Avoiding compliance traps with contribution reserving
While contribution reserving can be used to maximise a tax deduction, it can also be useful for handling work test requirements.
According to SMSF Alliance practice principal David Busoli, contribution reserving gives SMSFs a unique opportunity.
“The process is not actually reserving at all but, rather, one of deferred allocation. Subject to the deed, a contribution is not required to be allocated to a member account until 28 days into the following month so a contribution made in June may be allocated to a member no later than the 28th of July,” Busoli said.
“The tax deduction, if applicable, is taken in the financial year in which the contribution is made but the allocation against the member’s account, and contribution cap, is not made until the next year.”
Contribution reserving is most useful, he said, for SMSF members who want to maximise a tax deduction in one year and don’t need it the following year, perhaps because of a large, one-off capital gain or retirement plans.
“It can also be useful for a member who may not be eligible to take a tax deduction in the following year due to work test requirements as the deduction depends on their eligibility in the year of contribution, not the year of allocation,” Busoli said.
He explained that the opportunity applies to both employer and personal contributions and doesn’t matter whether they are concessional or non-concessional, however, he warned that the mechanics differ.
“The ATO can be proactively informed of deferred concessional contributions using form NAT 74851. Non-concessional contributions are not as straightforward as there is no standard method to advise the ATO of the situation in advance,” Busoli said.
“The member needs to write to the ATO requesting the reallocation. Alternatively, the contribution will result in an excess determination being issued by the commissioner which must be resolved by explaining that reserving has taken place.
“This process can be alarming to trustees so should only be used if they are fully aware and in agreement.”
The ATO, he added, has been “inconsistent with its approach”, adding that it is “not wise to mix contributions where some are to be allocated in the year of contribution and some, the year after”.
“This may be particularly relevant where an in-specie contribution is concerned,” Busoli said.
“Remember that the member’s available contribution cap for the following year will be reduced by the amount used and that the allocation is sensitive to the caps that apply in the year of allocation.
“This means that a deferred non-concessional contribution could not be allocated in July if the member’s total super balance at 30 June was $1.9 million. Conversely, a deferred concessional contribution made this June could be for the cap amount that will apply next financial year, $30,000.”
