By Nicholas Ali
The tax-deductibility of personal super contributions is a useful device but needs handled deftly.
Under the current arrangement, those wishing to claim a deduction for super contributions must meet the 10% rule, that is, they must be self-employed or substantially so and derive no more than 10% of their income from any secondary waged employment.
Also, they must ensure in advance that a ‘Notice of intent to claim a deduction’ form (s290-170) is supplied to their super fund, and that the fund acknowledges the form.
It’s crucial that an s290-170 is supplied and acknowledged by the trustee/s of the fund before the member takes a lump sum or pension – or rolls over to another super fund. Otherwise, they may lose the ability to claim a deduction.
In order to be valid, the s290-170 must be supplied to the trustee before the person submits their tax return – and no later than the 30th of June of the financial year following the contribution.
An s290-170 will be invalid if:
The ATO has ruled that once a pension commences, an s290-170 can only cover contributions made post-pension. It doesn’t matter if only part of a member’s accumulation account is used to commence a pension, and there’s still enough money in accumulation to cover the deductible contribution. If an s290-170 is submitted post-pension, no deduction is allowed for any contributions made prior to the pension.
This may be relevant where a member is implementing a pension strategy and wishes to ‘re-cast’ the income stream to accommodate personal deductible contributions at the end of the financial year to ensure a tax deduction (also known as a pension commutation). If an s290-170 is not made prior to the new pension, then the contributions will not be considered personal deductible contributions and no deduction can be claimed. This may have a substantial impact on the client resulting in higher personal tax.
Richard is aged 60, self-employed with marginal tax rate is 38.5% (incl. Medicare Levy), and a member of a large retail super fund.
He contacts his adviser who recommends he:
Richard’s provides his adviser with cheques for $35,000 and $500,000 who remits them to the retail super fund. Included is a cover letter advising the $35,000 is to be treated as a personal concessional contribution and the $500,000 as a non-concessional contribution.
Unfortunately, in this instance the retail fund can’t differentiate between concessional contributions that are personal versus employer, does not treat the $35,000 in the manner intended and does not issue an s290-170 acknowledgement.
However, Richard is unaware of this, rolls the benefit to his newly established SMSF and commences a pension.
Whilst successor funds are able to accept an s290-170, this does not ordinarily apply to SMSFs and Richard has started a pension.
When Richard lodges his personal tax return, the ATO disallows the tax deduction of $35,000 as there is no valid s290-170 prior to rolling the benefit and/or commencing the pension. The $35,000 is then re-classified as a non-concessional contribution. Consequently, Richard’s non-concessional contributions for the 2015/16 FY are $535,000. As each contribution was within the relevant contributions cap, the retail fund was obliged to accept them.
For Richard, this means the $35,000 will not be a tax deduction and his taxable income will be increased proportionately. At his marginal tax rate this equates to an additional $35,000 x 38.5% = $13,475 in personal tax. Furthermore, as he may have contributed more than the non-concessional cap, there may be an excess non-concessional contribution of $35,000 (given the proposed lifetime limit of $500,000). Whilst there are legislative mechanisms to allow excess non-concessional contributions to be refunded this is a less than desirable outcome.
Advisers, fund members and trustees need to be extremely vigilant when making contributions to super with the intent of claiming a tax deduction, especially where the deductible contribution is being made to a retail or public offer fund then rolled over to an SMSF. It is imperative to provide a valid s290-170 before a pension starts. As section 290-170 notices are enshrined in law, there is very little that can be done after-the-fact and the ATO has no room for discretion.
