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Self Managed Super Fund (SMSF) Article
Tricky Personal Super Tax Deduction Rule Changes

By Tony Negline.

This article may be out of date.

31st October 2007

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There are various rules which you have to satisfy before being allowed to claim your personal super contributions as a tax deduction.

The government’s simplified super reforms have changed some of these rules for contributions made after June 2007.  As we shall see some of these changes may make life particularly tricky if you are nearing retirement.

The key rules are:

If all of these rules are not fully satisfied then a deduction for personal super contributions is not allowed.

The first rule allows personal contributions to be made by anyone before their 75th birthday.  Once you are aged 65 or over, you have to satisfy a work test before being allowed to contribute to super.

The second rule is relatively straightforward: it is either true or false.  A contribution made by cheque is deemed to have been made on the later of when the fund accepts the contribution and the date on the cheque itself.  If the contribution is made via direct debit then it is made when it appears in the super fund’s bank records.

The third requirement says that less than 10% of your assessable income and reportable fringe benefits comes from any employers you might have.  For example you earn $30,000 from being a non-executive director of a company but earn $200,000 from your investments.  In this case the director’s fees are 13% of total income ($30,000 divided by $230,000) therefore a deduction for personal contributions would not be allowed.

If you have no income from an employer – for example because you are not employed – then you are deemed to have already satisfied this rule.

The next requirement says that you and the fund formally exchanged relevant information.  The document swap technically begins with the contributor sending to the fund a notice telling the fund that they intend to claim some or all of their personal contribution as a tax deduction.  In practise this chain of correspondence is often started by the super fund because the members don't know how to get this ball rolling and don’t know all the information that has to be on the notice.  Also large administrators want the communication on their documentation so it's easier for their processing systems.

The notice that you give the super fund will not be valid if it is given when you were no longer a fund member.  There are many practical planning reasons as to why this might occur.  For example, you might have made a contribution to a fund and then very quickly moved that money to another super fund.

For contributions made after June 2007, your notice to the fund will also be invalid (and therefore no deduction will be allowed) if the trustee had already begun to pay a pension with some or all of the contributions covered by that notice.  If you made personal contributions in August 2007 and then used those contributions to begin a pension in January 2008 then you will only be allowed to claim these contributions as a deduction if you gave the fund your notice of intention to claim the contribution before the pension commences (that is before the fund officially starts the pension not before the first pension payment is made).

This will be a particularly difficult rule for many investors because they often do not know how much income they will earn during a financial year and do not know what personal contributions deduction they want to claim.  A key issue with the tax rules is that you can only claim so much of your personal super contributions so that your taxable income is not negative.  For example suppose you have income of $30,000 and personal super contributions of $50,000.  The maximum you can claim as a deduction is $30,000.

This rule will typically impact retirees who are moving money into super just before retiring.  It might also impact investors who want to use a Transition to Retirement pension who again are moving money into super before beginning that pension.

Some Self Managed Super Funds will overcome this problem by back-dating their documentation. For public offer funds this is a much harder problem to overcome as back-dating is almost impossible.

Why was this new rule introduced?  The maximum concessional contributions that can be received each year is $50,000 ($100,000 for each financial year you are over 50 between July 2007 and July 2012) from all sources.  In the main these sources are tax deductible personal contributions and all employer contributions.  Once these thresholds are breached by your personal or employer contributions then the excess contributions are taxed at the highest individual tax rate plus the Medicare Levy (this year, 46.5%).  The government wants the excess contributions tax collected as soon as possible after the threshold is breached and didn’t want to take to money from a pension that had already started.

The last piece of this jigsaw says that the fund must officially acknowledge the documentation with another notice.  Without this notice the deduction for personal super contributions is not allowed.

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