How the ATO materials affect used contributions reserving

Contribution reserving can be a powerful strategy; however, practitioners need to be aware of some of the difficulties and what impact the release of the NAT 74851 form by the ATO will have.

Ever since ATO Taxation Determination TD 2013/22 and ATO Interpretative Decision ID 2012/16 many have considered contribution reserving to be a ‘lay down misere’. There are a few traps that practitioners need to consider, however, and the ATO has also recently released materials which have implications for the process of this strategy.

Recap: The typical strategy

Contribution reserving is often used as follows. An SMSF member who is eligible to make personal deductible contributions makes two contributions to their SMSF in one financial year. The first contribution uses up their concessional contributions cap for that financial year. The new contribution is held in an ‘unallocated contribution account’ or a contribution reserve until the new financial year and then is allocated to the member.

The member claims both contributions as personal deductions in the financial year in which the money was transferred (i.e., in the first financial year). Only the first contribution counts towards the member’s concessional contributions cap in the first financial year. For the reasons set out in TD 2013/22 and ID 2012/16, the second contribution counts towards the member’s cap in the year of allocation (i.e. in the second financial year) rather than in the year it was transferred to the fund.

Naturally the second contribution must be made in June of the first financial year. This is due to reg 7.04 of the Superannuation Industry (Supervision) Regulations 1994 (Cth), which broadly requires that a contribution must be allocated to a member of the fund no later than 28 days after the end of the month in which it was made.

New ATO materials

The ATO has recently addressed one difficulty that existed with contribution reserving by releasing the new ATO form ‘Request to adjust concessional contributions’ (NAT 74851).

This form notifies the ATO that an SMSF member made concessional contributions in one financial year but that their SMSF did not allocate the contributions to him or her until the next financial year.

Previously, where contribution reserving was used for personal deductible contributions, a practical problem would arise. Namely, due to the way the SMSF annual return and the member’s personal income tax return provide information to the ATO, it would appear to the ATO that a member had excess contributions. Often the only way to deal with this was via an objection process, which can be costly and time consuming.

Hopefully this new form should streamline the process of alerting the ATO and do away with the need for a formal objection.

Other traps?

There are other traps to be aware of.

One such trap is that a reserving strategy is required. Many seek to implement a contribution reserving strategy without a contribution strategy, which contravenes superannuation law. A reserving strategy is different to an investment strategy.

It is important practitioners are aware of how to establish and maintain contribution reserves and are able to deal with any excess contributions issues that might arise from the implementation of this strategy.  

Another trap is that there must be two distinct contributions. The closest scenario that the ATO have considered suggests that it is not possible for one contribution to be split into two portions and one portion is allocated instantly to a member and the other portion is held in a contribution reserve. This raises the question: what can be done if there are not two distinct contributions? Some suggest that an alternative might be to put the entire contribution instantly to a contribution reserve and then allocate a portion in the first financial year and the balance in the next financial year. However, the closest ATO materials available on point also suggest that this is not possible. Namely, under heading 7.6 of the June 2012 NTLG Superannuation technical sub-group minutes the ATO state:

The asset … is less than $450,000 and the relevant member is under 65 years of age. The question is again if there could be a part allocation of an amount to the member's account and the balance to a reserve. The ATO in response indicated that where one amount or asset is paid or transferred to the fund as a contribution for a single member of the fund, this would be considered a single fund-capped contribution for the purposes of subregulation 7.04(3) of the SISR. The ATO suggested that subregulation 7.08(2) of the SISR, which refers to the allocation of 'a contribution', requires the whole amount of each contribution to which it applies to be allocated at one time.

I stress that although these ATO materials are not entirely on point. Nevertheless, the most conservative thing is to have two distinct contributions.

Some have mentioned that another trap is that contribution reserving cannot be used where an SMSF has only a sole member. On the one hand, there is a certain logic to this. However, I am aware of sole member SMSFs who have used contribution reserving and have had to lodge an objection to an excess contribution tax assessment and were successful.

Conclusion

Contribution reserving can be a powerful strategy, but, like many powerful strategies, it must be carefully implemented else it can do more harm than good.