Historically the validity of contribution reserving strategies had been the subject of much debate, with many advisers doubtful they passed the “sniff test” particularly for single member funds.
However, a number of years ago the Australian Taxation Office (ATO) confirmed the validity of the strategy under both tax and super laws, provided the various legal requirements are met.
So let’s backtrack, what is a contribution reserving strategy?
Contributions are eligible for deductibility in the year they are received by a superannuation fund, however they are not counted towards the member’s contribution cap until they are allocated to the member [TR 2010/1, TD 2013/22].
In most cases, contributions are allocated to members on the day of receipt so they are eligible to be claimed as a tax deduction and cap tested in the same year. However trustees of SMSFs do not need to allocate contributions to members until the 28th day after the end of the month in which the contribution is received [SIS Reg 7.08(2)].
This means that if a contribution to an SMSF is received in June 2019 but not allocated to the member until July 2019, it will:
- be eligible for deductibility in the 2018/19 year, but
- count towards the relevant cap in the 2019/20 year.
This process of making a contribution in one financial year but allocating it to the member in the following financial year is commonly called a “contribution reserving strategy”. However, that name is a bit of a misnomer as unallocated amounts are not reserves from a superannuation law perspective and a reserving strategy is not needed. A more appropriate name would be a “deferred allocation strategy”.
When would such a strategy be used?
In terms of concessional contributions, a deferred allocation strategy may be appropriate whenever an individual wishes to bring forward a tax deduction. For example where an individual’s taxable income is unusually high in a year (eg a one-off capital gain is received) but they have little need for a contribution deduction in the following year.
The ATO provides a couple of examples in https://www.ato.gov.au/Forms/Request-to-adjust-concessional-contributions/.
What are the Legal Requirements?
Where a member of an SMSF wishes to utilise a deferred allocation strategy, it will be essential to ensure:
- the fund’s trust deed does not require contributions to be allocated immediately on receipt, and
- the contribution is allocated within the 28 day requirement.
Trustees should also keep documentation including:
- evidence of the receipt of the contribution
- a trustee resolution detailing the trustee’s decision to defer the allocation of the contribution until a later date
- a trustee resolution detailing the trustee’s decision to subsequently allocate the contribution
- section 290-170 contribution notice and acknowledgement (where applicable)
In respect of concessional contributions, trustees should also ensure the ATO is notified of the use of the strategy by completing and lodging a “Request to Adjust Concessional Contributions” [NAT 74851] by the time the fund’s SMSF Annual Return and the individual’s income tax return are lodged. In the case of non-concessional contributions, trustees will need to write to the ATO. Otherwise, as the contributions will be reported in the SMSF Annual Return in the year in which they were received, the ATO may believe the individual has excess contributions.
If you need our assistance in documenting a deferred allocation strategy, please do not hesitate to contact our tech team.
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