Senior SMSF Technical Specialist
Retirement might be a long way off, but can a child qualify for a Government co-contribution if they want to kick-start their super?
It’s possible for a child to qualify for a Government co-contribution but they will need to jump through a few hoops first. Here is what is involved.
To begin with, the child will need to make a personal super contribution to a complying super fund. It must be their own contribution (and not a contribution from third party). This means the source of the funds must come from the child’s after tax monies. For example, a child might be gifted monies from a parent or grandparent from which the child can make the contribution, but the parent or grandparent shouldn’t bypass the child and deposit their gift directly into the child’s super fund.
The child must not claim a tax deduction for this contribution, even if they are eligible to (ie it must be a non-concessional contribution). We explored the tax deductibility of child contributions in our earlier blog.
Next, in the financial year the contribution is made, at least 10% or more of the child’s total income must come from:
- carrying on a business, or
- activities that result in them being an employee for Super Guarantee (SG) purposes.
This will include a child who is regarded as an employee in the ordinary sense of the meaning as well as a child in a genuine arrangement who is paid for:
- work under a contract predominantly for their labour, or
- an activity involving their skills as an artist, musician or sportsperson, or
- work of a domestic and private nature (even if it’s for less than 30 hours a week).
It will be important a child is able to evidence the hours worked and remuneration received with appropriate documentation such as a work diary, invoices, time sheets, pay slips etc.
When checking whether the right amount and type of income has been earned, it is a child’s "total income" that is relevant.
This includes assessable income, reportable fringe benefits and certain superannuation contributions.
Take for example, Connie. She is 15 years old and works 5 hours a week at her local coffee shop. She has no other income. Connie would satisfy the income test as 10% or more of her income (in fact all of her income) relates to income from activities that result in her being an employee for SG purposes. It doesn’t matter that her employer hasn’t paid SG contributions for Connie, only that she qualifies as an employee for SG purposes. Connie’s older sister Peta, who is studying at university full time, won’t qualify for a co-contribution however as her income consists entirely of a family trust distribution.
There are other conditions which need to be met but these are not usually problematic for a child:
- they generally need to be a permanent resident of Australia,
- their total super balance at the start of the financial year must be less than the general transfer balance cap ($1.7m in 2021/22 year), and
- they must not have excess non-concessional contributions.
Another key requirement is the child will need to lodge a tax return for the year in which the non-concessional contribution was made. This might be the only reason why the child needs to lodge a tax return. The ATO will then automatically match data lodged by the super fund against the tax return to determine co-contribution eligibility.
For the current financial year, the maximum co-contribution payable is $500. With a matching rate of 50%, a personal super contribution of $1,000, would maximise the co-contribution available provided the individual’s “total income” does not exceed $41,112 (a smaller amount will be payable until a child’s total income exceeds $56,112).
Whilst a child’s benefits in super will generally not be accessible for many years, being able to boost their super benefits with a small amount now will not only provide an opportunity to encourage and educate the next generation about their retirement savings but also the magic of compounding investment returns.
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