Contribution reserving strategies are particularly useful where an SMSF member runs up against the Division 293 tax rules after realising a significant gain on the sale of a personally held asset, but they require careful execution, according to a superannuation expert.
BT technical consultant Matt Manning said SMSFs had a key advantage in dealing with Division 293 issues that was unavailable to Australian Prudential Regulation Authority-regulated funds in that they could direct large income sums into super across two financial years using a reserving strategy.
Speaking during an online briefing with advisers today, Manning gave the example of Karen, who earns $100,000 a year and is the single member of an SMSF, and during 2024/25 sold an investment property outside the fund resulting in a $100,000 taxable capital gain.
“This is an ideal opportunity for the double deduction strategy where we want it all to happen in one financial year, but for contribution cap purposes we want to split it between the 2024/25 and 2025/26 financial years,” he said.
“In some people’s situation, however, the contribution might put them at a level that is not as tax-effective, even though their income is higher, and the reason for that is their effective marginal tax rates and Division 293.
“Where that gain puts someone above $250,000, it puts them into the Division 293 territory and the benefit of the voluntary concessional contribution is reduced [from 32 per cent at $249,999] to the level of somebody in the 32 per cent marginal tax rate [who earns $66,668 to $135,000] where the voluntary concessional contribution benefit is also 17 per cent.
“So if it means paying Division 293 when we would otherwise be in the following financial year subject to the 39 per cent marginal tax bracket [for those earning $135,000 to $190,000], it’s probably not worth doing the reserving strategy.
“In the case of Karen, her voluntary concessional contribution deduction benefit would be 32 per cent and by reducing the $200,000 income below $190,000, there was still a 24 per cent benefit available to her and so doing that via a reserving strategy where the client has an SMSF can be particularly valuable.”
