Superannuation

Reader’s question: I’ve recently received $275,000 in net proceeds from the sale of an investment property.

I’m now retired but was working full-time until my 65th birthday at the end of September. Can I contribute this amount to super and claim a tax deduction for some of it to offset the gain I made on the property?

Government announcements such as people over 70 being entitled in future to compulsory super contributions mean it is essential to be aware of key super rules where 65 is a milestone.

The head of technical services at ipac, Colin Lewis, says in particular there is confusion about the rules that apply if you want to make contributions in your 65th year. These rules are significant, given anyone under 65 can make both tax-concessional and after-tax contributions to super – regardless of their work status.

Work test

But if you want to make either tax-concessional or after-tax contributions after 65, you must satisfy a work test. This test involves working gainfully, which means being paid to work for at least 40 hours within a period of 30 consecutive days in the financial year in which you wish to contribute.

As you were working full time up until your retirement on your 65th birthday in September, you have met the work test for this financial year. Therefore, you are eligible to contribute to super in the current 2011-12 tax year, even though you are not physically working at the time you want to make the contribution.

Having established you can contribute to super, the next question is how much? As you want a tax deduction, you need to be aware the maximum entitlement for tax-concessional contributions this year is $50,000. Assuming you either didn’t earn $50,000 in the period you actually worked and contributed it all to super, how much you can contribute as a tax-deductible contribution that will offset some of your investment profits will be determined by what is known as the 10 per cent test.

Defining income

When you add up your total income from all sources for the year, including the sale proceeds from the property, if your employment income is less than 10 per cent of this total, you can make an extra personal tax-concessional contribution to super. But be aware your employment income is more than just your salary. It also includes any fringe benefits you received plus super contributions you may have made in addition to your employer compulsory contributions, which are known as salary sacrifice contributions.

How much of the $50,000 you are entitled to contribute as a personal contribution will be reduced by your employer’s compulsory super contribution and any salary contributed under a salary sacrifice arrangement. Another potential reduction will also apply: how much salary you actually earned. The amount that can be claimed as a tax deduction is also limited to your taxable income.

After tax

Given the best you can do is a $50,000 deduction and you have your work income plus $275,000 of property returns, your greater opportunity to contribute to super is after-tax contributions. If you are not eligible to claim a tax deduction because of the 10 per cent test and therefore cannot make a concessional contribution, the entire $275,000 – if it is after-tax proceeds – can be contributed as a non-concessional contribution.

Given that you were under age 65 on July 1, 2011, you can contribute this amount provided you have not contributed more than $150,000 of after-tax contributions in either of the previous two years. If you did, you will have triggered the bring-forward allowance that limits your after-tax entitlement to $450,000 over three years.

When it comes to someone turning 65 putting money into super, the rules concerning their eligibility revolve around their birthday. But when it comes to the amount they can contribute, the bring-forward rules are based on your age as at July 1. Turning 65 during a financial year will allow you to make use of the bring-forward rule and contribute up to $450,000 in non-concessional contributions.