SMSF, Strategy, Tax

Reserving still an effective strategy

Contribution reserving

Contribution reserving in an SMSF is a useful tax planning strategy but shouldn't be confused with the limits on the use of fund reserves.

An SMSF technical expert has reminded trustees that contribution reserving strategies can still be used to manage potential tax liabilities at the end of the financial year.

Contribution reserving usually involves a member or employer making a concessional contribution in June of a financial year and holding the unallocated amount in a contribution reserve account until the start of the next financial year.

Smarter SMSF chief executive Aaron Dunn noted that while the ATO has discouraged the use of reserves within SMSFs, which are generated from fund earnings and unallocated to members until the end of the financial year, contribution reserves remained a viable tax planning strategy for trustees.

“The ATO back in 2018 really put the kibosh on reserves generally and they came up with a regulator’s bulletin (RB) which said ‘reserves have no place within self-managed super funds’,” Dunn told attendees at a recent Smarter SMSF tax planning webinar. 

“In reality, the ATO did say if you want to use a contribution reserve, that’s fine. The reason why you can is because it’s not a reserve per se. It is nothing other than a short-term warehousing account.

“As we’ve seen in SMSFRB 2018/1, you can utilise this strategy and therefore it’s just understanding the mechanism that’s needed to make that particular adjustment.”

Smarter SMSF technical and education manager Tim Miller added the use of contribution reserves was still a beneficial oddity for SMSFs from a regulatory perspective.

“It is ironic because the concept states we need 28 days following the end of the month in which the money is deposited to work out who this money is for, but if you’ve got a single member superannuation fund, it is relatively obvious who it is for,” Miller said.

“Yet it’s always had the tick of approval from the tax office. This has had tax determinations and interpretative decisions, regulatory bulletins and the ATO has even made forms for people to be able to use it.

“If people use it for legitimate deductibility purposes, then it is a genuine strategy, but you’ve got to get it right.”

In the same webinar, Dunn noted SMSF members using this strategy and looking to claim a deduction for personal superannuation contributions must submit accurate notices of intent as auditors were no longer checking those claims following the removal of the work test.

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