ADVICE

Getting super contributions wrong can lead to losing significant tax deductions

Some might not know you have to submit a
Some might not know you have to submit a "valid notice of intent to claim a deduction for personal superannuation contributions". Picture: Shutterstock.

Making personal tax-deductible contributions to your superannuation is a great way to build wealth.

For most people such contributions lose just 15 per cent entry tax, which would normally be less than their marginal tax rate. But make sure you take advice before you make the contribution - getting it wrong could mean loss of the tax deduction.

You must submit a "valid notice of intent to claim a deduction for personal superannuation contributions in the approved form, to the superannuation fund trustee within the required timeframes".

You then need to receive an acknowledgement from the trustee that a valid notice has been received, before you can claim a tax deduction. The timing of these actions is critical.

More lifestyle:

Here are a few case studies:

Allen makes a personal contribution to his fund in April 2021, intending to claim it as a deduction when he does his tax. He does not submit a notice of intent at the time. In September, he rolls his three existing super funds into a new fund.

In early October, Allen is ready to do his tax, and he lodges a notice of intent to claim a deduction for personal super contributions with his new fund. But the notice is invalid as he has not made any personal contributions to the new fund.

The notice would also be invalid if he sent it to the old fund (where he made the contribution) for two reasons: first, when he gives the notice in early October, he is no longer a member of the fund and second, the fund no longer holds his contributions.

Jo's $50,000 super fund consists of a tax-free component of $27,500 and a taxable component of $22,500. She makes a $25,000 personal contribution in February 2021, bringing the balance to $75,000. The fund records this contribution against the contributions segment and counts it against the tax-free component of any superannuation benefit paid to her.

In June 2021 she rolls over $50,000, leaving $25,000. The rollover comprised of a $35,000 tax-free component and a $15,000 taxable component. The tax-free component of the remaining super interest is $17,500. As the super fund no longer holds the entire $25,000 contribution, the maximum deduction she can claim is $8333.

Harry's superannuation balance is $175,000. He makes a $25,000 contribution in March 2021, taking the balance to $200,000. Before lodging a notice of intent, he started a pension using $150,000 of his fund.

Because his fund has started to pay a superannuation income stream based in part on the contribution recently made, any notice he gives to the fund will be invalid. However, if he had submitted the notice of intent before starting the pension, he would have been eligible to claim a $25,000 tax deduction.

Beck makes a $15,000 contribution to super in June 2018 to save for a house deposit. The following September she applies for release of the $15,000 under the First Home Super Saver Scheme.

She accidentally declares she does not plan to claim a tax deduction. In March 2021 she buys her first home using the released amount towards the purchase.

In June 2021, when catching up on her tax, she submits a notice of intent to claim a tax deduction. The notice is invalid because the fund no longer holds her contributions. The tax deduction is denied.

It's complex, but the cost of getting it wrong can be costly. Tread carefully.

Noel answers your money questions

Question

We sold an investment property with a resultant capital gain. The capital gain was obviously a one off, but it pushes us over the threshold to be eligible for the Commonwealth Seniors Health Card CSHC. We do not qualify for a pension and I am not seeking to do that.

Is it possible to have the one off capital gain exempted from the assessment? I've tried to contact Centrelink to discuss, but have not been able to get through at this stage.

Answer

The CSHC provides access to Pharmaceutical Benefits Scheme prescription items at a cheaper rate, plus a lower Pharmaceutical Benefits Scheme threshold and Extended Medicare Safety Net threshold.

A departmental spokesperson tells me that one-off taxable capital gains are included in the income test for the CSHC. However, in calculating a person's income for the CSHC income test, a "reference tax year" is used - usually the tax year immediately preceding the current tax year.

If a person's income for the reference tax year is above the CSHC income limits, and they can show that the source of the increased income is of a "one-off" nature then, subject to certain conditions, they may give an estimate of their income for the current tax year.

Services Australia will consider a range of factors on a case-by-case basis when determining what income estimate can be used for eligibility purposes. They suggest you test your eligibility for the Commonwealth Seniors Health Card by making a claim.

Question

If the abolition of the work test for non-concessional contributions becomes effective from July 1, 2022 and I turn 72 in that financial year, can I use the bring-forward rule and deposit $330,000 in my SMSF that year and another $330,000 in the 2025-2026 financial year?

Answer

John Perri of AMP Technical Services says there is an expectation that the bring-forward rule will be available to individuals aged 67 to 74 when the government amends the legislation to abolish the work test for non-concessional contributions from July 1, 2022.

If that is the case, and as you will be aged 71 at July 1, 2022 (though you are turning 72 in that financial year), then assuming your total super balance at June 30, 2022 is less than $1.48 million, you can use the bring-forward rules to make a non-concessional contribution of $330,000.

This will mean you cannot make any further non-concessional contributions till July 1, 2025 (at which point you will be aged 74).

It will be necessary to see the legislation before answering the second part of your question. The ability to use three years of bring-forward at age 74 may not be available, given no non-concessional contributions can be made at age 75 and 76.

Question

I receive the full age pension as I have no assets. If I won a house in a lottery would I lose my pension?

Answer

When you say you have no assets, I assume that means you don't own a house right now. Therefore, if you won a house in a lottery, and live in that house, it would be an exempt asset and would not affect the pension.

If you sold the property, and bought a cheaper house to live in, you would need to take advice as the capital released on the sale could be sufficient to have an effect on your pension.

A single pensioner homeowner can have assessable assets of up to $268,000 with no effect on their pension. However, the income test cut-off point is $178 a fortnight - if you had deemed assets of $260,000 this could just take you over the bottom threshold.

Question

I was telling my son about the miracle of compound interest, but he responded that you can't use it any more because interest rates are so low.

He showed me a clipping that read "daily compound interest on your savings account might net you a few cents, but not much more. Daily compounding makes only a minimal difference in how much you ultimately save."

I would appreciate your comments. Are there any investments you can recommend to maximise compounding?

Answer

An understanding of compound interest is essential for anybody who wants to be financially secure.

Today, we tend to use the term "compounding" because that more accurately describes the way it works. It simply means that the return on an investment is left to grow instead of being withdrawn and spent.

Today, the two classic investments for compounding are real estate and shares. The returns from both of these assets, if chosen well, should consist of both growth and income and in both cases the only way to access that growth is to sell the asset.

Compounding works better with shares because the dividends can be reinvested in more shares, whereas with property the rental income would be insufficient to buy another property. However, real estate investors can have the best of both worlds by using the rental from the properties to invest in shares.

The essence of compounding is that it is slow to work its magic, but the investment grows faster and faster as time passes, which is why starting early can make such a difference.

The two factors that make the difference in the amount of money you retire with, and how long your money will last after retirement, are time and rate.

  • Noel Whittaker is the author of Retirement Made Simple and numerous other books on personal finance. Send questions to noel@noelwhittaker.com.au
This story Getting super contributions wrong hurts tax deductions first appeared on The Canberra Times.