The new rules of salary sacrificing versus personal super contributions
Written on the 15 September 2017 by AMP Capital
One of the fundamental concepts in the superannuation regime self-managed super fund (SMSF) trustees need to understand is the difference between salary sacrificing and making personal super contributions to a fund.
The rules have recently changed, which means more people can now make additional contributions to their super.
What's important to understand about salary sacrificing is that it's an agreement between an employer and employee.
Under the agreement, the employer is prepared to salary sacrifice part of their staff member's salary package and put the money into a superannuation fund.
In contrast, personal super contributions are additional amounts added to a super fund made by an individual rather than his or her employer.
"Since 1 July this year anybody who is eligible has been able to make a tax-deductible contribution to superannuation," says Graeme Colley, Executive Manager, SMSF Technical and Private Wealth, SuperConcepts.
This new measure was announced at last year's federal budget.
Before 1 July this year the 10% rule applied, which limited tax-deductible contributions made to a super fund to people who only received up to 10% of their income from salary and wages.
"There was a view this rule needed to change. For instance, the new rules help low-income earners and people whose employer won't allow salary sacrificing to make additional super contributions. It allows anyone to make tax-deductible contributions to super, rather than just a small group, so it's much more equitable," Colley says.
The new rules don't, however, mean anyone can contribute to super.
If you're older than 75 you cannot make an agreement with your employer to make salary-sacrificed contributions to your SMSF. You also can't make personal contributions to superannuation after this age.
"Between 65 and 75 you need to meet a work test to be able to make contributions, which means you need to have worked 40 hours in 30 consecutive days in a financial year to qualify," Colley adds.
Additionally, anyone under the age of 18 has to meet the same work test of having worked 40 hours in 30 consecutive days if they want to make deductible contributions to their super fund or SMSF.
There are a number of housekeeping tasks SMSF trustees must perform when members are either salary sacrificing or making personal contributions to their SMSF.
When making personal contributions, the contributor must notify the fund trustees a tax deduction will be claimed for the contribution, and the contribution gets taxed at 15% in the fund.
As part of that, the fund must acknowledge it has received the application from the member. An SMSF is required to acknowledge receipt of the notification that the contribution will be claimed as a tax deduction.
It's essential for trustees to ensure members meet the work test to be able to make personal contributions.
"If you can't make the contribution to the fund, you can't claim a tax deduction for it," says Colley.
"Sometimes people are older than 75 and make the contribution thinking it's allowed because it's a self-managed fund. But this isn't the case. So it's important to think through whether fund members meet the work test and are able to make personal contributions before adding funds to the trust," he adds.
From a financial planning point of view, if you're earning less than about $37,000 a year, make sure making a personal contribution is going to be tax-effective.
Remember, the contribution will be taxed at 15% in the fund. So if your personal tax rate is equivalent to this, making a non-deductible contribution to superannuation will have the same effect as making a personal contribution.
It may be more beneficial to make a non-deductible contribution rather than a personal contribution because it avoids the member having to use part of his or her concessional contribution cap, which is $25,000 at the moment.
The concessional contribution cap is a federal-government-set amount that limits how much you can contribute to super, netted against gross income, to reduce the member's assessable income.
On the other hand, the non-concessional limit, also a government-mandated figure, is the more generous $100,000 a year or $300,000 at any time over three years if you are under 65 and trigger a bring-forward rule.
The message for SMSF trustees is to always ensure they remain vigilant about the amount contributed to the fund for each member. This ensures accurate information is available for the Australian Taxation Office (ATO) so it can determine members are staying within the limits and claiming all allowable deductions.
A robust electronic administrator is essential to meet these requirements.