Superannuation - there can be traps for the unwary

In the lead up to 30 June no doubt cash flows and taxation projections were a focus for many SME owners. 

One of your plans could have been to contribute a sum of cash into superannuation and claim a tax deduction. 

Perhaps now that the dust has settled, it might be a good time to consider various issues that may occur around this particular taxation benefit and keep these in the memory bank for when the new financial years comes to a close.

Understanding the cashflow impactBeware of the super trap

There is indeed a tax benefit to be gained from making a superannuation contribution.  The contributor (you or your company) is paying tax at a rate of at least 27.5% and possibly higher and the tax deductible contribution to the fund is only taxed at 15%.

However, you will have to factor into your planning that 100% of the cash for the contribution is leaving the business or your bank account in order to take advantage of this tax saving.  Your superannuation fund will of course retain the 85% after-tax contribution but this is now cash that is no longer accessible to the contributor.  (This does not take into account any entitlements of the superannuation fund member to draw a pension or lump sum from the fund which in itself requires advice suitable to your specific situation.)

Claiming a deduction

To claim the deduction, a simple three step procedure is required;

  1. Contribute the cash into a superfund prior to 30 June 2017
  2. Lodge a Notice of intention to claim a tax deduction with that superfund
  3. Wait for the acknowledgement letter from that fund stating the deduction you will be claiming and give that to your accountant for the tax return to be completed.

Reasonably straight forward, however, what happens if you decide to change funds prior to completing step 2 & 3?

FOR EXAMPLE: You decide that your industry superannuation fund isn’t performing to your required expectations and you set up a Self-Managed Super Fund (SMSF) because you fancy your chances at getting a better result.  This happens on 1 July 2017, but prior to this you contributed $25,000 to your old industry fund hoping to claim a tax deduction.  On the 3rd of July 2017 you roll from the industry fund (closing it) to your own SMSF without completing steps 2 & 3 above.

Your old fund accepted the contribution, but because you did not lodge an intention to claim a tax deduction notice the fund treated the contribution as non-concessional, or not tax deductible. You are no longer a member of the old fund so a variation of the contribution to become tax deductible is not possible. I.e. NO tax deduction.

In summary follow the three simple steps to claim a deduction for superannuation, and get the timing of moving superfunds right or your tax bill maybe higher than anticipated.

 Changes, changes, changes

Those of you who have a significant amount of wealth in superannuation should have been inundated with information about the changes that may affect your member balance.  The limit to $1.6m of member balance has impact on future contributions as well as the treatment of amounts over this limit for those who already had more than this in superannuation.  For some members, various actions had to be undertaken prior to 30 June.  There still may be further work to be done around the capital gains tax position of your fund assets.  Essentially, if you are in this position, then you should ensure that you have discussed your fund with your financial advisor.

Looking for more information about Superannuation?

If business owners would like assistance with their SMSF or advice in relation to the taxation and cashflow implications around superannuation, contact your local RSM office to discuss your queries.