In the 2006/07 financial year, a self-employed client (aged 58), made a series of superannuation contributions totalling $1.1 million.
His intention (with the help of his adviser) was to:
•Take advantage of the $1 million transitional cap on non-concessional contributions, and
•Utilise most of his maximum deductible contribution (MDC) limit of $105,113 by claiming a tax deduction of $100,000.
To confirm the amount he wanted to claim as a tax deduction, the fund sent the client a personal tax questionnaire (or section 82AAT notice). The client gave this to his accountant and informed him he wanted to claim his $100,000 contribution as a tax deduction.
What went wrong?
Without considering the other contributions made in the course of the 2006/07 financial year, the accountant advised him that he could only claim the first $5000 plus 75 per cent of the balance up to his age based MDC limit. In other words, he could only claim a maximum tax deduction of $76,250 [ie $5000 + 75 per cent x ($100,000 – $5000)].
On the basis of this advice, the client returned the Section 82AAT notice to the fund stating he wished to claim a tax deduction of $76,250. This was duly processed by the fund with an acknowledgement letter sent back to the client.
The potential tax consequences
In December 2007, the client’s adviser became aware of the accountant’s advice. Although the client was yet to submit their tax return for the year, the adviser was worried his client would receive an excess contributions tax assessment from the ATO. This was because the fund would already have reported personal deductible contributions of $76,250 and non-concessional contributions of $1,023,750 to the ATO.
Given the non-concessional contributions exceeded the $1 million transitional cap by $23,750, the client would have been subject to penalty tax of $11,043 (ie $23,750 x 46.5 per cent). The adviser was also concerned that by only claiming a tax deduction of $76,250, the client would end up paying more income tax in their end of year return.
The fund’s response
To help his client avoid these adverse tax consequences, the adviser approached the fund to see if the original notice could be amended. However, the fund told the adviser it was only possible to vary the Section 82AAT notice downwards (to the extent the client was denied a deduction by the ATO) and not upwards. This was because the notice had already been processed and acknowledged.
The adviser then asked MLC Technical Services if there was any way we could help. We confirmed that while it wasn’t possible to amend an existing notice upwards, it was possible for the client to submit a new Section 82AAT notice in respect of contributions not previously covered.
This meant that, because the client had made other personal contributions for the year totalling $1 million, there was scope to submit a second notice in respect of contributions of $31,667 and claim an additional tax deduction of $23,750*. This would give the client a total tax deduction for the year of $100,000.
Although the fund was required to re-report the contributions to the ATO, submitting a second notice was extremely favourable for the client. He avoided penalty tax on excess contributions (which might otherwise have been payable) and claimed a larger deduction in his end of year tax return.
Postscript: The rules relating to the tax deductibility of personal contributions were changed on 1 July 2007. Self-employed and substantially self-employed clients (meeting certain criteria) will now receive a full deduction for their personal contributions made in 2007/08 and later financial years. Additionally, under section 290-170 of the ITAA 1997, there are now greater restrictions on when a deduction notice can be submitted to a super fund. Amongst other things, the notice must be submitted by the earlier of the client lodging their tax return for the year or by 30 June of the following financial year.
* As the client has already claimed the first $5000 in his previous notice, he is only able to claim 75 per cent of the contributions made in the second notice.