Part IVA risks flagged with contribution reserving strategies

Mr Dunn noted that the ATO has made it clear previously in SMSF Regulator’s Bulletin SMSFRB 2018/1 that contribution reserves are allowed.

“[However], the ATO also states in that regulator’s bulletin that they do have that part IVA stick available to them if you are using a reserve to try and leverage another outcome,” he warned.

“For example, if you want to use a contribution reserve and you are trying to use that reserve to reduce the total superannuation balance (TSB) of an individual to below a threshold and then based upon that outcome, you then take specific actions, the ATO will then look to apply part IVA,” he cautioned.

Mr Dunn gave the example of an SMSF client who, on 30 June 2021, had a total superannuation balance of $1.4 million.

“Now, throughout the year to date, there’s been around $20,000 of contributions made during the financial year. When we get to 1 June, the balance of that member’s account is now $1.479 million, so we are below $1.48 million. This means we have the opportunity to do a three-year bring forward if that was still the value at 30 June,” he stated.

“If we then credit a member contribution of $7,500 in the month of June, that will take us to $1.486 million with some earnings and so forth. Given that the contribution was made in June, that increases our total superannuation balance value at 30 June 2022, so if the individual is to then make a non-concessional contribution in the subsequent 2022-23 financial year, they will only be able to use the bring-forward rule [for two years of contributions].

“That is, their TSB is between $1.48 and $1.59 million, allowing a two-year bring forward rather than a three bring forward.”

However, if the $20,000 contribution was made in June but allocated to the subsequent year in the same set of circumstances, then this may present a potential issue, said Mr Dunn.

“If the contribution was made in June but not allocated to July, we then have that three-year bring-forward period available to us. If the action is deliberate and then say in July, the client makes a $330,000 non-concessional contribution, the Tax Office here will look to apply part IVA in that arrangement,” he said.

“This doesn’t prevent us from using the contribution reserving strategy, but if we’re doing it to take advantage of something else by an action that follows in that next financial year, then you may have something to answer for because naturally, they should have only been allowed to have done a two-year bring forward rather than three.”

Mr Dunn stressed that it is the intention use of reserves that the ATO will be looking for where a member’s total superannuation balance is reduced in order to make additional contributions.

“For example, if you’re trying to reduce the TSB below $500,000 so that the member can make catch-up concessional contributions or you’re trying to reduce a member’s balance so they can get a greater amount into retirement phase,” he explained.

“There’s some opportunities in there, but don’t get too clever because the ATO could look to apply part IVA to those arrangements because you’re getting more into a concessional tax environment than you would have otherwise been allowed to.”