This is the month to consider contribution reserving or, more correctly, deferred allocation of contributions. Subject to the SMSF deed, a contribution is not required to be allocated to a member account until 28 days into the following month so a contribution made in June may be allocated to a member no later than the 28th of July. The tax deduction, if applicable, is taken in the financial year in which the contribution is made but the allocation against the member’s account, and contribution cap, is not made until the year of allocation.
This is most useful for SMSF members who want to maximise a tax deduction in one year with little need for it the year after, maybe due to a large, one-off capital gain. It can also be useful for a member who may not be eligible to take a tax deduction in the following year due to work test requirements as the deduction depends on eligibility in the year of contribution, not the year of allocation.
This opportunity applies to employer and personal contributions and is irrespective of whether they are concessional or non-concessional, though the mechanics differ. The ATO can be proactively informed of deferred concessional contributions using form NAT 74851. Non-concessional contributions are not as straight forward as there is no standard method to advise the ATO of the situation in advance. The member needs to write to the ATO requesting the reallocation. Alternatively, the contribution will result in an excess determination being issued by the commissioner which must be resolved by explaining, with appropriate evidence such as deed wordings and minutes, that reserving has taken place. This process can be alarming to trustees so should only be used if they are fully aware and in agreement.
Though the ATO has been inconsistent with its approach, it is not wise to mix contributions where some are to be allocated in the year of contribution and some, the year after. This is particularly relevant where an in-specie contribution is concerned.
Remember that the member’s available contribution cap for the following year will be reduced by the amount used and, also, that the allocation is sensitive to the caps that apply in the year of allocation. This means that a deferred non-concessional contribution would be excessive when allocated in July if the member’s total super balance at 30 June 2025 was $2M. Conversely a deferred concessional contribution made this June could be for the cap amount that will apply next financial year, $30,000.
The Div 296 saga continues. We have updated our embeddable FAQ to reflect the treatment of legacy pension reserves. We’ve also added a few examples of the way that contributions and withdrawals affect the taxable percentage, even though they are removed from the adjusted total super balance. These updates will have automatically populated any embedded versions.
