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What is the ‘10 per cent rule’?

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I am an employee but I also run a very successful part-time business on the weekend and I have been told about a ’10 per cent rule’ which means I can increase my super contributions. Could you explain this?

You are referring to concessional contributions, which were once called deductible contributions. These are concessional in tax terms, as this income only gets taxed at 15 per cent when it’s plonked into your super fund. If you put money into your super that has already been taxed it’s called non-concessional – it used to be called undeducted.

As it has already been taxed, it’s tax free inside your super fund and for those under 65 years of age they can put $150,000 a year into super this way or $450,000 in one go but it knocks you out for further non-concessional contributions for the following two years.

The 10 per cent rule allows someone who earns 10 per cent or more of his or her income in a self-employed activity to make tax-deductible contributions, that is, concessional contributions, up to the respective maximum based on age. For under 50s, it’s $25,000 and over 50 to 65, it’s $50,000.

For over 65s and under 75s, you have to pass a work test to make these contributions. The work test says you have to work 40 hours over 30 days in a row in a relevant financial year. The big difference is that a self-employed person, unlike an employee, can make these concessional contributions as a lump sum.

By the way (this is an interesting twist), if you’re retired and aged between 55 and 65, you’re considered ‘self-employed’ and can make lump sum concessional contributions up to $50,000 and this can help reduce your capital gains tax if you’re selling shares or property to put the proceeds into super.

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

For advice you can trust book a complimentary first appointment with Switzer Financial Services today.

Published on: Saturday, February 19, 2011

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