The new rules on sacrificing

Summary: The new personal deductible contribution rules will be a big boost for individual super. But there are some complexities.

Key take-out: A deduction notice will need to be filed with your super fund, with receipt acknowledged by your super fund, before you file your own personal tax return

Bright spots were few and far between in the recent super upheaval – but the new allowances for personal deductible contributions topped the list.

Another was the “five-year catch-up” provisions for concessional contributions. But they don't start for another seven months (July 1, 2018).

Allowing anyone to make personal deductible contributions kicked in on July 1 this year, and effectively came about because of the removal of the old “10 per cent rule” – a nasty rule that stopped anyone who earned 10 per cent or more of their income from being an employee from making personal deductible contributions, without going through that employer (salary sacrifice).

Now, the door has been opened for anyone to be able to make contributions to their super fund, at any time of the year, without having to go through their employer.

But there are rules around these contributions. And if you're going to make them, you need to be aware of what they are, or it could be painful tax lesson.

Many might already be taking advantage of this opportunity. From July 1, 2017, you have been able to make contributions to a super fund, with the intent that you will claim a tax deduction for them after the end of the financial year.

Some will have already set up regular (weekly, fortnightly or monthly) payments direct from their personal savings account into their super fund, after finding out the EFT or BPAY details.

Understanding the new rules

So, let's go through the new rules and what you need to know.

These are rules that only a few per cent of the population ever had to worry about before, and they were mostly the self-employed. Their financial advisers or accountants would generally be expecting these contributions and could assist with the paperwork.

However, the global availability of these new rules might mean that 10 per cent or 20 per cent of super members could make these extra contributions each year, often spontaneously and without professional advice, so knowing the rules will be critical.

Sadly, you can't just plonk the money into your super account and go and claim a tax deduction. No. The Australian Tax Office, as always, has rules in place for these things.

Probably the most important of these rules comes around the “deduction notices”, which I'll return to.

Some of the more standard rules are:

1. The individual must be over 18 when the contribution is made.
2. The contribution must be made with 28 days of the end of the month in which a member turns 75.
3. The contribution cannot result in, or add to, a tax loss.
4. Individuals can't claim transfers from foreign super funds, personal contributions of Capital Gains Tax retirement exemptions if aged under 55, or contributions made to “constitutionally protected funds” or defined benefit interests in Commonwealth public sector funds.
5. A valid notice of intention must be made.

And it is this last one that is where the real knowledge must be required.

Lodging a deduction notice

In order for you to claim a tax deduction for that contribution, you need to have lodged the right paperwork, in order.

This first part of this paperwork is known as a “deduction notice”. It needs to be filed with your super fund, with receipt acknowledged by your super fund, before you file your own personal tax return (because that will have the tax deduction for the contribution in it).

On top of that, it needs to be in before the end of the following financial year. So, if you make these contributions in the financial year ended June 30, 2018, then the notice needs to be in with the super fund before June 30, 2019, even if you don't lodge your personal tax return for some time after that.

Realistically, for most members making contributions to a non-SMSF, they will receive a letter from their fund telling them that non-concessional contributions of $XX were received for the financial year.

With most super funds, this should come with a tick-a-box form to sign and return in regards to whether you are going to claim some, or all, of those contributions as a tax deduction.

You will need to return this. You won't be able to forget about it, or have a default position with the super fund where they know that it is automatically claimed.

There is a list of reasons why a deduction notice itself can be invalid, and these include that the notice was not in respect of the contribution, included all, or part of an amount from a previous notice, or when the person gave notice, that they were:

1. Not a member of the fund.
2. The trustee no longer held the contribution.
3. The trustee has begun to pay an income stream based on a whole or part of the contribution, or
4. The person has applied to split contributions with their spouse.

These rules can, and will, trip people up. With regard to point 2 above, if you put in a contribution earlier in a year, then rolled over your super to another provider, you will need to claim the contribution from the new provider.

And for point 3 above, you will want to get your deduction notice in before starting any pension with your funds.

How will these contributions work in practice?

The biggest benefit of these changes in rules is the removal of the need for salary sacrifice agreements.

Previously, if you earned more than 10 per cent of your income as an employee, a salary sacrifice agreement was the only way you could get extra money into super.

So, let's take someone earning $100,000 as an employee. Their employer is putting in $9,500 as Superannuation Guarantee payments into their super fund each year.

This employee has a couple of options. They could wait until near the end of the financial year and put in up to $15,500 as a deductible contribution lump sum in the lead-up to June 30, which would still keep them below their $25,000 concessional contributions limit for the year.

They could split it up and put an amount in monthly. If done for an entire financial year, that would be approximately $1,290 a month.

Or they could put in ad hoc amounts during the year, as it suits.

Note: Members will need to monitor these contributions during the year, particularly if pay rises are received, and make their own adjustments.

Soon after the end of the financial year, their super fund (or check with your SMSF accountant) should send them a notice about the contributions, which will need to be signed and sent back, prior to lodging your personal return.

In this case, let's say our salary earner put in a contribution of $10,000 late in the financial year.

This adds to the $9,500 SG contribution. He has therefore made $19,500 of concessional contributions for the financial year.

On his personal tax return, the $10,000 contribution will reduce his declarable income from $100,000 to $90,000. He will receive a tax return in regards to the contribution of $3,900 (given his marginal tax rate is 39 per cent).

The real beauty of these new rules is the control it gives back to people to make their own contributions, at a time that suits them, rather than having to go into often difficult salary sacrifice agreements with their employer.

The information contained in this column should be treated as general advice only. It has not taken anyone's specific circumstances into account. If you are considering a strategy such as those mentioned here, you are strongly advised to consult your adviser/s, as some of the strategies used in these columns are extremely complex and require high-level technical compliance.