Personal deductible contributions: it’s all in the timing

Rachel Leong explains how the retirement date, withdrawals and the timing of Section 290-170 notices can have a great impact on the amount of deductions that can be claimed for clients with deductible contributions as part of their financial plan.

The ability to claim a deduction on personal contributions to superannuation may help many eligible individuals reduce their taxable income. When approaching retirement, the retirement date can affect the ability to claim a deduction on contributions in the current financial year.

However, all individuals should take care to ensure that 290-170 notices are provided before certain events and that they are aware of the maximum amount that can be claimed.

Otherwise, they may miss out on claiming a deduction on some or all of the contribution, or worse, a significant tax liability may be created by exceeding the contribution limits.

Who can claim?

An individual who is deemed an employee for super guarantee (SG) purposes and has less than 10 per cent of total assessable income, reportable fringe benefits and reportable employer superannuation contributions attributable to employment, is eligible to claim a deduction on personal contributions to super.

However, if an individual is not involved in employment-related activities (as an employee) they do not have to satisfy the 10 per cent test.

Those who qualify to claim a deduction on personal contributions include retired, unemployed, self-employed and substantially self-employed people.

Timing of retirement

If an individual is retiring this year, they should consider what the optimal retirement date is. The retirement date may affect their ability to make personal deductible contributions for the current financial year.

Timing of 290-170 notices

A valid 290-170 notice must be submitted before a contributions splitting application is made or a pension has commenced. If any part of the contribution is used to commence a pension, none of the contribution can be claimed as a deduction.

In addition, for contributions made in the 2010-11 financial year where rollovers (to another accumulation account) or withdrawals were made, the amount that can be claimed is limited to the lesser of the contribution made that year and the tax-free component remaining.

Contributions from 1 July 2011

From 1 July 2011, if withdrawals/rollovers are made to another accumulation account, it is assumed that part of the withdrawal/rollover is funded from the contribution.

Note that super funds may choose to apply this approach as part of their administrative practise for the 2007-08 and later financial years, however it is only mandatory from the 2011-12 financial year.

There are two steps that need to be followed to calculate the maximum amount that can be claimed as a deduction for a particular financial year. 

They are:

1. Calculate the amount of tax-free component rolled/withdrawn, and
2. Calculate the maximum amount of deductible contributions for the year.

However, the calculation is more complicated when there is more than one withdrawal/rollover in the financial year of contribution.

Excess contributions tax

If individuals attempt to claim a higher level of personal deductible contributions than they are eligible for, they may inadvertently breach the non-concessional contribution limit.

Conclusion

The retirement date, withdrawals/ rollovers and the timing of 290-170 notices can greatly affect the amount of deductions that can be claimed. Individuals should take great care when personal deductible contributions are part of their financial plan, as an error may have substantial negative tax implications.

For a PDF version of this article that includes additional tables and case studies click here.

Rachel Leong is a technical services consultant at Suncorp Life.