Finding opportunities for tax deduction strategies during contribution cap changes
The contribution caps which are set to increase due to indexation will provide an opportunity to formulate effective tax deduction strategies, but following ATO guidance will be crucial, according to a technical specialist.
The release of the Average Weekly Ordinary Times Earnings (AWOTE) figures for the December 2020 quarter means the concessional contribution cap and the non-concessional contribution caps are set to increase due to indexation from 1 July 2021.
SuperConcepts technical support executive manager Nicholas Ali said the use of an unallocated contributions account can provide a beneficial strategy for SMSFs where members are claiming a tax deduction for concessional contributions.
“An unallocated contributions account (or ‘contributions reserve’, as they are sometimes called) entitles the trustee to ‘warehouse’ contributions for up to 28 days after the end of the month in which the contribution was made,” he said in a blog.
“This is enshrined in the Superannuation Industry (Supervision) Regulations 1994 (SIS Reg 7.08). As explained by the Australian Taxation Office (ATO) in Taxation Ruling TR 2010/1, contributions are eligible for deductibility in the year they are received by a superannuation fund; however, they are not counted towards the member’s contribution cap until they are allocated to the member.”
Mr Ali noted this means if a contribution to an SMSF is received in June 2021 but not allocated to the member until July 2021, it will be eligible for deductibility in the 2020–21 financial year, but it will count towards the relevant cap in the 2021–22 financial year.
Where a member of an SMSF wishes to utilise such a strategy, Mr Ali said it will be essential to ensure the fund’s trust deed allows for an unallocated contributions account strategy.
“The contribution is allocated within the 28-day requirement and there must be evidence of the receipt of the contribution,” he said.
Furthermore, Mr Ali noted there needs to be a Trustee Resolution detailing the trustee’s decision to defer the allocation of the contribution until the next financial year as per Regulation 7.08(2) of the SIS Regulations A Section 290-170 Notice of intent to claim or vary a tax deduction for personal super contributions form (NAT 71121).
“Trustees should also ensure the ATO is notified of the use of the strategy by completing and lodging a Request to Adjust Concessional Contributions (NAT 74851) by the time the fund’s SMSF annual return and the individual’s income tax return are lodged,” he said.
“This is important; otherwise, the contribution will be reported in the SMSF annual return in the year in which it was received, which may mean the ATO may believe the member has exceeded their concessional contributions for the year.”
In a case study provided, Trevor is 66 and retired, wishes to maximise his tax-deductible contribution to super in the 2020–21 financial year to offset his assessable income. He has not used any of his concessional cap for the 2021 financial year.
“As the concessional cap will increase to $27,500 from 1 July 2021, Trevor can make a $25,000 concessional contribution in 2021, as well as a $27,500 concessional contribution in the month of June 2021, which will remain in an unallocated contributions account for the remainder of 2021 financial year, to then be allocated to him by 28 July 2021,” Mr Ali explained.
“Trevor will be able to utilise the tax deduction of $52,500 ($25,000 + $27,500) in the year of contribution (2021 financial year), but will not have an excess concessional contribution, as the $27,500 will be allocated to him by the trustees in the following year (2022 financial year).”
Tony Zhang is a journalist at Accountants Daily, which is the leading source of news, strategy and educational content for professionals working in the accounting sector.
Since joining the Momentum Media team in 2020, Tony has written for a range of its publications including Lawyers Weekly, Adviser Innovation, ifa and SMSF Adviser. He has been full-time on Accountants Daily since September 2021.