The window to use a strategy to offset tax liabilities by allocating contributions to the next financial year will close soon, with SMSF members advised to be clear in how they use it, according to a technical specialist.
BT technical consultant Matt Manning noted the strategy allows SMSF members to maximise tax deductions by effectively using future concessional caps in advance.
“This is commonly called the double deduction strategy. The requirements are all the usual rules that apply to concessional contributions and it’s only really permitted in an SMSF,” Manning told attendees of a BT Financial Group webinar today.
“Where you have an SMSF client in a certain situation, it can be extremely valuable, particularly for anyone that’s going to have a spike in their income or potentially benefit from more of a deduction this year versus next financial year.
“It could also suit clients that have a payment from termination of employment and they’ve got a spike in their income due to that, or they would otherwise be on a reasonably low income and they’ve triggered a capital gain which makes their voluntary concessional contributions so much more tax-effective.
“However, the contribution that we want the deduction for this financial year, but for cap allocation purposes next financial year, has to be made in June. The reason for that is we’re effectively doing an SMSF reserve allocation and we have to allocate reserves within 28 days from the end of the month in which the contribution occurs.
“There’s only really an option to do it in June, because even if you did it in May, we would have to allocate it by 28 June and it’s still the same financial year.”
To illustrate the benefits of the strategy, Manning used a case study involving 55-year-old Betty, who is self-employed and for the past decade has fully used her concessional cap by making personal contributions to her SMSF and claiming a tax deduction.
She intends to continue this for the next five years and then retire. Her business was very successful in the 2024 financial year and as a result she has an increase in her assessable income of $240,000 in the current year compared to $120,000 in a typical income year.
“If we were to do the full amount this financial year, as in from a contribution deduction perspective, we’ve got $57,500,” Manning said.
“But from a cap allocation perspective, we can allocate $30,000 of that $57,500 into the next financial year. So the deduction is spread across those two years. That gives us an additional tax benefit of $4500.
“What can unravel this strategy is if you try and do the $57,500 as a single contribution. It won’t work because we need those separate contributions to then be able to allocate that $30,000 to next financial year.”