Taxation: Tax deductible superannuation contributions

Transcription

1 TB 35 Taxation: Tax deductible superannuation contributions Issued on 15 November Summary Employers and certain individuals are able to claim a full tax deduction for contributions to superannuation. To be eligible 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 offsets 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 to consider the amount of employer contributions (including SG and salary sacrifice) made on their behalf before making a personal tax deductible contribution. Employer contributions Employers are able to 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. Contributions which are tax deductible include: Superannuation Guarantee contributions (payable for employees less than age 70) Voluntary employer contributions (including those made under an effective salary sacrifice arrangement) made for an employee, on or before 28 days 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: Self employed persons; Employees who satisfy the 10% rule; and Persons receiving pension and/or investment income only. For information on personal superannuation contributions refer to Technical Bulletin 59 Superannuation member contributions.

2 Personal contributions are contributions made for the purpose of providing superannuation benefits for the individual making the contribution or, in the event of their death, their SIS dependants. This means 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. Conditions for claiming a tax deduction include: The contribution is made on or before 28 days of the month following the month in which the person turns 75. (see example 1) 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 (grossed up by reportable employer superannuation contributions); and reportable fringe benefits. 1 John turns 75 on 12 July To claim a tax deduction for personal contributions to superannuation, the contributions must be made by 28th August Anne is self employed 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 from her business. Total assessable income plus reportable employer superannuation contributions for the year is $66,000. Anne is able to claim a tax deduction for personal superannuation contributions as her assessable income from employment and reportable employer contributions ($6,000) is less than 10% of her total assessable income and reportable employer superannuation contributions ($66,000). 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. 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. (see example 2) 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. (see example 3) 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) and the trustee must have given an acknowledgement of receipt of notice. (see example 4) 4 Alex makes a contribution to superannuation in the 2010/11 financial year and intends to claim a tax deduction for the contribution. She lodges her tax return on 31st October As this is before the end of the next financial year (30 June 2012) she must provide a written notice to the trustee of the fund of her intention to claim a tax deduction by 31st October If Alex were to commence a pension or roll over her benefits to another fund, she needs to provide the notice to the fund before this occurs. If she does not, the deduction notice is invalid (see Invalid notices ). 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. 2

3 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 9 Superannuation Guarantee for information on who is an employee for SG purposes. Since 1 July 2009, 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 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 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 eg 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. Before 1 July 2009 Prior to 1 July 2009, an individual could salary sacrifice to reduce assessable income from employment below 10% of their total income. This was because salary sacrifice contributions were excluded from the assessable income of the individual. If the amount was not salary sacrificed to superannuation, the amount would ordinarily be from employment as an employee. Adding back salary sacrifice contributions to income used to determine whether personal superannuation contributions may be deducted ensures that only primarily self-employed individuals may claim the deduction. Other payments attributable to employment Special mention needs to be made to the following types of payments that an employee or former employee may receive. First and foremost it is important to 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 are considered income attributable to employment and would count towards the 10% income threshold: Assessable amount of lump sum payments on termination of employment eg. annual leave, long service leave, employment termination payments Worker s compensation payments. Claiming a tax deduction Deductions can only be claimed for the financial year in which the contribution is made. The Commissioner 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. A deduction cannot be claimed to the extent that the contribution relates to a disregarded capital gain under the small business retirement exemption and the amount was required to be contributed to superannuation because the individual was under age 55. 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 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 3

4 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: pdf 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 individual has given a contributions-splitting application in relation to the contribution to the trustee of the fund^ fund rejects the notice because the tax payable in respect of the notice is greater than the interest in the fund. * 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. ^ A notice to claim a tax deduction must be given to the trustee before requesting those contributions to be split. A notice of intent to claim a deduction should be given to the fund before commencing an income stream or rolling over benefits to another fund. invalid notice as contribution used to commence income stream Philip (57) is a sole trader and made a personal contribution to superannuation of $40,000. He intends to claim a tax deduction for the entire contribution. After making the contribution, Philip commenced a transition to retirement income stream with 100% of his superannuation benefits. 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 $40,000 contribution. The superannuation fund rejected this notice because the contribution has been used to commence an income stream. Clients who commence an income stream with all or part of a personal tax deductible contribution must give the trustee of the fund (to which the contribution was made), a section notice before they commence the income stream. If the income stream commences part way through a financial year, this means the notice must be given at this time, rather than after end of the financial year. 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, a section notice will need to be submitted to the fund to which the client made the contribution. Deduction limitations Deductions for personal superannuation contributions are limited to the individual s: Assessable income deductions In addition, 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. Eva makes a personal contribution to superannuation of $10,000 in the 2010/11 year and satisfies all the conditions for claiming a tax deduction for her personal contribution. She gives the fund a notice to claim a tax deduction of $10,000, the fund acknowledges this notice and she claims a deduction of $10,000 in her 2010/11 tax return. Eva s assessable income for the year is $5,000. She has no other deductions apart from the personal superannuation contribution deduction. A deduction is not allowable for $5,000 of the contribution since this is the amount by which the contribution exceeds her assessable income. Eva may apply to her superannuation fund to vary her notice, reducing the amount covered by the notice to $5,000. 4

5 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 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 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 are counted against the splitting spouse s concessional contributions cap not that of the receiving spouse. Non-resident taxpayers Non-residents 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. Income from overseas employment is generally not assessable in Australia (ie it is not included in an Australian tax return). Therefore most non-residents who are employed overseas will 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. 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 offset the assessable 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 an assessable capital gain of $100,000. 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 nonresident 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). 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) 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. Without any assessable income to be included in an Australian tax return, a deduction will not be required and will be disallowed by the Australian Taxation Office. 5

6 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 will provide a benefit. In the event that a non-resident derives income that is assessable in Australia (and included in an Australian tax return), a personal superannuation contribution for which a tax deduction is claimed 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 will generally be 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 non-resident, 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 examples 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 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 is eligible to contribute to superannuation. In addition, Anthony does not engage in any employment activities, therefore, he is also eligible to claim a tax deduction for the contribution. A concessional contribution of $50,000 could considerably reduce Anthony s personal taxation liability. Maximum earnings as employee (10% rule) Beth (53) derives part-time employment income of $50,000 and investment income of $80,000 in the 2010/11 year. She wishes to reduce her overall tax liability; cashflow is not a concern. Beth requests that her employer salary sacrifice $42,000. To determine whether she is eligible to claim a deduction for personal superannuation contributions, she needs to work out whether less than 10% of her total income comes from employment. Assessable income from employment $ 8,000* Reportable employer super contributions $42,000* Investment income $80,000 Total income $130,000 * Assessable income from employment and reportable employer superannuation contributions count under the 10% rule $50,000 / $130,000 = 38% (Beth does not satisfy the 10% rule). She is unable to claim a deduction for personal contributions in the 2010/11 year. Concessional contributions Concessional contributions 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 the taxable component of a directed termination payment which exceeds $1 million (this limit is reduced by the taxable component of any previously received directed termination payments since 1 July 2007). Concessional contributions cap A concessional contributions cap has applied since 1 July 2007 in place of age-based deduction limits. 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 will generally be able to claim a tax deduction for the entire amount of concessional contribution made. 6

7 The concessional contributions cap is: Financial year/s Concessional contribution cap 2010/11 Under 50: $25,000 (indexed) Age 50 or over*: $50,000 (not indexed) 2009/10 Under 50: $25,000 (indexed) 2008/09 & 2007/08 Age 50 or over*: $50,000 (not indexed) Under 50: $50,000 (indexed) Age 50 or over*: $100,000 (not indexed) * This transitional cap applies to an individual who is age 50 or over on the last day of the financial year. The transitional cap of $50,000 is in effect until 30 June From 1 July 2012 the cap for those aged 50 and older will come into line with the cap for those under age 50. However in the 2010 Federal Budget the government announced that the $50,000 cap will continue to apply from 1 July 2012 for individuals who are 50 years and older where they have total super balances below $500,000. This announcement is yet to be legislated. An individual s total concessional contributions are counted against the concessional contributions cap regardless of the source. Jeremy (47) receives total SG payments of $2,000 and salary sacrifices an additional $10,000 to superannuation. Jeremy is eligible to claim a tax deduction for personal super contributions as he satisfies the 10% rule. Jeremy s total concessional contributions to date are $12,000; therefore he can only make personal deductible contributions of $13,000 without breaching his concessional contributions cap of $25,000. Breaching the concessional contributions cap Concessional contributions made in a financial year which exceed the cap are subject to penalty tax. This additional tax liability is levied on the individual who may choose to nominate a superannuation fund to release monies to pay the liability or settle the liability with non-superannuation monies. How much is excess contributions tax? Concessional contributions above the concessional cap incur excess tax of 31.5%. This is In addition to 15% contributions tax in the fund, resulting in a total tax of 46.5% (top marginal rate). Excess concessional contributions count towards the non-concessional cap. Contributions in excess of the non-concessional cap attract excess contributions tax of 46.5%. The combination of exceeding both of these caps may result in some excesses being taxed at up to 93%. Will s total concessional contributions for the financial year are $55,000, resulting in excess concessional contributions of $5,000. Will has already made $450,000 of non-concessional contributions for the same financial year. The following taxes will be applied to the excess concessional contribution of $5,000: Tax Amount Contributions tax 15% $ 750 Excess concessional contributions tax 31.5% Excess non-concessional contributions tax 46.5% $1,575 $2,325 Total tax incurred (93%) $4,650 Sam (49) wishes to maximise his concessional contributions for the current financial year. Sam will turn 50 prior to the end of the financially year. As Sam is 50 prior to the completion of the financial year, the transitional concessional contribution cap of $50,000 applies. Sam can make these contributions before or after his 50th birthday within the current financial year. Tax Commissioner s discretion The ATO has discretion to reduce the breach penalty or to reallocate the years in which concessional contributions are calculated in circumstances where a genuine mistake is made. Through a salary sacrifice arrangement and SG contributions, Angela has $25,000 of concessional contributions made for her benefit in 2010/11. 7

8 In that same year, her previous employer makes a late SG payment, relating to 2009/10, of $5,000 for her. As a result, $30,000 is assessed against Angela s concessional contributions cap of $25,000. Upon receiving her assessment notice from the ATO, Angela applies to the Tax Commissioner to apply discretion. She claims that she is only in breach of her concessional contributions cap because her previous employer was tardy in issuing her required SG payments. The Commissioner may apply discretion to reduce her assessment or to reallocate the $5,000 to the year in which it should have been paid. How can you pay excess contributions tax? Excess concessional contributions tax can be paid by: an individual an individual, using a voluntary release authority a super fund, using a voluntary release authority a combination of all of the above. A voluntary release authority allows a super fund to release funds to meet excess concessional contributions tax. It is provided by the ATO to the individual and must be lodged with a super fund within 90 days following the date of the notice. After 90 days, a super fund is unable to release any funds. Defined benefit funds Employer contributions into defined benefit funds may count towards the concessional contributions cap. Funded defined benefit funds The amount counted against the concessional contributions cap is based on the notional taxed contribution (ie the amount the scheme has notionally allocated to the member), not the actual amount contributed by the employer. Funded defined benefit funds receive employer contributions which are combined in the fund and not allocated to individual members. The amount of the notional taxed contribution is determined by an actuary. The calculation may vary depending on the nature of the defined benefit fund. The defined benefit fund should be contacted directly to determine the amount of the notional taxed contribution. If a person is a member of a funded defined benefit fund then the 'notional taxed contribution' is added to any other concessional contributions (eg. salary sacrifice and personal tax deductible contributions) made in respect of the person. If the total amount exceeds the concessional contributions cap then tax will be payable on the excess at penalty rates. Grandfathering arrangements Grandfathering arrangements apply to individuals who have an interest in a defined benefit scheme on 12 May Where the notional taxed contributions exceed the concessional contributions cap, the notional taxed contributions are taken to be equal to the concessional contributions cap. The excess is disregarded for the 2009/10 and later financial years. If the defined benefit interest is transferred to a successor fund that retains equivalent rights for members, grandfathering also applies. Any rule changes to the fund could jeopardise the availability of these transitional provisions. Aidan has an interest in a funded defined benefit fund. Notional taxed contributions made in the 2010/11 year are $30,000 and are therefore in excess of his concessional contributions cap of $25,000. However as Aidan was a member of the fund on 12 May 2009 the grandfathering provisions provide that his notional taxed contributions are equal to the cap in the 2010/11 year ($25,000) and future financial years. This is provided the fund continues to meet certain conditions (generally requiring that the fund rules have not changed). Unfunded defined benefit funds If a person is a member of an unfunded defined benefit fund (eg. Commonwealth Superannuation Scheme CSS and Public Superannuation Scheme PSS ), then the notional taxed contribution is generally nil. Employers do not make contributions to unfunded schemes. Instead, the employer finances the member s benefits when they become payable. Untaxed defined benefit funds Employer contributions made to an untaxed fund are not counted towards the individual employee s concessional contribution cap. Untaxed funds ( constitutionally protected funds ) are run by state governments for employees or are set up for members of the judiciary. This Technical Bulletin has been produced by OnePath 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. OnePath 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. 8