Tax deductions for personal super contributions. Are you eligible...

In certain circumstances a person will be eligible to claim a tax deduction for personal concessional contributions. Such opportunities are available to self-employed people (sole traders and partners in partnerships), and to those who derive less than 10% of their tax assessable income (plus reportable fringe benefits, plus reportable employer superannuation contributions) from employment.

When making personal deductible contributions, the amount counted as a concessional contribution will be limited to maximum tax deduction that can be used. That is to say, if a taxpayer makes a contribution of (say) $50,000 but they can only use a tax deduction of $35,000 to reduce their taxable income to $0, the residual $15,000 will be treated as a non-concessional contribution.

Over the years we have come across cases of people seeking to maximise their superannuation contributions by making a personal deductible contribution of (say) $50,000, in addition to maximum non-concessional contributions. In a number of these cases, the contributor was a non-resident, living overseas and had no Australian sourced assessable income. They were willing to forgo the 15% contributions tax even though they could not claim a personal tax deduction. The objective was to maximise contributions. In each case, as the tax deduction could not be utilized, the personal concessional contribution was counted against the member's non-concessional contribution cap, resulting in an excess contribution tax assessment.

Where a taxpayer is entitled to claim a deduction for personal contributions, rigid notice requirements apply. If intending to claim a tax deduction for personal contributions, a notice of intention to claim a tax deduction (s.290-170 notice) must be given to the relevant superannuation fund. The notice must be given by the earlier of the date the taxpayer lodges their tax return for the financial year in which the deduction is to be claimed, of the following 30 June. The superannuation fund must also acknowledge receipt of the notice.

In certain circumstances, the s.290-170 notice must be provided by an earlier date. If intending to deal with the contribution for which it is intended to claim a tax deduction, before lodging the income tax return, the s.290-170 notice must be provided, and acknowledgement received.

Dealing with the contributions includes commencing a pension with all or part of the contribution, withdrawing the contribution from the fund to which it was made, or rolling the contribution to another superannuation fund.

By way of simple example, let's consider a self-employed person who wishes to make a personal deductible contribution and then commence drawing a pension from their superannuation fund. In such a case, they would need to lodge their s.290-170 notice (and receive acknowledgement) before they commence their pension. Failure to lodge the notice before commencing the pension will result in a loss of the tax deduction for the personal contribution.

Some simple tips for managing personal deductible contributions include:

• If intending to claim a tax deduction for personal contributions, ensure that the s.290-170 notice is lodged by the prescribed date or before dealing with the contribution;
• The obligation to lodge the notice rests with the taxpayer, even though some retail fund managers may forward notices to their super fund members - don't rely on the fund manager sending the notice;
• In some cases we have seen fund managers record member contributions as personal deductible contributions on the member's June statement - in a number of cases, where valid s.290-170 notice was not provided, such contributions have subsequently been re-reported as non-concessional contributions, resulting in the loss of a tax deduction to the taxpayer, and potentially an excess contribution assessment arising; and
• Very little tolerance exists for amending or lodging s.290-170 notices after expiry of the relevant lodgment dates

Superannuation remains a very tax effective environment for building wealth for retirement, but the rules are complex and we are currently experiencing regulators adopting a very strict compliance approach, where very simple administrative errors occur. With careful management, financial planners and accountants can add significant value to their client relationships.

The above Information kindly provided by Professional Investment Services Pty Ltd