A deferred contribution allocation strategy, often referred to as contribution reserving, enables a member to bring forward the timing of a contribution into the current financial year but still allocate the value of the contribution to the next financial year for the purposes of contribution caps.

Stay with me on this and I’ll outline how this strategy works from a tax and caps perspective and the required documentation an SMSF needs to prepare if members use these rules.

(By the way, don’t confuse this strategy with the ‘carry forward’ concessional contribution rules.  Those rules allow for an individual to carry forward unused amounts from previous years, subject to a member’s total superannuation.  This strategy allows an individual to bring forward a contribution to claim a tax deduction but have the contribution counted in the following year, but it’s a limited window and doesn’t apply to everyone.)

Does the ATO give this the thumbs up?

The ATO has highlighted that if undertaken correctly and for legitimate purposes, the use of these holding accounts are acceptable.  However, the ATO has raised concerns about SMSFs that may implement this strategy to circumvent restrictions imposed by both super and tax laws.  So expect to be scrutinised if contribution reserving is used to alter the total superannuation balance to allow contributions to be made that would not otherwise be allowable.

What are the legal requirements?

An SMSF’s trust deed must allow for contribution reserves/unallocated contributions, or at the very least for contributions to be allocated in accordance with the law. It’s therefore important to recognise what the law requires. It’s a requirement under superannuation law that an SMSF trustee must allocate contributions to a member’s account within 28 days after the end of the month in which it is received.

As a result, a contribution can be made in June of a financial year and allocated to a member in the next financial year so long as the allocation is made within 28 days following the end of the month in which the contribution is received i.e. a June contribution must be allocated by 28 July.

Importantly for members, contributions subject to a deferred allocation are recognised when they are made for tax deductibility purposes and, if they are, concessional contributions are treated as taxable income to the SMSF in the year of receipt (year 1).  However, the amount then count towards the appropriate contribution cap in the following year (year 2).

Here’s an example of how this strategy works

Consider this scenario where an individual has fully used their concessional contribution cap in year 1 but has a significant tax event occur that would benefit from the ability to claim a higher tax deduction without incurring an excess contribution tax assessment.

• The member makes a personal contribution at any time during the year, prior to 30 June 2021, of $25,000 and intends to claim a tax deduction for it.
• The same member then makes a further contribution of an amount up to $27,500 between 1 June 2021 and 30 June 2021, they intend to claim a tax deduction for this amount too. (NOTE: $27,500 is the indexed concessional contribution cap for 2021/22).
• The trustee must resolve to accept the contribution into a reserve to be allocated within 28 days following the end of the month which it is received.
• Within 28 days following the end of the month, the contribution is received (in year 2), the trustee needs to resolve to allocate the amount to the member’s account.
• The overall effect of this is that the member obtains a tax deduction of up to $52,500 and the SMSF pays tax at 15% on the assessable portion contribution in the year of receipt ($52,500 if the full amount is contributed and deduction claimed).
• The member can have $25,000 counted towards their concessional contribution cap in year 1 and up to $27,500 in year 2.
• As stated above, with the deferred amount, the SMSF needs to resolve to allocate it to an unallocated contribution ‘reserve’ account (in year 1).
• In practice, all contributions are allocated to the member account at the time of receipt to ensure the fund’s income is reported correctly and to allow matching for deductibility purposes.
• The member must then apply for the contribution to be reallocated by the ATO.

Warning! Any contribution made on or before 31 May must be allocated in the same financial year it is received.

What forms and paperwork needs to be in place for this strategy?

This strategy can be used for both concessional and non-concessional contributions, however, the ATO only has a formal process for concessional contributions, and this is where the strategy has a greater benefit.

In order to correctly notify the ATO that you are using this strategy and have made concessional contributions in one year and they should not be allocated to your contribution cap until the next financial year, you must lodge a specific form ‘NAT 74851 Request to adjust concessional contributions’. The form should be lodged with the ATO either before or at the same time as the SMSF annual return and personal income tax returns are lodged. The objective of lodging this form is to avoid an excess concessional contribution assessment being raised by the ATO.

As stated above in the example, the following documentation should ideally be in place for this strategy:

1. Receipt of the contribution.
2. Trustee resolution showing the fund has considered the governing rules and allocated the contribution to a reserve rather than a member account in year 1.
3. Trustee resolution showing the allocation from the reserve to a member account in year 2.
4. Personal deductible contribution notice and acknowledgment where required.
5. NAT 74851 Request to adjust concessional contributions.

This strategy is most appropriately undertaken where an individual has the capacity to make a larger concessional contribution as an aid to avail themselves of a higher personal tax deduction.  Appropriate tax advice should be obtained to determine the ability and necessity to use it.

Strategy risk

The most significant risk associated with this strategy is that once a contribution has been allocated to the following year, the member needs to be aware that any further contributions made that year (year 2) may be subject to excess contributions.

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 regard to your circumstances.