Contributing to super as a wage earner
By Colin Lewis
Often, it’s not until you’re about to lose something that you really appreciate what you’ve got.
Whether or not wage earners recognised this with their voluntary concessional (pre-tax) superannuation contributions is another thing.
For most employees, their contributions come mainly via the 9.5 percent compulsory Superannuation Guarantee (SG) paid by their employer.
Since July 1, 2017, wage earners have been able to make personal contributions and then claim a tax deduction at year’s end, just like people who are self-employed and retirees (eligible to contribute) have been able to do for years.
Before then, a tax deduction could only be claimed by people who earned less than 10 percent of their income from employment. Generally, the only way employees could make tax-effective super contributions in the past was via voluntary salary sacrifice contributions.
The so-called ‘10 percent test’ was axed by the Coalition government from July 1, 2017. Generally, all taxpayers eligible to contribute to super are now able to make personal deductible contributions so long as they provide a written notice of intent to claim a tax deduction to their super fund and this notice is acknowledged, and they stay within the $25,000 concessional contributions cap.
If Labor had won the election and implemented their proposal to abolish personal deductible contributions by employees, wage earners may have been forced back to the old 10 percent test and only been able to use a salary sacrifice arrangement to make tax effective contributions.
As the Coalition was returned to government, employees continue to have options in the way they make tax effective contributions.
If you’re a wage earner and wish to top-up your super you can choose between making salary sacrifice contributions, provided your employer offers this, or making a personal deductible contribution(s), or a combination of both.
Regardless of how you contribute, in working out your voluntary concessional contributions, you must take into account, amongst other amounts, your employer’s SG contributions, your employer’s notional taxed contributions if you’re a member of a defined benefit fund and your fund’s administration expenses and/or insurance premiums for cover in the fund if paid by your employer, as all count towards the concessional contributions cap.
Unfortunately, SG opt-out for employees earning more than $263,157 with multiple employers to avoid breaching the cap – proposed in the 2018/19 Federal Budget – is not law yet.
Any space left under the $25,000 cap is the amount you may contribute either by installments each pay period over the year under a salary sacrifice arrangement or as a personal deductible contribution(s) or a combination of both.
But what’s the best way as there are pros and cons of each.
If salary sacrificing, you will want to ensure your contributions are not used by your employer to meet its SG obligation, otherwise you’ve reduced your remuneration. The measure proposed in the 2018/19 Federal Budget to prevent this happening is also not law yet.
Salary sacrifice allows you to ‘set-and-forget’ for the year as contributions will automatically be made for you on a regular basis.
Making regular deposits into an investment at regular intervals over a period of time is a powerful way to invest and is known as ‘dollar cost averaging’. It gives you the opportunity to build exposure to growth assets in a disciplined way, can reduce the risk of investing during times of market volatility and helps avoid the pitfalls of attempting to ‘time’ entry into markets. By spreading contributions throughout the year, the odds are some will be made in favourable market conditions, even if others are not. Entering into a salary sacrifice arrangement with your employer is a means of implementing dollar cost averaging.
A disadvantage of this approach is that it is very rigid. To salary sacrifice into super, you must first enter into an ‘effective salary sacrifice arrangement’ with your employer, which requires planning as this arrangement must be in place before income is earned. So, an unexpected bonus cannot be tipped into super.
Also, you don’t know if and when your employer will actually put the money into your super fund, making it difficult to target the $25,000 cap.
Alternatively, claiming a tax deduction for a personal contribution(s) can be easier.
Instead of your employer contributing to super via a salary sacrifice arrangement, making your own contribution(s) gives you greater control, flexibility and certainty over the amount and timing of contribution(s) and dealing with the concessional contributions cap around year end, but you need to be disciplined.
Reducing a capital gain on the sale of shares or property may be achieved within the cap at any point, without having to incorporate it into an employer’s salary sacrifice arrangement. But the downside of making large personal deductible contributions is that you lose the benefits of dollar cost averaging that salary sacrificing offers.
If you wish to adopt dollar cost averaging, you’ll need to try and administer this yourself.
Making your own contributions means you’re not reliant on someone else doing it and you have peace of mind knowing that your money goes into your super fund. Many employers leave it for months between the money being deducted from wages and making the contribution. Unfortunately for some, the money never gets there! Also, it avoids a nightmare should your employer go into administration/receivership, as money deducted from salary but not contributed may take years to recover.
If you choose to make a personal deductible contribution(s) you must provide your super fund with a notice of intent (NOI) to claim a tax deduction for the contribution – usually done around tax time. Be very careful not to touch the contribution, e.g. roll it over to another fund, withdraw it, or start an income stream, before first lodging your NOI.
In the aftermath of the election, wage earners should be relieved they still have options in the way they contribute to super and appreciate the ability to continue making personal deductible contributions.