The ATO has confirmed that contribution reserving is a viable strategy. It has issued an interpretative decision (ID), ATO ID 2012/16, relating to contribution reserving up to 30 June 2013 and a tax determination (TD), TD 2013/22, in respect of contributions made on or after 1 July 2013 (due to the new treatment of excess concessional contributions from that date under div 291 of the Income Tax Assessment Act 1997 (ITAA 1997).
Broadly, contribution reserving involves an employer or member making contributions directly to an unallocated or reserve account within a superannuation fund, as opposed to a member’s account. The contributions are subsequently allocated to the applicable member’s account shortly afterwards – typically early in the next financial year.
This strategy is best illustrated by the ATO’s examples.
Summary from ATO ID 2012/16
A member of an SMSF made a personal contribution of $25,000 on 4 April 2011. This contribution was immediately allocated to the member in accordance with reg 7.08(2) of the Superannuation Industry (Supervision) Regulations 1994.
The member made a further personal contribution of $25,000 on 28 June 2011. The trustees applied this amount to an unallocated contributions account. On 4 July 2011, the trustees resolved to allocate this amount to the member’s account.
The member was allowed a $50,000 tax deduction in their 2010/2011 income tax assessment. The member’s concessional contributions cap for the 2010/2011 financial year was $25,000.
The ATO confirmed that the member had made one contribution in the 2010/2011 financial year and the other in the 2011/2012 financial year. In particular, the ATO stated: "… a contribution does not cease to be made to provide superannuation benefits for a particular person merely because the trustee does not immediately allocate it to the member".
Summary from ATO TD 2013/22
A member of a large superannuation fund made a personal contribution of $25,000 on 30 June 2014. The trustees applied this amount to an unallocated contributions account. On 2 July 2014, the trustees resolved to allocate this amount to the member’s account.
The ATO confirmed that the member had made the contribution in the 2014/2015 financial year under 291-25(3) of the ITAA 1997.
TD 2013/22 constitutes a public ruling. Accordingly, if you rely on it, the ATO must apply the law that way (ie, no tax would be payable). In contrast, ATO ID 2012/16 is only administratively binding.
Note that both ATO ID 2012/16 and TD 2013/22 refer to an ‘unallocated contributions account’ which is used in a similar context to a reserve.
ATO clarifies that an objection will be required
The ATO has confirmed:
Reporting contributions when they are made and not when they are allocated will mean that, in the exceptional circumstances in which TD 2013/22 applies, affected SMSF members will be assessed incorrectly in relation to the excess contributions caps. The ATO’s administrative assumption is that contributions are always made and allocated in the same year so affected SMSF members will need to draw the circumstances to the ATO’s attention when this assumption does not apply.
When TD 2013/22 applies, they will need to object to any incorrect assessment of excess contributions tax (for 2012/2013 and earlier years) or income tax assessment that includes excess concessional contributions in their assessable income (for 2013/2014 and later financial years).
Objections will need to include details of the arrangement that was entered into including evidence of when and how the relevant contributions were allocated to the member and in relation to any deduction claimed. The ATO also recommends that if you use an SMSF for this strategy, you make sure you:
• Implement it in a manner consistent with TD 2013/22 and keep accurate records that document receipt and allocation
• Report member contributions information in the usual way in Section F of the SMSF annual return, following the
instructions. This means you must report contributions in the financial year in which they were made to the fund (not in
the year they were later allocated to the member).
• Follow the contribution standards applying to SMSFs. You must allocate contributions to a member generally within 28
days of their being made to the fund.
• Comply with the requirements for deductibility of any personal contributions involved in the arrangement.
Based on both TD 2013/22 and ATO ID 2012/16, contribution reserving is a viable strategy if appropriately handled and you are prepared to go through the objection and administrative effort to ensure it is not rendered ineffective due to ATO processes. Naturally, this requires putting all details forward to the ATO and the objection and any appeal could give rise to significant additional costs, uncertainty and inconvenience. Expert advice should be sought, if there is any doubt. For those that have already undertaken the strategy, then they will have to now proceed with the objection to ensure they are not adversely dealt with.
Naturally, advisers need to consider varying their policy if they have previously assumed that contribution reserving will simply ‘sail through’ the ATO’s bureaucracy. Unless advisers properly inform their clients, they could be jeopardising their good will and be liable for any additional costs.
The use of a contribution reserving strategy may also give rise to a division 293 tax assessment for high income earners. Expert advice should be sought if in doubt.
Following this news from the ATO, contribution reserving is no longer a practical strategy unless your clients are prepared to lodge an objection and provide full disclosure. For those willing to run the objection and potential appeal process, the costs and benefits of the strategy should also be closely examined.
Daniel Butler is a director at DBA Lawyers.