Thursday 01 February 2018

In what circumstances can clients claim a deduction for a personal super contribution?

The general conditions that must be met for a client to claim a deduction for a personal super contribution are as follows:

  General conditions
Purpose Personal contributions must be made to a complying fund1 for the purpose of providing superannuation benefits
Age limits
  • Individual must be age at least 18 when contribution is made (unless carrying on a business or engaging in employment-related activities)
  • Contribution must be made within 28 days after the month the individual turns 75.
Deduction notice Valid notice of intention to claim a tax deduction (a deduction notice), in ATO approved form, must be given to fund trustee within certain timeframes (see below).
Notice acknowledgement The trustee of the fund must have acknowledged the notice.
Contributions excluded The following contributions cannot be claimed:
  • Personal contributions of CGT retirement exemption amounts by individuals under the age of 55
  • Transfers from foreign super funds
  • Downsizer contributions2
  • First Home Super Saver Scheme re-contributions.3
Sufficient assessable income A deduction for a personal contribution cannot result in, or add to a tax loss.

Maximum earnings test no longer applies

Prior to 1 July 2017, a maximum earnings test applied to prevent individuals who earned more than 10 per cent of income4 as an employee from claiming a deduction for personal contributions. This test was removed for 2017/18 and later income years.

Deduction notice requirements

To claim a deduction for a contribution, a deduction notice for the contribution must be given in an ATO approved form. While the ATO has developed a standard form for this purpose, many superannuation funds use their own approved form.

The timeframe and other requirements for deduction notices are outlined in the table below. If these requirements are not met, the client will not be entitled to claim the deduction.

  General conditions for deduction notices
Timeframes for lodgement A deduction notice must be given to the fund before the earlier of:
  • the day the member lodges their tax return for the year in which the contributions were made, and
  • the end of the financial year after the year in which the contributions were made.
When is a notice invalid? A notice is invalid if:
  • it is not in respect of the contributions made
  • it includes all or part of an amount covered by a previous notice
  • when the member gave the notice:
    • they were not a member of the fund – for example, the client has withdrawn all of their benefits from the fund
    • the trustee no longer holds the contribution, for example the client has made a partial withdrawal after making the contributions but before submitting the notice – see example 1
    • the trustee has begun to pay a super income stream based in whole or part on the contribution. The ATO’s view is that an income stream will be based in whole or part on a contribution if a pension has commenced from an account after a contribution was made but before a notice is submitted – see example 2
    • the person has applied to split contributions with spouse (and trustee has accepted application).
Varying a notice

A client may wish to vary a notice that has previously been submitted if the amount they are actually able to claim is less than the amount they specified in a notice. Where the variation is effective, the contributions tax deducted from the contribution will typically be refunded to the member’s account.

A notice cannot be revoked or withdrawn. It can be varied, but only so as to reduce the amount claimed (including to nil). Variations are ineffective in circumstances similar to those in which a notice is invalid. For example, a variation submitted after a pension has commenced based in whole or part on the contribution cannot be accepted by a fund trustee.

Rolling over or drawing a lump sum – proportioning rule affecting deduction notices

As noted above, tax legislation provides that a deduction notice for a personal contribution is not valid if the superannuation fund no longer holds the contribution.

The ATO considers that where a client withdraws or rolls over benefits to another fund after making a contribution but before providing the deduction notice for the contribution to the fund, the amount of contributions that the fund still holds is calculated as a proportion of the tax free component of a client’s superannuation interest in the fund that remains after the roll-over/withdrawal. A valid deduction notice will be limited to this amount.

That proportion is the value of the relevant contribution divided by the tax free component (TFC) of the superannuation interest immediately before the rollover.

The formula is as follows:
TFC of remaining interest X (ContributionTFC / of interest before rollover)

Example 1

Rachel has a superannuation account balance of $100,000 which includes a tax free component (TFC) of $25,000.

She made a $25,000 personal contribution in July 2017, taking her balance to $125,000 which now includes a TFC of $50,000.

In August 2017, Rachel rolled over $50,000 to another fund leaving her with an account balance of $75,000 (assuming, for simplicity, that there have been no earnings).

The $50,000 rollover was made up of $20,000 TFC and $30,000 taxable component (determined by operation of the tax component proportioning rule).

Following the rollover, the TFC of the remaining account balance is $30,000.

A valid deduction notice for the contribution would be limited to $15,000 which is worked out as follows:

TFC of remaining interest X (Contribution / TFC of interest before rollover)
= $30,000 X ( $25,000 / $50,000 )
= $15,000

A similar restriction applies to variation notices.

Impact of commencing a pension on validity of deduction notices

As noted above, where the trustee of a superannuation fund has begun to pay an income stream, the ATO’s view is that an income stream will be based in whole or part on a contribution if it is commenced from an account after a contribution was made but before a notice is submitted.

Example 2

Edmund made a personal contribution of $30,000 to his accumulation account in July 2017.

Prior to lodging his tax return for the 2017/18 year (or prior to 1 July 2019 if that is earlier) he could lodge a deduction notice that covers all or part of the $30,000 personal contribution.

However, if after making the contribution but before providing the notice, Edmund was to commence a pension with any amount from his accumulation account, any notice for his $30,000 contribution is invalid and he will not be eligible to claim a tax deduction.

This means that contribution will be treated by the ATO as a non-concessional contribution, instead of a concessional contribution.

A similar restriction applies in the case of a variation of a deduction notice. For example, if a client makes a contribution to their accumulation account, lodges a deduction notice, commences a pension from the super account and then, later, finds that the deduction is disallowed by the ATO, they will be unable to vary the deduction notice. This means that they are unable to have the associated contributions tax refunded to their account.

Importantly, stopping the pension and transferring funds back to an accumulation account will not solve the problem. The contributions will still be considered to have formed the basis (in whole or part) of an income stream and any deduction or variation notice for the contributions will continue to be invalid.

Further information:

ATO Taxation Ruling TR 2010/1

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Additional information

1 Excluding Commonwealth public sector superannuation schemes and untaxed superannuation funds that would not include the contribution in its assessable income.

2 For more information see Downsizing contributions into superannuation on the ATO website.

3 For more information see First Home Super Saver Scheme on the ATO website.

4 Income for this purpose = Total assessable income plus Reportable Employer Superannuation Contributions plus Reportable Fringe Benefits Total

Macquarie Investment Management Limited (MIML) ABN 66 002 867 003 AFSL 237 492 is not an authorised deposit-taking institution for the purposes of the Banking Act (Cth) 1959, and MIML’s obligations do not represent deposits or other liabilities of Macquarie Bank Limited ABN 46 008 583 542. Macquarie Bank Limited does not guarantee or otherwise provide assurance in respect of the obligations of MIML.

This information is provided for the use of financial services professionals only. In no circumstances is it to be used by a potential investor or client for the purposes of making a decision about a financial product or class of products.

The information provided is not personal advice. It does not take into account the investment objectives, financial situation or needs of any particular investor and should not be relied upon as advice. Any examples are illustrations only and any similarities to any readers’ circumstances are purely coincidental.

While the information provided here is given in good faith and is believed to be accurate and reliable as at February 2018, it is provided by MIML for information only. We will not be liable for any losses arising from reliance on this information.

MIML and Macquarie Bank Limited do not give, nor purport to give, any taxation advice. The application of taxation laws to each client depends on that client’s individual circumstances. Accordingly, clients should seek independent professional advice on taxation implications before making any decisions about a financial product or class of products.