The use of the contributions reserving strategy in Self-Managed Super Funds is popular for managing contribution caps in situations where a member would like to contribute more into super in one year than in the next. Contributions received in June may be counted towards the member’s contribution cap in the following financial year by allocating the funds to a contributions reserve account and then re-allocating to the members’ account prior to the 29th of July in the following financial year. In addition to avoiding (or at least reducing) a breach of the contribution cap in the year of contribution, a tax deduction for concessional contributions can be claimed in the income year that the contributions are received by the fund, provided the requirements for deductibility are met.

Whilst the ATO has effectively given the ‘all clear’ for the use of the contributions reserving strategy through interpretative decision 2012/16 and Taxation Determination 2013/22, the relevant income tax returns do not enable contributions made in one financial year to be reported as counting towards the members’ contributions cap for the following financial year.  The ATO’s administrative assumption is that contributions are always made and allocated in the same year, so it is up to the trustee to ‘set the ATO straight’ in some circumstances where the ATO deems that excess contributions have been made. Further, the process of ‘setting the ATO straight’ will likely occur over a series of steps. The focus will be on concessional contributions only for the purposes of this article.

After the tax returns are lodged, if the ATO identifies excess contributions for an income year, it will usually issue a pre-assessment letter to the member.  If the ATO does not receive a response or is not satisfied with the letter they do receive, for the 2014 and later financial years the ATO will amend the member’s individual tax return to include this excess amount – tax is paid on the excess concessional contributions at the individual’s marginal tax rate, a non-refundable 15% tax offset is applied and there may be a shortfall and general interest charge. It is then up to the member to lodge an objection to the individual tax return amendment using the specified forms (links are provided below) explaining the operation of the contribution reserving strategy. Whilst the general consensus is that it is only after the amended notice of assessment is issued that the objection is lodged, it might be beneficial to contact the ATO to explain as soon as the pre-assessment letter is received by the member. Tax Agents may lodge the objection form online on behalf of a client through the Tax Agent Portal. Objections will need to include details of the arrangement that was entered into including evidence of when and how the relevant contributions were allocated to the member.

Briefly, for the 2013 and prior financial years, rather than automatically amending the individual tax return, the ATO issued an Excess Contribution Tax Assessment. For concessional contributions, the tax payable was 31.5% of the excess concessional amount which was in addition to the 15% already paid in the fund. The excess amount also counted towards the non-concessional contribution cap. For the 2011-12 and 2012-13 financial years in particular, where the level of excess contributions did not exceed $10,000, taxpayers could elect (subject to certain criteria) for their super funds to refund to them up to 85% of their excess concessional contributions and have those amounts assessed as income at their individual marginal rate of tax with a 15% tax offset (thereby also reducing the amount counted towards the non-concessional cap). This was a once-only concession, however for those using the reserving strategy, the priority is to object to an ECT assessment over making use of any refunding options (note, in some cases it may be necessary to do both).

After an objection is lodged, the ATO may then request additional evidence and documents to support the taxpayer objection. This may include:

  • A copy of the fund’s trust deed, which shows the ability for the fund to hold unallocated contributions
  • Trustee minutes outlining the resolutions to allocate to and from the contribution holding account/reserve
  • Minutes of the decision to allocate funds to the contribution reserve
  • Contribution reserving strategy
  • Bank statements from your SMSF that confirms the contributions being paid for the period your application relates to
  • Evidence of the reallocation within 28 days of the end of the month

Given that these administrative issues could be considered somewhat of a burden if it is necessary to lodge an objection, it helps to factor in these requirements when deciding to undertake the contribution reserving strategy. In many situations, the strategy will still be well worth the effort, and given that the ATO has clearly indicated that such a strategy is acceptable, with sufficient evidence and documentation, there should not be any difficulties with the process.

Best practice when establishing a reserving strategy

  • The deed should include express powers to allow trustees to maintain reserves. Note, that if a deed is silent on reserves, this should still be sufficient given that Section 115 of the Superannuation Industry (Supervision) Act allows trustees to maintain reserves provided that the fund’s trust deed does not prohibit reserves
  • Formulate and give effect to a reserving strategy that is consistent with the fund’s overall investment strategy – see s. 52(2)(i) and s. 52(2)(g) of the SIS Act. The strategy should be clear on why the reserve is established, its ongoing purpose and how the funds are to be invested.
  • Minutes of the resolution to allocate funds to the contribution reserve
  • Minutes of the resolution to allocate funds from the contribution reserve
  • Keep accurate records of the receipt of the contribution to the bank account and the corresponding accounting records into and out of the contributions reserve account
  • Ensure that funds are reallocated from the contributions reserve before the 28th of July of the following financial year.

 

Objection form – for taxpayers: https://www.ato.gov.au/uploadedFiles/Content/L_P/downloads/FORMS18128Objectionformfortaxpayers.pdf

Objection form – for tax professionals:

https://www.ato.gov.au/uploadedFiles/Content/CS_C/downloads/CSC_18130.pdf

 

The information in this document is factual information only and is not intended to be financial product advice or legal advice and should not be relied upon as such. The information is general in nature and may omit detail that could be significant to your particular circumstances.  While all care has been taken to ensure the information is correct at the time of publishing, superannuation and tax legislation can change from time to time and Star Super Services Pty Ltd and Star Super Advice Pty Ltd is not liable for any loss arising from reliance on this information, including reliance on information that is no longer current. Tax is only one consideration when making a financial decision. We recommend that you seek appropriate professional advice before making any financial decisions.