With excess contributions tax assessments on the rise, this update is a timely reminder of the requirements that need to be satisfied to make a concessional contribution to superannuation.
Importantly, a self employed individual will need to ensure they are within the employment earnings threshold of 10% and a notice of intent is provided to the fund. Further, the self employed individual must have derived sufficient assessable income to claim a deduction.
In this update we also discuss some tricks and traps to keep in mind when claiming a deduction for contributions made in mid June but allocated in July and timing issues on when a contribution is deemed to have been received by a fund trustee.
Complying with the formalities
With 30 June fast approaching, self employed or substantially self employed individuals looking to make a concessional contribution to superannuation should ensure they strictly comply with the formalities:
- in respect of being eligible to make a contribution; and
- to ensure they are entitled to a deduction.
Keep in mind that once an individual reaches age 65 they must satisfy the work test to be eligible to contribute to superannuation, meaning that they must be gainfully employed for at least 40 hours within a 30 day period in the relevant financial year.
First, self employed individuals should ensure that any assessable income, reportable fringe benefits and reportable superannuation contributions received as an employee is less than 10% of their total assessable income.
Second, a notice of intent to deduct a contribution in the approved form must have been provided to the fund trustee on the earlier of:
- the date the individual lodges their tax return; or
- the end of the next income year.
Importantly, the notice will not be valid if the fund trustee has commenced to pay the individual an income stream or the individual made an income splitting application before providing the notice.
The fund trustee must also provide the self employed individual with an acknowledgement of receipt of the valid notice to deduct the contribution.
To be 'gainfully employed', an individual must be employed or self-employed for gain or reward in any business, trade, profession, vocation, calling, occupation or employment. 'Gain or reward' means receiving remuneration such as wages, business income, bonuses and commission for personal exertion. It does not include the passive receipt of income, such as dividends.
It is important that self employed individuals carefully monitor their concessional contributions to ensure they do not exceed their applicable concessional contribution cap.
Another trap for the unwary is where the deduction for the concessional contribution exceeds the self employed individual's assessable income. In this circumstance, the relevant proportion of the concessional contribution will be deemed to be a non-concessional contribution and will count against the individuals non-concessional contribution cap. This could result in the individual exceeding their non-concessional contribution cap and being subject to an excess contributions tax liability.
Timing of the deduction
In ATO ID 2012/16, the Commissioner of Taxation confirmed that a concessional contribution made to a superannuation fund in the current financial year and allocated to the relevant member account in the subsequent financial year in accordance with the superannuation law, is:
- deductible to the member in the current financial year (subject to complying with the deductibility requirements); and
- counted against the member's concessional contribution cap in the year it is allocated.
Therefore, a concessional contribution of $25,000 (or $50,000 for a member age 50 or more) can be made in mid June 2012 in addition to concessional contributions up to the cap already made during the 2012 income year and a deduction for the total amount of up to $50,000 (or $100,000) claimed in the 2012 income year.
Importantly, the fund deed must permit contributions to be allocated in accordance with superannuation law, being 28 days after the contribution is received by the trustee. If not, the member will breach the concessional contribution cap and incur an excess contributions tax liability.
If the member maximises their contributions as set out above, they cannot make any further concessional contributions in the 2013 income year without incurring an excess contributions tax liability.
When is the contribution received by the fund trustee?
In Chantrell and Commissioner of Taxation  AATA 179, the Administrative Appeals Tribunal held that an electronic funds transfer to a superannuation fund made on Saturday 30 June 2007 and credited to the superannuation fund's account on Monday 2 July 2008, was made in the 2008 income year.
In this case, the Administrative Appeals Tribunal declined to
make a determination that the excess contributions tax that arose
because of this transaction should be disregarded or allocated to
another income year as the facts did not give rise to special
The Commissioner of Taxation relied on Taxation Ruling TR2010/1 in asserting that the contribution was not made until the funds were credited to the fund trustee's account.
In contrast, TR 2010/1 states that a cheque is received by the fund trustee when it is provided to the fund trustee, subject to the cheque being cashed within 3 business days and the cheque not being subsequently dishonoured when the presented to the bank.
Therefore, given 30 June 2012 falls on a Saturday, it would be prudent to make all contributions by way of cheque by 29 June 2012.
Before 30 June 2012
Given the increasing number of excess contributions tax assessments being raised by the Commissioner, we recommend checking whether the formal requirements for making a deductible contribution have been complied with and then checking them again. ?
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.