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. From 1 July 2017 the 10% test was removed, which provided many employees 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

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 total $26,842, being the sum of his super guarantee of $17,892 paid on his salary and bonus, and $8,950 in salary sacrificed 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 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 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 $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 100% of her income for this period, she won’t maximise her cap. However if she has personal savings available, she can fully utilise her contribution cap with personal deductible contributions.

Conclusion

For many, the removal of the 10% test can further assist save for retirement in a tax effective manner. 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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