From 1 July 2017 employees will be able to claim superannuation deductions for contributions made to a superannuation fund. Currently the only contributions that could be claimed would be ones that were made by an employer or if the employee’s salary is a minor part of their overall income.
For families who own businesses these changes should be carefully considered.
Why tax effectively contributing to superannuation is attractive
Where a person makes contributions to their superannuation fund they are effectively generating a lower tax rate.
For example, for $10,000 that is contributed to superannuation as a concessional (tax effective) contribution the overall tax saving is as below:
| 21% | 34.5% | 39% | 49% | |
| Amount sacrificed | ||||
| $10,000 | $600 | $1,950 | $2,400 | $3,400 |
| $20,000 | $1,200 | $3,900 | $4,800 | $6,800 |
| $30,000 | $3,600 | $5,850 | $72,00 | $10,200 |
The above calculation only factors on the tax saving. Other factors also need consideration like the possible application of the superannuation surcharge and the ability to access money.
The current position
An employee can only contribute monies, tax effectively, to their superannuation if they “salary sacrifice”. This process involves:
- Reducing the pre-tax salary of the employee; and
- Increasing the employees superannuation contributions.
This process, for some of our family business clients is untidy as they effectively have to manage the personal investment profiles of their employees. And sadly this position cannot be avoided. The employee could not claim a tax deduction for superannuation contributions if their salary exceeded 10% of their total income.
Further, when family members contributed monies to their superannuation fund they had to do it through an entity. Care had to be made to ensure that the superannuation contributions made to the superannuation fund reflected the timing of the salary payments to the employee. The big “end of year contribution” did not always work as planned due to the super guarantee levy demanding quarterly payments.
Further, the employee’s ability to contribute to superannuation increased from $30,000 to $35,000 when the employee reached 49 years of age or more. This also created confusion for some.
In particular we found that many family owned business clients were actively giving financial advice to their key employees to ensure key staff did not miss out on opportunities. And while this intention was well founded: it could end up with a blurring of the relationship between the employer group, the family group and the ownership group.
From 1 July 2017
The ability to contribute to an employee’s superannuation fund will fall from $30,000 (or $35,000) to $25,000. So if you are employing staff (family or non-family) who make the maximum contribution, while not a statutory requirement, you could enquire as to how much the employee wants to contribute for that year. Failure to do that could create ill-will later on when the employee incurs additional tax.
Further, the need to manage the salary sacrifice position of an employee will no longer be present. The current process puts an additional administrative load on the employer to make sure that the exact contributions are made on time and the additional salary sacrificed contributions are properly reflected on the group certificates.
A family business could simply change their policies to require employees to make their own additional contributions to their superannuation fund. This is beneficial as:
- It removes the administrative burden on family businesses to properly disclose the salary sacrificed contributions to superannuation; and
- allows the employee greater control as to how much they put into their superannuation; and
- Allows the employee the ability to manage their own superannuation affairs privately without engaging their employer.
Again, the process of managing family staff and non-family staff needs delicate management. However if the proposed tax changes are discussed carefully among all of the interested parties then a family owned business will be able to simplify administration and show care towards their staff.
As a practice that only focuses on families who own business we have a unique advantage. We are able to understand the fine balance between the needs of the family and the needs of the business. Understanding this fine balance and then incorporating different tax outcomes in an unusual way is a typically way that we can generate value to our clients. For more information on claiming superannuation deductions, get in touch with our SMSF Specialists today.
