Compliance, Contributions, Tax

Contribution deduction can’t outweigh income

Contribution Deduction ATO Assessable income Non-concessional contribution

Trustees must ensure they have enough assessable income to offset a contribution deduction to avoid the risk of a compliance breach that will incur additional tax liabilities.

SMSF trustees should review their taxable income position before claiming a deduction on personal contributions as failing to do so could impact their contribution caps and lead to unnecessary liabilities, according to a technical expert.

BT technical consultant Matt Manning noted he receives several inquiries each week about the deductibility of contributions and taxable income was being overlooked in the decision-making process.

“We have to have enough taxable income to offset the deduction. If we try and take our taxable income below zero with a deduction, the ATO is going to deny the deduction and classify it as a non-concessional contribution and that could cause further pain in addition to certainly not being tax-effective,” Manning told attendees of a webinar hosted by his firm last week.

“There could be flow-on effects with our non-concessional cap being exceeded or the bring-forward provisions are inadvertently triggered and that scenario is not much fun at all.”

He added if trustees find they do not have enough assessable income to cover the deduction, they should act now as the end of the financial year is approaching and the situation becomes difficult to rectify after an income tax return is lodged.

To illustrate his point, he used the example of Peter, who made a $20,000 contribution to his fund on 12 July 2023 and submitted a notice of intent to claim a deduction on 14 July. When he visited his accountant on 22 August 2024, he realised his assessable income for the 2024 financial year was $15,000.

“In this situation we’ve got $15,000 worth of income and a valid notice for $20,000. What should we do in this case?” he said.

“We should submit a downwards variation, vary that notice right down to nil, and then submit the tax return. The order is important because when we go to submit the tax return, it’s too late to submit the downwards variation for the notice.

“If we don’t do that, we get the disastrous situation of not only the contribution not being tax-effective, but we’ve also effectively paid 15 per cent tax on the $5000 that gets disallowed anyway.

“Once the ATO denies the deduction, we can get our 15 per cent contributions tax back. You could also decline to submit the notice in this case, however, if you do lodge the notice, pick it up before you’ve submitted the tax return so you can vary it downwards and not run into that situation.”

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