Creating a contribution reserving strategy

Since the Australian Taxation Office's (ATO’s) release of interpretative decision ATOID 2012/16, I have seen a growing number of people looking to implement a contributions reserving (or holding account) strategy.

This strategy as outlined within the ATO’s interpretative decision effectively allows for a taxpayer to ‘double-dip’ on claiming a tax deduction for superannuation contributions, with the crediting of any June contributions being applied no later than 28 July in the following financial year (refer SIS Reg. 7.08(2)).

Only recently though, I have started to see an increasing number of questions around the interaction of how the tax and superannuation laws operate with this contribution reserving strategy … this has created a sizeable headache for many due to the ATO issuing excess contributions tax assessments. Panic-stricken members and advisers wonder what they have done wrong. In many instances, it’s probably nothing!

To help people through this maze, I’ve put together a list of important considerations in operating this strategy.

Nine things you must know when undertaking the contribution reserving strategy:

Read ATOID 2012/16 carefully – it is important that you understand the intricate details of how to effectively implement this in a contribution reserving strategy, from the application of income tax on contributions made in respect of the member, through to the allocation requirements of contributions per SIS Reg.7.08(2).

Ensure that you have correctly reported the contributions within SMSF Annual Return – this is the first flag for the member, where the ATO will ask (via letter) that the fund’s reported contributions are correct. It is important at this stage to ensure you have reviewed the reported contributions to ensure that the accountant/administrator/tax agent has correctly reported the contributions and paid the necessary tax on the entire contribution (made in respect of the member).

Notice of intent to claim tax deduction is completed – where the member is self-employed (or substantially self-employed), ensure that the notice of intent to claim a tax deduction is valid. Strict requirements apply for members to ensure a valid notice exists, as per s290-170 of the ITAA 1997.

Where a contribution is being made by a fund member as an allowable asset transfer (eg. business real property), it is important to understand the commissioner’s stance that a single contribution cannot be split. Furthermore, it has been noted through the ATO NTLG Super Technical sub-group that any amount must not be fund capped – eg. more than 1 x NCC cap if 65 and over; more than 3 x NCC cap if under 65.

Gross-up the allocation in the following financial year – as the unallocated contribution is subject to contributions tax in the year the amount is paid into the SMSF, it is the net of tax amount that is allocated to the member in the following income year. Therefore, when reporting for contribution cap purposes, the amount must be grossed-up by 1.176 to correctly report the total contribution.

You will get an ECT notice – given the technical interaction and operation of both section 292.25 of the ITAA 1997 and SIS Reg 7.08(2), it is quite apparent that the ATO’s systems were not designed to cope with the operation of the commissioner’s interpretation in ATOID 2012/16.

Contact the ATO to discuss your intent to lodge an objection – in my view, you should engage with the ATO prior to any assessment being issued. I suggest to start the ball rolling as soon as the member receives a letter from the ATO raising the potential excess contributions (as per point 2). Whilst ordinarily you would wait to object to an assessment, experience dictates that the ATO are happy to enter into dialogue around the operation of this strategy prior to any assessment being issued.

Apply to have the unallocated contribution reallocated to the following income year – once this issue has been flagged with the ATO, the fund trustees will need to complete the application – excess contributions tax determination (NAT 71333) to object the decision and have the contribution reallocated to the following income year.

Make sure you have your documentation in order – the paper trail evidencing the strategy is always king! Ensure that you have carefully prepared the necessary documentation that clearly demonstrates the operating of the contribution reserving strategy strictly in accordance with both the fund’s governing rules and also superannuation law. Failure to do so will only prejudice the fund’s ability to apply the strategy correctly.

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