Super sacrificing before June 30

End of financial year personal finance planning has tended to revolve around several tried and tested strategies, including prepaying tax-deductible interest, making charitable contributions and bringing forward any work-related expenditure.

These strategies all have the impact of reducing a person's taxable income for the year, and therefore reducing the amount of income tax that they need to pay.

For this current financial year, under new rules, most people are able to make a personal contribution to superannuation, and claim a tax deduction for it – adding another end of financial year strategy that we should be aware of.

The new rules

In previous years only, a person earning less than 10 per cent of their income from employment could claim a tax deduction for personal superannuation contributions – personal superannuation contributions being contributions that people make from their own money directly to their superannuation fund.

While this suited self-employed people, it effectively excluded most people in employment. People who were employed had to make salary sacrifice arrangements if they wanted to make tax effective contributions to superannuation.

From this current financial year, the ‘10 per cent rule' no longer exists, which means that most people, including people in normal employment arrangements, will be able to make a personal contribution to superannuation and claim a tax deduction for it.

Is it worth it?

To consider whether this strategy is worth pursuing, let's consider a person on an average income of around $80,000 per year (AWOTE, or Average Weekly Ordinary Time Earnings was most recently $1,567 per week, or just over $80,000 per year).

The tax rate on earnings between $37,000 and $87,000 is 32.5 per cent, and the 2 per cent Medicare levy, for a total tax rate of 34.5 per cent. Personal contributions made to superannuation, where a tax deduction is claimed, are subject to superannuation contributions tax of 15 per cent.

Let's say that a person earning around $80,000 a year has an extra $5000 to contribute to superannuation at the end of the financial year. They use that $5000 for a personal contribution to superannuation, where the will claim a tax deduction and their super fund pays 15 per cent contributions tax, or $750, on the contribution.

The person making the contribution reduces their taxable income by $5000, and given that they are paying tax at the rate of 34.5 per cent, this is an income tax saving of $1725. After taking into account the $750 tax paid by the superannuation fund on the contribution, the tax saving is $975.

A key issue that a person needs to be aware of are their total concessional contributions for the year. Employer contributions, salary sacrifice contributions and personal contributions where an income tax deduction is claimed all count as concessional contributions. The general concessional contributions cap limit for the current financial year is $25,000 – care should be taken not to exceed this amount if you are making a personal contribution where you will claim an income tax deduction.

The 'how to'

Making a personal superannuation contribution is not hard – usually funds have multiple ways for members to add to their account. My fund has a BPay option that can be used for personal contributions, as well as the option of setting up a direct debit. In a strategy that is quickly becoming a touch old fashioned, they even accept cheques.

Importantly, though, this is not the end of the process for making a personal contribution. A personal contribution can now be make in two different ways, where a tax deduction is claimed, and where one is not claimed.

Superannuation funds will have to tax these two types of contributions differently, and therefore will require notification from yourself as to whether or not you intend to claim a tax deduction for your personal contribution.

The Tax Office has a form for this, however the best approach will be to contact your tax agent and find out their requirement for making sure that your personal contribution is classified correctly. In the ATO summary of these changes they state that the fund will notify you in writing of the contributions that you have made. These details will need to be kept to use when completing your income tax.

2019 FY: salary sacrifice vs. tax deductible personal contributions

Currently there are two ways that employed people tend to make concessional contributions to their superannuation funds: salary sacrifice contributions and compulsory employer contributions.

The ability for employed people to claim a tax deduction for personal contributions adds a third way, and one that has exactly the same tax effect as making a salary sacrifice contribution.

A key question for next financial year is which is better for additional superannuation contributions: a salary sacrifice strategy or waiting until the end of the year and making a tax deductible personal contribution?

There are several arrangements where employers make additional superannuation contributions when extra contributions are made by employees. If you benefit from one of these arrangements, the answer is simple – the additional employer contributions will make salary sacrificing the more attractive arrangement.

Beyond that, a definitive answer is more challenging. Let's consider the case we talked about earlier. Both $5000 of salary sacrifice contributions and $5000 of tax deductible contributions have the same tax effects; they reduce taxable income by $5000 and are taxed at 15 per cent by the superannuation fund. On this basis neither offer a clear preference.

I think a salary sacrifice arrangement offers two advantages. One is that the employer reduces the amount of income tax taken out of each pay, based on the salary sacrifice arrangement, which means you are benefitting earlier from the reduced income tax. In the situation of the tax-deductible personal contribution to superannuation, the income tax benefit is received as a tax refund (or reduction in tax payable) in the following financial year.

The second advantage is that a salary sacrifice arrangement has a built-in element of financial discipline with it. It is set up with the employer, and money is taken out of each pay without anything more needing to be done. Saving up for a larger tax deductible personal contribution at the end of the year requires more discipline.

That said, it is important to remember that the tax benefits are exactly the same, so we can think about which arrangement suits us best. I suspect that many people who are particularly focussing on building their superannuation balance will have in place a salary sacrifice arrangement, and use any surplus money at the end of the financial year for an additional tax-deductible personal contribution, while being careful not to exceed contributions limits.