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

Before 1 July 2017 a person’s employment income had to be less than 10 per cent of their total assessable income, reportable fringe benefits, and reportable employer super contributions 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 the self-employed and substantially self-employed. From 1 July 2017 the 10% test was removed, allowing many employees the ability to make personal deductible contributions.

The following people may benefit from its removal:
- employees whose employers don’t offer salary sacrifice
- Australian tax residents who earn employment income overseas
- employees who receive workers compensation

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 ’ salar y sacrif ice arrangement leading to an excess

At the start of the financial year Sam earns a salary of $150,000 per annum plus super guarantee contributions of $14,250 per annum. He arranges to salary sacrifice $895 a month ($10,740 per annum) to maximise his concessional cap. In May, he is paid a performance bonus of $30,000, and is promoted and paid a higher salary of $200,000 per annum. Concerned about his concessional cap, he asks his employer to stop the salary sacrifice arrangement, but 10 months have already passed.

Although he acts immediately, Sam’s total concessional contributions for the financial year are $26,842, being the sum of his super guarantee of $17,892 paid on his salary and bonus and $8,950 in salary sacrifice contributions.

Rather than salary sacrificing, he could make a personal deductible contribution up to his remaining concessional cap ($7,108) closer to the end of the financial year.

Example 2: Commence salar y sacrif ice 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 tax-effectively. Her adviser recommends that she maximise her unused concessional cap as her cash flow and accumulated personal savings can support her expenses.

Her total super guarantee for the year is $6,650 leaving her $18,350 under her concessional cap. 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 her remaining income she won’t maximise her cap. However if she has personal savings available she can top up the remainder with personal deductible contributions.

Conclusion

For many, the removal of the 10% test can pave the way to tax-effectively save for retirement. At the very least it creates a level playing field for employees and the self-employed.

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FOR ADVISERS USE ONLY

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