In a monthly column to assist trustees, specialist Meg Heffron explores major issues on managing your SMSF.
As Liam Shorte said in his excellent article here, there are so many things worth doing at the end of the financial year that we almost need an extra month to do them.
But one of Liam’s suggestions (Item 9) caught my eye as being worthy of more discussion: claiming tax deductions for personal super contributions. The article highlights the importance of putting in the right paperwork at the right time, which is absolutely crucial. There are a number of points that are often forgotten.
Eligibility for and use of a deduction
Anyone aged between 18 and 67 is eligible to claim a tax deduction for their personal contributions as long as they have enough income to do so (you can’t use one of these tax deductions to create a tax loss). It doesn’t matter how the income was earned in the first place or whether the person is working.
Working is only important for people over 67. Someone between 67 and 75 who does meet the relevant work test, though, can also claim deductions for their super contributions. For this purpose, the work test is doing paid work for at least 40 hours in a 30-day period at some point before 30 June 2023. It doesn’t need to be met before the contribution was made.
And the deductions can be useful for all sorts of people at different stages of life, for example:
1. Someone who is 60 and retired but made a large (personal) capital gain. The deduction will help reduce the tax they pay on that capital gain.
2. Or perhaps they’re 20 and at university but received a distribution from their parents’ family trust. The deduction will reduce the tax they pay on that distribution.
3. Or working and just didn’t get around to putting a salary sacrifice arrangement in place and have some spare cash they’d like to put into super in the next two weeks.
All of these are scenarios where a tax deductible super contribution could be very handy.
The limit
These contributions (together with any contributions made by an employer) are checked against the member’s 'concessional contributions cap'. For most people this is $27,500 but as Liam points out in his article (Item 3) some people can also use limits they haven’t used in the past.
Watch for the traps
There are a few traps that can easily bring a good strategy undone and it’s largely to do with the paperwork. Liam’s article touched on two – it’s critical to prepare and sign the paperwork before starting a pension or taking money out of the fund.
1. Starting a pension
There are some quirky rules around these contributions that mean if you (say):
- contribute to your fund in July 2022,
- start a pension with even just some of that super account in December 2022, and then
- complete the paperwork for your tax deduction in July 2023,
your deduction is denied. You have to do the paperwork before starting the pension.
What if it’s too late and you’ve only just discovered that this is how things work and haven’t done your paperwork yet?
That’s terminal for your July contribution but you could make another contribution now (June 2023) as long as the paperwork is completed before doing anything with this money (such as starting another pension or making a withdrawal).
What that will mean is that your July 2022 contribution has to be treated as a non-concessional contribution.
What if you weren’t actually able to make these types of contributions in 2022/23? People who had too much in super at 30 June 2022 or who had already used up their 2022/23 cap for these contributions beforehand would be in this boat.
Don’t panic, it’s not illegal to do that. It just means you’ll have an 'excess' non-concessional contribution. The ATO will issue a notice telling you about it in due course and unless you really want to leave it in your fund (don’t do this), your fund will eventually be told to refund it to the ATO, together with some interest.
The ATO will use that as an opportunity to grab any money you already owe them (if you have outstanding personal tax bills) but will give the rest back to you less some tax on the interest. It’s not a terrible result and will at least mean you get to claim the tax deduction you were aiming for.
2. Taking money out of the fund
Something similar happens if you’ve taken your money out of your super fund during the year after making the contribution but before doing this paperwork. Unfortunately the deduction gets 'scaled back' – if you took 25% of your super balance out of the fund, you can only claim a deduction for 75% of the contribution. In fact, if you took all your money out of your fund you’d get no tax deduction at all. That even happens if you just moved your super from one fund to another. Ouch.
3. Changing your mind
What if you planned to claim a tax deduction for $20,000 and put this paperwork in place in July 2023? Then in October 2023 – while doing your personal tax return – you realise you actually have more income than you thought. You’d really like to increase your deduction.
Unfortunately, you can’t change a notice you’ve already done to increase the deduction you claim. (You can vary it down, even to $nil, but not up.)
A tip for the future is that if you make multiple contributions in a particular year, your deduction can be attached to specific contributions. In this case, let’s imagine you contributed $20,000 in August 2022 and $15,000 in May 2023. Your original plan was that the May amount would be a non-concessional contribution. You haven’t started a pension or taken any money out of the fund during 2022/23.
If your notice about claiming a tax deduction was specifically attached to the August 2022 contribution, there’s nothing to stop you doing another notice later to claim part of the May contribution as a personal tax deduction. That second notice could even happen in October when you discovered the problem.
In other words, you can do as many notices as you like (one for each contribution in the extreme) and they can be specifically attached to individual contribution amounts rather than just “all the contributions made this year”.
4. And finally on the paperwork
There are two components to these notices. The member tells the trustee they intend to claim a tax deduction (and which contributions it relates to) and then the trustee acknowledges it. Both components are critical. The tax deduction isn’t valid without them. And this is one time when the date it’s actually signed is critical.
This is quite different to other SMSF events. For example, it’s common for pensions to start on 1 July but for the paperwork to be formally signed some time later. That can’t happen for these notices. They have to be actually signed before the earlier of:
- the date the member lodges their personal tax return for the year, or
- 30 June of the following year (so 30 June 2024 for 2022/23 contributions).
That means someone who lodges their 2022/23 tax return on 15 October 2023 has until 14 October 2023 to do this paperwork as long as they don’t start pensions etc beforehand.
Claiming a tax deduction for super contribution can be a great strategy and definitely something to consider before 30 June. But this is definitely one time when the paperwork really matters.
Meg Heffron is the Managing Director of Heffron SMSF Solutions, a sponsor of Firstlinks. This is general information only and it does not constitute any recommendation or advice. It does not consider any personal circumstances and is based on an understanding of relevant rules and legislation at the time of writing.
For more articles and papers from Heffron, please click here.