TAX NEWS - June 2010

Australia Tax: Tax deduction for a super contribution

Most people who make personal contributions to super to claim a tax deduction are self-employed. Some have their own business while others work as contractors where their business is offering a personal service or a particular skill. 

For anyone in this second group being able to claim a tax deduction for a super contribution can be an important entitlement that you should check prior to June 30. It will very likely be among the major expenses you could expect to claim.

The maximum annual deduction you can claim is $25,000 if you are under age 50 or $50,000 if you're 50 or older. It's the same entitlement that is available to employees.

In order to claim the higher entitlement you need to have turned 50 at any time during the financial year that started on July 1 last year and ends this coming June 30.

There's another important condition you must satisfy to make a personal tax deductible super contribution: the vast bulk of your income must be from self employment, at least 90 per cent. This should be no problem where you are working for your own business.

But the requirement can catch out newcomers to contracting, someone who previously worked as an employee but who has decided to go into business for themselves by offering their services as an independent contractor.

Where they do this it is vitally important they understand the employee look and smell test. To be a bona fide contractor you must be engaged to produce a result. You can't call yourself a contractor if you turn up at an employer's office or premises and work on a casual basis under the employer's instructions.

In this case the look and smell test will classify you an employee and require the employer provide you with the 9 per cent compulsory super contribution. If you work in a job where there might be extra compulsory super such as an award payment which might take you up to 12 per cent that will also be a requirement.

More important though is that the salary or wages income you earn from this work plus the value of any fringe benefits you receive will be counted as employment income rather than income from self employment.

Where the total income from such work becomes more than 10 per cent of your annual assessable income you won't be allowed to make any separate personal contributions to super. In other words, your super contributions could be limited to what the employer contributes under the compulsory super rules. And all because the work income you earned represented more than 10 per cent of your total assessable income.

This means is that if you do some work in circumstances where you will be regarded as an employee it is important to monitor this as any tax deduction for a personal super contribution won't be allowed. It will be rejected by the Australian Taxation Office if you do make a claim.

To be regarded as a legitimate contractor any work you do should be focused on producing a result. It'll be work where the employer won't care how you do it or when you do it, so long as you meet a particular deadline.

In those circumstances the income you earn will be self employed income. Provided 90 per cent of your total income is regarded this way, you'll be able to personally make super contributions up to the contribution limits – less any compulsory super amounts you received as an employee. The contributions you make can then be offset against the income you earn, providing a valuable tax deduction.