Speaking in a webinar, DBA Lawyers special counsel Bryce Figot reminded SMSF professionals that the ATO confirmed last year in its SMSF Regulator’s Bulletin 2018/1 that using a reserve to hold unallocated contributions is still permissible as it’s not technically a reserve for superannuation law purposes.
Mr Figot said a contribution reserving strategy would generally be used for SMSF clients that have higher assessable income this year and are expected to have lower assessable income in the next financial year.
The strategy allows a member to claim two years of concessional contributions.
“The second $25,000 contribution sits in an unallocated contributions account until July 2019 and then is allocated to the member. You are allowed to leave that second amount for 28 days until the end of the month, so the 28th of July. So, this strategy only works in June,” he reminded SMSF practitioners.
Does it require a reserving strategy?
One of the common questions with this strategy, he said, is whether the fund requires a reserving strategy in order to use this strategy.
Given the ATO established last year that a contributions reserve is not considered to be a reserve under superannuation law as it’s actually a suspense account, he explained, this means that a reserving strategy is not required.
He stressed that there are other types of paperwork that will need to be completed, however.
“You will need trustee resolutions which state what you’re going to do. As always, don’t backdate these resolutions,” he warned.
“You will also need contemporaneous trustee allocation resolutions, a notice of intention from the member to the fund to deduct the contribution and acknowledgement of that notice from that fund.”
If the notice of intention and acknowledgement of that notice from the fund aren’t received in time, the fund cannot claim the deduction, he warned.
Using contribution reserving for one-member funds
One of the points of contention with this strategy, Mr Figot said, is whether it can be used for one-member funds.
“I have seen some commentators who have suggested that you can’t use it for a one-member fund. As a matter or common sense, I’m sympathetic to the reasoning behind that, but I think you can use it for a one-member fund,” he said.
“I have worked on one-member funds where the ATO had heavily scrutinised them in great detail, and this was never picked up as an issue. The ATO did not expressly stated that it had considered the use of this strategy by these funds, but given they had gone through them in such detail and picked up on so many issues, it gives me confidence to say that you can still do this with a sole member fund.”
The big issue is NOT to create a contributions reserve which effectively brings into play a lot of reserving issues. As should always be the case if the Commissioner has issued a ruling or set of guidelines stay within his tram tracks. So contributions suspense account is the way to go and if you follow that logic the one member issue is not an issue at all.
The big issue is NOT to create a contributions reserve which effectively brings into play a lot of reserving issues. As should always be the case if the Commissioner has issued a ruling or set of guidelines stay within his tram tracks. So contributions suspense account is the way to go and if you follow that logic the one member issue is not an issue at all.