Every year, many SMSF members who are otherwise fully entitled to a tax deduction on their personal super contributions lose it over nothing more than timing and a form. The culprit is the notice of intent (NOI) process. If members could make the deduction election in their tax return, and trustees had some discretion to accept late notices, many who would miss out could keep their deduction.

The current rules are strict. An NOI must be submitted to the fund before the earlier of two dates, which are:

• when the member lodges their tax return for the year in which the contribution was made, and
• the end of the income year after the one in which the contribution was made.

The common trap

Members who make personal super contributions sometimes forget to submit an NOI to their fund trustee or trustees. The member mistakenly then ‘claims’ the deduction in their tax return. As the super trustee had not received the NOI, the contribution is not reported to the ATO as a deductible contribution. As a result, the regulator denies the deduction. The member is unable to rectify the problem by submitting a late NOI as the return had been lodged.

Fix the outdated method

The outdated method should be modified. Allowing members to make the election to claim a deduction via their tax return would simplify things. For many members, it is at tax time when they think about their deductions. The ATO can then pass that election on to the fund for the preparation or amendment of its tax return. If a member’s notice is ‘invalid’, then the deduction can be denied and reflected in their notice of assessment.

Another trap: when a notice of intent is invalid

Late notices are not the only problem. Invalid notices deny members their deductions just as often. Reasons for this include the:

• member no longer being a member of the fund,
• fund no longer holding the contribution, or
• trustee has begun to pay an income stream based in whole or in part on the contribution.

Three common situations where members get caught out with invalid NOIs

Members who roll to another fund

A member who rolls out to another fund before submitting the NOI cannot claim a deduction, either with the fund they have exited or with the receiving fund. This seems unfair as the contribution remains in the super system.

Partial commutations and rollovers to insurance-only policies

A member who commutes part of their super, for example, by rolling an amount to another fund to pay an insurance premium, is denied the deduction on the portion that has left the fund. Taxation Ruling 2010/1 sets out a complicated formula for how much the member may still claim.

Commencing a pension before submitting the NOI (for any amount)

Commencing an income stream, such as an account-based pension, before submitting the NOI makes the member ineligible to claim any part of the contribution as a deduction. Members often protest that accumulation funds remain to cover the contributions tax, but the rules deny the deduction even where a single dollar started the pension.

Allow trustee discretion

Members may have all sorts of reasons for their NOI being late or invalid, but the trustee has no discretion and cannot accept it in these circumstances. Giving the trustee the discretion to accept an otherwise invalid NOI, where practical, would stop many members losing their deduction.

Why it may not always be practical

Allowing a deduction where the NOI would otherwise be invalid can make it difficult to calculate the fund’s tax-free and taxable components, which for an income stream are set at commencement. Where the trustee can still make a fair and reasonable calculation, the discretion should be available.

Last thoughts

The current NOI process is outdated and sometimes leads to members being denied a deduction on super contributions. This is often over nothing more than timing and a form. The detail of the fix can be worked through. What should not be in doubt is that the process needs to be modified.