Topping Up Super Tax Effectively – A Third Option for Employees

March 23, 2017

If you work as an employee, chances are your employer is already putting money into superannuation for you.  When the employer puts this money into superannuation, they get a tax deduction because, to them, it is a cost of running a business.  If the person or business putting money into superannuation is getting a tax deduction that reduces their tax, the super fund has to pay tax instead at a 15% rate when they receive the money.

If an employee wants to top up their superannuation, there are currently two main options available:

  1. Ask the employer to put extra super in for them and reduce their gross wage to offset this (called salary sacrifice). This can be tax effective because the gross wage is reduced and tax is saved at the employee’s marginal tax rate (around 34.5% for people earning between $37,000 and $87,000).  Instead, the super fund pays tax at a fixed 15%.
  2. Voluntarily transfer extra funds into the super fund from a personal (or spouses) bank account. Generally, there is no tax deduction involved for the employee (which means they have already paid full tax to get it into their bank account in the first place) and so the super fund does not need to deduct any tax when they receive it.

From 1 July 2017, employees are going to have increased flexibility because they will get a third option.   From next financial year, an employee will have the option to claim a tax deduction themselves on money that they put voluntarily into superannuation.  This option is currently already available to the self-employed or investors.

There are a number of circumstances where this could be useful.  Examples of those could be:

  • Someone is only an employee for part of the year, or
  • Their employer doesn’t offer salary sacrifice, or
  • They have extra income from say an investment property that they want to pay less tax on

The maximum tax deduction that can be claimed from next financial year will be $25,000.   Importantly, if an employer is already adding to super on your behalf, the amount put into super by the employer already counts towards this limit.   Thus if an employer is already putting $5,000 per year into your superannuation, the maximum tax deduction that can be claimed on voluntary contributions would be $20,000.


To give an example, suppose Michael was working as an employee earning $50,000 per year and his employer already put $5,000 each year into super on his behalf.  Michael also has an investment property that makes him a profit of $20,000 each year.  If Michael does nothing, he would have to pay 34.5% tax on the $20,000 profit from the investment property, which is equivalent to $6,900 tax.  This means he is left over with $13,100 from the investment property.

Suppose Michael instead chooses to add the $20,000 profit from the property to his superannuation fund.  He claims the $20,000 added to his super fund as a tax deduction.  This means there is no longer a profit for him to pay tax on personally.  Instead, the super fund receives the $20,000 and pays $3,000 tax on it (15%) which means Michael’s super fund has $17,000 left over which is then invested for Michael for his retirement.  Instead of Michael having $13,100 in his bank account, there is $17,000 in Michael’s super fund which means the overall benefit is $3,900.