Self-employed super contributions

Superannuation strategies for SMSF trustees.

The strategy of making tax-deductible self-employed super contributions is particularly applicable to people who make, or know they will be making, a large capital gain. It also applies to people who are not employed with significant levels of investment income.

For those not employed, and therefore not eligible to receive employer-sponsored superannuation support, it will be easy to qualify to make a tax-deductible super contribution. If a person's employment income, including reportable superannuation contributions and taxable fringe benefits, is less than 10 per cent of their total income they can also make self-employed super contributions.

If they are under 65 and only earn investment income they can make a deductible super contribution up to the concessional deductible limit. People who are 65 or older must work at least 40 hours in 30 consecutive days in the financial year they make the contribution.

This means people who earn passive investment income cannot make deductible super contributions once they reach the age of 65, unless they find some kind of paid work for 40 hours within a 30 day period.

For those who are employed the amount claimed as a deduction by them personally will depend on how much has been contributed to superannuation by their employer including any salary sacrifice contributions. In other words if they qualify for making a self employed super contribution the total of all concessional contributions, employer SGC, salary sacrifice, and self employed, cannot exceed the concessional limit.

As a result of the changes being introduced on July 1, 2017 it will be a lot easier for someone who is employed to make tax deductible personal contributions.

Where an unexpected capital gain occurs, and a person is employed, the ability to qualify for the self-employed super contribution is a matter of luck. If on the other hand people know they will be making a capital gain, and have control over when it is made, they could delay the sale of the asset until after they have finished working and therefore qualify for the self-employed super contribution deduction.

Example of how this works

James Fleming is now 63, is looking to retire in the near future, and on a salary of $50,000 a year. In addition to his home he has a holiday house that he no longer wants. He approaches a real estate agent in April 2013 and works out that if he sells the property he will make an assessable capital gain of $100,000.

James wants to make sure that he can put the proceeds from the sale of his holiday home into superannuation as a non-concessional contribution. Realising that this must be done before he turns 65 he decides to retire at 30 June 2013. He then puts the holiday home on the market, sells it in October 2013 and makes an assessable capital gain of $110,000.

With the proceeds from the sale James makes a tax-deductible super contribution of $25,000.

If James had sold the property while still working he would have paid tax and Medicare levy in the 2012–13 year as follows:

 

$

Salary

50,000

Capital gain

110,000

Taxable income

160,000

Tax and Medicare payable

49,547

By delaying the sale until he is retired, and he is receiving a tax free super pension and making the self-employed super contribution, James saves approximately $26,000 in income tax.

 

$

Capital gain

110,000

Assessable income

110,000

Less deductible super contribution

25,000

Taxable income

85,000

Total tax payable

20,672

Also by having sold the holiday home before he turned 65 he is able to get up to $400,000 as a non-concessional contribution into superannuation fund using the bring forward rule.

Documentation and Actions Required

  • When making a self-employed super contribution a letter should be forwarded to the trustee/s stating that the member intends to claim a tax deduction.
  • In addition the member should complete an ATO form, Deduction for personal super contributions number NAT 71121, that can be downloaded from the ATO web site. By doing this the contribution will be classed as a self employed deductible super contribution and not face the risk of some of it being classed as non-concessional, as can occur if a lump sum payment is paid out in the same year as the contribution was made.
  • The trustees of the fund send a letter to the member acknowledging that the contribution received is to be claimed as a tax deduction, with the date of this letter being the date the contribution was received.

Warning

Before using this strategy you should seek professional advice as to whether you will actually benefit from following the strategy and will not end up worse off if the strategy does not really apply to you.


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