Seven rules for claiming personal tax deductions

SMSF technical expert and columnist for The Australian newspaper
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Personal super tax deductions, if you can access them, significantly increase the tax effectiveness of superannuation because they reduce the cost of investing in super, meaning more money for you!

In order to claim these tax deductions, it’s essential to avoid some common traps for the unwary.

Before we look at the tax deductibility issue you’ll need to make sure you understand when contributions can be made to super and how those contributions will be taxed. If you haven’t already, you can bring yourself up to speed by reading How your SMSF is taxed on our website.

There are seven key rules for claiming a personal super contribution as a tax deduction:

1. You can’t be employed. In effect, this tax deduction may be available if you’re a semi-retiree who is not in any formal employment arrangement.

2. If you’re employed, then 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, during a financial year, less than 10% of your total assessable income for income tax purposes, reportable fringe benefits and salary sacrifice contributions were received from employers who would have to make compulsory Super Guarantee contributions for you.

There are some exceptions and exemptions to these MET rules, which I won’t discuss here in detail, but you should seek further information if you’re one of the following:

  • Not an Australian resident for tax purposes;
  • Your employer doesn’t have to make Super Guarantee contributions;
  • You may receive a PAYG Payment Summary from a former employer, but this doesn’t mean you’re employed.

3. Remember, you play the part of a member and of a trustee for your SMSF. So, in your role as a member, you must trade documentation with your SMSFs trustees before you can actually claim your personal super contributions as a tax deduction.

You begin this process by putting in writing to the trustee that you’ll claim some or all of your personal contribution as a tax deduction. This known as a “Sec 290-170(1)(a) Notice” – ATO document reference NAT 71121. Then, in your role as a trustee (and any other trustees of the fund, such as your spouse) acknowledges in writing that you’ve received this information. This is called a “Sec 290-170(1)(c) Notice”.

4. You must submit your Sec 290-170(1)(a) Notice either by the end of the financial year following when the contribution was made, or when you submitted your individual tax return – whichever falls earlier.

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. Make sure that your Sec 290-170(1)(a) Notice is valid. Your notice will be invalid – and can’t be accepted by the super fund – if before submitting the notice to your super 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.

6. You can vary your Sec 290-170(1)(a) Notice, although you can only reduce the amount you want to claim as a tax deduction. However, 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 verifying the amount you want to claim.

This last problem, in particular, catches some people unawares, which sometimes sees taxpayers paying contribution tax and not being able to get it refunded.

7. 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 $30,000 and personal super contributions of $50,000. The maximum you can claim as a deduction would be $30,000.

Important information: 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. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

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