Louise Biti explores the rules for claiming tax deductions on personal super contributions and steps you can take to avoid falling into the many traps.
Personal contributions to super may be tax deductible, but traps exist for the unwary and can result in significant tax penalties. Advice in this area needs to take into consideration the client’s eligibility to claim a deduction, the timing of contributions and other transactions, and completion of the correct paperwork.
Before launching into advice on the deductibility of contributions, the first step is to separate out the decision on whether a client is eligible to contribute to super (defined under Superannuation Industry Supervision (SIS) rules) from the decision on what type of contribution to make (defined in taxation legislation).
To make a contribution to super the client needs to meet the eligibility requirements in SIS. This means they need to be under age 65 or between age 65 and 75 and have met the work test (40 hours within a 30-consecutive-day period).
To then claim a tax deduction for personal contributions the client will need to meet the 10 per cent rule. In most cases this requires the client to be self-employed (sole trader or in a partnership) or unemployed. However, if the total of employment income (including directors’ fees) plus reportable fringe benefits and reportable super contributions is less than 10 per cent of total income, the client may also qualify for a tax deduction.
HOW MUCH TO CLAIM?
An eligible client can claim any amount as a tax deduction. However, amounts that exceed the concessional contributions cap will be taxed at a penalty rate of 31.5 per cent. In most situations, it is important not to claim a deduction for amounts that will exceed the cap.
Deductible contributions reduce personal income tax but are taxed at 15 per cent in the super fund. Therefore, the tax calculations should balance the rate of PAYG tax saved against the tax paid on concessional contributions. A tax deduction should only be claimed if the personal tax rate on a dollar is more than 15 per cent.
To be tax effective, tax deductions should generally not be claimed for amounts that reduce a client’s taxable income below $30,000. This is the point where each dollar starts to be taxed at a rate higher than 15 per cent.
Clients should be referred to their accountant or tax agent to check their own personal taxation implications.
WHAT ARE THE ADMINISTRATION REQUIREMENTS?
Before claiming a tax deduction the client must provide a section 290-170 Notice of intention to claim a tax deduction to the super fund trustee and receive a confirmation notice back from the trustee. This process is required in both public offer funds and self-managed super funds (SMSFs).
All personal contributions are first classified as non-concessional contributions when received by the super fund. The status is only changed to concessional once the trustee receives the section 290-170 notification form.
The notice can be obtained from the ATO website www.ato.gov.au and must be provided before:
• the tax return is submitted for that financial year, or
• the contributions are used to start an income stream, or
• the contributions are split with a spouse.
If any of these transactions have already occurred, a tax deduction cannot be claimed.
HOW CAN CONTRIBUTION RESERVES BE USED?
Contribution reserves are created when contributions are paid into a reserve rather than allocated to a member’s account.
The strategic use of contribution reserves is limited because contributions must be allocated to the member’s account within 28 days after the end of the month in which the contribution has been made (SISR 7.08(2)).
A strategic opportunity exists in an SMSF for contributions made in June that would otherwise create an excess contribution. These amounts can be paid into a contribution reserve and then allocated to the client’s account in July (but by July 28). This shifts the assessment of contributions against the relevant contribution cap into the following year. The contribution is assessed against the relevant cap in the year of allocation (not contribution) (ITAA97 sec 292-90(4)).
If the client elects to claim a tax deduction, the deduction can be claimed in the year of contribution, rather than the year of allocation. This can help a client to claim a larger tax deduction in the first year to manage tax liabilities without creating an excess contribution.
Deductible personal contributions can be an effective way to reduce tax payable, but it is important to break the strategy down into steps to ensure the person is eligible, the amount claimed as a deduction is tax-effective, and all administrative steps are followed. If any errors are made along the way, the client may end up paying too much tax or being ineligible for the deduction.
Louise biti is a director of Strategy Steps, an independent company providing strategy support to financial planners – www.strategysteps.com.au
