Contribution reserving can be used in some circumstances to sidestep the Division 293 tax for superannuation members, but they will need to have sufficient cap space to be able to use the strategy, according to BT technical consultant Tim Howard.
Howard said a number of advice practitioners have raised the issue of whether it is possible to reduce the level of Division 293 tax, which is charged at 15 per cent and levied on super fund members whose combined income and concessional contributions exceed $250,000.
“I want to suggest a strategy around reducing a client’s liability for Division 293 tax using a deferred allocation in June,” he said during a recent online briefing.
“It only works when the client has got enough cap space available and have a high-income last year or this year and are going to have lower income next year.”
To illustrate the strategy, he used the example of an SMSF member earning $380,000 in the current year with a balance below $200,000 within their fund who would be paying the additional 15 per cent tax on their concessional contributions.
“There is a way where we can use a reserving strategy in this case to make two contributions in June,” he added.
“We are going to make one contribution of $55,000 in June and then do, effectively, a carry forward of $142,500 in that month as well, but we want that second amount to be allocated to the next financial year and the first to be allocated to the current financial year.
“What that is going to do in relation to Division 293 is reduce the taxable income in the current year because we are claiming a big deduction of nearly $200,000.”
He noted that while the income definition for the Division 293 tax was the same definition as for Medicare levy surcharge purposes, the latter added back any contributions made to super while the former definition did not as Division 293 includes any low tax contributions for a particular year.
“This means this strategy is going to considerably reduce this individual’s income,” he noted.
“They will only add back the super contributions for this particular year, which is going to be the $55,000, and they are not going to add back the $142,000 that is going to be allocated next year where there is the assumption they’re going to have far less income,” he said.
“What we have done with that strategy is managed the tax, managed the deductions and those help manage the liability for Division 293.
“Like any good case study, there’s a few things that need to line up for it to look that good, but it might be something you could implement if you have a client on much higher income who is approaching retirement.”
