10% Substantially Self-employed Deduction Rule

In simple terms, a taxpayer who carries on both a business and who is engaged as an employee, will be able to claim a tax deduction for their personal super contributions if their assessable income as an employee is less than one-tenth of their total assessable income.

A taxpayer who is in the position of deriving both employment income and business or investment income can claim a tax deduction for their personal super contributions by converting their employee income into fringe benefits or salary sacrifice employer super contributions.  This device reduced the amount of income derived from employment activities and the value of the fringe benefits and the salary sacrifice contributions were not treated as assessable income.

The Government has closed one of these loopholes by “adding back” the value of certain types of fringe benefits – called reportable fringe benefits, as part of the total assessable income of the taxpayer.

From 1 July 2009, the second loophole will be closed when salary sacrifice employer contributions are also “added back” into the total assessable income of the taxpayer.

In short, for 2009/10 and subsequent tax years, many taxpayers who were previously able to claim a tax deduction for their personal super contributions (by substituting salary sacrifice contributions for employment income) will no longer be entitled to claim these tax deductions for personal super contributions.

This change will in particular, adversely affect taxpayers who are medical practitioners who carry on a private practice combined with acting as a visiting medical officer.

The change will be affected by adding another paragraph to s290-160(2) of the 1997 Income Tax Assessment Act to include reportable employer superannuation contributions – the new name for salary sacrifice contributions.