The cutback in the annual tax deductible superannuation contribution to $25,000 has reduced the potential tax savings from making voluntary super contributions for many taxpayers. But for those wanting to lower tax bills and build up retirement assets, making tax deductible super contributions is now much easier than it ever has been.
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Before the latest changes, making deductible super contributions was a simple process only for the self-employed and other taxpayers not receiving compulsory employer contributions. The Tax Office strictly enforced a 10 per cent rule denying tax deductions for personal voluntary contributions when earnings attracting compulsory employer contributions exceeded 10 per cent of total gross income.
This rule forced taxpayers to seek employer assistance to make salary sacrifice contributions on their behalf. Those arrangements involved exchanging taxable wage income for higher tax deductible employer super contributions. Not all employers were willing to assist employees to do this and even when they did, they charged employees for the costs incurred by using salary packaging agencies.
Employees were then in the hands of employers or packaging agencies who could delay the timing and in some cases not make the payment to their super fund. Since July 1, however, the 10 per cent rule has been abolished and all eligible individuals including those between 65 and 75 meeting the work test are able to claim tax deductions for personal super contributions.
The only limitation is that the total tax deductible super contributions including personal and compulsory employer contributions must not exceed $25,000 annually. This change gives all the control to the employee, allowing them to cancel any current salary sacrifice super arrangements if they want to.
This provides greater flexibility in budgetary planning allowing decisions about tax deductible super contributions to be left to June just before the end of the tax year. This timing allows adjustments to be made for any variations in employer contributions during the year to ensure total contributions remain within the $25,000 cap.
Apart from the benefits of being able to deal directly with their own super fund, the new rules greatly reduce the power of employers, many of whom are still failing to comply with their compulsory super obligations. Replacing current salary sacrifice employer super contributions by tax deductible personal contributions will, however, change the timing of the tax benefit.
Salary sacrifice employer contributions reduce ongoing pay as you go tax payments while the tax benefits of deductible personal contributions are obtained by a tax refund or lower tax assessment at the end of the year. Whether or not receiving the benefits earlier via the salary sacrifice contributions is a better option will depend on how efficient and user friendly the employer salary packaging arrangements are.
Daryl Dixon is the executive chairman of Dixon Advisory. comments@dixon.com.au
