Technical Bulletin: Eligibility and process for claiming tax deductions for personal super contributions made in 2013/14 December 2013 1 In brief The finer points of the tax deduction rules need to be followed to ensure your clients don t lose the ability to claim a deduction for their personal superannuation contributions. Not following the rules can lead to a loss of deduction and in some cases to a breach of the contributions caps as well. This bulletin looks at the eligibility, requirements and processes which must be followed to: claim a personal tax deduction for personal superannuation contributions made in 2013/14 vary a previous personal tax deduction notice to reduce the amount of personal superannuation contributions for which a tax deduction is claimed claim a personal tax deduction for personal contributions if a partial withdrawal from superannuation is intended. 2 Eligibility to contribute to super In order to make a personal contribution to superannuation an individual needs to be aged: under 65; or 65 to 75 and satisfy the work test by being gainfully employed for at least 40 hours in a period of not more than 30 consecutive days in the financial year in which the contribution is made. Individuals who are turning 75 in the financial year (and meet the work test) must contribute before the 28th day of the month following the month in which they turn 75 (for example, if a person s 75th birthday is in April, the contribution needs to be made by 28 May of the same year). 2.1 What is the right reason for making a personal contribution to super? The primary purpose for making any contribution to superannuation must be to obtain superannuation benefits for the member on retirement or for their dependants in the event the member dies. Importantly, any associated tax deduction should only be an ancillary or minor purpose, not the primary purpose; otherwise the ATO may deny the tax deduction.
2.2 What is the time period the contribution must be made in? To be able to claim a tax deduction for personal contributions in 2013/14, an eligible person must ensure their superannuation fund has received their personal contribution by Monday 30 June 2014. 3 Who is eligible to claim a deduction on a personal contribution? Tax law states that any individual can claim a deduction on their contribution provided that, if they have been an employee during the year, the <10% test is met. Effectively this means that a deduction can be claimed by any of the following: a self employed person i.e. sole trader or a partner in a partnership; a substantially self employed person provided that the total income 1 they earn as an employee is less than 10% of their total income from all sources for the financial year in which the contribution is made; or a person who is not engaged in any employment activity during the financial year, aged 18 to 64 inclusive. Individuals under age 18 at the end of the financial year cannot claim a tax deduction unless they earned income as an employee or business operator in that financial year. Unemployed individuals aged 65 and over would not meet the work test, so would be unable to contribute to super. Further discussions on the <10% test and the definition of total income can be found in the Appendix to this Bulletin. 3.1 Deduction may be limited Eligible persons are able to claim a full tax deduction for the total amount of personal contributions made to superannuation for a financial year. Note, however, that the deduction cannot exceed the level of the individual s taxable income for that financial year. 3.2 How is the contribution treated for contribution cap purposes? Personal contributions for which a personal tax deduction has been claimed are included in an individual s concessional contributions cap. For further information on how contributions are treated for the contributions caps, refer to Technical Bulletin: Contributions: Concessional and non-concessional contributions caps. 1_ Total income = assessable income plus reportable fringe benefits plus reportable employer superannuation contributions. 2
4 Lodging a notice to claim a deduction Individuals eligible to claim a deduction for personal contributions need to notify their superannuation fund in an approved form of their intention to claim the deduction within a restricted time period. If the notice is valid, the fund will provide the individual with an acknowledgement of receipt of the notice which allows the individual to claim the deduction in their tax return. An individual cannot claim any deduction on their personal superannuation contributions in their tax return if no acknowledgement of receipt of their notice is received from their fund. A copy of the ATO s approved form, Notice of intent to claim or vary a deduction for personal super contributions, is available on the ATO website: http://ato.gov.au/uploadedfiles/content/spr/downloads/spr86434n71121.pdf Many superannuation funds also produce their own branded version of this ATO form. 4.1 Time-frame for lodging a notice Restricted time period to give notice to superannuation funds Individuals wishing to claim a tax deduction for personal contributions made during the 2013/14 financial year must: a) meet the eligibility criteria to claim a deduction (outlined earlier); and b) complete and return their Notice of intent to claim or vary a deduction for personal super contributions to their superannuation fund by the earlier of: the day they lodge their income tax return for the 2013/14 financial year, or 30 June 2015. Note however, that many individuals will need to notify their superannuation fund prior to the above date as their ability to claim a tax deduction will cease on the day: they cease to be a member of the fund; the superannuation fund trustee no longer holds all of the contributions (this may occur after a partial withdrawal 2 ); or the superannuation fund trustee begins to pay an income stream based in whole or part on the contribution (i.e. when any amount of the member s superannuation benefit is used to commence an income stream within the same fund). 2_ For details of the treatment of personal tax deduction notices provided after a partial withdrawal see the Taxation Ruling 2010/1 and its impact on partial withdrawals section of this bulletin 3
When will a notice to claim a tax deduction be invalid? Under tax law, a superannuation fund cannot accept a personal tax deduction notice or variation of a notice where it is received outside the restricted time period described above. In these instances the notice would be invalid. For example, a notice received after the member commenced a pension with (even a part of) their superannuation benefit would be invalid. These requirements place an onus on individuals and their advisers to be aware of the timing implications of when they need to provide a notice to the superannuation fund. Other occurrences causing the notice to be invalid are: if the amount stated as a deduction is covered by a previous notice; if the notice is incomplete; or if the information in the notice is not correct. When signing the notice, the member is asked to make a declaration that none of these apply. Example 1: Valid notice John makes $40,000 in personal superannuation contributions in the 2013/14 financial year. He checks and confirms he is substantially self employed (i.e. less than 10% of his total income 4 comes from employment). He wishes to claim a tax deduction for $10,000 of personal contributions and intends to submit his tax return on 30 August 2014. John must submit a personal tax deduction notice to his superannuation fund prior to submitting his tax return on 30 August 2014. However, if John intends to make a full or partial withdrawal, or commence an income stream, he should provide his notice prior to any of these events. His notice must be in the approved form. John can only claim this deduction in his 2013/14 tax return after he receives a written acknowledgment of his personal tax deduction notice from his superannuation fund. Example 2: Invalid notice (lodged outside the permitted time-frame) Karen has made personal super contributions in 2013/14. As she wishes to claim a deduction on these contributions, she lodges a notice on 16 July 2015 and awaits the acknowledgment from the trustee before lodging her tax return for 2013/14. The trustee cannot acknowledge the notice as it is invalid. The latest date Karen could have lodged a valid notice was 30 June 2015. Karen has missed the opportunity to claim a deduction on personal contributions made in 2013/14. 4_ Total income = assessable income plus reportable fringe benefits plus reportable employer superannuation contributions.. 4
Example 3: Invalid notice (contributions no longer held) Larry makes personal contributions of $10,000 to superannuation fund A in the 2013/14 financial year. He is self-employed and wishes to claim a tax deduction for the full amount of these contributions. He intends to submit his tax return in October 2014. In July 2014, Larry rolls over his entire superannuation account balance to superannuation fund B. He provides a notice of intent to claim a tax deduction for $10,000 to superannuation fund A in September 2014 prior to completing his tax return. Superannuation fund A advises that the notice is invalid as they no longer hold the contributions. Larry has lost the opportunity to claim a tax deduction for these contributions, as he cannot provide a notice to either fund A or fund B. Example 4: Invalid notice (income stream commenced) Maxine is 62 and makes $20,000 in personal contributions to her superannuation fund in the 2013/14 financial year. She is self-employed and wishes to claim a tax deduction of $20,000 for these contributions. She intends to submit her tax return in October 2014. In August 2014, Maxine retires and commences a pension with the same provider, using $140,000 of her $200,000 superannuation benefit in her accumulation account. She provides a notice of intent to claim a tax deduction for $20,000 of personal contributions to her superannuation fund in September 2014, prior to completing her tax return. Her superannuation fund advises Maxine that her notice is invalid as the trustee has begun to pay an income stream based in whole or part on the contribution. Maxine has lost the opportunity to claim a tax deduction for these personal contributions. 5 Multiple notices during the year Can more than one notice be lodged in a financial year? A member may lodge as many valid notices as they wish during the year, provided that the amount stated as a deduction in any notice is not already covered by a previous notice. If a notice has been provided for contributions and further personal contributions are made, a new notice can be provided in relation to the new contributions, provided that it is given within the restricted time period and is otherwise valid. Example 5: Multiple notices Deb made personal super contributions of $25,000 in 2013/14. Deb lodged a valid notice covering $20,000 of these contributions, claiming the full $20,000 as a deduction. She receives an acknowledgment of the notice from the trustee. Deb now wishes to claim the entire year s contributions as a deduction; an increase of $5,000. Deb can lodge a second notice covering $5,000 of the contributions made in 2013/14, claiming the full $5,000 as a deduction. Note that if Deb s original notice covered the total contributions of $25,000 and claimed only $20,000 as a deduction, the second notice would be invalid. This is because the original notice covered total contributions of $25,000, even though the deduction stated was for an amount less than the total amount of contributions for the year. 5
6 Varying a notice Can a notice to claim a tax deduction be varied? A notice can only be varied to reduce the amount of personal contributions intended to be claimed as a deduction, by giving notice to the superannuation fund in the approved form within the restricted time period described above. After this time, the notice cannot be varied unless all or part of the deduction is disallowed by the Commissioner of Taxation. The ATO approved form Notice of intent to claim or vary a deduction for personal super contributions is used the vary a notice previously submitted to the fund. Note that if a person has given notice to their superannuation fund of their intention to claim a deduction for personal contributions and has subsequently requested to split those contributions with their spouse, the person s ability to vary the notice will be limited. Example 6: Variation notice allowed Lisa is 45 and makes $30,000 in personal superannuation contributions in the 2013/14 financial year. She is self-employed and wishes to claim a tax deduction for the full amount of these contributions. She intends to submit her tax return on 20 October 2014. Lisa provides a valid notice of intent to claim a tax deduction of $30,000 in August 2014 and receives an acknowledgement from her superannuation fund. She then realises she will exceed her concessional contributions cap of $25,000 so she provides a variation notice to her superannuation fund in September 2014 to reduce the amount claimed to $25,000. Since providing her original notice Lisa has not made a full or partial withdrawal, has not commenced an income stream and she confirms on the variation notice that she has not yet lodged her tax return. As her variation notice is provided within the restricted time period, it is acknowledged by the superannuation fund and the amount advised in her previous notice is revised downwards to $25,000. Example 7: Variation notice invalid (lodged outside the permitted time-frame) James provides a valid notice of intent to claim a tax deduction of $5,000 for personal contributions made during the 2013/14 financial year and receives an acknowledgement from his superannuation fund. After lodging his income tax return, James provides a variation notice to his superannuation fund requesting to vary the amount advised in his previous notice down to $3,000. The fund cannot accept the variation notice because it is outside the restricted time period as James has already lodged his tax return. The fund can only accept a variation outside the restricted time period if the ATO has disallowed the deduction on his personal super contributions. Example 8: Variation notice allowed where deduction disallowed by Commissioner Jenny provides a valid notice of intent to claim a tax deduction of $8,000 for personal contributions made during the 2013/14 financial year and receives an acknowledgement from her superannuation fund. Jenny s taxable income for the year is $5,000. When she lodges her 2013/14 tax return, $3,000 of Jenny s deduction for personal superannuation contributions is disallowed as this amount exceeds her taxable income. Jenny can provide a variation notice to her superannuation fund requesting to vary the amount advised in her previous notice down to $5,000, and this variation will be allowed. 6
Example 9: Invalid notice (partial rollover) Lauren makes $10,000 in personal contributions to superannuation fund A in the 2013/14 financial year. She is self-employed and wishes to claim a tax deduction of $10,000 for these contributions when she submits her tax return in October 2014. In July 2014, Lauren rolls over part of her account balance to superannuation fund B. She provides a notice to superannuation fund A to claim a tax deduction for $10,000 in September 2014 prior to completing her tax return. Superannuation fund A advises this request is invalid as they no longer hold the all of the contribution. Lauren has lost the opportunity to claim a tax deduction on the total contributions, but may be able to claim a partial deduction; see discussion in next section. 7 Notices provided after partial withdrawals On 25 February 2010, the ATO issued TR 2010/1 Income tax: superannuation contributions. As a result of this ruling, individuals cannot claim a tax deduction for the full amount of their personal contributions after making a partial withdrawal (rollover or lump sum) from their superannuation benefit. After a member has made a partial withdrawal from their superannuation they can only provide a valid personal tax deduction notice for an amount up to the proportion of their personal contributions that remain in their account after the withdrawal. This amount is determined using a formula provided in TR 2010/1: Tax free component of remaining interest x Contribution Tax free component of account before roll-over Example 10 demonstrates how this formula is applied. Assuming a member makes further personal contributions after the partial withdrawal, they can claim a deduction for the full amount of those contributions if a valid notice is provided prior to making any further withdrawals and the notice is provided within the restricted time period. This rule applies in relation to contributions made from the 2007/08 financial year however transitional relief has allowed most superannuation funds to apply this rule to contributions received from 1 July 2011 only. See Technical Bulletin: Superannuation contributions tax ruling Tax deductibility of superannuation contributions for further information. 7
Example 10: Impact of partial withdrawals on amount claimed Rebecca has a superannuation interest valued at $50,000. This interest includes a contributions segment of $10,000. She makes a $25,000 personal contribution in March 2014. The fund records this contribution against the tax free component of her superannuation account. The value of her superannuation interest is $75,000. In June 2014, Rebecca rolls over $60,000 leaving her with an interest of $15,000 in the fund. The $60,000 roll-over is comprised of a $28,000 tax free component and a $32,000 taxable component. Using the proportioning rule, the tax free component of the roll-over is worked out as follows: Roll-over amount x Tax free component of interest before roll-over/value of the superannuation interest before roll-over = $60,000 x $35,000/$75,000 = $28,000 The tax free component of the remaining superannuation interest is $7,000 i.e. $35,000 - $28,000. Rebecca then lodges a notice in September 2014 advising that she intends to claim a deduction for the $25,000 contribution made in the 2013/14 year. That notice is not valid. Rebecca s superannuation fund no longer holds the entire $25,000 contribution. However, Rebecca could give a valid deduction notice for an amount up to $5,000. That amount is worked out as follows: Tax free component of remaining interest x Contribution/Tax free component of interest before rollover = $7,000 x $25,000/$35,000 = $5,000 Due to her prior rollover, Rebecca was only able to claim a maximum of $5,000 even though she had contributed $25,000 to superannuation in 2013/14. For simplicity, this example assumes no investment earnings and all results have been rounded to the nearest dollar. 8
8 Variation notices provided after partial withdrawals After a member has made a partial withdrawal from their superannuation, the amount by which they wish to vary an earlier notice may be limited due to the operation of TR 2010/1 Income tax: superannuation contributions. A formula is used to determine how much of the contribution remains in the account and a variation up to that amount is permitted. The formula used is the same as that used for new/original notices provided after partial withdrawals but the focus is on determining the taxable component (rather than the tax-free component). The amount up to which a person can vary a previous notice is determined using the formula: taxable component of remaining account balance x contribution subject of notice (net of 15%) taxable component of account before withdrawal x 1.176 The example below demonstrates how this formula is applied. Example 11: Impact of partial withdrawals on a variation In early August 2013, Marco s super account balance is $478,750 including $50,000 tax free component. On 10 August 2013, Marco makes two personal contributions: $25,000 and $150,000. His account balance is now $653,750 including $225,000 tax free component and $428,750 taxable component. In November 2013, Marco provides a personal tax deduction notice advising his intention to claim a tax deduction for $25,000 of personal contributions made earlier in 2013/14. After contributions tax of $3,750 ($25,000 x 15%) is deducted, Marco s account balance is $650,000 including $200,000 tax free component and $450,000 taxable component. In December 2013, Marco withdraws $260,000 which includes a tax free component of $80,000 (calculated using the proportioning rule). Marco s account balance is now $390,000 including $120,000 tax free component and $270,000 taxable component. In June 2014, Marco provides a variation notice to reduce the amount advised in his previous notice to $12,000. To assess whether the notice is valid, the trustee must determine the amount of personal contributions covered by the previous notice that remain in the taxable component of Marco s account following the partial withdrawal. 9
Example 11: continued This is calculated as: taxable component of x contribution subject of notice (net of 15%) x 1.176 remaining account balance taxable component of account before withdrawal = $270,000 x ($21,250 / $450,000) x 1.176 = $14,994 Therefore, Marco is able to reduce the amount advised in his previous notice by up to $14,994. As the variation notice requests to vary the amount to $12,000 (being a reduction of $13,000) the notice is valid and can be acknowledged by the trustee. For simplicity, this example assumes no investment earnings and all results have been rounded to the nearest dollar. 9 Checklist If your client intends to claim a personal tax deduction for personal superannuation contributions made during the 2013/14 financial year they need to ensure: their superannuation fund receives their personal contribution by 30 June 2014; and they are eligible to claim a personal tax deduction for personal superannuation contributions made in 2013/14 (Refer to Who is eligible to claim a deduction on a personal contribution? section earlier in this bulletin); and they provide a personal tax deduction notice (and any subsequent request to vary the notice) to their superannuation fund in the approved form within the restricted time period. For contributions made in 2013/14, this period ceases on the earliest of the following events: the super fund no longer holds all of the contributions (this may occur after a partial withdrawal or after contributions have been split with the member s spouse); the client uses any amount of their super benefit to commence a pension in the same superannuation fund; the client ceases to be a member of the fund; the client lodges their tax return for the 2013/14 financial year; and 30 June 2015. 10
10 Tips & Traps ensure your client considers their concessional contributions cap when claiming a deduction for personal contributions so they do not pay excess contributions tax. claim the correct amount, as there may be a restricted ability to vary a notice at a later time. ensure your client provides a notice prior to any part or full withdrawal or rollover, or prior to using any amount of their super benefit to commence an income stream in the same fund. remember that different rules apply when claiming tax deductions for personal contributions made in financial years prior to 1 July 2011 and also prior to 1 July 2007. 11 Legislative references Income Tax Assessment Act 1997 Subdivision 290-C (ability to claim a personal tax deduction for contributions made from 1 July 2007) Related ATO Rulings/Determinations Taxation Ruling 2010/1 Income tax: Superannuation Contributions FOR GENERAL INFORMATION ONLY This information has been prepared by BT Funds Management Ltd ABN 63 002916 458. It is provided solely for the general information of external financial advisers and must not be relied on as a substitute for legal, tax or other professional advice. Further, it must not be copied, used, reproduced or otherwise distributed or circulated to any retail client or other party. The information is given in good faith and has been derived from sources believed to be accurate at its issue date. However, it should not be considered a comprehensive statement on any matter nor relied upon as such. BT Funds Management Ltd (including its related entities, employees and directors) does not give any warranty of reliability or accuracy or accept any responsibility arising in any way including by reason of negligence for errors or omissions in the information. 11
12 Appendix The <10% test If an individual has been an employee during the year, they can claim a deduction on their personal contribution if the <10% test is met for that financial year. An individual is eligible to claim a deduction if the sum of their: assessable income from employment, reportable fringe benefits, and reportable employer superannuation contributions is less than 10% of: their total assessable income from all sources their reportable fringe benefits, and their reportable employer superannuation contributions for the financial year. If the individual has not been an employee at any time during the year, this test does not apply. Assessable income from employment Amounts that are attributable to the employment activity are taken into account as assessable income in the <10% test. These include the assessable amounts of: salary or wages; allowances and other payments earned by an employee; other payments, such as commission, director s remuneration and contract payments, that are treated as salary or wages by section 11 of the SGAA 5 for those persons who engage in an employment activity in a capacity other than a common law employee; payments received on termination of employment including accrued leave and employment termination payments; and workers compensation and like payments made because of injury or illness received by a person while holding the employment, office or appointment, the performance of which gave rise to the entitlement to the compensation payments. Employment activity need not be an activity in Australia. However, if income attributable to overseas employment income is non-assessable in Australia then it will not be counted towards the maximum earnings test. This needs to be distinguished from employment activities where the person is an Australian resident and where the income is assessable in Australia. 5_ Superannuation Guarantee (Administration) Act 1992 12
Assessable income from employment: continued Example 12: Income from employment Brendan was retrenched from his employer on 7 July 2013 and shortly after he decided to establish a lawn mowing business as a sole trader. For the period from 1 7 July 2013, his employer paid him the following including termination payments: Gross salary $2,000 Reportable employer super contributions Reportable fringe benefits $ nil $ nil Accrued Annual Leave $3,000 Tax-free redundancy payment $12,000 Brendan s assessable income from employment for 2013/14 is $5,000 (note the tax-free redundancy payment is not assessable income). Brendan makes a personal contribution to superannuation during the 2013/14 year. To be eligible to claim a deduction on the personal contribution, the sum of Brendan s assessable income from all sources, plus reportable fringe benefits plus reportable employer superannuation contributions for 2013/14 needs to be more than $50,000. This is because his total income from employment is $5,000 and this must be <10% of his total income for deduction purposes. Reportable Employer Superannuation Contributions (RESC) A reportable employer superannuation contribution is an amount contributed by an employer in respect of a particular financial year (regardless of when the contributions are actually made), where the individual has or has had, or might reasonably be expected to have or have had, the capacity to influence the: a) size of the amount; or b) way the amount is contributed so that their assessable income is reduced. The following table provides a general overview of what types of contributions would and would not be considered to be RESC. For a more detailed explanation, see Technical Bulletin: Reportable Employer Superannuation Contributions. 13
RESC: continued Type of contribution Salary Sacrifice Superannuation Guarantee Award Contribution required under an industrial agreement Employer payment to the default superannuation fund to pay for expenses of the fund (such as insurance premiums) Employer contribution in excess of the SG requirement made due to payroll system limitations. After tax contributions made by an employer on behalf of an employee (e.g. via payroll deduction) Employer contributions to a defined benefit fund Employer contributions made on behalf of an employee as required by an industrial instrument or rules of the superannuation fund RESC? Yes No No No, provided the agreement is an arm s length agreement and the employee had no involvement in its preparation aside from voting on it. Yes No No Generally no, as the amount of the contribution is usually determined by the fund s actuary. If the employee can elect to make salary sacrifice contributions these would be included. No, provided that and the employee had no involvement in the content of that industrial instrument or the rules of the superannuation fund Example 13: Impact of the inclusion of RESC on the self employed Jack, aged 45, largely works freelance (as a sole trader) but is employed 1-2 days a week with a professional photography studio. In 2013/14 Jack s earnings include: Salary $ 5,000 SG Contributions $ 450 Salary sacrifice contributions (RESC) $ 4,200 Reportable fringe benefits (RFB) $ 3,800 Freelance income $70,000 Assessable income + RFB + RESC = $83,000 (Assessable income = salary plus freelance income) Jack will be ineligible to claim a tax deduction for any personal contributions made to superannuation as he will fail the <10% test. The percentage of assessable income, RFB and RESC attributable to employment as an employee will not be less than 10% of $83,000. (Salary + RFB + RESC)/Total Income = ($5,000 + $3,800 + $4,200) / $83,000 = 15.7%. 14