A recent announcement by the Australian Tax Office (ATO) may see an increase in requests for salary sacrificing of superannuation contributions, particularly for employees soon to retire.
The strategy can be illustrated by the following example:
- 64 year old Harry decides he wants to retire on 30 June 2014. After talking to his financial adviser, Harry makes arrangements commencing in January 2014 to sacrifice part of his salary so that in effect employer contributions totalling $35,000 will be made for the period up to 31 March 2014. These will be paid into Harry’s self managed superannuation fund (SMSF). Then in the last quarter of the year he has arranged for further amounts to be sacrificed (including employer contributions) totalling another $35,000, with the contribution being made in June 2014 to his SMSF. The trustee of the SMSF allocates the $35,000 received earlier in the year to Harry’s member account at that time, and the remaining $35,000 received in June goes into an unallocated contributions account. Then on 2 July 2014 the trustee allocates the second $35,000 to Harry’s member account.
- The employer receives a deduction for the full contribution ($70,000) in the 2013/14 financial year. The full contribution is included in the SMSF’s assessable income in that same financial year.
- A $35,000 contribution is included in Harry’s concessional contributions for the 2013/14 financial year, and a further $35,000 contribution is included in his concessional contributions for the 2014/15 financial year.
The upshot is:
- Harry has sacrificed 2 years worth of contributions in the same year – the so-called “double dipping”.
- The SMSF has included 2 years worth of contributions in its assessable income.
- Harry has not breached his $35,000 concessional contribution cap in the 2013/14 financial year and, provided no further concessional contributions are made and allocated to Harry in the 2014/15 financial year, he will not breach his concessional contribution cap for that year. There should be no issue with this as Harry is retiring on 30 June 2014.
When adopting this strategy it is important to bear in mind the following:
- The ATO announcement only applies from 1 July 2013.
- The strategy relies on the acceptance by the ATO that contributions made to a fund during a particular month need not be immediately allocated to the member, but can be allocated up to 28 days from the end of the month in which the contribution was made. Consequently, as illustrated in the example, it is important that the contributions to be allocated to the following financial year be made no earlier than June of the current year.
- There are other aspects that the employee/member will need to ensure are met, including having an SMSF or other fund that will allow for this strategy. There is also a question as to whether this strategy is available where the SMSF has only one member. These are matters for the employee to consider.
- This strategy is far less effective for employees whose employment will continue (and for whom contributions will be made) in subsequent financial years.