It is an ATO requirement that Concessional Contributions received by the SMSF must be allocated to a member within 28 days after the end of the month. In an SMSF, all members of the SMSF are also Trustees of the SMSF, therefore a contribution is usually allocated to a specific member as soon as the SMSF receives it. However, if the contribution is received by the SMSF in June of a Financial Year, then the SMSF Trustee can make an election to allocate the contribution to a specific member in the next Financial Year subject to meeting all the requirements.
For contributions cap purposes, the contribution counts towards the Member’s Concessional Contributions Cap when the contribution is received by the SMSF and allocated to a specific member.
The above two rules grant the Trustees the flexibility to make additional Concessional Contributions in June without exceeding the Concessional Contributions Cap for that Financial Year by implementing a Contributions Reserving Strategy.
Contributions Reserving strategy refers to an arrangement whereby Contributions made in June of a Financial Year are allocated to the Member in the next Financial Year. The Contributions are recognised for income tax deductibility and other purposes in the year the Contributions are made but count towards the member’s Concessional Contribution cap in the next Financial Year.
To implement Contributions Reserving, the SMSF Trust Deed must include provisions to enable this strategy. The Trust Deed used by ESUPERFUND allows Trustees to implement the Contributions Reserving Strategy.
How It Works
If you wish to implement the Contributions Reserving Strategy, Contributions made in June to the SMSF will be allocated to your member account in the next Financial Year. For example, Contributions made in June 2020 will be allocated to your member account in the 2021 Financial Year. The Contributions made in your SMSF’s bank account in June 2020 will be placed into a Contributions Reserve Account (an accounting entry) before being allocated to your member account.
The Contributions are reported to the ATO in the SMSF’s tax return in the receiving year (i.e. in the 2020 Financial Year) and subject to the 15% Contributions tax in the same year (i.e. 2020 Financial Year).
However, the Contributions will only count towards the Concessional Contributions Cap in the year in which the Contributions are allocated to your Member account (i.e. 2021 Financial Year).
Personal Concessional Contributions
For Personal Concessional Contributions (i.e. Personal Contributions on which a tax deduction is claimed), the Tax Deduction must be claimed in the Personal Tax Return in the receiving year.
A copy of the ATO Tax Deduction form is required to be provided to our office as part of the Annual Compliance process.
Notifying the Australian Taxation Office
The SMSF tax return does not make provisions for a Contribution Reserving Strategy automatically. To notify the ATO of the Contribution Reserving Strategy, thereby allowing the ATO to apply the Concessional Contributions Cap for both years correctly, you must complete the ‘Request to adjust Concessional Contributions form’ here*.
The form can be completed and lodged with the ATO after the end of the Financial Year. The form can be lodged before or at the same time, as both your SMSF tax return and your personal income tax return are lodged.
If you wish to implement the Contributions Reserving Strategy in your SMSF, please notify our office in writing once the Contributions have been deposited in June.
Concessional Contributions Caps
It should be noted that the Contributions made under the Contributions Reserving Strategy count towards the Contributions caps in the year the Contributions are allocated to the members.
For more information on Concessional Contributions cap, please click here.
Assume Barney is aged 64 and has made total Employer Contributions and Salary Sacrifice Contributions of $25,000 during the 2020 Financial Year (i.e. he has used up the Concessional Contribution cap for the year). He makes a further Personal Concessional Contribution of $25,000 in June 2020 and wishes to implement the Contributions Reserving Strategy. He can do so given the $25,000 was made in June.
This means that a total of $50,000 will be reported in his SMSF’s 2020 Tax Return and attract 15% tax (i.e. $7,500 Contributions tax). The tax deduction for the $25,000 is also claimed in his 2020 personal tax return. Barney completes the ‘Request to adjust concessional Contributions’ form and send to the ATO.
The $25,000 Employer Contributions and Salary Sacrifice Contributions will count towards Barney’s Concessional Contributions Cap for the 2020 Financial Year as normal while the $25,000 made in June 2020 will count towards his 2021 Concessional Contributions Cap. In this case, Barney does not exceed his Concessional Contributions Cap for both 2020 & 2021 Financial Years. However, given he has used up the 2021 Concessional Contributions cap, he cannot make further Concessional Contribution during the 2021 Financial year.
Assume Lisa is aged 40 and makes total Personal Concessional Contributions of $35,000 in May 2020. She wishes to implement the Contributions Reserving Strategy. Unfortunately, she cannot do so given the Contributions were made in May and must be allocated to her member account in the same Financial Year. Therefore, she has exceeded her Concessional Contributions cap limit for the 2020 Financial Year (which is $25,000) and will be subject to the Excess Concessional Contributions Arrangement.
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