Tax deductions for personal super contributions

The latest super reforms impose several key changes for clients to be aware of if they intend to make personal super contributions and claim a tax deduction on those contributions.

Removal of the 10% test

The requirement that employed clients derive less than 10% of their income from employment sources was abolished effective 1 July 2017. Regardless of their employment arrangements, clients may now be able to claim a tax deduction. However, those aged 65 to 74 will still need to meet the work test in order to be eligible to make a contribution and claim a tax deduction.

The removal opens up the opportunity to make personal contributions to clients who were employed but previously failed the 10% test. This is particularly beneficial for clients who are currently not working but are looking to reduce a capital gain.

The changes will appeal to many salaried clients. Those who have salary sacrifice arrangements, where their employer deducts contributions each pay cycle but may only remit the contributions to the super fund quarterly, will benefit from being able to make personal contributions in a timely manner.

Further, a previous barrier to salary sacrificing was that the arrangement had to be put in place before the salary was earned, which generally precluded clients from sacrificing their annual bonus. The new changes mean clients can effectively sacrifice a bonus after they have received it.

Useful tips for claiming a tax deduction for personal super contributions:

  • Ensure clients consider their reduced concessional contributions cap in 2017/18 when claiming a deduction for personal super contributions.
    • the cap is $25,000 per year, per person, regardless of age.
  • Clients must meet the age restrictions:
    • clients over age 65 must meet the work test of working 40 hours in 30 consecutive days.
    • children who are under age 18 at the end of the income year in which the contribution is made, can only claim a deduction for personal super contributions if they also earned income as an employee or a business operator during the year.
  • Ensure clients claim the correct amount, as there may be restrictions if they need to notify the ATO of a change.
  • Notify the super fund of the amount the client is intending to claim as a deduction by using the approved ATO form ‘Notice of intent to claim or vary a deduction for personal super contributions’ (NAT 71121) (Notice of intent).
  • Ensure clients receive an acknowledgement from their fund. This is often overlooked by self-managed super funds but is essential if the deduction is claimed.
  • Clients must complete and return their Notice of intent to their super fund or to vary a deduction they are claiming by the earlier of:
    • the day they lodge their income tax return for the relevant year in which the contribution is made
    • the end of the income year following the one in which they made the contributions (ie 30 June 2019 for contributions made in 2017/18).
  • Many clients will need to notify their super fund prior to the above date as their ability to claim a tax deduction will cease on the day that:
    • they cease to be a member of the fund
    • the super fund trustee no longer holds all of the contributions (eg this may occur after a partial withdrawal)
    • the super fund trustee begins to pay an income stream based in whole or part on the contribution
    • the super fund trustee is provided with a request from the member to split taxable contributions with their spouse.

There are important rules if clients intend to vary their Notice of intent:

  • a client cannot revoke a valid Notice of intent but can vary it to reduce (but not to increase) the amount stated in relation to the contribution (including to nil) so long as it is within the timeframes.
  • after this time, the Notice of intent cannot be varied unless all or part of the deduction is disallowed by the Commissioner of Taxation. When this has occurred, clients may reduce the amount stated in the Notice of intent by the amount not allowed.
  • to increase the amount the client intends to claim as a deduction, they do not have to give their fund a variation Notice of intent. Instead, they can give a second Notice of intent specifying the additional amount they wish to claim. This second Notice of intent is subject to the same due dates for lodging as the original Notice of intent.
Caution: members are often dissatisfied when they find out they can’t claim a deduction as intended because they have not complied with the above eligibility rules for lodging a Notice of intent. With the relaxation of the 10% rule, the ATO expects many more individuals will want to claim a deduction on their personal super contributions. Hence, advisers will need to guide clients through this claim process.

Example: Variation notice allowed

Helen is 45 and makes $30,000 in personal superannuation contributions in February 2018. She is employed and intends to submit her tax return by 31 October 2018.

Helen provides a valid ‘Notice of intent to claim a tax deduction’ for the full amount of $30,000 in March 2018 and receives an acknowledgement from her super fund. She then realises she will exceed her concessional contributions cap of $25,000 (for 2017/18) so she provides a variation Notice of intent to her super fund in September 2018 to reduce the amount claimed to $25,000. The remaining $5,000 is a non-concessional contribution.

Since providing her original Notice of intent, Helen has not made a full or partial withdrawal, or commenced an income stream and she confirms on the variation notice that she has not yet lodged her tax return relevant to that year. As her variation Notice of intent is provided within the restricted time period, it is acknowledged by the super fund and the amount advised in her previous Notice of intent is revised downwards to $25,000.

Super reforms have introduced opportunities as well as some new restrictions that clients and their advisers will need to be mindful of if they intend to claim a tax deduction on their super contributions.

Advisers will need to assist clients through the eligibility conditions as well as the process of making the
contribution and the deduction claim.