Prior to 1 July 2017, very few people with salary and wage income were able to claim personal superannuation contributions as a deduction on their individual tax returns. The reason was, a rule which prevented those with more than 10% of their income from sources which would require an employer to make contributions on their behalf from claiming deductions.
This denied deductions to those who perhaps have part-time employment income and also operate some kind of business as a sole trader or partner in a partnership, or those with investment income wanting to top up their contributions. Really, unless you were fully self-employed, your odds next to none.
The only option for employees really was to try and salary sacrifice. Salary sacrifice is a method whereby an employee asks their employer to withhold amounts from future salary and wage payments. However, there are potential pitfalls to salary sacrifice, including:
- Employers do not have to agree as it is extra work for them.
- Your salary and wage earnings may be less than the extra amount you would like to contribute
- The requirement to sacrifice future payments means committing to a strategy before you may be ready to
- A loophole allows employers to treat salary sacrifice amounts as their mandated superannuation guarantee contributions which while unethical, is technically legal (although the 2018 Federal Budget proposes to close the loophole)
- An employer may fail to make the payment to the fund
- An employer may make the payment in a different financial year than you intend which can cause an unexpected breach of contribution limits.
Given the pitfalls, this makes making extra contributions personally a no brainer doesn’t it?
In short, not by a long shot. Like most things, there are strengths to both options which need to be carefully considered to help you decided which option is best for you.
Pros to salary sacrifice:
- Set and forget nature means individuals don’t have to keep funds aside to make payments
- Some employers offer to make bonus contributions over and above superannuation guarantee obligations
- With employers making the payments, individuals can’t use excuses such as “I forgot”, “I just didn’t get around to it” etc
Pros to Personal Deduction
- Allows individuals to wait until late in the financial year before committing and making contributions
- Ensures payment is made to fund
- Avoids potential for employer to treat salary sacrifice contributions as employer contributions
Before you are able to make a claim for personal contributions on your tax return, you will still need to comply with the requirement to notify the fund of your intention to claim a deduction. The fund will then write to you and advise they acknowledge your intentions and have withheld the 15% tax on concessional contributions payable to the ATO.
While superannuation is a very tax efficient way to save for the future, it is important to remember future investment returns are not guaranteed and you cannot withdraw from superannuation without meeting a condition of release which could be decades from now. Before deciding to make any non-mandatory contributions, you need to consider these factors. We also recommend you consider seeking advice from a properly licenced financial advisor.