Caution needed on contribution reserving strategy when managing the TSB

Making contributions to an SMSF in June of a particular year but not allocating them to a member’s account until July of the following year is known as “deferred allocation of contributions”. 

This means where a member makes a contribution, such as a concessional or non-concessional contribution, in June, the trustee will not be required to allocate the contribution to their account until 28 July in the following financial year at the latest. 

While advisers can tap into the opportunity, Colonial First State head of technical services Craig Day said that where a trustee implements a contribution reserving strategy, the member should be aware that the value of their unallocated contributions on 30 June will still generally count towards their total superannuation balance (TSB).

This could impact a range of issues for the SMSF, such as their non-concessional cap in the following year.

For example, Mr Day noted if the inclusion of a member’s unallocated contributions on 30 June caused their TSB to exceed the general transfer balance cap, their non-concessional cap in the following year would be nil. As a result, the trustee would be unable to allocate any non-concessional contributions in that year for the member without causing them to exceed their non-concessional cap.

“Under tax law, a member’s TSB includes their retirement and accumulation phase values. These values are generally defined as the amount of benefits that would be payable to the member if they voluntarily ceased their interest in the fund on 30 June,” Mr Day said in a Colonial FirstTech Strategy update.

“In relation to SMSF members, this will generally be equivalent to each member’s closing account balance on 30 June.    

“However, where a member has implemented a contribution reserving strategy, it may be possible to argue the member’s unallocated contributions on 30 June should be excluded from their TSB on the basis those contributions haven’t been allocated to their account yet and therefore would not be payable to them if they were to voluntarily cease their interest in the fund on that date.”

In this case, Mr Day said a trustee would then need to report different accumulation and retirement phase values for the member (indicated at Boxes X1 and X2 in the annual return).

“However, before adopting this approach, a trustee should proceed with caution and seek ATO guidance, as the ATO has previously warned the intentional use of reserves (which may include a contribution reserve) to manipulate the value of a member’s TSB to allow them to make non-concessional contributions without breaching the cap may result in tax avoidance,” Mr Day warned.