SMSF members have been warned that any plans to use contribution reserving should be well documented before the end of the financial year and not used as a backdoor to move funds into another member’s account.
DBA Lawyers principal Dan Butler said contribution reserving was a strategy often considered at this time of year and was supported by a tax determination from the ATO that also outlined the restrictions on the strategy.
“To make a contribution reserve a member needs to lodge a request to adjust a concessional contribution form and the ATO commissioner can then say: ‘Please show me your documents that you have a legitimate reserving strategy in place and the reserving was intended from the get go,’” Butler said.
“It cannot be like the horse has bolted and you are trying to put in paperwork after the event because the commissioner can ask for the paperwork and the SMSF deed and decide whether they are satisfied with that.”
According to the ATO’s website, records relating to a contribution reserve include a resolution by the fund trustees in the year the contribution is made in accordance with the SMSF’s governing rules not to allocate the contribution when it is made but to accept it into a reserve, evidence of receipt of the contribution by the SMSF, a resolution by trustees to allocate the contribution from the reserve in the year after which the contribution is made, and documentation in relation to any deductible personal contributions.
Butler said in addition to keeping the correct records, SMSF members using contribution reserving should ensure the contribution appears under their total super balance (TSB) in the next financial year.
“One of the most contentious issues with contribution reserving is that if a member has a contribution reserved, it’s not showing up in the member’s account balance as of 30 June, but when they are in the next tax year does their TSB reflect the contribution that has been reserved?” he said.
“Is the contribution sitting there really for that member because if it is not, it will not be deductible and raise the question of why did they put it in?
“If it was put in supposedly for one member who did a switch for another member, that will deny the deduction and I think the ATO might even go as far as Part IVA or other measures in order to give you a hard time over that.
“There might be advisers who take a contrary view on this approach, but I’ve fought federal court cases on this very point and the clients lost, so I wouldn’t be too adventurous in that regard.”