Keeping up with contributions
By Josh Rundmann – Technical Services Manager, IOOF TechConnect
It wouldn’t be a new financial year if there wasn’t a change to super, and this year is no different. While extending eligibility to contribute without having to meet the work test to age 67 is the most recent change, the ATO have also started changing how they manage personal concessional contributions based on super fund reporting changes implemented in 2018.
Specifically, the ATO have written to 25,000 individuals where there is a mismatch between the amount of a tax deduction an individual has claimed a deduction for personal super contributions in their tax return, and reporting provided by the super fund which indicates a notice of intent to claim was not acknowledged for the same amount.
Whilst the requirements for claiming a personal tax deduction have not changed since 2017, the ability for the ATO to enforce clients lodging valid notices of intent has increased through enhanced reporting by super funds, who are now required to report in real time when the fund is acknowledging a notice of intent to claim. Note, this includes insurance-only super funds where clients may be making personal contributions to fund the premium.
Section 290-170 of the Income Tax Assessment Act 1997 sets out the requirements for a notice to be valid. Whilst some would argue these requirements are archaic, since they are in legislation there is no ‘wiggle room’ if requirements are not met.
The notice must be in the approved form
The first hurdle is that a notice of intent must be in a form approved by the ATO. At time of writing, there are up to four options available:
- The ATO ‘Notice of intent to claim or vary a deduction for personal super contributions’ form (NAT 71121)
- A form created by the super fund which captures the same information in NAT 71121
- An online form built in line with the ATO guidelines, or
- A signed and dated letter from the member that contains the following:
- The member’s full name
- The member’s date of birth
- The super fund name
- The member’s account number with the fund
- The financial year to which the notice relates
- The amount of personal contributions made by the member
- The amount of those contributions the member seeks to claim as a deduction
- A declaration the member is lodging the notice in line with the required timeframes (see below)
- A statement that the information contained in the letter is true and correct
Due to these requirements, it is not possible to ‘lodge’ a notice over the phone.
Timeframe for lodgement
To be considered valid, a notice of intent must be received by the super fund before the earlier of:
- The day the member lodges their tax return for the financial year in which the contributions were made
- The end of the financial year following the contributions subject to the notice.
A notice of intent to claim can be lodged at any time before these cut-offs, and there is no maximum limit to the number of notices that can be lodged. For example, a client could make monthly contributions and submit a notice of intent after each notice should they wish.
Transactions that impact amount available for deduction
A notice of intent is considered invalid if, at the time the fund receives the notice:
- The client is no longer a member of the fund
- The client has commenced an income stream – including a transition to retirement income stream, or
- The super fund no longer holds the contribution.
The first two conditions reduce the amount available for deduction to nil. The third reduction is generally a result of a partial withdrawal being made from the account after the contribution was made, but before the notice was lodged. In TR2010/1 the ATO detailed their view that any withdrawal which applies the proportioning method for determining tax components will reduce the amount of any contributions which were made before the withdrawal – thus reducing the amount available for the client to claim as a deduction. Most transactions use the proportioning method, the main exception is any release authorities issued by the ATO due to excess contributions or the payment of a Division 293 tax liability.
Notices can be varied but not withdrawn
If a super fund receives a valid notice of intent to claim, the fund must acknowledge the notice as soon as practicable, and the amount of the contribution subject to the notice is taxed in the hands of the fund at 15%. However, if a client changes their mind and wishes to reduce the amount they are intending to claim, they can lodge a variation with the super fund.
The variation also needs to be in the approved form and is subject to the same timeframes and impacts from withdrawals as the original notice. A variation can only reduce the amount that a client intends to claim, including reducing the amount down to zero. If a client wishes to claim more of their contributions as a deduction, they can submit a new notice of intent – it is not possible to vary the amount in the original notice upwards.
Differentiation between employees and sole traders
A common misunderstanding exists when considering clients who may be operating their own business, and what type of super contributions are able to be made in respect of their work. Broadly speaking, personal contributions are contributions made by a client in their personal capacity, whilst employer contributions are made by a separate legal entity who has engaged the client as an employee for super guarantee purposes. An important point to note is that a client who is a sole trader is not their own employer. In fact, as a legal principle the same entity cannot be its own employer or employee. Sole traders make personal contributions, even if those contributions come from a bank account that is in the trading name of the business. This same thinking extends to partners in a partnership – since the partners are the partnership from a legal standpoint, the partnership does not employer the partners.
In both these cases, the sole trader or partnership may engage other parties as employees – or your client may be an employee of a sole trader or partnership. In that case, the partnership or sole trader is the employer, and the other party is the employee – and the employer may be required to make super guarantee contributions for the employee.
Additionally, another scenario exists. If your client is employed by say a company, of which they are the sole director and shareholder, we have two separate and distinct legal entities. This means the company may indeed by the employer of the client, even though the client is a director of the employer. In this case, the company may have employer contribution obligations under super guarantee laws in respect of the client.
Further, since 2015 employers are required to use SuperStream to make employer contributions on behalf of their employees. There is one exception to this, where the employer and employee are related parties and contributions are being made to a related party SMSF. The ATO unhelpfully list a second ‘exemption’ being for sole traders in respect of themselves – however we know from our discussions above that a sole trader does not have an employer relationship with themselves, so employer contributions are not a consideration in that case.
What this means in practice is that if your client has set up a company through which they operate their own business, the company may have super guarantee obligations in respect of the client. The company would be required to make those contributions through SuperStream, which could necessitate the use of a clearing house such or a sophisticated payroll system.
Revisiting carry-forward concessional contributions
Another historical change to super has recently come back into focus is the carry forward concessional contributions. Briefly, this change allows individuals with a total super balance under $500,000 at the start of the financial year to apply any concessional contributions in excess of the annual cap to the ‘unused’ cap from a previous financial year. Only unused cap that has accrued since 1 July 2018 is accessible, meaning the 2019/20 year is the first year the carry forward will operate.
To take advantage of the carry forward, the client just needs to exceed their annual concessional contributions cap. The ATO will then allocate the excess against the unused cap in the earliest financial year possible, and work towards the current year.
The specific type of concessional contributions made are not relevant. Similar to the non-concessional bring forwards the ATO will simply apply the carry forward as relevant on behalf of the client once they have received all the relevant contribution and balance information from super funds and the client’s tax return.
Update on change to bring forward provisions
One of the proposals announced as part of the 2019 federal budget was the increase of the age at which the bring forwards become unavailable from 65 to 67. This was proposed to take effect from 1 July 2020. However, at the time of writing legislation had not been enacted to give effect to this change. It is possible that the law is changed retrospectively, with effect from 1 July 2020, but at present if an individual is 65 or older at 1 July 2020, they are unable to trigger the bring forward provisions.