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Super contributions tax concessions

Tax deductions for personal super contributions

Section: 4.1

If the conditions outlined below are met, an individual may claim a full tax deduction for personal contributions made to super.

Personal contributions, where a valid deduction notice is submitted and acknowledged, and the client claims the tax deduction in their tax return, are concessional contributions and are subject to a person's concessional contributions cap. The amount of personal deductible contributions must be considered in total with the clients other concessional contributions for the year (see section other types of concessional contributions). Excess concessional contributions are subject to additional tax.

A client cannot create a tax loss by making a personal concessional contribution. This means the tax deduction that can be claimed in respect of a personal contribution is limited to the client's assessable income for the year, less other deductions.

An individual with a total superannuation balance of $1.6 million or more is not restricted from making personal deductible super contributions. However, if the deduction is denied by the ATO, the contribution will be classified as a non-concessional contribution. Individuals with a total superannuation balance of $1.6 million or more on 30 June, have a non-concessional contributions cap of Nil in the following financial year, so any non-concessional contributions will be excessive.

For this reason, extra care should be taken when making personal deductible super contributions for clients with total superannuation balances of $1.6 million or more.

Conditions for claiming a tax deduction for personal super contributions

The following primary conditions must be met to be eligible to claim a tax deduction for a personal super contribution:

  • the taxpayer makes a personal contribution to a complying super fund or RSA for themselves for the purpose of providing super benefits.
  • The contribution is not made to one of the following types of complying super funds:
    • a defined benefit interest in a Commonwealth public sector superannuation scheme
    • an untaxed super fund and
    • a fund prescribed by regulations that prevents members from claiming tax deductions. As at May 2017 no funds or contributions have been regulated for this purpose.
  • the taxpayer deducts the contribution for the income year in which the contribution is made
  • the taxpayer submits a valid notice to the fund trustee (see Taxpayer's valid notice (290-170 notice) below)
  • the fund trustee gives the taxpayer an acknowledgement of receipt of the valid notice

Additional conditions must be met if:

  • the contribution is made prior to 1 July 2017 and the taxpayer is an employee (see 10% rule for employees - applies to contributions made prior to 1 July 2017 below)
  • the taxpayer us under age 18 (see Age-related conditions below), or
  • the contribution is sourced from the sale of an active asset, where the small business CGT concessions apply.

Age-related conditions

If a taxpayer is under the age of 18 at the end of the income year in which they make a contribution, to be eligible to claim a tax deduction for the super contribution they must have derived income in the income year:

  • from the carrying on of a business, or
  • attributable to activities where the child is treated as an employee for SG purposes.

If a taxpayer is aged 65 to 74, they must satisfy the work test in order for the super fund to accept the contribution, before tax deductibility can be considered.

If a taxpayer is aged 75 or more, the fund cannot accept personal member contributions, so the member is unable to make personal deductible contributions from age 75. For this purpose, age 75 includes the period between reaching age 75, and 28 days after the end of the month in which a client reaches that age.

Contributions sourced from the sale of a small business

A person cannot claim a tax deduction for contributions they have elected to count toward their lifetime CGT cap.

If an amount arising from a CGT small business exemption is contributed by someone age 55 or over as a personal contribution, they may claim a tax deduction (if otherwise eligible) but the contribution will count toward the concessional cap.

Taxpayer's valid notice (290-170 notice)

To be eligible to claim a tax deduction for a super contribution, or a part of a super contribution, a taxpayer must have given the fund trustee a valid notice of their intention to claim a deduction and the trustee must have given the taxpayer an acknowledgement of receipt of the notice.

It is not compulsory to use the ATO version of this form. These notifications can be made to the super fund in various ways and funds may create their own form for their members to use. The ATO form sets out the minimum data requirements.

Timing

The notice must be given to the trustee and acknowledged in writing before the earlier of:

  • the day the taxpayer lodges their income tax return for the income year in which the contribution was made, or
  • the end of the next income year following the year of the contribution.

Merging super funds - submitting a notice

Members are able to lodge a deduction notice with a successor fund where the relevant contributions were made to the transferring fund. A member of a successor fund may submit or vary a valid notice if:

  • after making the contribution, all of the member balance was transferred to the successor fund, and
  • there has not been a notice relating to the contribution submitted previously.

A successor fund transfer is a transfer of a registrable superannuation entity's (RSE's_existing members to a different RSE (successor fund) without the consent of those individual members. Under the SIS Regulation, a super fund can only be considered a successor fund if both the transferring and receiving RSE licensees agree to confer on the members equivalent rights.

What makes a taxpayer's notice invalid

The taxpayer's notice is not valid in any of the following circumstances:

  • the notice is not in respect of the contribution
  • the notice includes all or part of an amount covered by a previous notice
  • when the taxpayer gave the notice:
    • they were not a member of the fund, or
    • the trustee no longer held the contribution, or
    • the trustee had begun to pay an income stream based in whole or part on the contribution
  • before the taxpayer gave the notice:
    • the taxpayer had made a contributions splitting application in relation to the contribution, and
    • the trustee had not rejected the application.

A taxpayer cannot deduct more for the contribution (or a part of the contribution) than the amount stated in the notice.

Deductions after an income stream has commenced

A  notice to claim a tax deduction for a super contribution is not valid if the superannuation provider has commenced to pay an income stream based in whole or part on the contribution.

Example

Silvia has a superannuation interest valued at $175,000. She makes a $25,000 personal contribution in March 2018 so that her interest is valued at $200,000.

If, before lodging a section 290-170 notice, Silvia was to commence a pension using $190,000 of her $200,000 interest, her fund will have commenced to pay a superannuation income stream based in whole or part on the contribution. Any notice Silvia then gives to her fund to deduct the contribution will be invalid.

The outcome will be same even if, after making her personal contribution, Silvia was to commence a pension of only $150,000, leaving the value of her interest in excess of the amount she intended to deduct.

Important

Don't let your client lose their eligibility for a tax deduction

If you are planning to commence any kind of pension for a client, remind the client to send the fund trustee a valid notice of intention to claim any tax deductions for personal super contributions prior to commencing the pension. The trustee must acknowledge the notice - only then is it safe to commence the pension.

If the notice is not submitted and acknowledged prior to commencing the pension, the client will lose their eligibility to claim the tax deduction.

Deductions for contributions that are partially rolled over

A valid deduction notice will be limited to a proportion of the contributed amount if the person has chosen to roll over or withdraw a part of the superannuation interest held by the trustee prior to the lodgement notice. The amount that can be covered by the notice will be limited to a proportion of the tax-free component of the superannuation balance that remains after the rollover or withdrawal. That proportion is the value of the relevant contribution divided by the tax-free component of the superannuation interest immediately before the rollover or withdrawal.

Amount that can be covered by a valid notice after the withdrawal or rollover = Tax-free component of remaining interest x Contribution/Tax-free component of interest before rollover or withdrawal

The calculation of the reduced amount that can be covered by a valid notice will be more complicated if there are multiple contributions and withdrawals in a financial year.

Example modified from TR 2010/1

Steven has a superannuation interest valued at $50,000, comprising of a tax-free component of $27,500 and a taxable (taxed) component of $22,500. He makes a $25,000 personal contribution in February 2018. The fund records this contribution against the contributions segment for Steven's superannuation interest. To this end, that amount would be counted against the tax-free component of any superannuation benefit paid to Steven. The value of his superannuation interest is $75,000.

In June 2018, Steven rolls over $50,000, leaving him with an interest of $25,000. The $50,000 rollover comprised of a $35,000 tax-free component and a $15,000 taxable component.

The tax-free component of the remaining superannuation interest is $17,500. As the superannuation fund no longer holds the entire $25,000 contribution, the maximum amount Steven can claim as a deduction is calculated as follows:

Tax-free component of remaining interest x contribution/ Tax-free component of interest before rollover

= $17,500 x $25,000/$52,500

=$8,333

Variations

  • A taxpayer cannot revoke or withdraw a valid notice in relation to the contribution (or a part of the contribution).
  • A taxpayer can vary a valid notice, but only so as to reduce the amount stated in relation to the contribution (including to nil). However, a taxpayer cannot vary a valid notice after the earlier of:
    • the day the taxpayer lodges their income tax return for the income year in which the contribution was made, or
    • the end of the income year following the year of the contribution.
  • A notice can still be varied after these time limits where:
    • the notice is being varied as a result of the ATO not allowing a deduction, and
    • the notice is reducing the amount of a previous notice by the amount that it is disallowed.
  • A variation is not effective if, when the taxpayer makes it:
    • they are not a member of the fund
    • the fund trustee no longer holds the contribution, or
    • the fund trustee has begun to pay an income stream based in whole or part on the contribution.

Acknowledgement of notice

The fund trustee must, without delay, give the taxpayer an acknowledgement of a valid notice. The fund trustee may refuse to give the taxpayer an acknowledgement if the value of the member's account, at the time the trustee receives the notice, is less than 15% of the contribution.

10% rule for employees - applies to contributions made prior to 1 July 2017

If a person is an employee at any time during an income year, the 10% rule must be met for the person to be eligible to claim a tax deduction for personal super contributions made prior to 1 July 2017.

The 10% rule does not apply to personal contributions made after 30 June 2017. This means employees may claim a deduction for personal contributions made after 30 June 2017.

The 10% rule - applies to contributions made prior to 1 July 2017:

To satisfy the 10% rule, less than 10% of the total of the following must be attributable to the individual's employment:

  • Total assessable income, plus
  • Reportable fringe benefits (RFB), plus
  • Reportable employer super contributions (RESC).

This rule can be summarised as:

(Assessable income (from employment) + RFB + RESC/Assessable income (from all sources + RFB +RESC) <10%

RESC and RFB

See definition of reportable employer superannuation contributions (RESC) and reportable fringe benefits (RFB).

Assessable income

Assessable income is income received before deductions. Salary sacrificing will reduce assessable income. Deductions for personal super contributions will reduce taxable income, but will not reduce assessable income.

Employment for the 10% rule

The 10% rule only has to be met for contributions made before 1 July 2017. It applies if, in the income year in which the contribution is made, the taxpayer is treated as an employee for SG purposes. For example, someone who is totally self-employed, unemployed or living off investment earnings only would not have to meet the 10% rule.

Employment is where the person is treated as an employee for SG purposes. A person may be treated as an employee for SG purposes even where they do not receive any SG support (eg an employee earning less than $450 per month).

All amounts that are attributable to the 'employment' activity are taken into account as assessable income in the 10% test (applicable to personal contributions made prior to 1 July 2017). These include:

  • salary or wages (as used in its ordinary meaning) from the activity
  • allowances and other payments earned by an employee
  • other payments, such as commission, director's remuneration and contract payments, that are treated as salary or wages by Section 11 of the SGAA for those persons who engage in an 'employment' activity in a capacity other than a common law employee
  • an employment termination payment received by a person in consequence of the termination of their employment, and
  • workers' compensation and like payments made because of injury or illness received by a person while holding the employment, office or appointment the performance of which gave rise to the entitlement to the compensation payments.

In the application of the 10% test, the relevant 'employment' activity need not be an activity in Australia. For a non-resident, the income attributable to employment outside Australia is not assessable income in Australia and will not be counted in the maximum earnings test. A non-resident with Australian sourced income that is not attributable to 'employment' activities may, therefore, be able to deduct a personal superannuation contribution made to an Australian superannuation provider against their Australian sourced income.

However, the 'employment' income of an Australian resident employed overseas by a foreign employer will be counted in the 10% test if the income is assessable income.

Last modified: Friday, August 25, 2017