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Self Managed Super Fund (SMSF) Article
Will Retirees Be Allowed A Personal Super Tax Deduction

By Tony Negline.

This article may be out of date.

4th October 2006

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How will the rules for claiming a personal contribution as a tax deduction work from July 2007?

The short answer is that no one knows. Recently, the Government sought to clarify how these rules would work, but unfortunately it is difficult to know what changes will ultimately be made.

This issue could potentially have a large impact on retirees aged between 55 and 75, in particular, who are trying to organise their affairs to generate a tax-effective retirement income.

Before we look at what changes may be made it is important to understand how the current rules work.

Under the current rules you will get a deduction for your personal super contributions if you haven't received, or can reasonably expect not to receive, super support from someone else, such as an employer. This is called the "unsupported rule".

If your employer makes super guarantee contributions you will fail this test and will not be allowed the deduction.

You will also be allowed a tax deduction for personal contributions if your income (assessable income plus reported fringe benefits) plus tax-exempt earnings is less than 10 per cent of your income.

This is called the "substantially self-employed rule". A very handy trick for many financial planners is to use the first rule for clients who are no longer working but with taxable income from other sources, for example capital gains from asset sales.

These clients contribute to super and claim the first $5000 plus 75 per cent of the balance up to their age-based limit as a tax deduction. Some financial planners use this rule extensively.

The Government has decided to attempt to simplify these two rules. In May the Government told us the 75 per cent plus $5000 deduction rule for the unsupported or substantially self-employed would be increased to 100 per cent.

We were also told that the co-contribution would be made available to people who (among other things) "earn 10 per cent or more of their income from carrying on a business, eligible employment or a combination of both".

On its own this doesn't tell us very much. However, after having read this material I could not help thinking that the ability of non-working investor to claim a personal super tax deduction may be doomed. One financial planner said that it would be a "disastrous outcome" if this actually happened, as he uses this rule for many of his newly retired clients.

In a document released recently, the Government said: "The rule that determines a person's eligibility to claim a deduction for personal contributions will be simplified.

The test will be changed so that it will only determine how much of a person's assessable income and reportable fringe benefits is attributable to employment as an employee, mirroring the test currently used for determining eligibility for a government co-contribution."

(One of the basic rules of the co-contribution is that the person must be employed, and at least 10 per cent of their assessable income must come from that employment.)

Now this still doesn't tell us if people who are not working will be able to claim their personal contributions as a tax deduction.

One reader asked Treasury and was told in an email: "The Government's superannuation reforms will not limit the ability of the unemployed/unsupported to claim a personal deduction for contributions to superannuation."

So far so good.

However, in a follow-up email the reader was told: "The personal deductible eligibility rule will be simplified by making it consistent with the rule that currently applies for the Government co-contribution. The test will be changed, so that it will only determine how much of person's assessable income and reportable fringe benefits is attributable to employment as an employee. The test will no longer be determined by the level of employer superannuation support a person receives or should have received."

This correspondence does not say if the first and second personal contribution deductibility rules will be altered. It appears that only the second rule will be amended.

However, one interpretation of the last sentence implies that if the new rule will not look at the level of superannuation support then perhaps those who are not employed will actually lose access to a deduction they now receive.

The ability to claim a deduction for personal super contributions was introduced for people who are "self-employed", not for those who have retired and want to move assets into super while eliminating tax.

The latter group have obtained their benefit because of the drafting of the law. Unless the Government decides to provide clear information now, we won't know what the rule is until the law is finalised, which will not happen until sometime early next year.

Those with an ability to exploit this rule this financial year might want to get in before July 2008 in case it is lost forever.

This may involve borrowing money to make the contributions before assets are sold. Careful analysis will be essential to determine when, how and what to do.

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