Time for careful contribution planning

superannuation contribution planning

June is a good time for planning on how to maximise a superannuation contribution and make the most of the rules to ensure clients get the best outcomes.

Our focus in June is usually planning to ensure we quickly get any eligible contribution into superannuation before midnight on 30 June.

This year will be no different, except that fortunately it’s on a Tuesday rather than on the weekend for the first time in a while. In theory this makes the timing a little easier than in the past few years, although I am wondering whether this COVID-19 shutdown phase I’m going through where all the days seem to merge into each other will mean I spend the day thinking it’s Monday anyway.

Either way, remember many public funds and clearing houses have a cut-off date that is several days earlier than 30 June – 23 June this year in the case of the ATO’s Small Business Super Clearing House. This is the time of year when those of us advising SMSF clients are all a little relieved the timing is so much easier to control when the contribution can be made simply by writing a cheque at a minute to midnight (just make sure the personal account holds sufficient funds to pay it and that the cheque is banked in the fund’s account in the first few days of the new financial year).

However, there are some occasions when we want to make the contribution before 30 June, but choose not to allocate it to the member’s account until on or after 1 July.

Most of us have heard this described as the “double deduction” strategy. An individual looking for a large personal tax deduction this year takes the following steps:

  • ensure enough concessional contributions have been made already to use up the 2019/20 concessional contributions cap of $25,000 (and any catch-up amounts available from 2018/19 if applicable), then
  • make an extra $25,000 contribution in June 2020,
  • allocate the second $25,000 to the member’s account on or after 1 July 2020, and
  • complete the relevant paperwork to claim a personal tax deduction.

The second $25,000 will be tax deductible in 2019/20, but won’t count against the member’s concessional contributions cap until 2020/21. Neat.

It’s generally only possible in an SMSF because only these super funds are allowed such a long delay between when the contribution is made and when it must be allocated to the member’s account (the 28th day of the following month).

But these same rules can also be used in other contexts and can be every bit as effective.

One example is our client John, 70, with $1 million in superannuation. He met the work test this year and can make superannuation contributions so has already used his limits to make $100,000 in non-concessional contributions and $25,000 in concessional contributions. He won’t meet the work test next year and so had assumed superannuation contributions were now all over for him. However, he can actually make further contributions up to the usual 2020/21 limits in June 2020, allocate these to his accumulation account in July 2020 and get another $125,000 (less tax on the concessional contributions) into superannuation.

The trick is:

  • his eligibility to make the contributions at all is based on whether he met the work test in the year in which the contributions are made. He’s met that condition for 2019/20 and so can make the contributions now,
  • he needs to defer allocating them to his account, however, as he doesn’t want them to be checked against his contribution caps until next year. Bear in mind this works for non-concessional contributions as well as concessional contributions, and
  • the fact he can’t make personal contributions next year (because he won’t meet the work test) doesn’t change the fact he has all the usual contribution caps available – everyone has these.

A second useful example of this deferred allocation strategy is for those who haven’t had concessional contributions for several years, but would ideally like to make a large concessional contribution now because they need the tax deduction in 2019/20. In theory the amount could be as high as $75,000, made up of $25,000 for this year and 2020/21 plus a further $25,000 left over from 2018/19.

The catch in this case is their total superannuation balance at 30 June 2019 was over $500,000 and so the catch-up rules are unable to be used in 2019/20. They could still use the deferred allocation strategy to contribute $50,000 ($25,000 each for 2019/20 and 2020/21), but would love the opportunity to also get that extra $25,000 deduction in 2019/20 for the concessional contributions cap they didn’t use in 2018/19.

During 2019/20 they have withdrawn some of their super and have made some losses – their balance now is only around $420,000. That means the catch-up rules will be available next year. So one approach could be:

  • contribute concessional contributions of $25,000 in June 2020 – to count towards the 2019/20 cap,
  • contribute an extra $50,000 in June 2020 and defer allocating this amount to 1 July 2020, and
  • as long as their total superannuation balance at 30 June 2020 is below $500,000, their concessional contributions cap in 2020/21 will be $50,000 (as they will be eligible to use the catch-up rules once more).

The main catch here is in making sure their balance really is under $500,000 at 30 June 2020. And in our view, the balance for this purpose will include all the contributions made in June, even those that have not yet been allocated to the member’s account.

So it won’t work in every case, but does highlight there are some interesting opportunities beyond the normal double deduction when it comes to the deferred allocation of contributions.

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