Superannuation and tax

There are many rules and requirements around claiming a tax deduction for a personal superannuation contribution. The process certainly requires some careful planning. Andrew Biviano explains how certain events can impact the amount that can be claimed as a personal tax deduction.

Successfully claiming a tax deduction for a personal superannuation contribution requires some careful planning. Not doing so could invalidate the amount that can be claimed as a deduction in full or part. TR 2010/1 details the view of the Australian Taxation Office (ATO) in relation to how certain events can impact the amount that can be claimed as a personal tax deduction.

Contributing to superannuation can be an effective way to save for retirement, given the tax concessions available. For those who are employed, this is generally done by entering into an effective salary sacrifice agreement with their employer.

In cases an employer and employee arrangement does not exist, the process is somewhat different and more complex. In the latter case, the person must first make a personal contribution to super and then claim it as a personal tax deduction by completing a Notice of Intent (290-170 notice) to claim a personal tax deduction.

In doing so, there are a number of issues that need to be carefully considered to ensure the intended deduction is not reduced.

Eligibility and age

Claiming a tax deduction for personal contributions made to super during the financial year is generally restricted to those who satisfy the 10 per cent test. That is, less than 10 per cent of the individual’s assessable income, reportable fringe benefits and reportable employer superannuation contributions come from employment related activities.

For example, if a person has income from employment related activities of $25,000 they would need to have other passive income or business income so that their total income was over $250,000, in order to meet the 10 per cent test. Where this is not the case, they would not be eligible to claim a deduction for a personal contribution made to super.

For those under 18 at 30 June of a financial year, there are additional restrictions in terms of their eligibility and the amount that can be claimed. In general, those under 18 must have business income or employment related income (subject to the 10 per cent test) and the amount that can be deducted is generally limited to the amount received from those activities.

In addition, the normal contribution rules also exist, including:

a) Meeting the work test of 40 hours over 30 consecutive days for those aged 65 or over;
b) Ensuring that the contribution is made no later than 28 days after the month the member turns age 75; and
c) The fund must have the member’s tax file number on file in order to accept the contribution.

Lodgement and validity

Another important aspect of successfully claiming a tax deduction for a personal contribution relates to the timeframe and the validity of the completed 290-170 notice. The notice needs to be provided to the trustee and acknowledged before the earlier of:

1. The end of the day the income tax return is lodged for the financial year in which the contributions are made or 
2. 30 June of the year following the financial year the contribution was made.

As described above and further clarified in TR 2010/1, once an income stream is started the ability to claim a tax deduction for a contribution made to that fund will be lost. 

Consider the following example: 

A person has an account balance of $150,000 (of which $10,000 belongs to the tax-free component) and makes a personal contribution of $50,000. After making the contribution, they commence an account based pension with $140,000 of the money within the Fund leaving $60,000 in the superannuation accumulation phase.

In doing so, they lost their opportunity to claim a tax deduction on the personal contribution that was made just prior to the commencement of the income stream, as any notice submitted would now be invalid.

To avoid this outcome, the following steps could have been considered:

1. First commence the income stream with $140,000 leaving $10,000 in the accumulation phase, then make the personal contribution of $50,000 into superannuation; or
2. Lodge the Notice of Intent before the income stream is commenced. However, this may still lead to a problematic outcome if the client does not end up having sufficient assessable income. It may also end up paying 15 per cent tax and not be able to claim a deduction on the entire amount.

Similar to the commencement of an income stream, where a member leaves the fund taking 100 percent as a withdrawal or rollover then any Notice of Intent lodged with the fund will not be valid. 

On the other-hand, if the member made a partial rollover or withdrawal, ironically, different rules apply and a reduced amount can be claimed. From the same tax ruling, the reduced amount can be calculated using the following  the formulae in Figure 1.

By applying the formula to the previous example, if the $140,000 was rolled-over or withdrawn instead of using it to commence a superannuation income stream, a reduced amount of $15,000 would still be available. This can be calculated as follows:

• TF component of the interest before R/W = $10,000 + $50,000 = $60,000
• TF component of the remaining interest after R/W =
  $60,000 – ($140,000 x ($60,000/$200,000)) = $18,000
• Personal contribution remaining = $18,000 x ($50,000 / $60,000) = $15,000

Interestingly, if a second rollover or withdrawal from the remaining superannuation balance of $60,000 were to occur, the above formulae could be reapplied. In this case, if a further $10,000 was taken, the personal contribution amount of $15,000 (that remained after the first withdrawal) would reduce to $12,500. This can be calculated as follows:

• TF component of the interest before the second R/W = $18,000 
• TF component of the remaining interest after the second R/W =
  $18,000 – ($10,000 x ($18,000/$60,000)) = $15,000
• Personal contribution remaining after the second R/W =
  $15,000 x ($15,000 / $18,000) = $12,500

It should also be noted that where an initial 290-170 notice has been submitted and acknowledged it cannot be revoked or withdrawn, but it can be varied down (to nil if required).

However, to do so, the notice must be valid and done within the required time-frame. Importantly, where a deduction amount has been denied by the ATO, the amount initially claimed can still be varied down, but only by the amount denied so long as the other validity issues have not been triggered.

In summary, where a person makes a personal deductible contribution to super it is important to give consideration to the impact a recommendation may have on the amount that can be claimed as a deduction, especially where it relates to the use of a superannuation income stream.

Andrew Biviano is the technical services and paraplanning manager, Fiducian Portfolio Services.