When investing for the long term, it is hard to look past the benefits of personal deductible contributions to superannuation. These voluntary contributions allow you to reduce your personal income tax while also building retirement savings in a tax effective environment.
In this article, we will explain how personal deductible contributions work, who can benefit from them, and the steps to make these contributions to your super fund.
What are personal deductible contributions?
Personal deductible contributions are voluntary contributions that individuals can make into their superannuation from their after-tax income.
By making these contributions, you can claim a personal tax deduction for the amount contributed. The tax deduction is claimed in the financial year the contribution was made, assuming you have allowed sufficient time for your super fund to process the contribution in the same financial year.
The contribution is treated as a concessional contribution and therefore taxed by your super fund at the superannuation rate of 15% upon entry. The tax saving is the difference between your marginal tax rate (which can be as high as 47% including Medicare levy) and the 15% super tax rate.
Example
To help illustrate the benefit of personal deductible contributions, let’s look at an example.
Ben is 50 years old and earns an annual salary of $200,000 + super. He decides to maximise his concessional cap limit by making a personal deductible contribution of $7,000 into his superannuation. The table below outlines the tax saving:
| Current | Proposed | |
|---|---|---|
| Gross Income | $200,000 | $200,000 |
| Personal Deductible Contributions | $0 | -$7,000 |
| Taxable Income | $200,000 | $193,000 |
| Income Tax Payable | -$56,138 | -$52,988 |
| Medicare Levy | -$4,000 | -$3,860 |
| Net Income | $139,862 | $136,152 |
| Contribution Position | ||
| Employer Contributions | $23,000 | $23,000 |
| Personal Deductible Contributions | $0 | $7,000 |
| Total contributions | $23,000 | $30,000 |
| Contributions Tax | -$3,450 | -$4,500 |
| Net Contributions | $19,550 | $25,500 |
| Total Benefit | ||
| Net Income + Net Contribution | $159,412 | $161,652 |
| Total Tax Paid | -$63,588 | -$61,348 |
| Tax Saving | $2,240 |
As you can see from the above example, by making a personal deductible contribution of $7,000, Ben will reduce his personal income tax by $3,290 but increase his tax on super contributions by $1,050. This gives him a net tax saving of $2,240.
A $2,240 tax saving on a $7,000 contribution is the equivalent of a risk-free, tax-free return of 32%!
Eligibility
Before making personal deductible contributions, it’s important to ensure that you meet the eligibility requirements:
- Age Restrictions: You must be under 75 years of age to make personal deductible contributions. If you are aged between 67 and 74, you will need to meet the work test which requires working at least 40 hours over a 30-day period in the financial year. Alternatively, you may be eligible for the work test exemption.
- Contribution limits: Personal deductible contributions fall under the concessional contributions cap limit. In the current 2024/25 financial year, the cap limit is $30,000. Employer contributions and salary sacrifice contributions also fall under this cap limit so be sure to factor that in. You may also have access to unused carry-forward concessional contributions which you can utilise.
How to make personal deductible contributions
After assessing your eligibility, making personal deductible contributions is a straightforward process. Here’s a step-by-step guide:
- Contribute to Your Super: Make a contribution to your super fund using your after-tax income. You can do this as a lump-sum payment or as regular contributions throughout the financial year. Your super fund will be able to provide EFT or Bpay details to do this.
- Lodge a Notice of Intent: You must inform your super fund that you intend to claim a tax deduction for your contribution. This is done by lodging a Notice of Intent to Claim a Deduction for Personal Contributions form (NAT 71121) with your superannuation fund before the due date, which is generally the earlier of the date you lodge your tax return or the end of the next financial year.
- Receive Acknowledgment: Wait for an acknowledgment from your super fund confirming that they have received and accepted your notice. Without this acknowledgment, you cannot claim the deduction.
- Claim the Deduction: When completing your income tax return, include the amount of your personal deductible contribution in the section for tax deductions. This will reduce your taxable income, and the tax benefit will be calculated based on your marginal tax rate.
Quick tip: we often advise our clients to make their personal deductible contributions at the end of the financial year, prior to the contribution cut-off date. This allows us to accurately assess existing contributions which have been made in the current financial year and anticipated remaining contributions still to be received, in order to ensure we are contributing the right amount.
Considerations before making a contribution
Before making a personal deductible contribution to superannuation, it is important you consider the following potential risks / disadvantages:
- Contribution cap limits: As mentioned previously, you need to ensure you are working within the contribution cap limits. If you exceed your current years cap limit plus the unused carry-forward amounts, tax implications will apply.
- Limited access to funds: Superannuation savings are preserved until you meet a condition of release. For most people, this condition is reaching preservation and retiring from the workforce. There are some instances where you may be able to access the benefits earlier such as release on compassionate grounds, financial hardship or under the First Home Buyer Super Saver Scheme.
- Understand your investment strategy and fee structure: Before putting any additional money into superannuation, you want to ensure you understand (and are comfortable with) the investment strategy and fee structure within your super fund.
- Division 293 tax: For high-income earners, if your combined income and concessional contributions exceed $250,000 in a financial year, you may face an additional 15% tax on some or all of your super contributions, totaling a 30% contributions tax.
The Guided Investor approach
Making a personal deductible contribution to superannuation can be a very powerful strategy to minimise tax and build your net asset position. Superannuation is the only structure that gives you a tax deduction for investing for yourself.
Typically, we reserve personal deductible contributions for Phase 2 onwards of the wealth creation process. However, it make also be appropriate for first home buyers utilising the First Home Super Saver Scheme in phase 1.
