Trustees mistiming contributions reserves

reserved contributions

The early use of reserved contributions continue to trip up trustees and denies members of a tax deduction, an technical expert has warned.

SMSF members are having tax concessions on reserved contributions denied by the ATO due to trustees beginning to pay an income stream based on the contribution before it has been properly allocated, an SMSF technical expert has warned.

Smarter SMSF chief executive Aaron Dunn said the situation is still occurring where SMSF members are making contributions that are to be allocated to the following financial year and mistiming the use of those contributions.

Dunn said the mistiming was important to note, particularly as SMSF members can make reserved contributions of $27,500 due to indexation in this financial year, claim the deduction for tax purposes before 30 June, but allocate the contribution under Superannuation Industry (Supervision) Regulations in the new financial year.

He highlighted this contribution had to be accompanied with a notice of intent, but could be considered invalid by the tax commissioner if it failed to satisfy certain conditions.

“An individual can claim the contribution amount in the current year and use a section 290-170 notice under the Income Tax Assessment Act, but there are circumstances where that notice will be treated as invalid,” he said.

“If we don’t get the timing right we will end up in a situation where the commissioner of taxation will deny the individual the deduction, which is going to create a significant tax issue in the hands of that individual.”

He said it was still common for SMSF members to make a contribution into superannuation as part of a contribution reserving strategy and then have the trustee move that contribution into an income stream, invalidating the contribution.

“The timing here becomes absolutely critical around getting that notice accepted if the intention is that money is going to be bundled up inside an income stream,” he said.

“That notice needs to have been prepared and signed and accepted by the trustee prior to the commencement of that income stream for either the whole or part of that particular contribution.

“Practitioners should be raising this timing issue with clients, otherwise they could be denied the deduction on a contribution which may be larger than a single year’s concessional contribution if we start to incorporate those previous year, catch-up concessional contributions where an individual is eligible to use them.”

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