Rules for claiming personal super tax deductions
If you’re self-employed or semi-retired, you could be eligible for significant tax deductions when you make contributions to your superannuation fund. These deductions will, in effect, increase the size of your contributions and mean a big boost to your retirement balance.
In order to claim these tax deductions, it’s essential to avoid common traps for the unwary. The Australian Taxation Office (ATO) has some good tips on its website around who is and isn’t eligible, but we’ve outlined the basics below.
If you’re unsure, and your adviser or accountant doesn’t have the answers, you can always ask the ATO for a ruling.
The ATO doesn’t put limits around the amount you can claim as a deduction but you need to know your annual concessional and non-concessional contribution tax limits – A$25,000 for concessional and A$150,000 for non-concessional – as you will still be required to pay extra tax if you exceed those limits. Contributions you make to your self-managed superannuation fund (SMSF) but don’t claim a tax deduction for are classed as non-concessional contributions.
The Magnificent Seven
There are seven key rules for claiming a personal super contribution as a tax deduction:
1. Be self-employed
Essentially, you can’t be employed in a full-time arrangement by another employer. This tax deduction may be available if you’re a semi-retiree who isn’t in any formal employment arrangement but you need to be under the age of 75.
2. Pass the test
If you’re employed, you might still be eligible for a personal super contribution tax deduction if you satisfy the “maximum earnings test” or MET.
This test says that from 1 July 2009 onwards, a tax deduction for personal super contributions will be available if less than 10 per cent of your total annual assessable income was received from employers who would have to make Superannuation Guarantee (SG) contributions for you.
The ATO uses the following example of a promoter who earns A$70,000 in assessable income from his business. But he also works as an employee for another employer, where he earned A$6500 before tax.
He may still be eligible to claim a deduction for his personal super contributions, as the income from his employment with the other promoter (A$6500) is less than 10 per cent of his combined assessable income, reportable fringe benefits and reportable employee superannuation contributions (A$76,500 x 10% = A$7,650).
There are some exceptions and exemptions to these MET rules and you should seek further information if the following applies:
• You’re not an Australian resident for tax purposes
• Your employer doesn’t have to make SG contributions
Note: You may receive a PAYG Payment Summary from a former employer, but this does not mean you’re employed.
You also can’t claim deductions for contributions made under a salary-sacrificing arrangement. That’s because the ATO deems those contributions as employer contributions, not your own.
The ATO says: “If you have entered a salary-sacrifice arrangement to receive extra super contributions from your employer, the extra super will be counted as reportable employer super contributions. These will be included on your payment summary and may affect your income tests.”
3. Remember your role
Remember, you play the part of both member and trustee for your SMSF. So, in your role as a member, you must send documentation to your SMSF’s trustees (even if you’re the sole member) before you can actually claim your personal super contributions as a tax deduction.
You begin this process by stating in writing to the trustee that you’ll claim some, or all, of your personal contribution as a tax deduction. Don’t fall asleep but the form you need is called a “Section 290-170(1)(a) Notice” (the ATO document reference is NAT 71121 and it is available on the ATO website here.
Then, in your role as a trustee you (and any other trustees of the fund, such as your spouse) need to acknowledge in writing that you’ve received this information. This is called a “Section 290-170(1)(c) Notice”.
4. Watch your step
You must submit your notice of intent to claim a deduction either before you lodge your income tax return for the income year in which the contribution was made or by the end of the financial year following the financial year when the contribution was made.
This is a very important step. There has been an Administrative Appeals Tribunal case about not completing this documentation process in the required timeframe.
5. Don’t be invalid
Make sure that your notice of intent is valid. Your notice will be invalid – and can’t be accepted by the fund – if before submitting the notice to your super fund:
• you cease to be a member of the SMSF
• you have rolled over, or transferred, some, or all, of a contribution to another super fund
• the super fund has begun to pay a pension with some or all of the contributions
6. Be careful when making changes
You can vary your notice of intent, although you can only reduce the amount you want to claim as a tax deduction. You can’t vary it if you’ve rolled over or transferred some of the contribution or you’ve started a pension with the contribution before verifying the amount you want to claim.
This last problem in particular catches some people unaware, which sometimes sees taxpayers paying contribution tax and not being able to get it refunded.
7. Remember, the sky’s not the limit
Finally, you can only claim so much of your personal super contributions so that your taxable income is not negative. For example, suppose you have income of A$30,000 and personal super contributions of A$50,000. The maximum you can claim as a deduction would be A$30,000.