Removal of 10% test to make personal deductible contributions

Technical resource

The rules to make a personal deductible contribution were more restrictive in the past. The strategy is now available to employees.

For Adviser use only

Prior to 1 July 2017, an individual’s employment income needed to be less than 10 per cent of their total assessable income, reportable fringe benefits, and reportable employer super contributions, for them to be eligible to make personal deductible contributions.

This was known as the ‘10% test’ and was in addition to age and work test requirements. The 10 per cent test generally limited personal deductible contributions to self-employed and substantially self-employed persons. Since 1 July 2017, the 10% test has been removed. This provides many employees with the ability to make personal deductible contributions.

The following people may benefit from this:

  • employees whose employers don’t offer them the ability to salary sacrifice
  • Australian tax residents who earn employment income overseas
  • employees who receive workers compensation payments

The ability to make ‘top-up’ personal deductible contributions allows more flexibility in managing contributions and maximising the concessional cap.

Example 1: Set up a ‘set and forget ’ salary sacrifice arrangement leading to an excess concessional contribution

Sam earns a salary of $150,000 per annum plus super guarantee contributions of $16,500 per annum. Sam’s enterprise agreement  states his employer pays super guarantee on all of his remuneration without limit. At the start of the financial year, he arranges to salary sacrifice $916 a month ($11,000 per annum) to utilise his concessional cap of $27,500 (assuming he cannot take advantage of the carry forward concessional provision). Towards the end of the financial year in May, he is also paid a performance bonus of $30,000, and is promoted, with a new salary of $200,000 per annum. Concerned about his concessional contribution cap, he asks his employer to stop the salary sacrifice arrangement, but 10 months have already passed since the arrangement was first put into place.

Although he acts immediately, Sam’s total concessional contributions for the financial year will now total $29,877, being the sum of his super guarantee of $20,717 paid on his salary and bonus, and $9,160 in salary sacrificed contributions (i.e. 10 months of salary sacrifice).

Rather than choosing to salary sacrifice, he could instead make a personal deductible contribution up to his remaining concessional cap ($6,783), closer to the end of the financial year, to avoid the above situation.

Example 2: Commence salary sacrifice late in the year and fall short of the cap

Veronica earns $70,000 per annum and is paid fortnightly. She decides to see a financial adviser to assist her with building her retirement savings in a tax-effective manner. Her adviser recommends that she maximise her current financial year’s unused concessional cap as her cash flow and accumulated personal savings can support her personal expenses.

Her total super guarantee amount received for the year is $7,700, leaving her $19,800 under her concessional cap (assuming she cannot utilise the carry forward concessional provision). However, with only four fortnights left in the year, her remaining unearned salary amounts to approximately $10,770. Even if she arranges with her employer to salary sacrifice 100% of her income for this period, she won’t take advantage of her contribution cap. However, if she has personal savings available, she can fully utilise her contribution cap via personal deductible contributions.

Conclusion

For many, the removal of the 10% test can further assist saving for retirement in a tax effective manner. At the very least, it creates equitable contribution opportunities for employees and those who are self-employed.

Next: Superannuation and divorce

Superannuation can be split in the event of a divorce as part of a property settlement. Some SMSF rules are relaxed to facilitate transfers between spouses
Technical resource

Contact BT Technical Services for more information

Mandated employer contributions are contributions by, or on behalf of an employer that are equal to the contributions made in relation to the member.
Technical resource
Individuals aged between 67 and 74 who have recently retired, may be eligible to make additional voluntary contributions to super where they meet certain eligibility criteria around their previous year of work and their total super balance.
Technical resource
The transfer balance cap and total super balance are different concepts. Differences include their purpose, how they are measured and when to apply them.
Technical resource

FOR ADVISERS USE ONLY

This information has been prepared by BT, a part of Westpac Banking Corporation ABN 33 007 457 141 AFSL 233714 (Westpac), for financial advisers only and must not be made available to any client or any other person, or attributed to Westpac or any other company in the Westpac group.

The information is an overview only and it should not be considered a comprehensive statement on any matter nor relied upon as such. Any graph, case study or example is for illustrative purposes only and is not an indication of future performance or result. Where past performance is used, please note that past performance is not a reliable indicator of future performance. Any taxation information is a general statement based on current laws and their interpretation. The article is current as of the date of the article unless stated otherwise. The article does not contain, and should not to be taken to contain, any financial product advice and it does not take into account any person’s financial situation, needs, objectives or taxation situation. Because of this, you should, before acting on the information, consider its appropriateness to your clients, having regard to their financial situation, needs and objectives, and your clients should seek independent professional taxation advice on any taxation matters. It is not the intention of Westpac or any member of the Westpac group that the information be used as the primary source of readers’ information but as an adjunct to their own resources and training and should therefore not be relied on for the purposes of making any financial recommendations or an investment decision. To the maximum extent permitted by law: (a) no guarantee, representation or warranty is given that any information or advice in this website is complete, accurate or up to date or fit for any purpose; and (b) no member of the Westpac group is in any way liable to you (including for negligence) in respect of any reliance upon such information.

This page may also contain links to websites operated by third parties (‘Third Parties’) who are not related to the Westpac Group (‘Third Party Web Sites’). These links are provided for convenience only and do not represent any endorsement or approval by the Westpac Group of those Third Parties or the information, products or services displayed or offered on the Third Party Web Sites.