A superannuation technical expert has reminded practitioners to gain a good understanding of the proportioning rule when determining the impact a fund withdrawal may have on the ability to claim a tax deduction for a personal contribution.
Institute of Financial Professionals Australia (IFPA) senior technical services specialist Stuart Sheary made the suggestion to alert advisers and accountants to certain situations where on the surface it appears an individual will be ineligible for a full deduction on a contribution due to a drawdown, but actually is entitled to claim one.
To emphasise the point, Sheary used an example of where an individual makes a personal deductible contribution, but makes a withdrawal from the SMSF afterwards to settle a Division 293 tax liability from the previous year.
He confirmed most SMSF withdrawals will be subject to the proportioning rule, meaning part of one will be taken from the taxable component and the other portion from the tax-free component of the fund. This treatment in turn will impact, and reduce, the size of the tax deduction available for the personal contribution if the drawdown is made subsequent to it.
However, he revealed a withdrawal to extinguish a Division 293 tax liability would not produce this outcome.
“[The rules say] if the contribution no longer sits or remains in the superannuation fund, then you cannot claim a deduction on that part of the contribution that has left the fund,” he told IFPA 2025 Conference and Expo attendees in Melbourne last Friday.
“The ATO applies a formula and the available deduction is based on a proportion of the reduction in the tax-free component. So when the contribution is made, the tax-free component decreases a bit and typically when you withdraw money from super [the proportioning rule is used].
“Typically when we make a lump sum [drawdown], if we have a tax-free component in the fund, part of that withdrawal will be [made up of] the tax-free component and part will be the taxable component.
“So in most instances when you withdraw money from super, our tax-free component should reduce. The caveat here though is, unlike other commutations or withdrawals, an amount withdrawn under a release notice, such as the Division 293 tax release notice, doesn’t reduce the tax-free component.
“[As such] in this scenario I’d argue [the member] should get the full deduction.”
He stressed best practice for members is to lodge the notice of intent to claim a tax deduction for a contribution as soon as possible to mitigate any potential risks from subsequent transactions, such as the payment of a Division 293 liability.
