superannuation contributions?” We’ll cover that here. These are a type of contribution that you make from your income after it’s been taxed, on which you can claim a deduction when doing your taxes. This income can come from various sources, such as the sale of assets, an inheritance, savings, or take-home pay.
Wherever you get this money, you can create a direct periodical debit or make a one-time payment, putting the money into the superfund you have.
These contributions will count toward the cap of your concessional contributions. Unless you’re utilising the carry-forward rule, this cap is $27,500 annually currently.
Definition
When it comes to claiming tax deductions, it helps to understand the actual definition of concessional contributions. For people in Australia, such as Aussie Muslims, who have an income that’s at most $250,000, concessional contributions are taxed 15%, which is the super rate in the “concessional” category. This is important because usually, the marginal tax they pay on their income is higher than 15%. For people with an income over $250,000, there might be an additional tax of 15% payable on all or some of their concessional contributions.
Example
Here’s an example that shows how to claim a tax deduction. Sara is a graphic designer who earns an annual salary of $80,000. The Super Guarantee payments her employer makes are $8,000 annually, which means Sara has a maximum of $19,500 she could contribute annually before she reaches the cap of concessional contributions, $27,500. She decides that, in terms of what she can afford, she can make an after-tax personal contribution of $10,000 to her super fund.
After 15% ($1,500) of the contributions tax has been deducted, Mary has $8,500, which is the net contribution made to the super.
Then, she makes a $10,000 tax deduction claim when she's doing her taxes. This reduces her taxable income to $70,000 for the tax year (this is ignoring any other deductions or income). Using Medicare levy, 34.5% is her marginal tax rate—so the amount of tax she pays is $3,450 less than it would be. Because her contributions tax payment was $1,500, the net tax saving she ends up with is $1,950.
However, this is important to note. If you go over the cap of your concessional contributions, you might have to end up paying additional tax. It’s also important to note that when someone makes excess contributions, these contributions count toward the cap of non-concessional contributions. Currently, this cap is $110,000 annually (or, using the bring-forward rule, $330,000 within any period of three years).
Those Who Can Make Tax-Deductible Contributions
Once, it was only possible for self-employed people (defined as earning less than 10% of an income from wages or salary) to claim a tax deduction from a super or halal super contribution.
However, because of the changes that came to super legislation on the first of July 2021, more Australians can now make concessional super contributions that are tax-deductible and voluntary.
If you’re a self-employed person, it is still possible for you to make tax-deductible contributions. If you aren’t, you also have eligibility now if:
- Earn investment income
- Earn wages or salary as an employee
- Receive a trust distribution or partnership
- Receive a government allowance or pension
- Earn superannuation income
- Earn an income that comes from foreign sources
However, there’s a catch, so don’t get too excited just yet. To have the eligibility needed to claim tax deductions on super contributions that are voluntary, you also need to:
- Be under 75 years old
- Not be using your contribution to assist in funding a pension or a super income stream that already exists.
- If you’re between 67 and 75 years old, you have to meet the work test
- Not make your contribution to a benefit fund defined by the Commonwealth public sector or a super fund that is untaxed
- Not be splitting, with your spouse (de facto or married), the contribution
Note that you can’t claim the government type of super co-contribution if you claim the personal type of super co-contribution when claiming your tax deduction.
The Work Test
If you’re the age required to meet the work test, it’s important to know how to meet the work test to know if you can make a tax-deductible superannuation contribution. To do this, you need to have worked a minimum of 40 hours within 30 consecutive days.
This work needs to have occurred during every income year for your fund to take on your personal super contribution on which you plan to claim a deduction.
If you’re not required to meet the work test, you still need to know if you’re eligible to meet the work test criteria for an exemption. This exemption applies from the 1st of July 2019. To meet these criteria, you need to have:
- Not used the work test exemption in a financial year before
- Had a $300,000 total super balance or less in the prior financial year
- Satisfied the required work test in the year prior to your contribution
It also helps to know what the age ranges are for the requirements regarding the work test and the work test exemption conditions.
The Age Ranges for Different Financial Years
If you were under 65 years old in financial years 2004-2005 or 2018-2019, you aren’t required to meet the work test. If you were between 65 and 74 years old in financial years 2004-2005 or 2018-2019, you are.
If you were under 65 years old in the financial year 2019-2020, you don’t have to meet the exemption criteria or the work test.
If you were between 65 and 74 years old in the financial year 2019-2020, you need to meet the exemption criteria or the work test.
In the financial year 2020-2021 and onwards, things are a little different. If you were or are under 67 years old during this fiscal year, you don’t have to meet the exemption criteria or the work test.
However, if you were or are 67 to 74 years old, you need to meet the exemption criteria or the work test.
Earning Employee Income
There are also potential limitations if you’ve earned income as an employee. You won’t be able to claim a deduction on contributions made before the 1st of July 2021 if you obtained at least 10% of what follows as an employee:
- Fringe benefits that are reportable
- Assessable income
- Employer super contributions that are total and reportable
Whether or not your employer has, on your behalf, paid super, it will be the case in all of these situations that you won’t be able to claim the deduction. However, this restriction has been abolished regarding contributions made after the 1st of July 2021.
How to Claim a Tax Deduction for a Personal Contribution
Before you can claim your tax deduction for your personal super contributions, you need to fill out the NAT 71121 form, also known as the ‘Notice of intent to claim or vary a deduction for personal super contributions' form. You can get this form from your own super fund or download it from the ATO (Australian Tax Office) website.
When completing this form, you need to:
- Provide your fund with the form by whichever of these two comes first: the day you submit that tax return for the same financial year during which you made your contribution or the last day of the financial year that follows the one in which the tax-deductible super contribution was made by you
- Before claiming the tax deduction on the tax return, you submit, and receive an acknowledgement, which is written, from your super fund. This works as an acknowledgement that confirms the amount of money you have eligibility to claim when it comes to the tax deduction.
When the Contribution Works Best
If you meet the eligibility requirements for making tax-deductible super contributions, it’s worth considering this strategy. In addition to boosting savings for your retirement, you’ll be doing it in a way that is more tax-effective than any other.
Whether it’s the right choice for you depends on your financial circumstances. You might be able to get more information from your super fund. Additionally, it might be worth your time to seek financial advice from an independent party.
