Super Contributions and the 10% test

So as Paul has mentioned quite a few changes to super once again. However a nice change is the removal of the 10% test.

Previously you passed the test if less than 10% of your assessable income , reportable fringe benefits and RESC contributions came from employment activity. For individuals with a capital gain it could sometimes be met but if the gain was not significant enough to compare to your employment income you couldnt adopt a superannuation contribution strategy.

Well now you can as you can make a contribution to super and receive a deduction up to the concessional contributions cap provided you have notified the fund of an intention to claim a deduction.

So a nice win. Some would argue same result could be achieved with salary sacrificing with is true but it is a nightmare sometimes for people to get their employers to agree to an effective salary sacrificing arrangement.

 

Another article from Noel Whittaker on same. On a Super spree today as I generally only follow the Other Assets section so had forgotten about this excellent section of the forum:

 

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That's me. I have no idea what is going on. I tried to read the other thread on super changes but I have no idea what many of the words mean.

 

A big problem is a number of new concepts and crap load of new jargon has been introduced along with the new Super changes.

After a lot of research today I'm feeling more confident that the strategies I was looking to implement under the new changes are correct despite being told I was wrong. But I will be confirming this and more with a trusted dedicated Superannuation specialist. I just did an awful job of explaining what I was intending to do so it was probably mis-interpreted. And quite frankly advisors need to be able to explain these changes in layperson terms.

Admitadly I'm only an ameteur but I do have a reasonable grasp of Super. So if I can't understand what some of these advisors are saying then god help many others. And quite frankly I've seen a number of examples and comments from heavy weight Super experts that suggest many of the advisors themselves are confused about these changes. So @Perthguy I don't think we need feel inferior.

The reason I try learn a bit about these things is that I've been given incorrect information by some advisors in the past. So I like to be well enough informed to sus out if the information seems right.

Some might think me a pain because I ask a lot of detailed questions but it's our money at stake so being careful and somewhat informed has proven to be a wise strategy overtime.

 

@austing indeed!

I don't consider myself inferior ok, I consider myself reasonably financially literate. However, when I read that thread on the new super cap thing it just made my head hurt and I didn't really understand it. I feel like if it feels to hard for me to understand, how do all the less financially literate people feel? It must be overwhelming. That said, I have a lot on the go right now so I might have another crack at it when things have calmed down a bit

 

Sorry mate, poor choice of words but I think you understand what I was getting at. We're both coming at it from the same viewpoint. I can feel the need for a couple of home brews coming on to relax my brain after today. Doesn't take much to make a retirees head hurt especially this retiree!

Cheers

 

The new ability for all taxpayers to make CONCESSIONAL contributions next year provided they meet the age tests and the work test is a game changer IMO.

The days of salary sacrifice to super are effectively over or just about to blossom depending how you look at it.

PLUSES
- Most taxpayers (ie employed persons) and those with investment income and cap gains now have a new deduction....Up to $25K a year tax deduction Its not quite that generous as any employed taxpayers will need to deduct their employer contributions to determine if there is an unused amount left. But for those who sell property its a further thought....Small but something. Perhaps $50K when both spouses do this. Could save up to $23K in tax for a couple.
- The Govt has proposed in future years to allow "catch up" contributions. Lets see. Perhaps rather than a lost deduction it can be accumulated ?? Who knows.
- The maximum benefits apply to higher income taxpayers who earn around $120K a year for this benefit. Why not those who earn more than that ? Div 293 tax is now broader and adds an extra 15% tax to contributions for more taxpayers. And low low rate taxpayers get a lower benefit.But...
- Basically any taxpayers earning between $37K and $150K may benefit by making a contribution IF THEY CAN and it suits them.
- Winners : Employed taxpayers can top up their super themselves. At year end. Its safer than ongoing extra super from wages and could be funded by a bonus for example that has been taxed. Enhanced refund ?
- Better than the rarely used and illogical spouse contribution
- Should be a strategy to be considered by those who currently have a transition to retirement pension. These pensions lost tax benefits next year.

MINUSES
- Determining contributions made by employers is fraught with issues. Some pay promptly and others are appalling. Managing caps is difficult and prone to error and excess contribution taxes so managing a extra deduction isnt a easy task.
- Deduction notice compliance is required. Lodging a tax return without the formalities is a audit risk and easily detected by the ATO. It can add a compliance burden for what should be a simple task.
- Caps, age limits, contribution timing rules, superfund contribution procedures etc make a simple issue complex.
- Largely ineffective as a tax benefit for those earning $19K - $25K since the tax on contributions would offset the deduction tax benefit.

 

I agree 100%. Its VERY complex and it just got far more complex. There are now about five different ways to get penalised by merely having a super account. And the poor taxpayer doesnt need to make a mistake....their employer can do it for them or they can misjudge their caps etc.

I really believe all taxpayers with a reasonable balance and using ANY strategy needs a personal tax / financial adviser to bounce ideas off. Our firm offers a fee for advice specific for this reason its it becoming VERY popular. Cant tell you how many people avert issues doing this but the growth in this service has exceeded our expectations

 

I'm a huge fan of Personal deductible contributions even as retirees. It can really help reduce tax on non-Super investment income including capital gains (eg in specie transfer of shares into SMSF). That and franking credits work very nicely in reducing our tax bill. If faced with a larger CGT bill in a given year then one can take advantage of contributions reserving but so far I haven't needed to do that. Great thing about shares not being a lumpy asset is that CGT is much easier to manage.

Currently waiting on ATO to assess my wife's refund which involves an uncommon variant of the rotten 10% rule. Wife received short term incentive bonuses in the past but law requires a third of this is deferred for two years. She permanently retired from work two years ago but the deferred income is still being paid to her. ATO's system automatically rejected her Personal Deductible Super Contribution claim for last financial year due to the 10% rule. So had to send proof she had retired and was not employed at the time the deferred bonus was paid to her along with other supporting technical information. Awaiting outcome but expect it to be positive.

So yes will be glad to see this pain in the ar*e rule finally gone.

 

Contributions Reserving may not be as easy as many allude to. In a SMSF you may need to check your deed (most say a contribution is accepted and dont talk about a process for it be become accepted etc so reserving is a concept that doesnt truly occur). Its like Westpac arguing your deposit wasnt deposited when you handed it over. The process is quite clear however and there is a TD that covers it which expects rules that allow the practice in the deed.

Deferred bonus.....Not usually a reason for a`breach of the 10% rule and why sal sac to super is easier. Issue is spelt out in TR 2005/24 in the eligible person description. If the employer pays SGC on the deferred bonus it can pose a risk. So if the employer pays SGC its a fail. You cant both contribute is the basic concept. Refer para 51/52.

 

Thanks again Paul.

I'm leaving it to "supposed" professionals to sort this out for us.

SGC was paid by the employer on the deferred STI payment but salary sacrafice was no longer offered by the employer as my wife was consider to no longer be an employee (under normal law, not Super) given she had resigned in previous financial year. That was the first question I asked the employer, "can she salary sacrifice Super from deferred STI bonus to avoid any issue with the 10% rule?".

Bear in mind I'm only an interested amateur in regard to the following. This is my own research I presented for SMSF EOY processing. I'm not sure what was added in challenging the ATO system auto-rejection.

My understanding is that TR 2005/24 has been superseded by TR 2009/D3:
TR 2005/24 - Income tax: deductibility of personal superannuation contributions (As at 17 June 2009)

http://law.ato.gov.au/atolaw/view.htm?locid='DTR/TR2009D3/NAT/ATO'&PiT=20090617000001

So it now appears not to be a case of whether the employer is paying SCG (both can't contribute) but whether the employee is engaged in "employment" activity in the year a personal contribution is made? See para 55 - 71 of TR 2009/D3 linked above.

Also the following:
http://www.onepath.com.au/public/adviser_advantage_pdfs/TB35.pdf (page 3)

Will be interesting to see if ATO upholds the auto-rejection! Should know soon.

Really appreciate you spending valuable time in offering your view on this. It's an unusual one and I imagine might be potentially challenging for even some professionals.

Cheers
PS: Needless to say many will be glad to see the end of this rediculous 10% rule from next financial year. Bit late for us though as the above situation applies to this and last financial year. Will see what happens.

 

Our deed appears to be ok in this matter but having seen the strict process that needs to be followed it's only something you would do through a Super specialist including a deed check. This strategy has become more widely publicised and increasingly popular in the the last couple of years. And in response the ATO seem to be taking a firmer approach to it.

It's obviously attractive in regard to minimising larger CGT by bringing forward the following years personal Super "deductible" contribution. To be honest I've always considered it a bit of a rort and not what it was originally designed for. But if they allow it then I suppose you can't blame superannuants trying to take advantage of it.

 

Going forward I expect your fee for advice service is going to well and truely more than exceed your expectations.

 

Forgot to add the following in relation to our deferred STI income circumstance and 10% rule:
Falson and Commissioner of Taxation [2007] AATA 1668; (2007) 68 ATR 299; 2007 ATC 2438 (17 August 2007)

Hope I've interpreted it correctly? I can assure you plenty of home brew was consumed after this exercise at the time to calm the brain.

Cheers

 

Hi Paul

I am based in Melbourne - is it just as easy to receive advice remotely (ie. via phone) as seeing you face to face?

Cheers
Greg

 

Yes it should be. Paul would have many clients he doesn't meet.

 

I rarely meet clients these days. Phone, email, skype etc are options. I also have software that allows mutually shared access to files and digital signing for returns so that no printing scanning etc is required. (no fancy complex PDF signatures either).