By Graeme Colley
Faced with complex change, it can be easy to be doubtful – and harder to find the upsides, the bright spots. Since the initial release of the 2016 Federal Budget, adjustments have been made and a number of opportunities now seem evident for middle to low income earners.
At the centre of the government’s reforms are changes enhancing the tax deductibility of super contributions, due to take effect from 1 July 2017. These changes present opportunities for those who’ve been unable to make tax deductible contributions due to broken work patterns or multiple jobs, and for those who’ve been unable to maximise salary sacrifice contributions.
One of the benefits of claiming tax deductions for personal super contributions is that there is no need to make the decision in the financial year. While the contribution is required to be made in a financial year, the nomination to claim the deduction can be deferred until the time the person’s income tax return is lodged or the end of the next financial year, whichever occurs first. This allows time to work out whether claiming the deduction for the contribution is worthwhile and tax effective.
To illustrate how this will work, let’s consider Sonya who has had a number of part-time jobs during the year, with SG contributions totalling $17,000 for 2017/18. During that year she’s also contributed $10,000 to super. In September 2018, when she visits her accountant to complete her tax return, she makes an election to claim a tax deduction of $8,000 which she sends to her super fund. This is the amount that will be tax deductible. The remaining $2,000 will be treated as a non-concessional contribution.
There are limits to the types of funds that can accept these personal tax deductible contributions. The contributions can be accepted by accumulation-type superannuation funds which make up the vast majority of super funds and include SMSFs. However, defined benefit funds and some government funds, referred to as constitutionally protected funds, are unable to accept the deductible contributions in view of the unique way in which they operate.
This offset is set to change with the spouse income threshold due to increase from $10,800 to $37,000, effective 1 July 2017.
Provided their spouse has an adjusted income of less than $37,000, anyone who makes a non-concessional spouse contribution of at least $3,000 can receive a tax offset of $540, which reduces their income tax payable. Between $37,000 and $40,000 the amount of the tax offset reduces gradually to zero.
There are a number of choices in respect of non-concessional contributions and the available tax concessions. One is to contribute solely for the purpose of the spouse contribution tax offset. Another is to structure contributions in order to tap both the offset and the government’s co-contribution scheme.
To illustrate how these strategies could work, let’s look at Phil and Emma. Phil has $3,000 to contribute as a non-concessional contribution for Emma in the 2017/18 financial year. Emma has an adjusted income of less than $37,000.
If Phil makes a non-concessional contribution of $3,000 for Emma, the tax offset will reduce the amount of income tax he pays by $540.
If Phil gifts $1,000 to Emma and she puts it into super as a non-concessional contribution, she may qualify for a co-contribution of $500, credited to her super account.
Phil can then place the remaining $2,000 into Emma’s super as a non-concessional spouse contribution. The tax offset will reduce his income tax by $360.
Emma’s super account balance will increase by $3,500 – made up of $3,000 worth of non-concessional contributions and a $500 co-contribution.
The final change in the new rules is the replacement of the low income superannuation contribution with the low income superannuation tax offset (LISTO).
Available for those earning up to $37,000, the LISTO provides a refund of tax paid on concessional contributions. The maximum amount of the refund is $500 and is paid to the member’s super account. It is intended to compensate for the fact that less tax would be paid if the money was in the form of salary, wages or income from self-employment – instead of super.
Pleasingly, recent adjustments to the government’s superannuation reform agenda will open things up and provide potential opportunities in relation to contribution tax concessions.
Now is the time for SMSF professionals to fully grasp the changes and to begin factoring them into client strategies.
