The three types of tax-deductible super contributions are compulsory employer superannuation contributions, voluntary employee salary sacrifice super contributions, and voluntary self-employed super contributions. This third type can provide many benefits but, if the rules are not properly understood, a tax deduction can be lost.
For a person to make a tax-deductible self-employed super contribution they must pass one of two tests. Under the first test, a self-employed super contribution can be made if a person is not eligible to receive compulsory employer super contributions.
It has become common practice for businesses to have people work for them as contractors rather than as employees. Where a contractor wants to provide for their retirement, and also receive a tax deduction for the contribution, they make self-employed super contributions. Unfortunately there are very strict tests when it comes to deciding whether a person is a true contractor or an employee. If the Tax Office rules that a person is really an employee and not a contractor, the business contracting with them becomes liable for making compulsory super contributions. When this occurs the contractor fails this first test and is unable to claim a tax deduction for the super contribution, and the business they were contracting to must make a compulsory super contribution on their behalf.
Under the second test, a person can make a tax-deductible self-employed super contribution if their salaries and wages income is less than 10 per cent of their total income. In some cases, a claim has been made for self-employed super contribution, but because of what is included as salaries and wages, the tax deduction is denied. The definition of salaries and wages income includes salary and wages, the total value of fringe benefits, and reportable employer superannuation/salary sacrifice contributions. It is the total of all three different types of salaries and wages that must be taken into account when assessing whether a person has salary and wages income of less than 10 per cent.
For self-employed super contributions to be tax-deductible, the member making the contribution must notify the superannuation fund of their intention to make a claim. Most superannuation funds send notices after the end of each financial year to members that have made personal contributions. The notices ask members to identify how much of the voluntary personal contributions they made will be claimed as a tax deduction.
A popular superannuation strategy is known as a recontribution strategy. Under this strategy, a person withdraws a lump sum from their super fund, often made up of mainly taxable superannuation benefits, and then recontributes the amount withdrawn as a non-concessional tax-free super contribution. When this occurs in a year that the individual has also made a self-employed super contribution, the ATO can disallow a tax deduction for some of the super contribution made.
The risk of having some of a super contribution not classed as a tax-deductible self-employed contribution can be avoided. This is achieved by lodging an ATO form at the time of making a self-employed contribution to a super fund. The form is called a "deduction for personal super contributions" form and it can be downloaded from the ATO website.