She said many advisers are familiar with a situation where a client is looking to make personal super contributions and claim a tax deduction for these contributions, as well as commencing a retirement phase or a transition to retirement (TTR) pension in the same income year after the personal super contribution is made.

“Most advisers these days understand the need to complete the required steps such as to lodge the valid notice of intent before the client commences their retirement phase income stream, such as an account-based pension or a TTR pension,” she said.

“This is because for the notice of intent to be valid, it needs to be lodged with the super fund before the commencement of any income stream. Also, any withdrawal or rollover that occurred after the personal super contribution was made can jeopardise the opportunity of lodging a valid notice of intent and therefore the opportunity to successfully claim a tax deduction for the personal super contributions.”

Ms Bruce said more importantly, advisers need to ensure that before commencing a TTR or a retirement pension, their client will need to have enough income to absorb this tax deduction for personal super contributions.

“We need to look at the client's taxable income prior to claiming the personal super contribution deduction. That's calculated as the assessable income minus any other tax deductions first,” she said.

“If the client then still has sufficient taxable income left, the ATO can allow the personal super deduction to go through, but if the leftover amount is not sufficient to absorb the deduction, we have a problem.

“This is because the amount of the personal super contribution that can be successfully claimed as a tax deduction can only reduce the taxable income to zero, but it cannot create a tax loss. This means that if there's any amount that the client intends to claim as a deduction in a tax return exceeds the remaining taxable income, the excess will simply be disallowed by the ATO as a deduction.”

“The amount that is disallowed by the ATO as a tax deduction will then be used by the ATO to count towards the client’s non-concessional contributions cap rather than the concessional contributions cap. If the client has already maximised their non-concessional contributions cap, the client will then most likely breach their non-concessional contributions cap. The client and the adviser will then need to deal with the excess non-concessional contributions determination and the associated tax consequences.”

Ms Bruce said realistically, for a better tax outcome, the taxable income should not be reduced to zero for a resident taxpayer by claiming a tax deduction for personal super contribution, or by salary sacrificing to super.

This is because the taxable income below the effective tax-free threshold, currently $21,884, is taxed at zero per cent. In comparison, the amount of the personal super contributions that the client intends to claim as a tax deduction are taxed in the the super fund at 15 per cent.

"It’s simply not tax effective to reduce the client’s taxable income to below effective tax-free threshold if the client is a tax resident," she said.

“It’s important to note that the moment the client lodges a valid NOI, the amount specified in the notice will form part of the assessable income in the fund, and that's taxed at 15 per cent. This includes any amount that may be disallowed by the ATO as a tax deduction at a later stage,” said Ms Bruce.

If the ATO denies part of the amount as a deduction, there are ways to vary the notice of intention lodged with the fund, she said, and wherever possible she advised, the client should go back to the super fund to lodge a notice of intent to reduce the amount that was included in the original notice to the amount of the deduction that the ATO allowed.

However, this is only possible if the super fund still holds the personal contribution, and the client hasn’t commenced a TTR or retirement phase pension. Once the amount included in the notice of intent is successfully varied down, the extra amount will no longer form part of the fund’s assessable income and will not attract the 15 per cent tax payable by the fund.

“However, if the client has already commenced the pension, it can be disastrous, because the client will lose the opportunity to go back to the fund to vary the notice of intent they originally lodged with the fund, which means they cannot get a refund on the 15 per cent tax that is payable on that excess amount.”

Ms Bruce said a similar situation can occur if a client breaches their non-concessional contributions cap because they lodged the valid notice of intent with the fund but forgot to claim the tax deduction for the personal super contributions in the tax return.

In this situation the ATO will count these contributions towards the client’s non-concessional contributions cap. However, it is possible for the tax return to be amended within two years from the date of the notice of assessment to include this tax deduction.

The client will need to lodge an objection if the tax return needs to be amended outside this two-year time limit. Once the tax return is amended and the deduction is successfully claimed, the ATO will amend their record to allocate this amount towards the client’s concessional contributions cap.