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Ask Colley: New personal tax deduction rules

Welcome to the first in the series of fortnightly technical Q&As with Graeme Colley, SMSF Technical & Private Wealth Executive Manager at SuperConcepts. Follow the links at the bottom of this article to pitch your technical questions to Graeme for upcoming editions of SMSF News, the curlier the better.



Q

I’ve read about these new rules which are supposed to allow me to claim up to $25,000 as a personal tax deduction but it seems like there are a lot of caveats. What do I need to be aware of to claim a tax deduction?

A
Well, you’re right - from July most of us could start claiming a tax deduction for any personal contributions we make to super. But, as you quite rightly point out, there are a few catches to be aware of.

First, you need to make sure you know what other tax-deductible contributions have been made to super for you. This will include contributions your employer makes under the Super Guarantee rules and any amounts you may have salary sacrificed to super.  If the total amount of deductible super contributions is greater than $25,000 this financial year, any excess can be withdrawn from the fund and will be taxed at your personal tax rate plus an interest rate penalty.  If you decide to leave the excess in the fund it will be taxed at the maximum tax rate and counted against your non-deductible contributions cap as well.

To claim the contribution as a tax deduction you will need to make the contribution in this financial year, which means it must be made by 30 June 2018. My advice is don’t wait until the last minute as it needs to be received by the fund by 30 June. If you are using an electronic payment system don’t forget there may be a day or two difference between the time of transfer and receipt by the fund. If the contribution is received after 30 June you may miss out on claiming the deduction. Just a reminder but 30 June 2018 is a Saturday.

If you are under 18 you need to be employed or self-employed to claim the deduction.  Between 18 and 64 there are no work tests applicable to you. However, if you are between 65 and 75 a work test of 40 hours in 30 consecutive days in the financial year will apply before you can contribute to super.

Claiming the contribution itself should be relatively easy and requires you to make an election of the amount you wish to claim as a tax deduction. The election can be obtained from your fund or if you have a self-managed superannuation fund there are pre-prepared forms you can access from the ATO’s website. Making the election can be done in the year you make the contribution or you have until the time your income tax return is lodged or to the end of the financial year after you have made the contribution, whichever happens earlier.

It may be better to make the election to claim the tax deduction for the contribution after the end of the tax year as you will have a better idea of other tax-deductible contributions that have been made to the fund by your employer and a better idea of how much you have earned.  Knowing how much you have earned may influence the amount you may wish to claim as other concessions such as the co-contribution concession may be available for non-deductible contributions and could provide a better tax outcome. Have a chat to your tax adviser who may be able to help you on whether you should claim a deduction.

The benefit of the deduction is that you can claim a tax deduction against your taxable income and the amount claimed as a deduction will be taxed at 15 per cent in the fund.  If you are on the maximum tax rate of 47 per cent which includes Medicare it will mean a tax saving of 32 per cent which could increase your tax refund for the year.

The new opportunity available to many of us to claim a tax deduction for super is something that needs to be considered seriously.  If you do wish to claim the deduction don’t forget to make sure, you don’t exceed the cap, you make the contribution in time and the election is made before you lodge your tax return.

Click here to post your technical question for upcoming editions of SMSF News.
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