Removal of 10% Rule From Super Contributions

POSITIVE CHANGE IN DEDUCTIBILITY RULES FOR CONCESSIONAL CONTRIBUTIONS SMSF

Up to 30 June 2017, individuals could only claim a personal deduction for super contributions where they adhered to certain inflexible conditions. Amongst those rules was a “10% test” that particularly impacted sole proprietors earning business income in conjunction with employment income. The 10% rule denied individuals from getting a personal tax deduction for their super contributions if their salary or wage income exceeded 10% of their total income. The only way the individual could get extra contributions into super was by salary sacrifice which not all employers could, or would, do.

The 10% rule was counterproductive to the government’s policy of encouraging individuals to save toward their retirement instead of relying the government’s aged pension. The rule was also unfair because some individuals could make tax deductible contributions, while others could not.

From 1 July 2017, the 10% test was removed. This now means an individual can claim a tax deduction for super contributions irrespective of the amount of employment income they receive.

To access the provision, the following conditions also need to be present:
– the super contributions must be made to a complying super fund,
– the individual is under 65 years old or between 65 and 74 and working (employed, for at least, 40 hours in a 30 consecutive day period during the financial year), and
– the individual notifies their fund in writing of the amount they intend to claim as a deduction, and the fund writes back acknowledging that notice.

As a word of warning, an individual that is making both super contributions direct into their fund and super guarantee contributions are being paid to the individual’s fund by their employer, needs to ensure their total concessional contributions do not exceed the $25,000 annual contribution, otherwise additional tax
will be imposed on the individual by the ATO.

Further to the concessional super contribution cap, individuals can make an after-tax (non-concessional and non-deductible) contribution up to $100,000 each year, or bring forward three years of non-concessional contributions into the current year up to $300,000. The above content has been simplified for easy reading however, SMSF and taxation legislation is complex so its very important to get professional advice in light of your circumstances.

Written by Chieftains an accounting firm that exists to help business owners increase profits and reduce risks allowing them to astutely provide for their retirement.

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