Would you like to double your concessional super contributions this financial year and also avoid excess contributions tax?

Here I’m going to show you how to do it and how to avoid getting into trouble.

Some important details about this strategy are found in a Tax Office Interpretative Decision (2012/16) which was published in early March. This simply allows you to claim a tax deduction on contributions this year, but have some of the contributions counted towards your concessional contribution cap next year.

Who it won’t work for

The strategy might be suitable for people who know they won’t be employed next year or will be unable to make contributions next year.

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. This strategy also won’t work if you don’t have access to sufficient cash flow to make higher super contributions this financial year.

Who it will work for

It’s too early to say (because we haven’t seen the legislation), but it may be that this strategy might help those earning more than $300,000 avoid some or all the increased 30% tax that will apply to their personal deductible and employer super contributions from 1 July 2012. We’ll keep an eye out and let you know if this will be the case.

How it works

Firstly, I think most SMSF trust deeds will need to be amended before executing the strategy. One of the purposes of the trust deed amendment is to remove the need to use a reserve account when you use this 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 self-managed super fund (SMSF) 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 which are above this year’s concessional contributions cap, but below next year’s concessional contributions cap of $25,000.

You must make sure this contribution can be treated as a contribution this financial year by your super fund. (Don’t forget that an 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).

The trustee of your super fund then holds these contributions in an ‘unallocated contributions account’ as required under your trust deed.

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 Australian Taxation Office (ATO) for concessional contributions tax purposes in the year they’re allocated.

The unallocated contributions account

The management of the ‘unallocated contributions account’ is important. Before the release of the ATO’s Interpretative Decision mentioned above, it was assumed that this account had to be a ‘reserve’ account. SMSF 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.

The ATO’s Interpretative Decisions makes no mention of these reserve requirements. Your trust deed, however, may impose specific requirements and you need to follow them unless you get your deed amended appropriately.

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. However, I suggest that 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 contribution caps is acceptable.

Finally, be careful relying on ATO Interpretative Decisions. If you rely on a particular decision that has circumstances that are materially the same as those described in the interpretative decision and it’s subsequently found to be incorrect, then penalties won’t apply on the outstanding tax. However, the ATO might impose penalty interest. It’s often necessary to check that there has been no amendment in the law after an interpretative decision has been published.

Some issues you’ll need to think about:

• Remember, if you need access to your concessional contribution cap next financial year for contributions made in that year, then please factor that into anything you do before 30 June.

• There’s some confusion about when your super fund must report the second contribution to the Tax Office. Some think it’s this financial year, which means you’ll need to apply to the ATO for a variation so it doesn’t count it as a concessional contribution this financial year. If you report next financial year, then the ATO may deny the deduction because it’s above the reported contributions. Again you’ll need to tell them about this.

• In the year the contribution is allocated to your member account, the Tax Office may think it’s a non-concessional contribution because it doesn’t have a record of concessional contributions this year. Based on another ATO interpretative decision, it would seem that you would need to report it the next year as an ‘assessable reserve allocation’ – which is a type of concessional contribution. Whichever is the best way of reporting this contribution, you may also need to clear this issue up with the ATO.

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

Important information: 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. Anyone should, before acting, consider the appropriateness of the information in regards to their objectives, financial situation and needs and, if necessary, seek professional advice.

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