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Contribution reserving worth considering to avoid cap breaches

David Busoli
Sarah Kendell
11 February 2020 — 1 minute read

Advisers whose SMSF clients are making the maximum amount of concessional contributions for a given year should consider contribution reserving as a strategy to avoid any potential inadvertent breaches of the concessional cap, according to SMSF Alliance.

The SMSF administrator’s principal, David Busoli, said the strategy, which was unique to SMSFs, could be used effectively to manage any contributions received late in the financial year and prevent timing lags causing members to breach their concessional cap by accident.

“We can use a contribution reserve in June so that any contributions received, even employer contributions, don’t need to be allocated in the member account until 28 July in the next year,” Mr Busoli said.

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“That gives us the opportunity to reserve sufficient contributions in June to prevent a breach, and you can’t do that with any other sort of fund.”

Mr Busoli said clients who were planning to contribute up to the top of their concessional cap were sometimes not aware that the amounts they had elected to contribute through salary sacrifice often did not match up with what was received by their fund in a given year, due to the requirement for employer contributions to be made quarterly rather than monthly.

Because of this discrepancy, clients could find themselves with an excess concessional contribution determination depending on the timing of the contributions’ arrival into their fund, which presented significant administrative difficulties for members and their advisers to deal with.

“If you breach the concessional cap, the refund of the excess has to go to the ATO and they refund it to the member after they’ve taken their tax”, Mr Busoli said.

He added that contribution reserving was easy to set up and helped provide reassurance that any accidental excess contributions would not be stuck in administrative limbo.

“All that we need is the appropriate minute from the trustee to say this contribution is going to be held in a contribution reserve, and a further minute that then says in July that it has been credited to the member account,” he said.

“That way you can get the deduction in the year the contribution is made, but you don’t have to count it against the cap until the next year.”

Mr Busoli said the strategy was also useful for situations where an SMSF member was eligible for contributions in the current financial year but would not be eligible in the following year.

Contribution reserving worth considering to avoid cap breaches
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