Making superannuation contribution planning count

Contribution planning above the non-concessional caps is essential for superannuation – but you have to make sure it counts, writes Damian Hearn.

Maximising contributions while remaining within the contribution caps continues to be a major focus for financial advisers. However, historical and ongoing information from the Australian Taxation Office (ATO) confirms that contribution caps are being exceeded.

Advisers are routinely exceeding the non-concessional contribution (NCC) cap and claiming a tax deduction for the amount above the NCC cap. This is a valid strategy to maximise both contribution caps for clients who are substantially self-employed, fully self-employed, retired or unemployed. This can be a particularly powerful strategy when the client’s personal income tax situation is not entirely known.

In the event of an excess contribution, many advisers seek a refund (on the grounds there has been a mistake) for the amount that exceeds the NCC cap. The ability to seek a refund of a contribution from a superannuation fund on the grounds of a mistake is very limited. However, many advisers are unaware that they can gain control by taking advantage of the Superannuation Industry (Supervision) Regulations (SIS), regulation 7.04.

“Financial advisers can gain control over contribution planning above the NCC caps to avoid excess contributions tax by putting some practical rules into their advice.”

Financial advisers can gain control over contribution planning above the NCC caps to avoid excess contributions tax by putting some practical rules into their advice. Financial advisers may not know if their clients will be eligible to claim a tax deduction for their contribution above the NCC cap. Some of the practical rules that should be followed include:

• Rule 1: Your client must intend to claim a tax deduction for each $1 above the NCC cap and remain within the concessional contribution (CC) cap;
• Rule 2: The total amount of the NCC must be made as a single contribution and will exceed the NCC cap of $450,000 ($150,000 if aged 65 or more); and
• Rule 3: If your client is ineligible to claim a tax deduction (including a denied deduction by the ATO), then the client must be eligible to submit a valid s290.180 variation notice.

Case study

Mike (66) made a single contribution of $200,000 into his superannuation account on April 2010. He provided an s290.170 deduction notice for $50,000 to the fund when the contribution was made.

Mike’s accountant prepared his tax return for the 2009-10 financial year in late January 2011 and informed Mike that he was ineligible to claim a tax deduction for his personal contributions made into superannuation for the 2009-10 financial year. Consequently, Mike has exceeded the non-concessional contribution cap by $50,000, and a potential tax liability of $23,250 (ie, $50,000 x 46.5 percent) will be payable.

To ensure Mike avoids the excess tax liability, Mike needs to provide a valid s290.180 variation notice to reduce the concessional contribution to zero, and the trustee must refund $50,000 as per the requirements under SIS reg 7.04, which prevents trustees from accepting a contribution in excess of the NCC cap of $150,000 (or $450,000 if the client is aged 64 or below under the three-year bring forward provision).

How to do it

Mike’s situation can be resolved since the practical rules (as shown above) have been followed.

There are three more important comments to make about Mike’s case:

• If Mike made multiple contributions instead of a single contribution during the 2009-10 financial year, the refund mechanism using SIS regulation 7.04 would not be available;
• If Mike had completed one of the disallowing actions such as commencing an income stream, then he cannot provide his super fund with a valid s290.180 variation notice and then trigger a refund; and
• The amount of the refund made by the trustee of the super fund will be net of fees, investment earnings and reasonable fees/expenses.

The key message is simple: stay within the contribution caps. Otherwise, be prepared to implement the above practical rules to avoid excess contribution issues.

Damian Hearn is technical services manager at IOOF.