Claiming personal superannuation contributions as a tax deduction

Paul Sarkis explains the implications that a recent tax ruling will have for clients who want to claim personal super contributions as a tax deduction.

The Australian Taxation Office (ATO) recently released Taxation Ruling (TR) 2010/1 to clarify its views on a range of matters relating to super contributions.

The ruling explains:

• the ordinary meaning of contribution;
• how a contribution can be made;
• when a contribution is considered to be made; and
• the rules relating to deductible super contributions for employers and eligible individuals.

It also explains when a notice to claim personal super contributions as a tax deduction will and won’t be valid.

What are the key deduction notice requirements?

To be valid, a person must submit a deduction notice in an approved form to their super fund within the earlier of:

• the time they file their tax return for the financial year; or
• the end of the following financial year in which the contribution was made.

In addition, there are other circumstances that will make a deduction notice invalid. These include:

• the person making the contribution is no longer a fund member (eg, their entire benefit has been either cashed out or rolled over to another fund, including a successor fund transfer);
• the fund no longer holds the contribution (eg, because the person has been paid a lump sum or partially rolled over to another fund); or
• the fund has started to pay a pension based in whole or part on the contribution.

Two of these scenarios where a person partially rolls over their super benefit to another fund or starts a pension before lodging a deduction notice are further clarified in the ruling.

Partial roll over

If a person rolls over part of their super benefit to another fund before a notice is submitted, the deduction is limited to the proportion of the tax-free component remaining after the rollover.

This portion is worked out by dividing the relevant contribution by the tax-free component of the total benefit immediately prior to rollover, as per the figure 1 formula.

Case study 1 — Claiming a tax deduction after partial rollover

George, aged 54, has a super benefit of $70,000, comprising a tax-free component of $20,000 and a taxable component of $50,000.

He’s self-employed and in February 2010 elects to make a personal super contribution of $50,000. This contribution is recorded against the tax-free component of the benefit, giving a total tax-free amount of $70,000.

In May 2010, after his 55th birthday, George retires and decides to rollover $60,000 of his total super benefit to another fund. The tax-free component of the rollover is worked out using the formula in figure 2.

The tax-free component remaining after the rollover is therefore $35,000 (ie, $70,000 less $35,000).

If George lodges a notice to claim $50,000 as a tax deduction, the notice will be invalid as the fund no longer holds the entire contribution.

However, a valid deduction notice may be submitted for a proportional amount of the tax-free component remaining after the rollover.

After applying the formula, the maximum amount that George can claim as a deduction will be $25,000. See figure 3.

It is important to note that while the ruling does not outline the ATO’s position when a partial lump sum withdrawal is made, it’s reasonable to expect a similar approach and formula will be used to determine how much of the contribution can be claimed as a tax deduction.

When a pension is started

A pension is considered to have started in whole or part on the contribution if it’s commenced from the fund into which the contribution was paid.

Unlike partial rollovers, it doesn’t matter whether or not some of the contribution remains in the fund after the pension is started.

It’s therefore critical that a deduction notice is provided to the fund before the pension begins.

Case study 2 — Claiming a deduction after starting a pension

Sarah, aged 62, has a super benefit of $250,000. She makes a personal contribution of $50,000 in March 2010. This brings the total value of her accumulation account to $300,000.

She then commences a pension using $280,000 of these funds in April 2010. A notice to claim a deduction submitted in June 2010 for the $50,000 will then be invalid as she has commenced a pension based in whole or part on the contribution.

This will still be the case even if she only uses $200,000 to commence the pension, even though this will leave an amount in her fund in excess of the amount contributed.

It is important to note that rules outlined in TR 2010/1 with respect to claiming super contributions as a tax deduction will apply in the 2007-08 financial year and thereafter.

However, if the super fund’s current administrative practice does not reflect the rules outlined above regarding partial rollovers and pension commencements, these rules will apply in the 2010-11 and later income years.

Paul Sarkis is technical services manager at MLC.