To maximise the contributions that can be made to an SMSF, and reduce your personal tax liability, an individual may wish to consider claiming a deduction on any personal contributions up to the concessional contribution cap. However, there are some issues to consider associated with making personal deductible contributions.
What are personal deductible contributions?
If you receive employment income, in the capacity of an employee rather than as a self-employed person, you can make personal deductible contributions in addition to the mandated employer contributions you receive. These contributions are an alternative or indeed a supplement to any additional employer contributions such as those offered through a salary sacrifice arrangement.
Self-employed individuals and individuals in receipt of passive income can also make personal contributions and claim a deduction so long as you have sufficient income for the deduction to offset. This means most individuals under 75 years old can claim a tax deduction for personal contributions to their SMSF (including those aged 67 to 74 who meet the work test).
These contributions are treated as assessable income to the fund and are taxed at 15%, they are attributable to the taxable component of your interest within your SMSF. The tax concessions afforded to individuals who wish to claim a deduction are limited to contributions up to the concessional contribution cap, currently $27,500, this is regardless of whether they are personal contributions or employer contributions. Contributions in excess of the cap are subject to the excess concessional contribution regime.
Whilst the annual concessional contribution cap is generally fixed, since 1 July 2018 if you have a Total Superannuation Balance across all superannuation funds of less than $500,000 (as at 30 June of the previous financial year) you may be eligible to carry forward any unused amount of the annual concessional contribution cap, for up to five years. The five years is a rolling period so any amount not used will expire after five years. Therefore, whilst the concessional contribution cap is currently $27,500, you may actually have a higher amount you can contribute based on any unused carry forward amount.
Eligibility to claim a tax deduction
Beyond having sufficient income available to offset, you must meet certain criteria to be eligible to claim a deduction on personal contributions. You must satisfy the age restrictions and must provide the SMSF with a notice of intent to claim a deduction and receive acknowledgment from the SMSF trustees that the notice of intent is valid.
Age requirements
Since 1 July 2020, if you are aged 67-74 then you must satisfy the work test (or work test exemption requirements) in order to be able to make a contribution and claim a tax deduction for it.
If you are over 75 years (subject to meeting the work test or exemption) a deduction can only be claimed for contributions made before the 28th day of the month following the month in which you turned 75 years old.
If you are under 18 years at the end of the financial year in which you make a contribution, a deduction can only be claimed if you also received income as an employee or from operating a business during the financial year.
Notice of intent to claim
Where the age eligibility criteria is met and a tax deduction is to be claimed based on the contributions, then a notice of intention to claim a deduction must be provided to the SMSF. The ATO has a pro-forma that can be used – ‘Notice of intent to claim or vary a deduction for personal contributions (NAT 71121)’.
To be valid the notice must be provided while you are still a member of the fund and the fund still holds the contribution i.e. it can’t have been rolled over to another fund or paid out as a member benefit, more information is provided on this below, including the impact of commencing a pension.
The SMSF only requires one notice for all contributions made during the year, however, multiple notices can be provided to accommodate certain circumstances.
The notice must be provided to the SMSF on the earlier of the day the SMSF annual return is lodged for the year in which the contributions were made, or the end of the financial year following the financial year in which the contributions were made. Written acknowledgment must be received prior to the tax deduction being claimed in the personal tax return.
Varying a notice of intent
The notice of intent can be varied until the due date for lodging the claim, you can only vary a notice to decrease the amount to claim not to increase it. Where the deduction is disallowed by the ATO you can vary the notice with the fund after the due date. However, if the contribution has been included in an account that has commenced to pay a super income stream then you cannot vary the notice. Written acknowledgement from the super fund will be provided to the member acknowledging receipt of the valid notice of intent to vary a deduction for personal super contributions.
How do personal deductible contributions affect lump sums and pension commencements?
All personal member contributions are non-concessional until such time as you lodge a valid notice of intent to claim a deduction. Getting the timing of the paperwork right on this is critical to being able to claim the full amount of the intended tax deduction.
Pensions – the notice must be provided prior to commencing any income streams/pensions as the tax free and taxable components are calculated immediately prior to the commencement date. Failure to provide a notice of intention before the pension commences means any notice received after that date will be invalid.
Lump Sums – Unlike pensions, if the fund pays the member a benefit, either directly or via a rollover to another fund, then a notice of intention to claim will be limited to a proportion of the tax free component of the superannuation interest that remains after the withdrawal. The proportion is the value of the contribution dividend by the tax free component of the superannuation interest immediately prior to the withdrawal. This proportioning will apply even on lump sums taken in a latter year if the lump sum is taken before the notice of intention is lodged.
It is important to understand how these notices work, with particular reference to lump sums and pensions, given that many people can now still contribute after the age where many already have access to their super benefits.
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.
