21 June 2021
By Colin Lewis, Head of Strategic Advice, Fitzpatricks Private Wealth
If you are thinking about making a last-minute superannuation contribution to give you a bigger deduction and tax saving this financial year, then you’d better snap to it as time is running out.
30 June falls on Wednesday—only days away—and your super fund must receive the contribution by then to have it counted in the 2020-21 tax year. A contribution is made—and counts towards your contributions cap—when the fund receives it, so you need to allow time for the transfer of funds.
If you have unusually high taxable income this year—say because you made a large capital gain from selling an investment property in the booming housing market—there may be a few things you can do to reduce your tax bill.
But first, things you need to know…
Your eligibility to get money into super depends on your age. Anyone under age 67 may contribute, but if you’re aged 67 to 74, you must have met the work test—40 hours of gainful employment in 30 days—to contribute.
If you have not met the work test in 2020-21, you may still contribute under the work test exemption (WTE) provided you satisfied the work test in 2019-20 and had a total superannuation balance (TSB)—the amount you’ve got in the super system—at 30 June 2020 of less than $300,000.
Making a personal contribution for which you claim a tax deduction—a concessional contribution (CC)—is relatively straightforward, but you need to be mindful the total amount that can be contributed by you and/or your employer is generally $25,000 before additional tax applies.
So, if you are a wage earner wanting to calculate how much you should contribute and claim as a deduction, you need to include your employer’s Superannuation Guarantee (SG) contributions and/or notional taxed contributions (if you’re in a defined benefit fund), any salary sacrifice contributions and your fund’s administrative expenses and/or insurance premiums paid by your employer, as all count towards the CCs cap.
You must provide your super fund with a notice of intent (NOI) to claim a tax deduction for the contribution and have it acknowledged by the fund trustee—all done before lodging your tax return for the 2020-21 financial year, but no later than the end of the 2021-22 financial year. Do not touch the contribution, e.g. roll it over to another fund, withdraw it, or start an income stream, before first lodging your NOI.
You need to have sufficient income when making a personal deductible contribution, as the amount claimed is limited to your assessable income, less other allowable deductions—you cannot create a tax loss by claiming a deduction for a personal contribution. Any amount disallowed as a deduction by the Australian Taxation Office (ATO) will count towards your after-tax non-concessional contributions (NCCs) cap.
It is not worth making a personal deductible contribution—taxed at 15 percent in the fund—which reduces your taxable income below the effective tax-free threshold, as income below this threshold is taxed at 0 per cent. For the 2020-21 tax year, the effective tax-free threshold—after applying tax offsets—is $23,226. If you’re eligible for the seniors and pensioners tax offset, its $33,898 for singles and $30,593 for couples (each).
So, what are some ways to increase your tax deduction?
Catch-up concessional contributions
If you didn’t utilise the full $25,000 concessional contributions cap in 2018-19 and/or 2019-20 then the unused amount(s) may now be contributed this financial year—giving you a bigger deduction and tax saving—but the catch is, you must have had a TSB at 30 June 2020 of less than $500,000.
Say in 2018-19 and 2019-20, your CCs amounted to $17,000 and $18,000, respectively. You’ve got $15,000 ($8,000 + $7,000) extra to play with this financial year provided your TSB at 30 June 2020 was less than $500,000.
Carrying forward these unused CCs cap amounts may now be helpful in reducing that capital gains tax liability with a larger one-off contribution.
If you don’t use unused cap amounts before 30 June 2021, all is not lost as you can carry them forward on a rolling five-year basis. So, the above $8,000 and $7,000 can be carried forward up until 2023-24 and 2024-25 respectively, provided in the year you wish to apply them, your TSB at the previous 30 June is less than $500,000.
Making a double contribution—known as a contribution reserving strategy—can be an effective way of reducing your taxable income, especially where it is peculiarly high.
This is an arrangement whereby a contribution made to an SMSF now—in June—is allocated in July.
Contributions must be allocated to members’ accounts within 28 days after the end of the month in which they are received, but they do not count towards a member’s contributions cap until allocated by the trustee.
Importantly, a tax deduction is permitted in the year the contribution is made, despite it not being allocated until the following financial year.
So, with the indexed CCs cap applying from 1 July—i.e. $27,500—this strategy may allow you to claim a larger tax deduction this financial year.
A deduction of up to $52,500—plus any unused cap amounts from 2018-19 and/or 2019-20—may be available because the second contribution will now be $27,500 as it’s being tested against the higher CCs cap in 2021-22.
Remember to allocate this contribution by 28 July.
To do this right, the SMSF trustee must resolve to defer the allocation of the contribution until the new financial year and lodge a Request to Adjust Concessional Contributions form with the ATO by the time the fund’s annual return and your tax return are lodged—otherwise it could be treated as an excess contribution.
Be aware that this strategy utilises the entire CCs cap for next year. So, any CCs made in 2021-22—including employer SG contributions—will result in excess CCs arising. This may not be that bad though if you are on the top marginal tax rate this year—say because of that capital gain being included in your income—but will revert to a much lower rate next year.
Whilst a spouse contribution will not increase your tax deduction, it may reduce your tax bill.
The age limit for spouse contributions has increased from 69 to 74 years of age, but the receiving spouse must meet the work test (or WTE) from age 67.
If you can make a spouse contribution, you may be able to claim a tax offset of up to $540 for an NCC to your spouse’s super fund.