SMSF practitioners should advise clients making a deduction for a personal contribution should be sure they have actually met the work test to prevent them being taxed inside and outside the fund for the contribution, according to a superannuation technical expert.
Colonial First State head of technical services Craig Day said the changes to the work test rule may trap superannuation fund members aged 67 to 75 who make a contribution and claim a deduction before completing 40 hours of paid work in 30 consecutive days as required under the work test.
“The rules used to state that if you wanted to make a contribution to superannuation and were in this age group, you needed to do the work before making the contribution,” Day said at the Tax Institute National Superannuation Conference in Sydney late last week.
“Now the rules say as long as you do the work at any point during the year, you can claim the tax deduction.
“The trap occurs where the contribution was made, the notice of intention [to claim a deduction] is provided and an account-based pension was started before the work test was satisfied.”
He said if any plans to get a job to meet the work test are not met and at the end of the financial year the fund member declares in their tax return they were not gainfully employed, then the deduction is denied.
“What happens when a deduction is denied is you can go back to the superannuation fund and vary the notice of intention to claim a tax deduction down and the fund will refund the contribution’s tax,” he said.
“The problem here is the notice to vary down is invalid if some or all of the contribution has been used to commence an account-based pension or any retirement income streams.
“If the member goes back to the fund to try and vary the deduction, it will be an invalid notice and the contribution is still assessable and the fund will be paying 15 per cent contributions tax to the ATO. Not only that, the member is now paying tax on that deduction in their hand as well.
“Probably a really good rule of thumb is don’t put your notice of intention or don’t start the pension until they’ve done the work because life has a funny way of getting in the way of that.”
