When will the unallocated amount first count towards his Total Superannuation Balance?
Your client has undertaken an unallocated contribution or contribution reserving strategy (note, strictly speaking the unallocated amount isn’t a “reserve” for superannuation or tax law purposes although it is commonly called one).
In our view, the unallocated amount will first count towards your client’s Total Superannuation Balance in the year in which the contribution is made, not the year in which the contribution is allocated.
An individual’s “Total Superannuation Balance” is the sum of the value of all of an individual’s superannuation interests (with some modifications for individuals with defined benefit pensions and a few other things). For accumulation and account-based pension interests, the value of the superannuation interest is not simply the closing balance of the member’s account. Instead, it is the total amount of superannuation which would become payable if the individual had voluntarily caused their interest to cease at that time [ITAA 1997 s.307-230, ITAA 1997 s.307-205(2)].
In our view, if the individual had requested the closure of their account at the end of the financial year, we expect that the SMSF trustee would have immediately allocated to the individual the amount of their unallocated contribution. It would be highly unlikely that an individual would “walk away”, leaving the unallocated contribution amount behind.
This is why, in our view, your client’s unallocated contribution amount will first count towards their Total Superannuation Balance in the year in which the contribution is made. This means unallocated contribution or contribution reserving strategies are not a way in which an individual can control their Total Superannuation Balance to remain below a particular threshold (eg $1.6m if the individual was seeking to make non-concessional contributions in the following year).
Note, you don’t need to change the way you report the contribution for the purpose of the SMSF Annual Return to get the Total Superannuation Balance to calculate correctly. The unallocated contribution is already required to be reported in the SMSF Annual Return in the year in which the contribution is made (and you lodge a “Request to Adjust Concessional Contributions" [NAT 74851] to reallocate the contribution to the following year for contribution cap purposes).
But it does mean you can’t rely solely on the individual’s SMSF member statement for the year the contribution is made to determine their Total Superannuation Balance. The unallocated contribution amount will also need to be added on. Whether this amount is gross or net of the 15% contributions tax will depend on the fund’s accounting treatment. For example:
- If the contributions tax has been deducted from the unallocated contribution amount, it is the net amount which needs to be added on.
- If the contributions tax has been deducted from the member’s existing balance, it is the gross amount which needs to be added on.