A contribution reserving strategy can be employed using non-concessional contributions (NCC), but advisers and their clients should be mindful they come with a level of compliance risk some people may find unacceptable, an SMSF specialist has said.
“[Using] concessional contributions [with contribution reserving strategies] is much easier because the tax office has a form [on which] you can notify [it of] what it’s all about. [Using] non-concessional contributions means you have to write to the tax office [to explain what you’ve done],” SuperGuardian education manager Tim Miller told delegates during a recent seminar in Sydney.
“Writing to the tax office isn’t always a pleasant experience because anybody can open that correspondence. I don’t mean anybody in the street; I mean anybody in the varying levels of knowledge base in the tax office can open that correspondence and therefore you may be captured in an environment where you have to explain the law to somebody in the tax office as to how those contributions reserves work.”
Despite the associated risk, Miller reiterated the use of non-concessional contributions in a contribution reserving strategy is legitimate and detailed the type of situation where advisers might suggest it is appropriate for their clients.
“The use with non-concessional contributions would be more akin to [circumstances where you want to be] making that June contribution because you’ve satisfied the work test and you’ve got more than $300,000, so next year, when you’re not going to work, you’re not going to be entitled to make a contribution so you allocate next year, but you contribute this year,” he said.
Contribution reserving strategies are more frequently executed using concessional contributions and earlier during the presentation, Miller dispelled the commonly held concern they may be caught as a tax avoidance scheme under Part IVA of the Income Tax Assessment Act.