The procedures required for SMSF members to claim a tax deduction for personal contributions must be completed before that money is used to commence a pension, a senior technical expert has suggested.
Specifically, the actions in question are the need to submit a notice of intent to claim or vary a deduction for personal contributions, form NAT 71121, and the need to receive an acknowledgement from fund trustees this notice of intent has been received, Colonial First State head of technical services Craig Day noted.
“Why would [the ATO] invalidate a notice [of intent] because I’ve commenced an income stream?” Day asked delegates at the SMSF Association Technical Summit 2023 held on the Gold Coast last month.
“Because essentially when you start a pension you crystallise the tax components at that time.”
According to Day, the situation where a notice of intention to claim a deduction on a personal contribution is lodged after an income stream has been started was raised when the current pension rules were implemented on 1 July 2007.
He revealed the set of circumstances in question at the time were considered too difficult to deal with, resulting in the adoption of a simpler solution.
“[The situation] would require a trustee to rework the taxable and tax-free [components of the fund]. That’s too hard [it was decided so] sorry, you miss out on your deduction,” he said.
This is a common mistake advisers make with their clients, he pointed out.
He also took the opportunity to remind practitioners of the limits placed on the amount of money allowed to be claimed as a tax deduction for a personal contribution.
“You’re only allowed to claim a deduction for the amount of taxable income that you’ve got. You can’t put yourself into a tax loss position by claiming a tax deduction for a personal contribution,” he confirmed.
In addition, he said it is not a sound strategy to claim tax deductions down to zero taxable income.
“You get an effective tax-free threshold, including the low-income tax offset, for $21,884. I want to claim a tax deduction down to that [amount] because if I go further I’m now paying the 15 per contributions tax, whereas in the hand it’s tax-free. So don’t do it,” he noted.
