The end result is that a contributor can potentially make a contribution in one year but defer having it checked against the relevant contributions cap until the following financial year, according to Colonial First State.

In a recent Colonial FirstTech Strategy Update, Colonial First State head of technical services Craig Day said, with contributions caps increasing, SMSFs will be able to increase their contribution levels to take advantage of the lift in the caps from 1 July 2021. This will mean members of SMSFs may be able to take advantage of these increases earlier via the use of contribution reserving strategies

Under SIS Regulation 7.08(2), the trustee of a superannuation fund must allocate any contributions made for a member to their account, by no later than 28 days after the end of the month the contribution was received.

This means where a member makes a contribution, such as a concessional or non-concessional contribution, in June, the trustee will not be required to allocate the contribution to their account until 28 July in the following financial year at the latest.

In 2013, the ATO released Tax Determination TD 2013/22 which also confirmed a concessional contribution made in June of one financial year, but allocated by 28 July in the following financial year, counts against the member’s concessional cap in the year it is allocated. In addition, the ATO confirmed that a personal contribution made in June will be deductible in the year it was made, regardless of when it was allocated.

Mr Day said the use of a contribution reserve strategy can therefore effectively allow an SMSF member to bring forward up to one year of their concessional cap into the current year to maximise their deductible contributions but without causing them to exceed their concessional cap.

“For example, taking into account the increase in the concessional cap to $27,500 on 1 July 2021, a contribution reserving strategy could allow a member to make and claim deductions for personal contributions of up to $52,500 in 2020–21 without causing them to exceed their concessional cap,” he said.

“The only provision is that the member must make a personal deductible contribution of $27,500, in June, which the trustee then allocates to their account in the following financial year by 28 July.”

Assuming the ATO takes the same approach of assessing contributions in the year of allocation for both contribution caps and Division 293 tax purposes, Mr Day noted a contribution reserving strategy could also reduce the amount of a member’s income for Division 293 tax purposes and result in a member not having, or having a reduced, Division 293 tax liability in a year.

“For example, if the member in the above example had assessable income of $275,000 in 2020–21, their income for Division 293 purposes would be assessed as $247,500 after taking into account their deduction and low tax contributions,” he said.

“Given this is less than the $250,000 Division 293 tax threshold, they would not incur any additional 15 per cent tax liability on their concessional contributions in that year.”

While TD 2013/22 only refers to concessional contributions, the same logic should also apply to non-concessional contributions, according to Mr Day. Therefore, a non-concessional contribution made in June in one year that is allocated in the following financial year by 28 July will count towards the member’s non-concessional cap in the second year.

This means that the main advantage of a non-concessional contribution reserving strategy is that it allows a member over age 67 to bring forward a non-concessional contribution into a year that they satisfy the work test.

“For example, implementing a non-concessional contribution reserving strategy could allow a member over age 67 who still works full- or part-time, but who plans to retire by the end of the financial year, to make additional non-concessional contributions of up to $110,000, in June, while they are still eligible to contribute, which the trustee could then allocate in early July in the following year,” he said.

“However, it’s worth noting a contribution reserving strategy will not assist a member to make a non-concessional contribution under the bring-forward rules in one year where they would not otherwise qualify to use the bring-forward rules in the following year because of their age.”

Practical issues when implementing the strategy

Before implementing a contribution reserving strategy, there are a range of practical issues a client should be aware of in both compliance and its effect on the fund’s contribution plan.

When considering contribution reserves and reporting, Mr Day said it is important to note that where a client implements a contribution reserving strategy, the ATO has confirmed that regardless of TD 2013/22, a trustee must still report member contributions in the year they are received rather than the year they are allocated.

“As a result, the member’s fund would be required to report total personal contributions for the member in 2020–21 of $52,500 in the SMSF annual return,” he said.

“However, to allow the ATO to properly administer the concessional cap, it has released a form which notifies the ATO that the trustee has allocated a concessional contribution made in one financial year in the subsequent financial year. 

“The ATO then uses this information to adjust the contributions information reported in the SMSF’s annual return.

“In regard to non-concessional contributions, the ATO has confirmed this form cannot be used. Instead, the ATO has clarified that where a member made a non-concessional contribution that the trustee allocated in a subsequent financial year, the member will need to write to the ATO outlining the situation and request the ATO reallocate their contribution to the following financial year.”

Furthermore, to implement a contribution reserving strategy, the trustee will need to keep records to substantiate what has occurred, according to Mr Day.

These include a resolution by trustees in the year the contribution is received in accordance with the SMSF’s governing rules, not to allocate the contribution when it is made but to accept it into a reserve and evidence of receipt of the contribution by the SMSF.

“Furthermore, a resolution by trustees to allocate the contribution from the reserve in the following financial year in accordance with SIS Regulation 7.08(2) will be needed,” he explained.

“Under these rules, a trustee should not attempt to break up any individual contributions made in June and then allocate different amounts in June and July so as to avoid a member exceeding their cap and incurring an additional tax liability, as this may be considered tax avoidance.”