14 September 2005 Dear Allan I have just received your Australia Post Express pouch containing the tax return prepared by you. From my reading of the available literature, I have always been under the impression that the contributions to a super fund are only taxable at 15% to the extent that they are actually claimed on the contributors' personal tax returns. In our cases, we contributed $105,000 and $40,000 respectively. Of these two amounts, the first $5,000 are fully deductible and up to 75% of the balance. This equates to 'claimable' contributions of $80,000 and $31,250 respectively on which the tax would be $16,687.50. Allowing for the $800 accounting fee and the $83.22 interest income, the tax amount payable would be around $16,580. Could you please confirm this? With kind regards Peter Goerman 15 September 2005 Dear Peter, From the Superfund perspective, all member contributions which the member is claiming a deduction for will be subject to a flat 15% tax - payable by the fund - keep in mind that you will get the benefit as an offset later when you draw it as a pension. Form the individual perspective, you will claim as deduction, 100% amount up to $5000 and the balance at 75% of contribution over the $5,000. Regards Allan Ong 15 September 2005 Thanks, Allan, for this clarification even though it very much surprises me as it makes the tax concessions rather less attractive, e.g. the Fund paying 15% on ALL contributions - even that part of the contributions which can not be deducted by the individual - makes the tax rate more like 20% when compared what can be saved by the invidual; therefore, any contributions which save less than 20% on an individual's tax are probably not worthwhile making. Regards Peter Goerman 28 September 2005 Dear Diego, just one last question to end the confusion and it has to do with the tax paid by my self-managed superfund: Last year I contributed $105,000 of which I can only claim $80,000 as a tax deduction. However, is it correct that the superfund has to pay 15% tax on the full contribution of $105,000 (or only, as I originally understood it, on the amount that I am allowed to claim, namely $80,000)? With kind regards Peter Goerman 28 September 2005 Hi Peter You are right, the super fund only has to pay the 15% on the amount you can claim as a tax deduction ($80,000) Should you require any further assistance please do not hesitate to contact me on 02 4472 2362 or E -mail me at carrasd@cba.com.au Yours Sincerely Dcarrasco 28 September 2005 Allan, just another comment on the Super Fund tax: as you know I questioned you on this as my impression had been that the fund only pays tax on the DEDUCTIBLE portion of the super contributions. CBA's financial planner confirmed this by email as shown below. Could you please comment? Regards Peter Goerman 28 September 2005 I think your planner had misunderstood you - you claimed 105,000 as tax deduction based on the rule 1st five thousand 100%, thereafter 75% balance + Aged based limit rules. First $5000 100% Balance 75,000 75% Total claim in tax return = $80,000 The planner thinks you are claiming $80k and the $25k undeducted contribution. If you did this then your actual claim of $80k would be reduced to: First $5000 100% Balance 75,000 75% Total claim in tax return = 5000 + 56250 = 61250 Then the 25000 would be classed as undeducted as you have not deducted form it. That's why we request that you let us handle your tax return. That way we calculate the optimum between both components. Regards Allan 28 September 2005 Allan, you have just succeeded in completely confusing me!!!For example, your paragraph QUOTE The planner thinks you are claiming $80k and the $25k undeducted contribution. If you did this then your actual claim of $80k would be reduced to: First $5000 100% Balance 75,000 75% Total claim in tax return = 5000 + 56250 = 61250 Then the 25000 would be classed as undeducted as you have not deducted from it. UNQUOTE makes no sense at all to me. And what do you mean by QUOTE That way we calculate the optimum between both components. UNQUOTE ? Surely, things can't be all that complicated that they can't be set out in straightforward terms. Coming back to my case, am I right in claiming just $80,000 on my personal return and are you correct in submitting on behalf of the SMSF 15% tax on $105,000? Best regards Peter Goerman 30 September 2005 Yes everything is correct. You claim 80k in your tax return We report 105k with tax 15% Will give you a ring Regards Allan Ong Allan gave me a call and over the telephone one more time confirmed that I would have to pay 15% tax on my FULL contributions! Luckily, shortly afterwards I received this email from Diego at the Commonwealth Bank which confirmed that MY interpretation was the correct one: 30 September 2005 Hi Peter I have had your details confirmed by my technical department and the agree with me as follows Contribution into super $105,000 Tax deduction allowed = first $5,000 Full Remainder 75% (100,000 x 75% = $75,000) Tax deduction = $80,000 When the money is paid into the super fund the fund will tax it as follows Total Deposit $105,000 maximum allowed deductible contribution $80,000 X 15% = $12,000 Remaining fund (which is the 25% $25,000 nil tax not allow to be claimed) The $80,000 (less tax) will be added to you Pre/Post 1983 components and $25,000 as undeductible contribution Should you require any further assistance please do not hesitate to contact me on 02 4472 2362 or E -mail me at carrasd@cba.com.au Yours Sincerely Dcarrasco But how to tell this to the misguided Allan who repeatedly gave me the wrong information? Perhaps something more 'official' might convince him; so I started searching for some appropriate information on the internet - and found it! 1 October 2005 Allan, I have visited several websites about tax on SMSFs. None are too explicit but the nearest thing to it is http://aussielegal.aol.com.au/informationoutline.asp?nocache=1&SubTopicDetailsID=1348 . Please read paragraph 7 where it says, "Self employed people are entitled to claim the first $5,000 as deductible contributions, and then 75% of additional contributions up to the age based threshold. The residual 25% of these contributions is treated as undeducted contributions." Note that the residual 25% are treated as undeducted contributions. Now please go back to paragraph 5 which reads, "What are Undeducted Contributions? Generally speaking, these are contributions made to the fund, for which you DO NOT claim a tax deduction. As such these contributions are accepted into the fund without being taxed, and at retirement are paid out on a dollar for dollar basis tax free. These amounts are also not assessed against the Reasonable Benefit Limits (RBL) thresholds." Again note where it says that these contributions are accepted into the fund without being taxed. If this is so, then the tax return and financial statements you prepared for the year ended 30 June 2005 require an immediate amendment. I very much look forward to your reply. Best regards Peter Goerman 1 October 2005 Allan, after some more searching through various website pages, I think I have found the definite answer - see http://www.national.com.au/Super_Living/0,,25355,00.html : in this example, a ficticious Helen contributes $15,000 to her superfund so that she can deduct $12,500 (first $5,000 and 75% of balance) from her income to save herself $6,062 in income tax (which happens to be in this case capital gains tax but this is neither here nor there). The example then illustrates her NET tax savings by offsetting against the $6,062 the contribution tax payable by Helen's superfund which is 15% on $12,500, PLEASE NOTE $12,500 !!! As it says in the footnote on the webpage: "A contributions tax of 15% will be payable on the tax-deductible component of Helen's super contribution (i.e.$12,500)." This seems to prove once and for all that you were wrong and Diego Carrasco was right! And it may also suggest that you have been submitting a lot of incorrect tax returns on behalf of other clients!!! Just as well I don't easily accept 'No' for an answer - after all, I have been an accountant myself - see - even though I didn't specialise in tax which was too country-specific for my twenty years in fifteen different countries. I think at a minimum you owe Diego and myself a beer (a whole carton would be even better) as we seemed to have saved you from a huge embarrassment not only with your clients but also the Commissioner of Taxation! Best regards Peter Goerman Finally, the admission came through: he had been wrong all along!!! It had taken a whole THREE weeks of persistent coaxing on my part to teach this chap his job! 4 October 2005 Dear Peter, Thanks for that. I have read the legislation. I think you are right. Deepest apologies, my interpretation of the law was incorrect s274 which says that 15% but then there is this 82AAT which excludes it from being tax (only the deductible amount will be taxed) – the 82 AAT notice thing. Really appreciate that, now I have to go fix up a couple of returns. Really, thank you for this. Really appreciate it. Owe you one. I will forward you an amended return for your signature today. Regards Allan Ong