A recent announcement by the ATO has provided further certainty around a superannuation strategy commonly used to address either a potential excess contributions tax problem, or to bring forward deductions for superannuation contributions.
The strategy can be illustrated by the following example:
- 42 year old Harry makes a personal contribution of $50,000 to his self managed superannuation fund (SMSF) in the last few days of June 2014. The trustee of the fund applies $25,000 to Harry’s member account immediately, and the remaining $25,000 to an unallocated contributions account. Then on 2 July 2014 the trustee allocates the second $25,000 to Harry’s member account.
- Harry is able to give notice of his intention to deduct the full amount of the contribution ($50,000) in the 2013/14 financial year. The full amount of the contribution will be included in the SMSF’s assessable income in that same financial year.
- A $25,000 contribution is included in Harry’s concessional contributions for the 2013/14 financial year, and a further $25,000 contribution is included in his concessional contributions for the 2014/15 financial year.
The upshot is:
- Harry has claimed a deduction for 2 years’ worth of concessional contributions in the same year.
- The SMSF has included 2 years’ worth of contributions in its assessable income.
- Harry has not breached his 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.
When adopting this strategy it is important to bear in mind the following:
- The ATO announcement only applies from 1 July 2013.
- The ATO announcement does not expressly confirm that the approach will not cause a breach of the member’s concessional contribution cap, but this is the only conclusion that can be drawn from this and previous ATO announcements, and from the application of the relevant legislation and regulations.
- The relevant rules require an allocation to be made by a fund within 28 days from the end of the month in which the contribution was made, so the ability to allocate to a subsequent financial year only applies in respect of the contributions made in June of the preceding financial year.
- The trust deed for the fund needs to allow for the application of an amount to an unallocated contributions account – in other words, a reserve. It is important to check the deed and to have documentation evidencing the application to the unallocated contributions account and subsequent allocation to the member account. Also, where a reserve is created, the fund needs to implement a reserving strategy.
- There is some doubt (not resolved by the ATO announcement) whether this strategy is available for a single member SMSF. The concern is whether, if the fund has only one member, is it ever possible to say that an amount is held on an unallocated basis, or in a reserve.
- The amount allocated to the subsequent financial year counts against the member’s concessional contribution cap for that year. This reduces the capacity to otherwise receive concessional contributions by or in respect of the member in that year within the cap, although contributions made in June of that year could be applied to an unallocated contributions account, and then allocated before 28 July of the next financial year.