Clarity provided on in-specie contributions and unallocated reserves
With 30 June fast approaching, a technical expert has clarified whether there are any issues with making an in-specie contribution to an unallocated contributions reserve.
SMSF Alliance principal David Busoli said with the end of the financial year just a few weeks away, SMSF professionals may consider implementing a contribution reserving strategy for some of their clients.
Mr Busoli reminded practitioners that this particular strategy involves making an additional contribution in June that will be allocated towards the member’s contribution caps in July.
“The requirement is that such contributions are allocated within 28 days of the following month, so 28 July,” he explained.
“The ATO regards the holding account as a sundry account rather than a reserve, but we tend to refer to it as a reserve through common usage.”
The strategy can be used for both concessional and non-concessional contributions.
“Contribution eligibility must be satisfied in the year of the contribution but does not need further reference in the year of allocation. This can be handy where a member is eligible to contribute this year but will not next year such as when a member turns 75 in June,” he said.
Under this strategy, a client may be able to receive tax deductible contributions of $50,000 this financial year, he noted.
“Remember, though, that next year’s cap will be fully utilised. The strategy is useful where it is known that next year’s personal taxable income will be much less than this year,” he said.
One of the questions that can arise with this strategy, he said, is whether there are any issues with making an in-specie contribution to an unallocated contributions reserve.
“There are no issues if the whole of the in-specie asset is to be added to the reserve, but the ATO have previously disallowed the splitting of an in-specie contribution,” Mr Busoli explained.
He gave an example of a 60-year-old member, John, with a total super balance of $1 million, wishing to contribute a $400,000 portion of a commercial property.
“He may wish to contribute $100k in June this year to be counted against his non-concessional contribution (NCC) cap this year, and $300k, also in June this year, to be counted against his NCC cap next year,” he said.
“If the whole parcel is transferred into the fund in a single transaction, the ATO is likely to treat it as a contribution that will count against his NCC cap this year, thus creating a $100,000 excess.”
If a tenant in common transfer of $100,000 was followed immediately afterwards by another for $300,000, he said, the unallocated contributions strategy could be used.
“This will incur higher transfer costs, but the uncertainty would be removed,” he said.
“It is arguable that cash transactions will be treated differently, but generally, I would split them as well, so rather than a member making a single $50k concessional contribution in June, I would suggest two $25k contributions.”