Superannuation fund members using monies from one fund to pay premiums for insurance held within another should be aware those rollovers will diminish any deductions made for personal contributions, according to a technical expert.
BT technical consultant Michael Tran said the issue of making a tax claim against personal deductible contributions when used to pay for life insurance premiums had grown in recent years with the ability to pay premiums for a policy held in a second fund via the use of rollovers.
Speaking during an online presentation today, Tran said the reason this strategy would reduce what could be claimed as a personal deductible contribution was the requirement under law that the contribution be retained by the fund.
Pointing to section 290-170 of the Income Tax Assessment Act 1997, he said “when the superannuation fund member lodges this notice of intent [to claim a deduction for a personal contribution], the superannuation fund must still hold that contribution”.
“If the superannuation fund no longer holds the contribution or only part of the amount, it will affect the amount that the client can successfully claim as a deduction,” he said.
He gave the example of Alfred who had a balance of $70,000, including a $1000 tax-free amount, who receives $10,000 under the super guarantee and then also makes a personal contribution of $17,500 in May 2023.
Under an enduring rollover from this main superannuation account, $3400 is sent to a secondary super account to pay life insurance premiums in September each year, and by September 2023, prior to the next rollover, the main account balance is $105,000.
Tran added that if Alfred lodged a notice of intent to claim a deduction for the $17,500, “as you will suspect … he’s going to be unsuccessful”.
“The super fund deems the notice invalid despite it still holding a majority of the balance,” he said, adding the fund would consider what had taken place as akin to a partial rollover or withdrawal and would focus on what remained of the contribution when considering a deduction for the personal contribution.
“We are focused on the tax-free components just before the rollover and just after the rollover, and just before the rollover it was $18,500, being the $1000 tax-free amount, plus the $17,500 personal contribution he made.
“The total balance at the time of rollover was $105,000, so the total tax-free component as a proportion of the balance was 17.62 per cent.
“When the rollover happened in September for $3400, 17.62 per cent of that would have been tax-free, or $599 in dollar terms, and the remainder taxable.”
This latter figure would reduce the tax-free component in Alfred’s primary superannuation account from $18,500 to $17,990, he said.
“Now that we have all of our inputs, plugging it into the formula of [tax-free component remaining of] $17,900 divided by [tax-free component before rollover of] $18,500, multiplied by his personal contribution of $17,500, equals $16,933,” he said.
“This is the amount that he could validly claim as a deduction and the reason this number is closer [to the original claim] is because we’ve only really rolled out a small proportion of his account.”
