Removal of 10% test to make personal deductible contributions

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 $17,250 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 $1,062.50 a month ($12,750 per annum) to utilise his concessional cap of $30,000 (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 $32,283, being the sum of his super guarantee of $21,658 paid on his salary and bonus, and $10,625 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 ($8,342), 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 $8,050, leaving her $21,950 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