Making a deductible super contribution and then cashing it out - Is this OK?

This very issue was the subject of a recent private binding ruling (released 25 March 2024).  The taxpayer had for a number of years (actual number was redacted in the published ruling) made personal superannuation contributions for which the taxpayer claimed a tax deduction.  The actual amount of each of these contributions was not provided in the published ruling.

The particular concern of the taxpayer was whether, in the relation to the financial year in which the taxpayer retired, could the taxpayer still make a personal superannuation contribution and claim a tax deduction for the contribution and then cash out part of his superannuation balance.  Possibly a more general concern of the taxpayer was whether the general anti-tax avoidance provision (“Part IVA”) would apply given the taxpayer was obtaining a tax benefit (being the tax deduction for the personal contribution) then after the contribution has been made and in the same tax year – cashing out the superannuation benefit (which included the contribution) tax free?  It should be noted that the taxpayer had not previously been entitled to cash out his superannuation.

The published ruling was that the taxpayer would be entitled to claim a tax deduction for the personal superannuation contribution so long as the notice of intent to claim a tax deduction (“deduction notice”) was lodged with the trustee of the relevant superannuation fund and that trustee issued an acknowledgment notice to the taxpayer before the super benefit was cashed out.  If the cashing out was effected before the acknowledgement notice was issued, the deduction notice would be invalid and, so, a pre-condition for the deduction would not have been satisfied.  The reason for the invalidity of the deduction notice in this situation is that once the cashing out has occurred, the trustee must have treated the superannuation contribution as being a non-concessional contribution and the trustee cannot retrospectively change that treatment.

The published ruling also noted that Part IVA did not apply to the circumstances of the taxpayer.  This was because the taxpayer had established practice of making deductible superannuation contributions and the superannuation contribution made in the financial year in which he retired was entirely consistent with that established practice. 

Unfortunately, the published ruling did not provide any details as to the previous superannuation deductions – whether those contributions were identical (or roughly identical) in amount is not known or whether the contribution was the maximum which could be contributed for that year is not known.  However, the ATO was of the view that the taxpayer had clearly established a practice and the contribution made in the financial year of this retirement was consistent with this practice.  It is the consistency of the practice which established that the sole or dominant purpose (being the key issues for the application of Part IVA) was not the obtaining of a tax benefit.

The reason the Part IVA was considered is shown in the following example.  Consider, Reg, who is thinking of making a personal superannuation contribution to his fund in the 2023/24 financial year.  Reg will be retiring on 1 June 2024 and proposes to make a $18,000 personal superannuation contribution in the first week of June 2024 and two weeks later, once he has attained age 60 on 15 June 2024, to cash out the contribution.  Reg has not previously made personal contributions to super.

Reg will have $18,000 tax deduction (when he lodges his tax return) which will reduce his tax by $6,000 (assuming 30% marginal tax rate).  Additionally, he will receive a $15,300 tax free super lump sum ($18,000 less 15% tax imposed on the super fund).  On this basis, he has obtained tax benefit of $3,300 ($6,000 less $2,700 tax paid by the fund) by making the deductible super contribution and then very shortly afterwards, cashing out the contribution.

There are other conditions which must be satisfied before a valid deduction can be claimed for a personal superannuation contribution (such as the fund being a complying superannuation fund; satisfaction of the work test if the contributor has attained age 67 and the contributor having sufficient taxable income against which to offset the deduction).  The Ruling Reference Number is 791 016 107 7376.