Post 1 July 2017 – Super contribution strategies to make the best of retirement savings

If one partner earns less than $37,000, super contributions can help cut the tax bill.

By John Wasiliev   12 July 2017  Australian Financial Review


One important aspect of the latest super reforms — in place since July 1  — is changes to contribution rules. Being aware of these changes  is essential for anyone, especially couples, looking to make the most of super’s tax concessions in the post-2017 super world.


While the most significant contribution changes are the  cuts in annual entitlements  — both tax-concessional and after-tax contributions – a series of other adjustments offer the scope to make contributing to super a new ballgame in terms of strategy.

New rules for personal tax-deductible contributions, spouse contributions and the future right to make catch-up contributions when coupled with existing salary-sacrifice and spouse  super splitting strategies could be very useful for couples seeking to benefit jointly from  retirement saving arrangements.

For couples in a private business where one member (or both) may also work for an employer, the new personal deductible contribution rules will allow them to claim tax deductions for any super contributions they make from their business income.

This change could be important from two points of view.

Many people these days have more than one source of income — from a combination, for instance, of part-time work with an employer and from consulting or other work through a business they operate.

Under previous rules, only those who earned less than 10 percent of their total income from formal employment sources were eligible to claim a tax deduction for personal super contributions from their private business earnings.

As a result, they missed out on making tax-deductible super contributions that could be worth more than the deductible contributions from employer-sourced super that was invariably limited to the 9.5 percent compulsory super

Extra top ups

An example of those who have missed out have been employees who received compulsory super contributions that were within the tax-concessional contribution limits. They were often denied the right to make additional salary-sacrifice contributions based on their income.

Under the 10 percent rule, anyone who switched from being a self-employed contractor to an employee during the course of a year could also be denied the right to make personal contributions due to the employment income they received.

The strategy allows a year-end tax-deductible contribution to super. What fund members will need to be careful about, though, is that this contribution plus any employer contribution does not exceed the total $25,000 annual tax-concessional contribution limit that applies for all tax-deductible super contributions.

As far as private business contributions are concerned, a super contribution on which a deduction is claimed must also not result in the business experiencing an income loss. 

With any claim for a personal super contribution tax deduction, it is important to provide the fund with a notice of intention to claim a personal deduction. With a self-managed fund, this notice and confirmation should be recorded in the fund minutes.

Spouse offset rules – Massive boost

In taxation, a tax offset is an entitlement to reduce income tax by a nominated amount if you comply with certain rules.

For instance where a couple has one partner earning a low income – less than $37,000 according to the spouse tax offset rules  –  and one member contributes $3000 to their partner’s super, this can reduce their tax bill by $540. 

What is different about the new spouse tax offset rules is that in the past an offset entitlement was only available where a spouse’s income was less  than $13,800. The maximum $540 could only be claimed where income was below $10,800.

Under the new rules, the $540 offset can be claimed on contributions of $3000 on spouse income up to $37,000. This represents a  big expansion of this entitlement.

Beyond $37,000 and up to $40,000, the offset is reduced according to a formula of 18 per cent of income above this amount until it phases out at $40,000.

For example, if  Ed has income of $37,500 – which is $500 above $37,000 – and his partner Hannah contributes $3000 to  his super,  she will be entitled to a tax offset of $450. This is calculated as 18 percent of the lesser of $3000 reduced by  every dollar earned above $37,000, in this instance $500. The $450 offset entitlement is 18 percent of $2500. 

The spouse tax offset of up to $540 will remain for any member, whether married or de facto, prepared to contribute $3000 to their partner’s super.

Catch up contributions from 1 July 2018

While the entitlement to make catch-up contributions to super won’t be available until after July 1, 2018 – just under 12 months from now  – this strategy is certain to attract attention given its special features.

To start with, it will only be available to those with a super balance below $500,000 on June 30 of the previous financial year.

As far as amounts entitled to be carried forward, these will be determined on a five-year rolling basis. As the new regime will only apply to unused amounts accrued from July 1, 2018, the first year a person may be eligible to utilise a carried-forward amount will be the 2019-20 financial year.

While that’s a future entitlement that is likely to attract some interesting strategies, an established strategy for couples is spouse contribution splitting.

Under contribution splitting rules, a spouse is entitled to share up to 85 percent of the tax-concessional super contributions made by their partner in the previous year.

The entitlement comes with certain conditions, such as the partner being younger than the preservation age that would give them access to this super. Or they could be between their preservation age and 65 and not retired. 

Super can’t be split with a spouse older than 65 and a spouse can be someone of either  gender living in a married or domestic relationship.

Spouse contribution splitting does not change a partner’s right to contribute to super and as such can be employed as a way of strategically sharing super savings between partners.

Original article here


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