From the start of July 2021, the annual limit for tax-deductible contributions rose from $25,000 to $27,500. Meanwhile, the non-tax-deductible contributions cap bumped up to $110,000 from $100,000. In addition, there are also bring forward non-Concessional contributions rules and, catch up concessional contributions. all of which are designed to help Australians make the most of their Superannuation tax benefits.
All super fund members can take advantage of these increases and strategies to boost their balance and enjoy a tax deduction on their concessional and non-concessional contributions. However, Self-Managed Super Fund (SMSF) members have an additional option to elevate their retirement savings through a method known as 'contributions reserving.' With this approach and the higher contribution limits, SMSF members could potentially add up to $55,000 in tax-deductible contributions to their super this year without having to take advantage of catch up contribtuions — that's twice the standard annual cap.
According to superannuation regulations, an SMSF member's concessional contribution must be allocated to the member within 28 days after the month's end.
This presents both timing challenges and opportunities when the contribution is received in June but isn't allocated until July of the following fiscal year.
Personal contributions made in June are tax-deductible for the year they're received, regardless of the allocation date. However, these contributions only count towards the concessional contributions cap in the year they're allocated, possibly in July the following fiscal year.
How Does It Function? At its most basic, contribution reserving allows you to fast-track a year's concessional contributions cap, effectively doubling your concessional contributions in a year.
Your contributions made in June go into a contributions reserve account before being assigned to your member account by the following financial year's 28th July. You can then claim two years' worth of concessional contributions as a tax deduction in the year they're received.
Elias, a 60-year-old, makes a total of $27,500 in employer and salary sacrifice contributions to his SMSF in the 2021-2022 financial year, utilizing his concessional contributions cap for the year. Then, in June 2022, he makes another personal concessional contribution of $27,500 and chooses to use contribution reserving.
This choice requires Elias to declare total concessional contributions of $55,000 in his SMSF’s 2021-22 tax return, resulting in a 15% contribution tax, amounting to $8,250, for the same year. He then claims a tax deduction for the $55,000 in his 2021-22 personal tax return and completes a Request to adjust concessional contributions form for the ATO.
The $27,500 made in employer and salary sacrifice contributions counts towards Elias’ concessional contributions cap for the 2021-22 financial year. However, the $27,500 contribution he makes in June 2022 will count towards his concessional contributions cap for the 2022–23 financial year. This means he won't be able to make any further concessional contributions that year.
High-income earners near the $250,000 Division 293 tax threshold might find a contributions reserving strategy useful, especially if their income varies significantly year-to-year. Under Division 293 rules, if your combined income and concessional contributions exceed $250,000, you may face an extra 15% tax on your super contributions.
Peter a small business owner, earned $275,000 in 2021-22 but expects his income to drop to less than $220,000 in 2022-23 due to a planned reinvestments into his business, impacting his personal income. Peter makes a $27,500 personal contribution to his SMSF in the 2021-22 financial year, using up his concessional contributions cap for the year. Then in June, he makes another $27,500 personal concessional contribution, allocating this second contribution to his account in July 2022.
This allocation reduces Peter's taxable income in 2021-22 to $220,000 ($275,000 – $27,500 – $27,500). As only the first concessional contribution contributes to Peter's taxable income for Division 293 purposes, he doesn't exceed the $250,000 threshold for 2021-22 ($220,000 + $27,500 = $247,500), avoiding any additional 15% tax liability on his concessional contributions.
If his income falls as predicted the following year, he won't exceed the $250,000 threshold or incur any additional Division 293 tax in 2022-23 either.
Note: Even though Peter's strategy falls within the rules and is discussed by SMSF specialists, the ATO's guidelines on contributions reserving don't explicitly mention it. It would be wise to seek professional advice or an ATO ruling before proceeding.
Details Matter When dealing with SMSFs, meticulous record-keeping is a must to back up your contribution reserving activities. Your fund's trust deed should have provisions allowing contributions reserving and the ATO recommends keeping records including:
While contribution reserving can bolster your super in a tax-efficient way, there are potential issues to look out for.
The ATO offers clear guidelines and a Request to adjust concessional contributions form for SMSFs wanting to use contributions reserving for advancing concessional contributions. However, it's silent on non-concessional contributions.
Despite this silence, contributions reserving to fast-track the next year's non-concessional contributions cap of $110,000 is possible. Recently, this approach may have appealed to members aged over 67 planning to retire and wanting to fast-track the next year's non-concessional contributions cap to a year they still meet the work test.
But, legislation passed in February 2022 removes the work test for making non-concessional and salary sacrifice super contributions for people aged 67 to 74, effective from 1 July 2022. This change might lessen the allure of a non-concessional reserving strategy.
According to Graeme Colley, the executive manager of technical support and training at SuperConcepts, the record-keeping for non-concessional contributions under a reserving strategy is the same as for concessional contributions, but with one extra administrative step. “When you complete your tax return, you'll need to notify the ATO that your non-concessional contributions are under a reserving strategy,” says Colley.
Monitor your total super balance (TSB) as its size on 30 June might affect your ability to leverage several super measures the following fiscal year.
Your TSB determines eligibility for carrying forward unused concessional contributions cap amounts, the non-concessional contributions cap, and advancing future non-concessional contributions cap amounts, and whether your SMSF can use the segregated method to calculate exempt current pension income.
A contributions reserving strategy can aid SMSF trustees in elevating their retirement savings and fast-tracking a tax deduction for the following year's concessional contributions. This can be a particularly lucrative strategy for investors incurring large capital gains tax in a particular financial year, for High paid business owners with varied income streams, or invidivuals transitioning to retirement. For non-concessional contributions, the benefits of a reserving strategy are not as straightforward. Given the complexity of the rules surrounding record-keeping and reporting, we strongly recommend trustees to seek independent professional advice.