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Boosting retirement savings through a personal deductible contribution strategy


A tax effective strategy of contributing to superannuation is to make a personal contribution, which is claimed as an income tax deduction. When doing this it is important to ensure that the contributions are indeed deductible so that the full benefits of the strategy can be realised.

In this article, we take a closer look at the rules and highlight tips and traps for a person implementing a personal deductible contributions strategy.

Deducting contributions

Personal contributions to superannuation can be claimed as a tax deduction if certain requirements are met. There is generally no limit (subject to the amount of taxable income) on the amount an eligible person can claim as a tax deduction. However, as these contributions are included in the concessional contributions cap, they would need to be mindful not to breach these caps.

For the 2021/22 financial year, the concessional contributions cap has been indexed to $27,500. However, since the 2018-19 Income year, a fund member now has the ability to carry forward unused concessional contributions for up to five years to be used in future years. This will allow a member to make concessional contributions in excess of a year’s contribution cap, assuming they had unused cap space carried forward and the other required conditions are met.

Contributions in excess of the concessional contributions cap, which are not taking advantage of the carry forward provision, are included in the member’s assessable income and taxed at marginal tax rates (with tax reduced by a non-refundable 15% tax offset). For excess concessional contributions arising in income year prior to the 2021-22 income year, an excess concessional contributions (ECC) charge was also payable to recognise that the tax on excess concessional contributions is collected later than normal income tax. The ECC charge has been removed in relation to excess concessional contributions that arise from the 2021-22 income year and onwards. Excess concessional contributions (up to 85%) can be withdrawn to pay the additional tax liability, subject to the relevant release authority being issued.

It is worth noting that excess concessional contributions will not count towards a person’s non-concessional cap if the person elects to withdraw the excess. However, any portion of the excess that is not elected to be withdrawn will also count towards the person’s non-concessional contribution cap. This could cause further issues if they had already used their non-concessional contribution cap for the year or had a non-concession cap of zero, due to their prior 30 June total superannuation balance exceeding the general transfer balance cap. Exceeding the non-concessional cap will also result in additional tax.

Eligibility

To claim a deduction for personal contributions to a complying superannuation fund a person needs to:

  • Ensure the trustee can accept the contribution,
  • Provide a valid notice of intent to claim a deduction to the trustees of the superannuation fund, and
  • Receive an acknowledgement of the valid notice from the trustee of the superannuation fund.

Contribution acceptance requirements

Personal contributions can only be accepted by the trustee of a superannuation fund where the contribution was made before the 28th day after the end of the month the person turned 75. Further, if the contribution is made when the member was aged 67 to 74 years, the individual contributor will need to have satisfied the ‘work test’ in the income year the contribution is made. Generally, the ‘work test’ should be satisfied before the contribution is accepted by the superannuation trustee(s).

To satisfy the work test the person will need to be gainfully employed (employed or self-employed for gain or reward) for at least 40 hours, over 30 consecutive days, in the financial year in which the contribution is made.

A work test exemption can also apply from the 2019-20 income year onward. In order to meet the work test exemption criteria a person must have:

  • Satisfied the work test in the year prior to that in which they made the contribution,
  • A total superannuation balance of less than $300,000 at the end of the previous year, and
  • Not relied on the work test in the previous financial year.

For those under 18 years old for the entire income year the contribution was made, the person will only be allowed to deduct these contributions if they have derived income as an employee or from carrying on a business.

The Federal Government has proposed that from 1 July 2022, the work test will no longer be required to be met by individuals aged 67 to 74 for voluntary contributions like non-concessional contributions and salary sacrifice contributions. However, individuals aged 67 to 74 will still need to meet the work test requirements in order to make any personal deductible contributions.

Notice of intent to claim a tax deduction

Once the contribution acceptance requirements are satisfied, a person can claim a tax deduction for personal contributions provided they give the trustees of their superannuation fund a valid notice of intent to claim a deduction, in the approved form and within the required timeframe.

Required timeframe
The notice of intent to claim a deduction needs to be provided to the super fund’s trustee before the earlier of:

  • The day a person lodges their tax return for the year in which the contributions were made, and
  • The end of the income year following the one in which the person made the contributions.

Tip: Those who are splitting contributions to their spouse and also want to claim a deduction for contributions must lodge the notice of intent to claim a tax deduction before lodging the contribution splitting claim.

Invalid notice of intent
The notice will need to be valid before a deduction can be claimed. A notice of intent provided to the trustees of a superannuation fund, in respect of a personal contribution, in an approved form and within the required timeframe is valid unless:

  • The person is no longer a member of the fund at that time,
  • The trustee no longer holds the contribution, or
  • The trustee has started an income stream using some or all of the contribution.

Example: Maria has a superannuation benefit of $200,000 in accumulation. In August 2020 she makes a personal contribution of $20,000 that she intends to claim as a tax deduction. She then started an account-based pension using $150,000 from her superannuation benefit in September 2020 and notified the trustees of her superannuation fund of her intent to claim a deduction in October 2020. As part of her superannuation benefit has been used to commence a superannuation income stream, her notice of intent is invalid and she cannot claim her contribution as a tax deduction.

Tip: If Maria had rolled over $150,000 to another superannuation fund provider and started an income stream with the other provider, she could have claimed a deduction for part of her $20,000 contribution with her current fund provider (see the example below for how this is calculated).

Example: Jill has $200,000 in superannuation with fund provider A which includes a tax-free component of $50,000. She makes a $30,000 personal contribution in March 2020 increasing her account balance to $230,000 with a tax-free amount now of $80,000.

In June 2020, Jill rolls over $100,000 to fund provider B, leaving her with an account balance with fund provider A of $130,000 (assuming no earnings). The $100,000 rollover is comprised of a tax-free component of $34,7831 and a taxable component of $65,2172. The amount remaining with fund provider A therefore has a tax-free component of $45,217 ($80,000 less $34,783) and a taxable component of $84,783.

Jill then lodges a notice in September 2020 advising the trustee of fund provider A that she intends to claim a deduction for the $30,000 contribution made in the 2019-20 income year. That notice is not valid. Jill’s superannuation account no longer holds the entire $30,000 contribution.

However, Jill could give a valid deduction notice to fund provider A for an amount up to $16,956. This is worked out as follows:

 

Varying a valid notice of intent
Once a valid notice of intent has been provided to the fund’s trustees it cannot be withdrawn or revoked. However, the amount that the person intends to claim as a tax deduction can be varied but only down (including to nil). To increase the amount claimed as a deduction, another valid notice would need to be provided for the additional amount.

To make a variation, the person will need to provide the variation notice to the super fund’s trustees within the required timeframe (see ‘Invalid notice of intent’). The variation notice can be provided outside of this timeframe if the ATO had subsequently denied the deduction (see ‘Limitations of personal deductible contributions’).

Example: Peter makes a contribution of $30,000 and lodges a notice with his super fund to claim $20,000 as a tax deduction. Later he decides to increase his deduction to $25,000. He must provide another valid notice to his super fund for the additional $5,000. His super fund will now have two valid notices – one for $20,000 and another for $5,000.

Tip: A person cannot vary their notice of intent if they are no longer a member of the fund or if the fund provider no longer holds the contribution or has commenced paying a superannuation income stream.

Trustee acknowledgement of notice to claim

The fund trustees must provide the person with an acknowledgement of receipt of the person’s notice. However, the trustee is not required to provide an acknowledgment where:

  • It has been provided outside of the prescribed time frame, and
  • The value of the superannuation interest to which the notice relates, at the time the notice was received, is less than the tax that would be payable in respect of the contribution.

It should be noted that the personal income tax return label (D12) for claiming an income tax deduction for a superannuation contribution requires the individual to answer the following question:

“Did you provide your fund (including a retirement savings account) with a notice of intent to claim a deduction for personal superannuation contributions, and receive an acknowledgement from your fund?”

Consequently, it is vitally important that prior to making a claim for a personal superannuation contribution, the individual has received the acknowledgment from their superannuation fund.

Limitations of personal deductible contributions

Although personal deductible contributions can be a useful strategy, it is important to understand the limitations.

Whilst personal contributions can be claimed as a personal income tax deduction, they can only be claimed as a deduction for the income year in which the contribution was made. When a contribution is made determines the financial year for which the deduction can be claimed. For example, even though a personal cheque was received by the superannuation fund provider just before 30 June, the contribution may not be considered as being made before 30 June where the cheque was subsequently dishonoured. This is more common with contributions made via an electronic funds transfer (EFT). In order for the contribution to be considered as made in a particular income year, the contribution must be credited to the superannuation fund bank account by no later than 30 June. Extra care is needed where 30 June falls on a weekend as this may result in the credit to the superannuation fund’s bank account not occurring until the next business day, being the next income year. For more information about the timing of contributions, refer to Taxation Ruling (TR) 2010/1 and paragraphs 13 – 16.

Tip: In relation to personal contributions that have been made as part of a contribution reserving strategy, the timing of the deduction is when the contribution has been received by the superannuation fund, not when the contribution is allocated to the member. The timing of the allocation of the contribution to the member is only relevant for the assessment of the contribution against the individual’s relevant contribution cap.

Example: Brian made a personal contribution of $25,000 in March 2021 and a further personal contribution of $27,500 in June 2021 to his SMSF. Both contributions were credited to the fund’s bank account in March and June 2021 respectively. Brian’s contribution in June 2021 is ‘reserved’ and allocated to him by no later than 28 July 2021.

Subject to Brian providing the relevant notice of intent and receiving the acknowledgment from the SMSF trustee, he may claim an income tax deduction for personal superannuation contributions of $52,500 in the 2020-21 income year. His SMSF will return $52,500 of assessable contributions for 2020-21. However, for contribution cap purposes, only $25,000 will count towards his concessional contribution cap for 2020-21, as this is the total of contributions allocated to him in 2020-21. The $27,500 June 2021 ‘reserved’ contribution will count towards his concessional contribution cap for 2021-22, the income year it was allocated.

Tip: His SMSF will be required to correctly report the contributions in the SMSF annual return (refer ATO website QC 46558) and lodge a Request to adjust concessional contributions form (NAT 74851) to ensure the contribution cap assessment is correct.

Further, the amount a person can deduct is limited to their assessable income less their other deductions. The ATO can still deny a tax deduction from a valid notice of intent if the person’s taxable income is below the amount in the notice. Put simply, a deduction for personal superannuation contributions cannot add to or create an income tax loss.

Tip: Consideration should also be given to where an individual’s taxable income before any claim for personal superannuation contribution is at a level that no income tax would be payable notwithstanding a claim for personal superannuation contributions. An income tax deduction for personal superannuation contributions effectively transfers assessable income from being taxed at the individual’s marginal tax rate to the 15% tax rate of the fund. Consequently, where the personal contribution amount would be subject to less personal income tax than 15% fund income tax, consideration should be given to not claiming an income tax deduction for the personal contribution.

Example: Harry has calculated his 2020-21 taxable income, before any claim for the $5,000 personal contribution he made in June 2021, as $16,450. As his taxable income is below the tax-free threshold of $18,200, his personal income tax will be nil. If he provided a notice of intent to his superannuation fund to claim the personal contribution of $5,000 and received the relevant acknowledgment from the trustee, he could claim an income tax deduction for the superannuation contribution. His taxable income would be reduced to $11,450 and his personal income tax assessed would remain as nil, however, the $5,000 personal contribution would be an assessable contribution of his superannuation fund and be subject to tax at 15%, being $750. By not claiming the $5,000, Harry saves himself $750 of income tax.

Conclusion

There are a number of options and strategies a person can consider to increase retirement savings. One option explored in this article was through deductible personal contributions. While a deduction for personal superannuation contributions can be a very tax-effective way to increase savings, it is important to ensure the rules are met to fully realise the benefits of the strategy.

1 $100,000 x ($80,000/$230,000)
2 $100,000 – $34,783
 

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