Overview
As another financial year draws to a close, taxpayers start turning their minds to year-end tax planning. The tax-deductibility of personal super contributions provides many sound strategies; however, trustees, members and practitioners need to make sure they get the documentation and timing right. If things are not done correctly, there is little discretion for the Australian Taxation Office (ATO) to remedy the situation.
Under the current rules, if someone is employed, self-employed, unemployed, or retired, they may be eligible to claim a tax deduction on their after-tax super contributions. Recent changes to super removed the need to meet a ‘work test’ before making a personal contribution, making tax deductible contributions to super even more attractive. However, if members are 67-74, they must meet the ‘work test’ to claim a deduction on personal super contributions.
Also, contributors must ensure in advance that a ‘Notice of intent to claim a deduction’ (NOI) form (s290-170) is supplied to their super fund, and that the fund acknowledges the form.
Getting the timing right
It is crucial that an s290-170 is supplied and acknowledged by the trustee/s of the fund before the member takes a lump sum or pension – or rolls over to another super fund. Otherwise, they may lose the ability to claim a deduction.
To be valid, the s290-170 must be supplied to the trustee before the person submits their tax return – and no later than the 30th of June of the financial year following the contribution.
A s290-170 will be invalid if:
• The person is no longer a member of the fund
• The trustee no longer holds the contribution
• The trustee has begun to pay an income stream.
The ATO has ruled that once a pension commences, a s290-170 can only cover contributions made post-pension. It does not matter if only part of a member’s accumulation account is used to commence a pension, and there is still enough money in accumulation to cover the deductible contribution. If a s290-170 is submitted post-pension, no deduction is allowed for any contributions made prior to the pension.
This may be relevant where a member is implementing a pension strategy and wishes to ‘re-cast’ the income stream to accommodate personal deductible contributions at the end of the financial year to ensure a tax deduction (also known as a pension commutation). If a s290-170 is not made prior to the new pension, then the contributions will not be considered personal deductible contributions, and no deduction can be claimed. This may have a substantial impact on the client resulting in higher personal tax.
Case Study
Tom is aged 60, self-employed with marginal tax rate is 37% (plus 2% Medicare Levy), and a member of a large APRA-regulated superannuation fund. He has a Total Super Balance (TSB) of $500,000 as at 30 June 2024; therefore, he can utilise the carry-forward unused concessional contributions provisions.
He contacts his adviser who recommends he:
• Make a personal deductible super contribution of $50,000 in June 2025
• Make a separate 3-year bring-forward non-concessional contribution of $360,000 in June 2025
• Roll the benefit over to a newly created SMSF, established early in the 2025/26 FY, from which a pension will be paid.
Tom provides his adviser with cheques for $50,000 and $360,000, who remits them to the retail superannuation fund. Included is a cover letter advising the $50,000 is to be treated as a personal concessional contribution and the $360,000 as a non-concessional contribution.
Unfortunately, in this instance the retail fund cannot differentiate between concessional contributions that are personal versus employer, does not treat the $50,000 in the manner intended and does not issue an s290-170 Acknowledgement.
However, Tom, unaware of this, rolls the benefit to his newly established SMSF and commences a pension.
Whilst successor funds can accept an s290-170, this does not ordinarily apply to SMSFs and in any case, Tom has started a pension.
When Tom lodges his personal tax return, the ATO disallows the tax deduction of $50,000 as there is no valid s290-170 prior to rolling the benefit and/or commencing the pension. The $50,000 is then re-classified as a non-concessional contribution. Consequently, Tom’s non-concessional contributions for the 2024/25 FY are $410,000.
For Tom, this means the $50,000 will not be a tax deduction and his taxable income will be increased proportionately. At his marginal tax rate, this equates to an additional $50,000 x 37% = $18,500 in personal tax (plus Medicare Levy). Furthermore, as he may have contributed more than the non-concessional cap, there could be an excess non-concessional contribution of $50,000. This could lead to more tax payable by Tom; in this case, the deemed earnings on the excess non-concessional contribution from date of contribution to the day the ATO issues a Release Authority. Whilst there are legislative mechanisms to allow excess non-concessional contributions to be refunded, this is a less than desirable outcome for Tom and potentially compliance issues for his adviser.
Case Law
There have been a couple of recent cases that further illustrate the impact of getting the s290-170 notice wrong.
The first is the Administrative Appeals Tribunal (AAT) decision in Khanna and Commissioner of Taxation [2022] AATA 33 where the taxpayer claimed a tax deduction on a contribution some 11 months after he had lodged his 2018/19 income tax return. He had not initially claimed a deduction and the retrospective claim of a deduction was due to the taxpayer being made redundant during COVID in 2020 and looking to get a tax refund.
His super fund said it was not able to process the s290-170 notice on the basis that, to claim a deduction for a personal superannuation contribution, a taxpayer must give to their super fund a notice of intent to deduct the contribution, and the notice must be given before the earlier of:
• when they lodge their personal income tax return; and
• the end of the next income year.
Whilst the taxpayer claimed he should have been given an extension due to the COVID pandemic, the AAT found that the word ‘must’ indicates an obligation to comply with the notice requirements, including the statutory time limit for giving the notice. There is no discretion to extend the time or to disregard non-compliance with that time limit.
Accordingly, the AAT held that the taxpayer was not able to claim a tax deduction for personal superannuation contributions because he did not submit his Notice on or before 3 July 2019 (when he lodged his personal income tax return).
In Nicholls and Commissioner of Taxation (Taxation) [2023] AATA 2772, it was also made abundantly clear the ATO has no available discretion where the s290-170 NOI requirements are not properly met.
In that case, the taxpayer had made multiple personal superannuation contributions throughout the year and lodged an s290-170 NOI with HESTA super fund within the required time limits. However, HESTA queried the claim as it was greater than the amount they had recorded as contributions.
The taxpayer then lodged another NOI after being notified by the fund of this oversight; however, HESTA claimed to have never received the subsequent NOI and therefore did not issue an Acknowledgement of the NOI as required by legislation for the deduction to be valid.
In the belief that this subsequently lodged NOI would be sufficient, the taxpayer proceeded to lodge their personal income tax return. The taxpayer then lodged a third NOI with HESTA, who did not accept it, as it was outside the required timeframe. The ATO then denied the deduction on the basis that the law had not been followed correctly by the taxpayer (he had not received an Acknowledgement from HESTA).
The ATO claimed not to have any available discretion to overlook the taxpayer’s failings in this instance, and the AAT agreed – resulting in the tax deduction being disallowed.
Both these recent decisions serve as an important reminder of the strictness of the rules for deducting personal superannuation contributions and the problems that can occur when those rules are not followed.
Be vigilant
Advisers, fund members and trustees need to be extremely vigilant when making contributions to super with the intent of claiming a tax deduction, especially where the deductible contribution is being made to a retail or public offer fund, and/or then rolled over to an SMSF. It is also imperative to provide a valid s290-170 before a pension starts and be in receipt of an Acknowledgement from the fund. As section 290-170 notices are enshrined in law, there is little that can be done after-the-fact and the ATO has no room for discretion.
What does Neo Super provide?
We are an innovative end-to-end SMSF service provider specialising in:
• SMSF administration and compliance
• Documentation services, including fund establishment, borrowing arrangements and pension documentation
• White label documentation and services for Intermediaries such as accountants and financial planners
• SMSF technical support, education, and training.
Further Information
For other service requirements, please contact our office at neo@neo-super.com.au or 1300 083 428.
