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ATO, Contributions, Strategy

Reserving process key to avoiding ATO scrutiny

contribution reserving strategies

Contribution reserving strategies have been given the green light by the ATO, but correct processes remain central to avoiding compliance action.

SMSF members using contribution reserving strategies who fail to file the required paperwork in the correct order will open themselves up to claims of carelessness, the backdating of documents and making misleading statements, an SMSF legal expert has said.

DBA Lawyers principal Dan Butler said in the lead-up to the end of the financial year there had been more commentary on the use of contribution reserves, but incorrect paperwork could lead to excess contributions and claims from the ATO the strategy was an attempt to hide contribution errors.

Speaking during a recent webinar presented by the firm, Butler said the ATO had outlined the process for using contribution reserving strategies in Tax Determination 2013/22 and would be seeking evidence the strategy was pre-planned.

“Before any reserving strategy is undertaken, the documentation should be in place. The deed should be consistent with that and there should be reserving resolutions and a strategy to allocate the reserved contribution amount after 30 June and before 28 July,” he said.

“The ATO has warned all the documents [related to the strategy] need to stack up because it could state: ‘We looked into this, but show us your deed. Show us the resolutions made before you went into this. Show us that this is not your strategy because you made a mistake and got yourself an excess contribution.’”

He said any SMSF member taking that approach could get into further trouble as those actions would be considered as the backdating of documents or making false and misleading statements.

The ATO had created a form to allow SMSF members to adjust a concessional contribution, but the most common issue with this was misunderstanding the time frames for that document to be processed in comparison with their personal and fund’s annual tax returns, he noted.

“The problem is a number of people have their personal tax return and the super fund’s tax return processed before that form is processed by the ATO,” he said.

“That form is a manual record of adjustment and the normal processing of tax returns take their toll, in which case an excess concessional contribution could pop up there.”

SMSF advice practitioners should be raising these issues with clients, including the possibility of having to lodge an objection to the excess contribution assessment and the work required to unwind that contribution, he noted.

“I encourage you before you encourage your clients to undertake contribution reserving to consider these issues because it sounds very appealing, but should your client get an excess contribution assessment they will say: ‘You got me into this pickle, now unwind it at your cost,’” he said.

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