The facts of TD 2013/22 are comparable to ATO ID 2012/16, which encouraged the growth of contribution reserving.
In TD 2013, a super fund member made a personal deductible contribution of $25,000 very shortly before the end of a financial year. The super fund trustees applied this amount to an ‘unallocated contribution account’. Very early in the next financial year the trustees resolved to allocate this amount to the member.
The member was allowed a tax deduction for the $25,000 in the first financial year. However, the $25,000 was counted towards the member’s concessional contribution cap in the second financial year (ie, the year of allocation).
The most important difference — more protection for taxpayers!
ATO ID 2012/16 was only an interpretative decision. It provides less protection than a taxation determination.
Under an interpretative decision, even if you apply a decision in good faith to your own circumstances, if the decision is later found to be incorrect, tax can still be payable.
A taxation determination is different. It constitutes a public ruling. Accordingly, if you rely on a taxation determination the ATO must apply the law that way (ie, no tax would be payable).
Difference 2 — no mention of ‘double dipping’
ATO ID 2012/16 made it very clear that the member was ‘double dipping’ and getting the best of both worlds.
More specifically, in ATO ID 2012/16 the member had already used up their concessional contribution cap for the first year by making a previous personal deductible contribution of $25,000 in April. The $25,000 contribution in June usually would have pushed them into excess territory. However the ability to hold the June contribution over until July ‘saved the day’ as it meant the member’s concessional contributions cap was not exceeded for that first financial year. Further, the member was able to claim both contributions (ie, $50,000 in total) in the first financial year.
The one example in TD 2013/22 does not make it so clear that the member had already used up their concessional contributions cap for the first year.
Difference 3 — no express mention of SMSF
ATO ID 2012/16 expressly stated that the superannuation fund was an SMSF. However, TD 2013/22 only refers to a ‘complying superannuation fund’. Nevertheless, TD 2013/22 should still apply to an SMSF (assuming of course the SMSF is a complying superannuation fund).
Still no express mention of reserves
Much like ATO ID 2012/16, TD 2013/22 does not expressly mention contribution reserves. Rather, it talks about an ‘unallocated contributions account’. An ‘unallocated contributions account’ is not a term found in legislation. I’ve only ever found one case that mentions the term ‘unallocated contributions account’ (and even then, it was a very fleeting reference). Accordingly, it’s not entirely certain if an ‘unallocated contributions account’ is different to a reserve. However, looking at the legislative materials that both ATO ID 2012/16 and TD 2013/22 refer to, ‘unallocated contributions account’ must be (at the very least) extremely similar to a reserve.
Only starts from 1 July 2013
TD 2013/22 only applies from 1 July 2013. Accordingly, the extra protection offered by TD 2013/22 will not apply to those whose contributions were allocated in the 2013 financial year. Rather, they will have to rely on the lesser protection of ATO ID 2012/16.
A word of caution
Many who have already implemented contribution reserving based on ATO ID 2012/16 have received ‘please explain’ letters from the ATO.
(We suspect that this is because of the way income tax returns have captured data in the past, the ATO has not been able to distinguish between who is legitimately using a contribution reserving strategy and who simply has personal deductible contributions that exceed their concessional contribution cap.)
The spectre of having to respond to an ATO ‘please explain’ letter emphasises the importance of ensuring that the reserving paperwork is 100 per cent ‘spot on’.
How to implement contribution reserving
Trustees should consider whether their current deeds and related documents support reserving. Reserves can be maintained unless prohibited by the governing rules. Nevertheless, out of an abundance of caution, it’s always best if the SMSF deed has express power.
Further, a reserving strategy (which is different from an investment strategy) should be in place. Also, trustee resolutions should be in place.
Bryce Figot is a director at DBA Lawyers