Superannuation switch warning: don’t get caught by tax trap

Switching super funds could lose you thousands of dollars in tax deductions if you get caught out by this obscure money trap.

Nobody wants to throw four thousand bucks down the drain, especially during a cost-of-living crunch.

But that’s what recently happened to my family, and hopefully it’s a warning for anybody wanting to switch their superannuation to another fund.

After more than two decades of writing about super I thought I knew all the rules, but this one has come from nowhere to bite me on the bum.

We recently switched some money from one super fund to a better-performing one, then learnt that our personal tax-deductible contributions made last year were no longer deductible because we didn’t tell the old fund before switching.

The widely-known rule for tax deductions from personal super contributions, made by self-employed people or those wanting to top up their nest egg, is the fund must be notified you want to claim a deduction, then confirm your request, before you file your tax return. We did this, but our request was denied.

That’s because there’s an obscure rule that says if you notify them after switching your money to another super fund, that money’s tax deduction simply disappears.

Ouch! Don’t get a nasty sting from a superannuation tax trap. Picture: iStock

I found losing an expected $4000 tax refund hard to swallow, thinking that a contribution to super is a contribution to super, whoever holds it, but after hours searching for answers got a clear message back from the ATO.

It says: “when an individual rolls over their money to another super fund, it is no longer classified as a personal contribution”.

“Therefore, the individual is not eligible to claim a deduction for a personal contribution for any of the amount that has been received by the new fund. The deductible amount is limited to the portion – if any – that remains in the original fund that received the personal contribution.”

For a person planning to claim tax deductions for the maximum they’re allowed under annual super caps, making this mistake could potentially cost them almost $13,500 of tax refunds, or $27,000 for a couple.

So the simple message is: do not roll over or switch any money from your super fund until it has confirmed and agreed to your tax deduction claim.

There are a few other sneaky super rules that can trap people, so seek professional advice if you are uncertain.

DE FACTO DEATH TAX

Australia technically doesn’t have death taxes, but if someone dies and their money in super goes to a non-dependent such as an adult child, there’s a 15 per cent tax levied on the taxable component of their super – in many cases the majority of it.

Financial planners fight this by recommending a re-contribution strategy, where people withdraw super tax-free once they reach a condition of release – such as stopping work after age 60 – then pump it back in as a non-concessional, non-taxable contribution.

CATCH-UPS ONLY FOR SOME

For a few years Australians have been able to make extra catch-up tax-deductible contributions using the unused portions of previous years’ annual concessional contributions cap.

However, this can only be done when their total balance is below $500,000. As more people build bigger nest eggs, more balances will exceed that before they have the spare funds available to make those catch-up contributions. Watch your balance and plan.

TAXING UNREALISED GAINS

This new Labor Government rule hasn’t started yet, but when it does in July next year it will make a rising number of small business owners and farmers pay tax on the growing value of their property, land and other assets in super – even if they haven’t been sold.

It starts with balances over $3 million but is not indexed to inflation, so more people will continually fall under this new tax’s umbrella. It may impact Labor’s election chances next year.