Clarity provided on contentious issue with contribution reserving
An industry lawyer has provided clarity on some of the confusing aspects of contribution reserving such as whether the fund needs a reserving strategy and if it can be used for one-member SMSFs.
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.”
Miranda Brownlee
Miranda Brownlee is the deputy editor of SMSF Adviser, which is the leading source of news, strategy and educational content for professionals working in the SMSF sector.
Since joining the team in 2014, Miranda has been responsible for breaking some of the biggest superannuation stories in Australia, and has reported extensively on technical strategy and legislative updates.
Miranda also has broad business and financial services reporting experience, having written for titles including Investor Daily, ifa and Accountants Daily.
