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Superannuation: A super way to tax advantage

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Cite as: May 2011 85(5) LIJ, p.80


Self-employed legal practitioners who contribute to super before 1 July can reduce their tax bill significantly.

As 30 June starts to approach each year, it’s worth remembering the tax advantages that self-employed legal practitioners can gain by making personal super contributions.

Eligible self-employed practitioners can reduce their assessable income by the amount of any personal super contributions they pay, subject to age-based limits. Further, a lower rate of tax (15 per cent) is applied to their personal super contributions, rather than up to 45 per cent levied on assessable income for people in the highest income tax bracket.

Practitioners in the highest tax bracket can use this approach to reduce their taxable income by $50,000.

Eligibility criteria

To be eligible for a tax deduction for personal super contributions, any amount you earn as an employee must be less than 10 per cent of your combined assessable income and reportable fringe benefits for the income year.

You must also:

  • be less than age 75;
  • pay personal contributions before 1 July in the financial year for which you wish to claim a tax deduction;
  • pay contributions to obtain super benefits for yourself; and
  • have submitted a “notice of intent” to claim a tax deduction for these contributions.

In addition, the super fund to which you pay your contributions must have acknowledged your “notice of intent” and the amount you intend to claim as a tax deduction.

Don’t exceed government limits

It may seem odd, but penalties apply if you exceed the government’s contribution limits.

You’d think we would be encouraged to save for our retirement, thereby reducing the pressures on the public purse. However, it appears the government believes high income earners are receiving too high a share of the tax concessions afforded for super contributions and has implemented caps on the amount of contributions that can be paid.

For the 2010/2011 financial year, a $25,000 limit applies for concessional contributions ($50,000 for those aged 50 or over). This is half the limit that applied a few years ago and applies to the aggregate of any personal contributions you have made, together with any employer contributions (including superannuation guarantee contributions) paid on your behalf.

Amounts paid in excess of this limit are required by law to be taxed at 31.5 per cent on top of the normal 15 per cent. It’s worth checking before 30 June that you haven’t paid more than the contribution limits.

On 28 February 2011, the government announced proposals to introduce higher superannuation concessional contribution caps from 1 July 2012. These would apply for individuals aged 50 and over with total super balances below $500,000.

The proposed new caps would permit an additional $25,000 of concessional superannuation contributions to be paid. Neither the threshold nor additional $25,000 concessional superannuation contributions will be indexed.

Non-concessional contributions (those paid and for which you are not able to claim a tax deduction) remain capped at $150,000 or $450,000 every three years for under-65s. However, any excess concessional contributions will count towards your non-concessional limit, which attracts a 46.5 per cent tax penalty if you exceed it.

Incredibly, this means that if you exceed both concessional and non-concessional limits, you can be taxed at up to 93 per cent on the excess amount.

While the Australian Tax Office (ATO) has the power to disregard or reallocate contributions in special circumstances, it is unlikely to look favourably on people who claim that they were ignorant of the new contribution limits.

The ATO is on record as saying that not understanding how the contribution limits apply, getting incorrect professional advice, or exceeding the contributions cap unintentionally are each not generally considered a special circumstance.

 

Contribution caps 1

 

Concessional cap 2

Transitional concessional cap3

Non-concessional cap

2010–11 financial year

$25,000

$50,000

$150,000

Tax on amounts over the cap

31.5% (in addition to the 15% paid by the super fund)

31.5% (in addition to the 15% paid by the super fund)

46.5%

Other information

Any concessional contributions in excess of the cap will also count towards your non-concessional contributions cap.

Any concessional contributions in excess of the cap will also count towards your non-concessional contributions cap.

If you are under 65 at any time during the financial year, you may be able to bring forward the next two years of contributions, but certain conditions apply. This effectively allows you to contribute up to three times the cap at once, or at any time during the three financial years.



ANDREW PROEBSTL is chief executive of legalsuper, Australia’s largest super fund dedicated to the legal profession. He can be contacted on ph 9602 0101, email aproebstl@legalsuper.com.au or via www.legalsuper.com.au.

1. Source: Australian Taxation Office.

2. The $25,000 concessional cap will be indexed annually from 2010–11 onwards to average weekly ordinary time earnings and rounded down to the nearest multiple of $5000.

3. The transitional concessional contributions cap is for those who are 50 or older on 30 June in a financial year, is available until 30 June 2012 and is not indexed.

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