When the Australian Taxation Office released interpretative decision ATO ID 2012/16, we received a number of enquiries from SMSF trustees with one-off large capital gains or income from irregular contracts looking to implement a contributions holding account (or suspense account) strategy, affectionately known as the 'double dip' strategy. I deliberately do not use the commonly used name 'reserving strategy' since the ATO seems to frown on ‘reserves’.
Details of the strategy are outlined in the ATO’s interpretative decision and, in effect, allow 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)).
SMSF practitioners can implement this strategy for their clients by setting up a holding or suspense account for them. The client then makes a contribution during June and claims that contribution as a tax deduction in that year if it is a concessional contribution. The amount is then credited to the client’s member account anytime between July 1 and July 28 which is when the amount will be counted as a contribution and counted against the new financial year’s contribution caps.
Now right at the start, let me advise you that the ATO’s systems are not able to cope with this strategy so there is a 'work-around' needed but it is just part of the process of implementing this strategy and nothing to be worried about.
Here are the steps involved:
1. Read your client’s deed to ensure there are no clauses preventing the operation of a contributions holding account (I would be surprised if there are, but read the deed anyway – it’s a good habit).
2. Read ATO ID 2012/16 to ensure you completely understand the details of how to effectively implement this in a contribution holding account strategy, from start to finish across the client’s personal and SMSF tax entities.
3. Ensure the SMSF trustee’s full contributions are reported within their SMSF annual return and that the necessary contributions tax on the entire contribution has been paid.
4. If the client is self-employed or substantially self-employed, ensure that the notice of intent to claim or vary a deduction for their personal super contributions (NAT 71121) is correct for the current year and submit the form. Follow the exact rules that apply to ensure a valid notice exists, as per s.290-170 of the ITAA 1997. Most advisers call the form an 'S290'.
5. Remember the contribution tax was paid by the SMSF trustee in the first year so the SMSF practitioner will need to gross up the amount to be allocated in the following financial year.
6. The ATO should be contacted as soon as the client receives a letter identifying that there may be a potential excess contribution. SMSF practitioners should let the ATO know what strategy they are using for their client. I always recommend being proactive with ATO communication rather than reactive. They won’t bite!
7. The ATO will then issue the client an ECT notice – remember I warned you the ATO’s systems were not designed to cope with this strategy. That does not mean the strategy is not valid.
8. The accountant or administrator should then contact the ATO to discuss the client’s intent to lodge an objection to the assessment.
9. The SMSF trustee will then need to complete the application – excess contributions tax determination (NAT 71333) to object to the decision and request that the contribution be reallocated to the following income year.
10. SMSF practitioners should minute the movement of money in this strategy to ensure there are complete and accurate records.
Worked example: using the contributions holding account
Tony is a 59-year-old, self-employed mechanic, who sold a Sydney property this year which he had held for 15 years. He has a very large capital gain and wants to minimise his tax. His SMSF adviser and tax agent agree that he should use the 'double dip' contribution strategy to make $70,000 worth of concessional contributions to his SMSF and claim them as a tax deduction this financial year. Both his adviser and tax agent have confirmed that he will have a lower income next year and hence the deduction will be more valuable to him by claiming it this financial year.
1. He has already made $35,000 worth of contributions so far so he makes a contribution of $35,000 to his SMSF this financial year in June and claims the deduction for this year. The total amount of $70,000 will count as an assessable concessional contribution this year and will count as taxable income of the super fund this year.
2. Tony completes the notice of intent to claim or vary a deduction for personal super contributions (NAT 71121) and provides it to the fund trustee(s) to pass to the accountant or administrator. The full $70,000 is treated as fund income for that year and the contributions tax is paid for that year.
3. The first $35,000 is allocated to the member’s account before June 30.
4. The fund does not allocate the other $35,000 of this money to his member account, but rather allocates it to a ‘contribution holding account’ or a ‘suspense account’ in the SMSF. The $35,000 is therefore delayed being allocated to his member account until the next month which is July and hence in the new financial year. The grossed up contribution will then be counted against his concessional contributions cap for the second year.
5. In the following month of July (but prior to the 28th of the month), the money is then allocated to Tony’s account and it counts as a concessional contribution in that new financial year using his full $35,000 concessional cap.
After an objection is lodged, the ATO may then request additional evidence and documents to support the taxpayer objection. This may include:
- A copy of the trust deed of the fund, which shows the ability of the fund to hold unallocated contributions
- Minutes outlining the resolutions to allocate to and from the contribution holding account and minutes of the decision to allocate funds to the contribution holding account
- Contribution holding account investment strategy
- Bank statements from the client’s SMSF that confirms the contributions being paid for the period the application relates to.
- Evidence of the reallocation within 28 days of the end of the month.
Note that having used the cap he has no ability to use further contributions to reduce his income in the new year unless he continues to use a reserve each June.
Liam Shorte, director, Verante Financial Planning and founder, Eviser.com.au