Allocating a single Self Managed Super Fund (SMSF) contribution across two financial years

The SMSF contributions caps mean you need to plan when a member's super contributions are made, and in what amounts.

One question to consider is 'can you allocate a single contribution across two financial years?'

The Australian Tax Office (ATO) has advised that you can. This article explains how.

How can you allocate a single contribution across two financial years?

The ATO has outlined how (and why) an SMSF member can allocate a single contribution across two financial years.[1]

Let's look at an example. Assume:

• On 15 June in Year 1, a member's non-concessional contribution of $100,000 is credited to a fund's "contributions reserve";
• The next day on 16 June, $60,000 is allocated from the contributions reserve directly to the member's account;
• As at midnight on 30 June in Year 1, of the initial $100,000:
  • $60,000 has been allocated to the member's account, and
  • $40,000 remains in the fund's contributions reserve; and
• On 1 July (that is, in Year 2), the balance of $40,000 is allocated from the contributions reserve to the member's account.

How it works

In these circumstances:

• The $60,000 contribution counts towards the member's non-concessional contributions cap for Year 1.
• The $40,000 contribution counts towards the member's non-concessional contributions cap in Year 2 (which is the year it was allocated to the member's account).

Why it works

The single payment across 2 years works because a non-concessional contribution is only counted against a member's cap from the date it is credited to a member's account (and not from the earlier date on which the fund receives the contribution).

Where can a member's non-concessional contributions be paid to?

A member's non-concessional contributions can be allocated by the trustee of the fund:

• directly to the member's account;
• first to the fund's contributions reserve (and then later to a member's account); or
• into another account, set up for recording contributions before they are allocated to members.

Is there a time limit on how long the contribution can stay in the SMSF's "contribution reserve"?

Yes, there is limit on how long a contribution can stay in the SMSF's "contribution reserve". The limit is that if the trustee receives a contribution in a particular month, then the trustee must allocate the contribution to a member's account:

• within 28 days after the end of the month; or
• if that is not reasonably practicable, within a longer period that is reasonable in the circumstances.[2]

So you can see:

• from the example above, it is essential that the 28 day period spans two financial years for this strategy to be effective; and
• from the limit, that a single contribution cannot be allocated over more than 2 years.

How does the Cleardocs SMSF deed handle reserves?

The Cleardocs SMSF Deed:

• allows the trustee(s) to set up an equalisation account which may be used to hold and record non-concessional contributions before they are allocated to members; and
• grants the trustee further discretion to establish or maintain any other account or reserve of the fund that the trustee thinks necessary or desirable or that is required or permitted by superannuation law — for example, a "contributions reserve".

What do SMSF trustee(s) and their advisers need to be wary of?

The ATO warns that the ability to allocate a member's contributions across two years leaves scope for the manipulation of the excess contributions caps. For this reason, the Commissioner applies subregulation 292-90.01(2) of the Income Tax Assessment Regulations 1997 only to amounts allocated within 28 days of the end of the month that the contribution is received.

The Tax Office has previously raised concerns with Treasury about this aspect of the law.

Although the Tax Commissioner's view has not yet been incorporated into a ruling, trustee(s) must proceed with caution as the ATO will be monitoring this area.

More information from Maddocks

For information please call Maddocks in Melbourne (03 9288 0666) or Sydney (02 8223 4100) and ask for a member of the Maddocks Tax and Revenue Team or Superannuation Team.

Read

You can read the ClearLaw article that provides an overview on contributions, reserves and contributions caps,here.

Order SMSF related document packages

Set up an SMSF
Update an SMSF deed
Set up an SMSF pension
Arrange SMSF borrowing lending docs:

• for when the lender is a bank
• for when the lender is a related party

Set up an SMSF corporate trustee

SMSF Death Benefit Nomination — binding or non-binding
An SMSF Death Benefit Agreement — binding and permanent

Download

Download a checklist of the information you need to order a document package

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[1] The ATO clarified its position on the use of contributions reserves within a SMSF and its effects on excess contributions under Div 292 of the Income Tax Assessment Act 1997, in the recently released minutes of a NTLG Superannuation Technical Sub-group meeting on 16 June 2009.

[2] see regulation 292-170.03 Income Tax Assessment Regulations 1997 (ITAA 1997).