Financial Planning

Unused concessional cap a reserve elimination tool

Unused concessional cap a reserve elimination tool

Expert says rules that allow individuals to carry forward their unused concessional cap can help to get rid of SMSF reserves.

The provision allowing superannuants to carry forward their unused concessional contributions cap for a period of five years if their total super balance is under $500,000 may assist trustees to extinguish existing reserves in an SMSF, a sector technical expert has said.

“Reserves are a real pain to get rid of at the moment and remember of course one of the problems or one of the challenges with getting rid of reserves is, yes there are ways and means they can be allocated out and not be counted as concessional contributions, but often they are if you want to allocate them out fairly quickly,” Heffron SMSF Solutions managing director Meg Heffron said during her presentation at Class Connect 2019 in Sydney last week.

“[This] is a huge problem if you’ve got a very large reserve because concessional contributions caps are quite small.”

To that end, Heffron suggested making use of the unused portion of the concessional contribution cap can speed this process along.

In particular, she pointed out an SMSF with elderly members in it who are drawing down their retirement savings balance could be of great assistance.

“Think about reserve allocations to old people, very old people. You’re thinking a 90-year-old doesn’t have a $25,000 concessional contribution cap, aren’t you, because you’re thinking they can’t contribute,” she said.

“You’re absolutely right. They can’t contribute but they do have a concessional contributions cap.

“So if you were tidying up reserves and saying ‘I want to shuffle all of this out to all of the members, my only member is a 90-year-old, they don’t have much in super anymore, I’m down to the half-a-million-dollar limit’, [this can be advantageous].

“Did you know that this year you can actually allocate $50,000 to them, have it all count as a concessional contribution, and it just won’t matter because that’s their cap [and] they didn’t use last year’s?”

The ATO cracked down on the use of reserves in an SMSF last year, creating a situation where funds had to eliminate them as quickly as possible.

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