For many years, salary sacrifice has been the most tax-effective way to build superannuation. However, from 1 July 2017, you will be able to add personal deductible contributions to your super strategy.
New legislation removes the restriction on claiming a tax deduction for personal contributions to superannuation – if 10% or more of your total income is attributable to employment. So, from a tax and super viewpoint, a personal deductible contribution will have the same net effect as salary sacrifice.
You can use either strategy to reduce your taxable income and boost superannuation contributions. However, personal deductible contributions can’t go to untaxed and certain defined-benefit super funds. The existing qualifications on these deductions remain. For example, you must give a notice of intent form to your super fund before:
- starting an income stream with all or part of the contribution
- withdrawing or rolling over benefits (including the contribution)
- giving the trustee a splitting contributions application.
In any other case, you must give a notice of intent form to your super fund when you lodge your tax return or at the end of the financial year following the year in which the contribution was made – whichever comes first.
You must be aged under 65 or satisfy the work test between 65 and 74, but a contribution can be accepted within 28 days of the end of the month you turn 75.
Salary sacrifice has its drawbacks
While salary sacrifice has been the cornerstone strategy, it’s good to remember that it can have restrictions. For example, some employees do not offer it, or will not allow you to pick your own fund, and there’s no guarantee about the frequency of contributions. If you have income replacement insurance, you might find this is affected by your reduced income through salary sacrifice. Your employer may even reduce your superannuation guarantee entitlements to match this reduced income.
A comprehensive super strategy
Personal deductible contributions could be a great fit for your financial plan. You can choose your super fund and the timing of your contributions. And because you’re claiming a tax deduction on your super contribution – not reducing your salary – your income replacement insurance probably won’t be affected.
Personal deductible contributions can also work well alongside your transition to retirement strategy and other contributions you’re making, such as spouse contributions, co-contributions and contribution splitting.
It’s always a good idea to review your financial situation and savings plan before new legislation comes into place. Speak with us to learn about how you could benefit from building personal deductible contributions into your retirement savings strategy.
