Contribution reserving can optimise tax positions: specialist
Contribution reserving provides an opportunity for SMSF trustees to optimise their contributions and tax positions, says a leading industry specialist.
Aaron Dunn, CEO of Smarter SMSF, said contribution reserving has been gaining attention in the SMSF sector due to its strategic advantages, particularly in light of the increased concessional cap.
An SMSF reserve is any monies or assets inside an SMSF that are not yet part of any member’s account. Reserves form part of the net assets of the fund and are calculated as the total value of an SMSF minus the total value of all member account balances.
Contribution reserving usually involves a member or employer making a concessional contribution in June of a financial year and holding the unallocated amount in a contribution reserve account until the start of the next financial year.
“At its core, contribution reserving allows for a more flexible approach to managing concessional contributions. For instance, with the cap increase, individuals could contribute up to $57,500 in the 2023-24 year, gaining a tax deduction for the entire amount, yet strategically allocating $30,000 in June 2024 to the next financial year for cap purposes,” he said.
“This not only maximises the immediate tax benefits but also enhances future financial planning flexibility.”
However, Dunn said there are a few challenges regarding compliance issues and understanding the mechanics of the strategy is important.
He said contribution reserving requires a careful balancing act between income tax rules and Superannuation Industry (Supervision) Act (SIS Act) requirements regarding contribution allocations.
“One of the key considerations is ensuring contributions are received and treated correctly within the SMSF’s annual return, which operates on a cash basis,” he said.
“Additionally, compliance with the SIS Act is paramount, particularly the rule requiring contributions to be allocated within 28 days following the month’s end in which they’re received. This allocation timing is crucial for determining in which financial year contributions are counted for cap purposes.”
Documentation is paramount when using this strategy and it must be meticulously completed at several stages, from recording contributions in the current year to documenting the allocation process for the next financial year.
“This procedure underscores the importance of understanding both the administrative and legislative frameworks governing SMSFs,” Dunn said.
One of the other advantages to contribution reserving is that it has been recognised and approved by the ATO, and has been reflected in its regulatory advice SMSFRB 2018/1.
“However, it’s essential to approach this with a thorough understanding of the terms and conditions, ensuring all actions are well documented and comply with current regulations,” Dunn added.
“Although it is a more complicated strategy, it does offer significant opportunities for tax planning and contribution optimisation in SMSFs.”
