Under superannuation regulations, the trustee of a superannuation fund must allocate any contributions made for a member to their account by no later than 28 days after the end of the month the contribution was received (in fact, the trustee can allocate within such longer period as is reasonable in the circumstances).
This means where a member makes a contribution, whether a concessional or non-concessional contribution, in June, the trustee will not be required to allocate the contribution to their account until 28 July in the following financial year at the latest.
However, this raises the question – in which year should a contribution count against the relevant contribution cap? Is it in the year the member made the contribution or in the year the trustee allocated the contribution (if different)?
Contribution reserves and the contribution caps
In 2013, the ATO answered this question by confirming a concessional contribution made in June in one financial year that is allocated in the following financial year (by 28 July), counts against the member’s concessional cap in the year it is allocated.
In addition, the ATO confirmed that a personal contribution made in June will be deductible to the member in the year they made the contribution, regardless of when it was allocated. (See Example 1 on ATO website page “Request to adjust concessional contributions”.)
Contribution reserves and concessional contributions
Therefore, like the non-concessional bring forward rules, the use of a contribution reserve strategy could effectively allow an SMSF member to bring forward up to one year of their concessional cap into the current year to maximise their deductible contributions but without causing them to exceed their concessional cap.
For example, taking into account the increase in the concessional cap to $27,500 on 1 July 2021, a contribution reserving strategy could allow a member to make and claim deductions for personal contributions of up to $52,500 (assuming the member does not have any unused concessional contribution cap amounts they could contribute or are ineligible to use the catch-up concessional contribution rules) in 2020-21 without causing them to exceed their concessional cap.
The only proviso is that the member must make a personal deductible contribution of $27,500, in June, which the trustee then allocates to their account in the following financial year by 28 July.
However, in this case, it will be important to note the member will have fully utilised their concessional cap for the next year (2021-22), and will not be able to make or receive any concessional contributions in that year without exceeding their cap.
Contribution reserves and Division 293 tax
Assuming the ATO takes the same approach of assessing contributions in the year of allocation for both contribution caps and Division 293 tax purposes, a contribution reserving strategy could also reduce the amount of a member’s income for Division 293 tax purposes and result in a member not having, or having a reduced, Division 293 tax liability in a year. (Note: Members wanting to confirm this may wish to consider seeking legal advice or applying to the ATO for a private binding ruling.)
For example, if the member in the above example had assessable income of $275,000 in 2020-21, their income for Division 293 purposes would be assessed as $247,500 ($275,000 - $52,500 + $25,000) after taking into account their deduction and low tax contributions. Given this is less than the $250,000 Division 293 tax threshold, they would not incur any additional 15% tax liability on their concessional contributions in that year.
However, it will be important to remember the $27,500 contribution allocated in 2021-22 will count towards the Division 293 tax threshold in that year. As a result, this could cause the member to have a Division 293 tax liability in that year as they will not also be able to claim a deduction for their contribution in that year.
For example, assuming the member’s assessable income dropped to $250,000 in 2021-22, their income for Division 293 tax purposes would be assessed as $277,500, and they would be subject to an additional 15% Division 293 tax liability on $27,500 of their concessional contributions.
Contribution reserves and non-concessional contributions
It is important to note that TD 2013/22 only refers to concessional contributions. However, the same logic should also apply to non-concessional contributions. Therefore, a non-concessional contribution made in June in one year that is allocated in the following financial year by 28 July, will count towards the member’s non-concessional cap in the second year.
The main advantage of a non-concessional contribution reserving strategy is that it allows a member over age 67 who is still working to bring forward a non-concessional contribution into a year that they satisfy the work test.
For example, the use of a contribution reserving strategy could allow a member over age 67 who works full or part time, but who plans to retire by the end of the financial year, to make additional non-concessional contributions of up to $110,000, in June, which the trustee could then allocate in early July in the following year.
However, it’s worth noting a contribution reserving strategy will not assist a member to make a non-concessional contribution under the bring-forward rules in one year where they would not otherwise qualify to use the bring forward rules in the following year because of their age.
For example, a contribution reserving strategy would not assist a member turning age 65 before the end of this financial year (2020-21) to make a non-concessional contribution of up to $330,000 in June 2021, on the basis it would then be allocated in the following financial year by 28 July, as they will not qualify to use the bring forward rule next year due to their age. (Note: the age at which a person can make a contribution under the bring forward rule is proposed to increase to age 67 from 1 July 2020. However, at the time of writing the Bill to implement this change has not yet become law. They will not qualify to use the bring-forward rules in 2021-22 as they were not under age 65 at any time during the year.)
In this situation, the maximum amount that could be allocated in 2021-22 without causing the member to exceed their non-concessional cap would be limited to $110,000. Therefore, the member would be better off triggering the bring-forward rules by making non-concessional contributions of up to $300,000 this year.
It should also be noted that where a member would be eligible to trigger the bring forward rules in both years, the only benefit of applying a contribution reserving strategy this year would be that it would allow a member to make a non-concessional contribution of up to $330,000, a maximum of 30 days earlier than they would otherwise have been able to.
Practical issues
Before implementing a contribution reserving strategy there are a range of practical issues a client should be aware of:
Contribution reserves and reporting
It is important to note that where a client implements a contribution reserving strategy, the ATO has confirmed that regardless of TD 2013/22, a trustee must still report member contributions in the year they are received rather than the year they are allocated. As a result, in the above concessional contribution example, the member’s fund would be required to report total personal contributions for the member in 2020-21 of $52,500 in the SMSF annual return.
However, to allow the ATO to properly administer the concessional cap, it has released a form (Request to adjust concessional contributions) which allows a member to notify the ATO that the trustee has allocated a concessional contribution made in one financial year in the subsequent financial year. The ATO then uses this information to adjust the contributions information reported in the SMSF’s annual return.
However, the ATO has confirmed that it is only possible to use this form in relation to concessional contributions and not non-concessional contributions. Instead, the ATO has clarified that a member in the same situation but who made non-concessional contributions will need to write to the ATO outlining the situation and request their contributions be re-allocated to the following financial year.
Documentation required
To implement a contribution reserving strategy the ATO has confirmed that a trustee will need to keep records to substantiate what has occurred. These include:
- a resolution by trustees in the year the contribution is received in accordance with the SMSF’s governing rules, not to allocate the contribution when it is made but to accept it into a reserve
- evidence of receipt of the contribution by the SMSF
- a resolution by trustees to allocate the contribution from the reserve in the following financial year in accordance with SIS Regulation 7.08(2).
It should also be noted that a trustee should not attempt to utilise a contribution reserving strategy to break up any individual contributions made in June and then allocate different amounts in June and July so as to avoid a member exceeding their cap and incurring an additional tax liability, as this may be considered tax avoidance.
Contribution reserving and total superannuation balance
Where a trustee implements a contribution reserving strategy, the member should be aware that the value of their unallocated contributions on 30 June will still generally count towards their Total Superannuation Balance (TSB) and could impact a range of issues, such as their non-concessional cap in the following year (see s307-205(2) of ITAA 1997).
For example, if the inclusion of a member’s unallocated contributions on 30 June caused their TSB to exceed the general transfer balance cap, their non-concessional cap in the following year would be nil and the trustee would be unable to allocate any non-concessional contributions in that year without causing the member to exceed their non-concessional cap.
Craig Day is an Executive Manager and Head of Technical Services at Colonial First State. This article is for general information only and readers should seek professional advice on their personal circumstances before taking action.