Tax deductible superannuation contributions

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1 Tax deductible superannuation contributions TB 35 TECHNICAL SERVICES ISSUED ON 29 OCTOBER 2014 ADVISER USE ONLY VERSION 1.1 Summary Employers and certain individuals can claim a tax deduction for contributions to superannuation. To claim a tax deduction, employers and individuals must satisfy certain conditions. One condition is that the individual must give to the trustee of the fund a notice of intent to claim the deduction. This must be given, where relevant to the client s circumstances, before: the client commences an income stream with either all or part of the contribution the client withdraws or rolls over benefits (which include the contribution) the client gives the trustee a splitting contributions application. Or in any other case, the earlier of: when the client lodges their tax return; or the end of the financial year following the year in which the contribution is made. Tax deductions reduce the amount of income that is subject to tax. Making tax deductible contributions to superannuation can assist eligible individuals to manage their tax liability whilst increasing their retirement savings in a tax effective environment. Non-residents must consider what income is assessable in Australia, as a deduction is only allowed to the extent that it reduces income which is assessable in Australia. Employer and personal tax deductible superannuation contributions count towards an individual s concessional contribution cap. Therefore it is important for employees (who satisfy the 10% rule) to consider the amount of employer contributions (including SG and salary sacrifice) made on their behalf before making a personal tax deductible contribution. For information on personal superannuation contributions refer to Technical Bulletin 59 Contributions. Employer contributions Employers can claim a tax deduction for contributions made for employees who are: engaged in producing assessable income of the employer; or Australian residents, engaged in the employer s business; or considered employees for Superannuation Guarantee purposes. Contributions which are tax deductible include: Superannuation Guarantee contributions (no age limit applies) voluntary employer contributions (including those made under an effective salary sacrifice arrangement) made for an employee, on or before the 28th day of the month following the month in which the employee turns 75 post age 75 contributions required to be made under an industrial award, determination or notional agreement preserving State awards. An Australian Workplace Agreement, collective agreement or preserved state agreement under the Workplace Relations Act 1996 is not an award or determination. Personal superannuation contributions Individuals who meet certain conditions may claim a full tax deduction for personal superannuation contributions. Typically they are: sole traders or partners in a partnership; employees who satisfy the 10% rule; and persons under age 65 (that is, are eligible to contribute to super) receiving pension and/or investment income only. Personal deductible contributions are made to provide superannuation benefits for the individual making the contribution (or in the event of their death, to their SIS dependants).

2 2 The following types of contributions are not tax deductible: rollover superannuation benefit foreign super fund transfer family and friend contribution spouse contribution government co-contribution small business CGT retirement exemption contribution for individual under age 55. Conditions for claiming a tax deduction include: The contribution is made on or before the 28th day of the month following the month in which the person turns 75. Example 1 John satisfies the work test and turns age 75 on 12 July The contribution must be made by 28 August 2014 to claim a tax deduction. Maximum earnings as employee (10% rule) If, in the year in which the contribution is made, the person is an employee (for Superannuation Guarantee purposes), then the sum of assessable income grossed up by reportable employer superannuation contributions and reportable fringe benefits from that employment is less than 10% of total: assessable income reportable employer superannuation contributions reportable fringe benefits. Example 2 Anne runs her own business as a sole trader and works part-time for an employer. Her assessable income from part-time employment is $5,000 pa and she salary sacrifices to superannuation $1,000 of her wages. In addition, she earns $60,000 pa as a sole trader. Total assessable income plus reportable employer superannuation contributions for the year is $66,000. Anne can claim a tax deduction for personal superannuation contributions as her assessable income from employment and reportable employer super contributions ($6,000) is less than 10% of her total assessable income and reportable employer superannuation contributions ($66,000). If the person is under age 18 (at the end of the year) they must have derived income from carrying on a business or from being an employee. David does not receive income from being an employee or from carrying on a business. Therefore he is not entitled to a tax deduction for personal superannuation contributions. If David had turned 18 by the end of the financial year, there would be no requirement for deriving income from carrying on a business or employment and he would be eligible to claim a tax deduction. The person must give a written notice of their intention to claim a tax deduction to the trustee of the fund by the date their tax return is lodged or the end of the next financial year, whichever is earlier. The trustee must have given an acknowledgement of receipt of the notice. Example 4 Alexis makes a contribution to superannuation in the 2013/14 financial year and intends to claim a tax deduction for the contribution. She lodges her tax return on 31 October As this is before the end of the next financial year (30 June 2015) she must provide a written notice to the trustee of the fund of her intention to claim a tax deduction by 31 October If Alexis were to commence a pension or roll over all her benefits to another fund, she needs to provide the notice to the fund before this occurs. Note: If the person has died, the executor of their estate may give a notice of intent to claim a deduction to the fund. The same timeframes apply ie must be given before the deceased s final tax return is lodged. Maximum earnings as employee ( 10% rule ) If, in the financial year in which the contribution is made, an individual is an employee for SG purposes, they must satisfy the 10% rule. Refer to Technical Bulletin 13 Superannuation Guarantee for information on who is an employee for SG purposes. Reportable employer superannuation contributions are added to assessable income and reportable fringe benefits when calculating the amount of: earnings as an employee total income. Reportable employer superannuation contributions Reportable employer superannuation contributions are contributions made on behalf of an individual by their employer (or an associate of their employer) where either the: individual has the capacity to influence the size of the contribution ( salary sacrifice contributions ); or Example 3 David has turned 17 in the current financial year and has a portfolio of investments which earn $12,000 per annum. He has a capital gains tax liability which he wishes to reduce by making a contribution to superannuation and claiming a tax deduction.

3 3 individual has the capacity to influence the way it is made so that their assessable income is reduced* * Generally this second category captures salary sacrifice contributions made to a defined benefit fund, for example, the rules of a defined benefit fund may require members to make after tax contributions. Instead of making after tax contributions, the fund rules allow and the member chooses to salary sacrifice the equivalent grossed up amount. Other payments attributable to employment You should also consider other types of payments an employee or former employee may receive. First, you should ask the question, is the client an employee at any time during the year in which the contribution is made? An employee on paid leave during a financial year (even if it is for one day) would be treated as having been an employee for that year, even if they don t physically go to work at any time during that year. If the answer is yes, then the following types of payments attributable to that employment, count towards the 10% test: assessable amount of lump sum payments on termination of employment eg annual leave, long service leave, employment termination payments worker s compensation payments. If employment ceases in June and lump sum payments of annual leave, long service leave and employment termination payments are not paid until the next financial year (ie from July) those payments do not count towards the 10% test. Such payments are not attributable to employment in the income year they are assessable. This would apply regardless of the person becoming employed later on in that financial year. A client in this situation may need to provide information to the ATO to exclude these payments from the 10% test and ensure a deduction is allowed (if eligible). Trust distributions When an individual receives a capital gains distribution from a trust, the grossed up amount adds to assessable income for the 10% rule and not the amount after applying the 50% discount. Claiming a tax deduction Deductions can only be claimed for the financial year when the contribution is made. The ATO s discretion to reallocate concessional contributions to different financial years only applies to the concessional contributions cap and not the ability to claim a tax deduction. Notice of intent to claim a tax deduction ( section notice ) To obtain a deduction for personal contributions, a person must give a written notice of intent to claim a tax deduction to the trustee of the fund that accepted the original contribution and receive an acknowledgement of the notice from that trustee. The notice must be provided by the earlier of the: date their tax return is lodged for the relevant year that the contribution was made; or end of the financial year following the financial year in which the contribution was made. Most superannuation funds have their own deduction notice which a client can complete and return to the fund. Alternatively the ATO have a standard form titled Notice of intent to claim or vary a deduction for personal super contributions which is available to download from the ATO website: Deduction for personal super contributions Invalid notices The notice is not valid if the: fund has begun to pay a superannuation income stream based in whole or part on the contribution fund no longer holds the superannuation contribution (eg if the benefits have been withdrawn or rolled over) contribution was covered by a previous notice fund rejects the notice because the tax payable in respect of the notice is greater than the interest in the fund individual has given a contributions-splitting application in relation to the contribution to the trustee of the fund. Fund has begun to pay a superannuation income stream A tax deduction cannot be claimed for a contribution that has been used to commence an income stream. This is because the contribution has been taken into account when determining the tax free and taxable proportions of the income stream. Example invalid notice as contribution used to commence income stream Philip (57) is a sole trader and made a personal contribution to superannuation of $20,000. He intends to claim a tax deduction for the entire contribution. His account balance is now $100,000. After making the contribution, Philip commenced a transition to retirement income stream with $80,000 }of his superannuation benefits and hoped to use the remaining $20,000 to claim a tax deduction. At the end of the financial year, Philip submits a notice of intent to claim a tax deduction to his superannuation fund in respect of the $20,000 contribution. The superannuation fund rejected this notice because part of the contribution has been used to commence an income stream. On the income stream application form, the client may be asked whether they intend to claim a tax deduction for personal contributions made to the fund being transferred. In addition to completing this question, notice of intent to claim a tax deduction must be submitted to the fund where the client made the contribution. Where a client has contributed to a super fund with the intention of claiming a tax deduction for all or part of the contribution, the notice of intent to claim a tax deduction must be provided before commencing an income stream from that fund (including a transition to retirement pension).

4 4 Fund no longer holds the contribution (benefits have been withdrawn or rolled over) The trustee no longer holds a contribution, or at least part of it, if the member has rolled over or withdrawn a part of the superannuation interest. In this case, a deduction notice cannot be given for the entire contribution. A valid deduction notice is limited to the amount of the personal contribution that remains in the fund after the partial withdrawal or rollover, calculated by: Step 1 Work out the tax free amount of the rollover Roll-over x Tax free component of interest amount Value of super interest Step 2 Work out the tax free component of the Tax free component Tax free component of of interest before the rollover (worked out rollover in Step 1) Step 3 Work out the remaining amount of the personal contribution Tax free component of x Personal contribution Tax free component (worked out in Step 2) of interest before roll-over A valid notice of intent to claim a tax deduction can be given for the amount worked out in Step 3. Example fund no longer holds the contributions as benefits are fully rolled over Step 1 Work out the tax free amount of the rollover Roll-over x Tax free component of interest amount amount Value of super interest = $50,000 x $50,000 / $80,000 = $31,250 Step 2 Work out the tax free component of the Tax free component Tax free component of of interest before the rollover (worked out rollover in Step 1) = $50,000 $30,000 = $20,000 Step 3 Work out the remaining amount of the personal contribution Tax free component of x Personal contribution Tax free component (worked out in Step 2) of interest before roll-over =$20,000 x $30,000 / $50,000 =$12,000 Ralph lodges a notice with the intention to claim a deduction for the $30,000 contribution. The notice is not valid as the super only holds $12,000 of the original personal contribution. Ralph can only lodge a valid deduction notice for an amount up to $12,000. A notice of intent to claim a deduction should be given to the fund before commencing an income stream, or in many cases, before withdrawing or rolling over benefits to another fund. Craig (52) makes a personal contribution into the ABC Super Fund with the intention to claim a tax deduction. During the year, Craig becomes unhappy with his provider and decides to roll over the account into the XYZ Super Fund. Craig does not provide the ABC Super Fund with a notice of intent to claim a tax deduction before the rollover. At the end of the financial year Craig becomes even more upset after realising that the XYZ Super Fund cannot accept a notice of intention to claim a tax deduction in respect of the amount rolled over. Craig should have provided the ABC Super fund with a notice of intention to claim a tax deduction prior to rolling over. Alternatively if he wasn t sure of his eligibility to claim a tax deduction (or the amount to claim as a tax deduction), he could remain with the ABC Super Fund until his tax position became clear. Example benefits are partially rolled over Ralph (48) has a super fund valued at $50,000 with a $20,000 tax free component. He makes a $30,000 personal contribution in March The fund balance now holds $80,000 ($50,000 tax free component). In June 2014, Ralph rolls over $50,000 leaving behind $30,000 in the fund. The amount of the $30,000 contribution that remains in the fund after $50,000 is rolled over is calculated as follows: Deduction limitations Deductions for personal superannuation contributions are limited to the individual s: Assessable income deductions In other words, personal superannuation contributions cannot add to or create a tax loss. In practice, it may be prudent to utilise an individual s tax free threshold, tax offsets and deductions where available. Variation notice A deduction notice cannot be revoked. However an individual can vary their deduction notice but only to an amount less than the original notice (including to nil). The variation notice must be provided by the earlier of the: date the tax return is lodged for the relevant year that the contribution was made; or end of the financial year following the financial year in which the contribution was made. The notice can only be varied after this time if the amount requested as a tax deduction was subsequently

5 5 disallowed by the ATO. This ensures that the ATO can effectively manage an individual s contribution caps. A variation notice will be ineffective where the: superannuation fund no longer holds the superannuation contribution (eg if the benefits have been withdrawn or rolled over) fund has begun to pay a superannuation income stream based in whole or part on the contribution. Similar to the original notice, a variation notice may be obtained directly from the super fund or the ATO website (the ATO provide a single form to cover both an original notice and a variation notice see link above). Contribution splitting Where an individual intends to claim a tax deduction for a personal contribution which will be split with their spouse, the notice of intent to claim a deduction must be given before the splitting notice. Concessional contributions count against the splitting spouse s concessional contributions cap not that of the receiving spouse. Non-resident taxpayers Non-residents for tax purposes may claim a tax deduction for personal superannuation contributions according to the same rules as applies to residents. However you need to consider what income is assessable in Australia when applying the 10% rule or working out the limit on the deduction which may be claimed. 10% rule Assessable income from employment is included in the 10% rule. For a tax resident, income from overseas employment is generally assessable in Australia (although certain aid/charity income may be exempt). Therefore most tax residents who are employed overseas may not satisfy the 10% rule. For a non-resident, overseas employment income is generally not assessable income Australia. Therefore most non-residents who are employed overseas would satisfy the 10% rule. A non-resident with assessable income from other sources (eg. a direct investment in Australian property) may be able to claim a deduction for personal superannuation contributions against this income. Example non-resident and 10% rule Luigi (50) is a non-resident taxpayer and has sold an Australian investment property. Luigi wishes to make a deductible superannuation contribution to reduce the capital gain from the sale of the investment property. As Luigi engages in employment overseas, Luigi must satisfy the 10% rule. Luigi s Australian sourced income includes: $13,000 rental income $5,000 interest and $100,000 assessable capital gain. We disregard all foreign sourced income (including his overseas employment income). Luigi s total assessable income and reportable fringe benefits is $13,000 + $100,000 = $113,000. The interest income is subject to non-resident withholding tax (not included in an Australian tax return). Luigi has no assessable income and reportable fringe benefits (included in an Australian tax return) that comes from employment as an employee for Super Guarantee purposes. Therefore, Luigi satisfies the 10% rule ($0 / $113,000) and can claim a tax deduction for a personal contribution. Deduction is limited to income assessable in Australia Non-residents are generally only allowed deductions to the extent the expenses are incurred in producing assessable income. Many types of income (including realised capital gains relating to taxable Australian property distributed from a trust) may be subject to non-resident withholding tax or are not assessable in Australia and therefore not included in an Australian tax return. For example, all foreign sourced income (including overseas employment income) is not taxed in Australia and dividends, interest and most distributions from managed funds are subject to non-resident withholding tax. For more information, refer to Technical Bulletin 47 Non-resident taxation. A deduction is not required if there is no assessable income in the Australian tax return. Furthermore, the ATO would also deny the deduction. Consider tax implications in country of residence Before making a personal superannuation contribution with the intention of claiming a tax deduction, it is important to understand both the Australian tax implications and the tax implications of the country of residence to determine whether this course of action provides a benefit. If a non-resident derives assessable income in Australia, a personal deductible contribution can reduce the Australian tax that may otherwise be payable. An example of income which is assessable in Australia is rental income from a property situated in Australia. However, the country of residence may still tax this income. Where the country of residence has a double tax agreement with Australia, the client is generally entitled to a tax offset for Australian tax paid (up to the amount of tax payable in the country of residence). Claiming a tax deduction for personal super contributions resulting in no Australian tax payable by the nonresident, may actually increase the imposition of tax in the country of residence. Note tax payable on the deductible superannuation contribution is not tax paid by the non-resident taxpayer. For additional information on non-resident taxation refer to Technical Bulletin 47 Non-resident Taxation. Additional example Retiree receiving pension and investment income, claims deduction to reduce capital gains tax Anthony (62) is retired and derives income from a superannuation pension and a personal investment portfolio. Anthony s only other income for the financial

6 6 year is an assessable capital gain of $100,000. Anthony wishes to reduce the tax payable on this capital gain. As Anthony is less than age 65 he can contribute to superannuation. In addition, Anthony does not engage in any employment activities, therefore, he can also claim a tax deduction for the contribution. A personal deductible contribution up to his concessional contributions cap could considerably reduce Anthony s personal taxation liability. Concessional contributions Concessional contributions generally include: employer superannuation contributions (eg Superannuation Guarantee (SG), salary sacrifice and any fund costs paid by the employer such as administration fees and insurance premiums) personal superannuation contributions which have been claimed as a tax deduction For a full list of concessional contributions, refer to Technical Bulletin 59 Contributions. Concessional contributions cap The concessional contributions cap should be considered when recommending personal deductible contributions to super. The cap is not administered as a limit on tax deductions, instead it limits the amount of contributions which receive concessional tax treatment. Individuals who meet certain conditions or employers making contributions for an employee can generally claim a tax deduction for the entire amount of concessional contribution made. The concessional contributions cap is: Financial year/s Concessional contributions cap 2014/15 Under 50: $30,000 Age 50 or over*: $35, /14 Under 60: $25,000 Age 60 or over^: $35,000 * This cap applied if aged 50 or over on 30 June ^ This cap applies if aged 60 or over on 30 June An individual s total concessional contributions count against the concessional contributions cap regardless of the source. For further information on the concessional contributions caps and the implications of breaching the cap, refer to Technical Bulletin 59 Contributions. This Technical Bulletin has been produced by ANZ Wealth Technical Services and is intended for the use of financial advisers only. It is current as at the date of publication but may be subject to change. This publication has been prepared without taking into account a potential investor's objectives, financial situation or needs. Before making a recommendation based on this publication, consider its appropriateness based on the client s objectives, financial situation and needs. ANZ Wealth Technical Services is not a registered tax agent under the Tax Agent Services Act Your client should refer to a registered tax agent before relying on information in this publication that may impact their tax obligations, liabilities or entitlements.

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