FocusOn - Superannuation Contributions

In the May 2006 Budget, the Treasurer announced significant changes to the superannuation regime. The intention of these changes was to simplify the current regulation and improve your retirement income. The changes will also provide greater flexibility to access your superannuation once you retire. Most of the superannuation changes took affect from 1 July 2007.

The changes include abolishment of reasonable benefit and age based limits. There are now annual contribution caps to consider, which are:

Concessional contribution cap: limits the employer contributions or personal tax deductible contributions to $50,000 (indexed) per person per year and not per employer. There is a transitional cap of $100,000 for those over 50, which will be available until 30 June 2012. Concessional contributions made in excess of the cap will be taxed with an additional 31.5% tax on top of the 15% contributions tax, totalling 46.5%.

A full tax deduction is available for all contributions made by individual taxpayers and self employed persons, even if the contributed amount is greater than the cap limit. However, as mentioned above penalty tax of 46.5% applies.

Contributions may now be made by those between 65 and 74 years of age if they meet a work test.

Non - concessional contribution cap: (previously known as undeducted contributions) annual cap of $150,000 or a ‘three year’ cap of $450,000 for those under 65 years of age. Again penalty tax is imposed if the cap is exceeded (46.5%).

After age 65 up until age 74 taxpayers must meet the work test to be able to contribute.

Superannuation Guarantee (SG) contributions

Employees over the age of 18 who work more than 30 hours per week or earn more than $450 per month are entitled to 9% SG contributions payable by their employer. Employers are obligated to pay the SG contributions directly to the nominated superannuation fund on behalf of their employees. Please note that business owners, directors and certain contract workers may also be required to receive the SG contributions.

The SG contribution is considered to be part of the concessional contribution and, therefore, the $50,000 cap limit is applicable.

Personal superannuation contributions

A tax deduction for personal superannuation contributions is available for self-employed taxpayers or those that satisfy the ‘10% rule’. The 10% rule is satisfied where an individual’s assessable income from eligible employment (i.e. salary income) is less than 10% of their total assessable income plus reportable fringe benefits.

If you meet this test and complete the prescribed form (nat 71121-07.2007) and send it to your superannuation fund you may claim a tax deduction.

Personal tax deductible contributions are part of concessional contributions. They therefore entitle you to claim a full tax deduction for the contributions. However, the $50,000 cap limit applies. If this cap is exceeded, your superannuation fund will be required to pay additional penalty tax as previously described.

Salary sacrificing

As an employee, you may request additional superannuation contributions be made on your behalf by reducing, or sacrificing, your salary. Salary sacrifice can provide a greater after tax benefit to you, as employer contributions to a complying fund are taxed at a 15% flat rate in the fund. Contrast this with your normal salary and wages which are taxed at your relevant marginal tax rate (up to 46.5%). Please refer to the following table for an example. This example assumes no change in SG, which in this case would be 9%, or $9,000.

Please note that salary sacrificing into superannuation will reduce your disposable income in the years prior to retirement.

Government co-contribution scheme

Previously the Government’s co-contribution scheme was limited to employees receiving salary and wages. From 1 July 2007 self-employed people are also eligible for the Government’s co-contribution. Under the scheme, the Government contributes $1.50 for every dollar contributed into superannuation, up to a maximum of $1,500 for a financial year. This means contributing $1,000 of after-tax money into superannuation may entitle you to a co-contribution of $1,500, deposited into superannuation. The maximum co-contribution may be received when your total assessable income is below $28,000 and phases out by 5 cents for each dollar as your income rises to $58,000 per annum. No co-contribution is available after that amount.

The requirements for the co-contributions are:

	assessable income from eligible employment and/or from carrying on a business is more than 10% of the individual’s total assessable income plus reportable fringe benefits
	contributions made out of after tax funds
	lodging tax return for the current year
	less than 71 years of age at the end of the income year
	not a temporary resident visa holder
	meet the $28,000 - $58,000 income tests as described previously

Superannuation salary sacrificing, tax deductible contributions and the co-contribution scheme are all issues which should be considered in maximising your after tax position now and in retirement.

Published : 6 July 2007