Key points

• This strategy is mainly suitable for the self-employed, that is, persons who can make contributions to super and claim a personal tax deduction.
• It allows you to claim a tax deduction this year but have some of the contributions counted towards your concessional contribution cap next year.
• The ATO recently released a pro-forma document and information around this strategy here.

This is an update of information first published in the Switzer Super Report in May 2012 and takes into account recent developments. At the outset, it is important to state that this strategy is mainly suitable to the self-employed – that is, persons who can make contributions to super and claim a personal tax deduction.

The current concessional caps – $35,000 this financial year if you were aged at least 49 on 30 June 2014 or $30,000 for everyone else – severely restrict our ability to grow our retirement income tax effectively.

Thankfully there’s a short-term solution to the problem that enables you to double your concessional contribution cap in a specific financial year.

The strategy allows you to claim a tax deduction this year but have some of the contributions counted towards your concessional contribution cap next year. So this idea isn’t a huge additional concession but it might help if you already know that next year you won’t be employed or will be unable to make concessional contributions.

This strategy won’t work for everyone and you must think and plan carefully before using it. For example, if you need access to your concessional contribution cap next financial year for contributions made in that year then please factor that in to anything you do before 30 June in relation to this strategy. Also this strategy won’t work if you don’t have access to sufficient cash flow to make higher super contributions this financial year.

How does the strategy work?

Firstly I think most SMSF trust deeds will need to be amended before executing the strategy.

For the sake of simplicity and ease of administration and audit I think you should make contributions up to your relevant contribution cap during the financial year. Your super fund can then allocate these contributions immediately to your member account.

Near the end of the financial year you make additional concessional contributions to your super fund that are above this year’s concessional contributions cap but below next year’s concessional contributions cap.

You must make sure this contribution can be treated as a contribution this financial year by your super fund. (Don’t forget that electronic funds transfer can take a few business days so leave enough time for the money to hit your super fund’s bank account by 30 June).

It’s important not to make all these contributions in a single transaction, as if you do then the strategy fails.

Your super fund’s trustee holds next year’s contributions in an “unallocated contributions account” as required under your trust deed.

Assuming that you can actually claim the contributions as a tax deduction this year then all the contributions made this year can be claimed as a tax deduction.

Early in the next financial year – in fact within 28 days of the contributions being made – your super fund’s trustee elects to allocate these contributions to your member’s account and once allocated these contributions will be reported to the ATO for concessional contributions tax purposes in the year they’re allocated.

The management of the “unallocated contributions account” is important. Before the release of an ATO’s Interpretative Decision and Tax Determination, it was assumed that this account had to be a reserve account. Super fund trustees have to run reserve accounts according to the super laws. For example, reserves must have their own investment strategy and money can only be distributed from them using specific tax rules.

One of the purposes of the trust deed amendments mentioned above is to remove the need to use a reserve account when you use this strategy.

The ATO says you don’t need to use a reserve account, however your trust deed may impose specific requirements and you need to follow these rules unless you get your deed amended appropriately.

ATO documentation

In a welcome development that will enable you to easily implement this strategy, the ATO recently released a pro-forma document available at this link.

This associated form should be lodged with the ATO and it recommends “you lodge it with us before, or at the same time, as both the fund’s SMSF annual return and your own individual income tax return are lodged. By following this recommendation you may avoid needing to deal with incorrect [tax] assessments.”

The above link also contains some useful background information as well as some good examples as to how the strategy works and fails.

Can this be used for non-concessional contributions?

An obvious outstanding issue is whether this strategy could be used for non-concessional contributions. On the face of it there doesn’t appear to be any reason why the concepts mentioned here wouldn’t apply to non-concessional contributions. To be on the safe side you should consider applying for a Private Binding Ruling from the Tax Office so you have official documentation that contributing above the non-concessional contribution caps is acceptable.

What if you want to make concessional contributions next financial year?

Then you need to factor that into anything you do this financial year.

Seek advice

Finally, if you want to consider this strategy, we strongly recommend that you seek professional taxation advice from an accountant or other appropriately qualified expert.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.