Clients and advisers have been caught unaware by changes to tax legislation that came into effect for the 2007-08 tax year. Not only has this resulted in clients being unable to claim or adjust a tax deduction for contributions into superannuation, it has also left many clients facing much larger tax liabilities than anticipated.

With the end of the 2008-09 financial year fast approaching, now is the perfect time to assess your client’s situation and take the appropriate steps to ensure they are able to claim the intended deduction.

Claiming a tax deduction

The use of personal deductible contributions into superannuation has long been a popular and effective method of reducing tax payable for eligible individuals. With careful planning the strategy can be implemented with

little fuss.

However, like many areas of superannuation, claiming a tax deduction for contributions is not always as simple as many people imagine and the consequences of getting it wrong can be very costly.

Eligible individuals can claim a 100 per cent tax deduction for contributions to superannuation and these contributions are classified as concessional contributions.

In addition to the reduction in taxable income, the benefits include an increase in superannuation savings, and earnings in the superannuation fund are taxed at 15 per cent, which may be more favourable than a client’s marginal tax rate.

For employees, the tax benefit is generally achieved by contributions to superannuation made under a salary sacrifice arrangement with their employer.

For self-employed, substantially self-employed or non-working individuals, a tax deduction may be claimed for the personal contributions made to the superannuation fund.

Where the person is an employee for Superannuation Guarantee purposes in the financial year, less than 10 per cent of assessable income and reportable fringe benefits must be attributable to employment. This is commonly referred to as the ‘10 per cent rule’.

To obtain a tax deduction, your client must give written notice of their intent to claim a tax deduction for personal contributions to the superannuation fund that received the original contribution and receive an acknowledgement of the notice from that fund.

It is at this point where some of the legislative changes come into play and it comes as no surprise that it is also this point in the process that has caused problems for clients and advisers during the past financial year.

Submitting a notice of intent

Unlike the previous rules, the notice of intent to claim the tax deduction must be provided to the fund by the earlier of:

• the submission of the client’s tax return for the year the contribution was made; or
• the end of the financial year following the financial year that the contribution was made.

Case Study 1

Lee makes a personal contribution to superannuation in the 2008-09 financial year and intends to claim a tax deduction for this contribution.

He also intends to lodge his tax return on September 30, 2009.

Lee must submit a written notice of his intent to claim the deduction to the superannuation fund before September 30, 2009.

Importantly, any subsequent variations to the deduction notice must also be provided to the trustee before the earlier of the above two dates.

After this time, the notification can only be varied if the tax deduction was subsequently disallowed, in whole or in part, by the Australian Taxation Office. This may occur when the amount claimed as a tax deduction exceeds the individual’s assessable income or where the 10 per cent rule is not satisfied.

Potential dangers

There are a number of other potential dangers that may result in a notice becoming invalid.

The majority of problems generally occur when the notice is provided in the following three situations:

• the superannuation fund no longer holds the contribution;
• the person is no longer a member of the fund; and
• the superannuation fund has begun to pay an income stream based in whole or in part on the contribution.

This means particular care needs to be taken when a client is considering withdrawing benefits from their superannuation fund, rolling over benefits to another superannuation fund or commencing an income stream.

Case Study 2

Anthony made a personal contribution to the Mahogany super fund in July 2008 and intends to claim a tax deduction for this contribution.

In January 2009 Anthony was made redundant from his job and decided to transfer his superannuation benefits to his new employer fund.

Anthony’s tax deduction notice will not be valid as the Mahogany super fund no longer holds the contribution.

Case Study 3

Richard made a personal contribution to superannuation in October 2008 and intends to claim a tax deduction for this contribution.

After making the contribution, Richard commenced a transition to retirement income stream with all of his super benefits.

As Richard has commenced an income stream with the contribution, his claim for a tax deduction will no longer be valid.

The result is the client paying tax on income at their marginal tax rate instead of the concessional superannuation rate of 15 per cent. This may leave the client liable for up to 31.5 per cent in additional tax.

Weighing the options

Fortunately, it is not all doom and gloom, and with careful planning potential dangers can be averted.

For clients not planning to withdraw funds or commence an income stream, it is as simple as lodging the notice of intent before completing their tax return, provided this is done before June 30 of the following financial year.

Clients who are planning to withdraw funds or commence an income stream can choose to submit a tax deduction notice and have the appropriate tax deducted from the fund at the time the contribution is made.

Alternatively, a notice can be submitted just prior to funds being withdrawn or rolled over.

Care needs to be taken in this situation if your client is uncertain as to whether they will meet the 10 per cent rule, as they run the risk of paying more tax than necessary. They may end up being ineligible to claim a tax deduction and also unable to adjust the tax deduction notice as a result of withdrawing funds or commencing an income stream.

Attractive strategy

Claiming a tax deduction for contributions to superannuation can be a very attractive strategy for many clients.

It is therefore important to be aware of the potential traps and pitfalls that may impact on your client when using this strategy.

Careful planning can see your client minimise tax, improve cash flow and create wealth all at the same time.

Careless planning can cost your client an additional 31.5 per cent in tax.

Stephen Bone is a technical services manager at ING Australia.