Personal super tax deductions, if you’re self-employed and can access them, significantly increase the tax effectiveness of superannuation because they reduce the cost of investing into super.
This is the second in a series of articles about year-end tax planning from a super perspective. You can read the first installment here [1].
Claiming these personal contributions as a deduction contains a number of traps for the unwary, as there is a considerable amount of sometimes confusing paperwork involved.
Here we will focus on the forms that you need to complete and how to make sure that process works smoothly.
Use the right form
You must trade documentation with your super fund trustee before you can actually claim your personal super contributions as a tax deduction.
You begin this process by writing to the trustee and telling them that you’ll claim some or all of your personal contribution as a tax deduction. This notice is known as a “Sec 290-170(1)(a) Notice” – ATO document reference NAT 71121. Your trustee then acknowledges in writing that they have received this information. This is called a “Sec 290-170(1)(c) Notice”.
Hand it in on time
Your Sec 290-170(1)(a) Notice must be given to your fund before the end of the financial year following that when the contribution was made or before you submit your income tax return for the income year in which the contribution was made, whichever date is earlier.
This is a very important step. There has been an Administrative Appeals Tribunal case – Byron Johnston v Commissioner of Taxation [2011] AATA 20 – about not completing this documentation process in the required timeframe and the taxpayer lost access to the deduction.
In this case, the Tax Office audited the client and asked to see the taxpayer’s and super fund’s documentation. When it wasn’t produced, the deduction was struck out and a penalty was applied for underpaying income tax. The AAT decided that the deduction wasn’t allowed because the legally required paper trail hadn’t been followed, but it cancelled out the penalty.
Ensure its validity
Make sure that your Sec 290-170(1)(a) Notice is valid. Your notice will be invalid – and can’t be accepted by your super fund – if before submitting the notice to your fund:
- You cease to be a member of the super fund
- 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 contribution.
You can vary your Sec 290-170(1)(a) Notice, however, the tax laws say you can only reduce the amount you want to claim as a tax deduction. You can’t vary your Sec 290-170(1)(a) Notice if you’ve rolled over, or transferred some of the contribution or you’ve started a pension with the contribution before seeking to vary the amount you want to claim.
This last problem, in particular, catches some people unawares, which can result in taxpayers paying contribution tax and not being able to get it refunded.
For example, in another AAT case handed down last year – Confidential and Commissioner of Taxation [2013] AATA 110 – the personal super contribution tax deduction was denied but the 15% tax on the contribution remained.
This investor had personally contributed money to the super fund. In the following financial year, they gave the fund a written notice, declaring that they intended to claim the contribution as a tax deduction. This notice was handed over before the investor put in their personal tax return. The super fund then acknowledged receipt of that notice in writing and, as demanded by the tax laws, deducted the 15% contributions tax from the member’s account.
However, soon after the investor wanted to leave the super fund. In the meantime the Tax Office denied the deduction because the taxpayer had failed the 10% assessable income test. The taxpayer tried to change the notice given to the super fund but because they’d left the fund nothing could be done.
So make sure you adhere and understand all of the above requirements, particularly if you plan on changing funds or starting a pension from your fund anytime soon.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.
Also in the Switzer Super Report
- Peter Switzer: Full scale stench or just BO? [2]
- Greg Fraser: Stock in focus – Crown [3]
- Paul Rickard: Product road test – BT Equity Income Funds [4]
- Rudi Filapek-Vandyck: Weekly broker wrap – AIO and AWE upgraded to buy [5]
- Penny Pryor: Weekly auction results – chugging along [6]