Unallocated contributions not a reserve

Piggy bank being held in a hand.

The ATO doesn't consider contributing reserve a true reserve.

Concessional contributions made by SMSF trustees as part of a contribution reserving strategy will not be considered a true reserve by the ATO, according to DBA Lawyers.

DBA Lawyers director Dan Butler told an SMSF online update webinar some SMSF trustees are asking if they can reserve a contribution, including a concessional or a non-concessional contribution, in light of the $1.6 million total super balance restrictions.

Butler gave the example of Ken, 50, who makes a $25,000 concessional contribution in May and a further $25,000 contribution in June. The trustee applies the June contribution to an unallocated contribution account.

“It’s interesting because while people broadly refer to this as contribution reserving, the ATO do not consider this to be a true reserve. They call this an unallocated contributions account,” Butler said.

In July, the super fund allocates the $25,000 to Ken’s account.

“So the idea here is the second $25,000 is allocated to the unallocated account and in July it’s then allocated to Ken’s account. And Ken provides his valid notice of intent to deduct $50,000,” Butler said, adding the ATO has said this strategy does work.

He cited the tax office’s “SMSF News”, issue 29, and a 2013 public ruling or tax determination, which said the ATO is comfortable for Ken to receive a deduction of $50,000, noting the vital component is when the contribution is made.

“It’s not when the contribution was subsequently allocated. Certainly for Ken’s contribution cap the allocation in July will use up his concessional contribution cap in the following financial year,” Butler said.

“The ATO back in this newsletter confirmed that the ATO admin system assumes contributions are made and allocated the same financial year. So if you want to go through this strategy, you have to notify the ATO.”

SMSF members must fill out a request to adjust concessional contributions form through the ATO, which acts as a disclosure.

The ATO said while members may have arranged to allow contributions to be recognised as deductible in year one, the amount may not have counted until year two.

It said this is a valid strategy provided it meets all legal requirements under tax and super laws.

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