Contribute More Without Excess Tax

By Author: Aiden Max
Total Articles: 1
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An unallocated funds strategy could help some SMSFs

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

This is how you 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), Published in early March. I encourage you to read this document. It’s my guess that because of the way many large super funds are set up and their need to standardize administration and operations, they’ll find it too hard to execute this strategy. This means if you want to use it you’ll need a self managed super fund.

Don’t get carried away with this strategy; it isn’t some magic pudding for everyone. It allows you to claim a tax deduction this year but have some of the contributions counted towards your concessional contribution cap next year.

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 June 30.

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

So how does the strategy work? First, 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. Quite close to the end of the financial year you make additional concessional contributions to your super fund that is above this year’s concessional contributions cap but below next year’s concessional contribution cap.

It’s essential to make sure this contribution can be treated as a contribution this financial year by your super fund. For example if you elect to use electronic funds transfer for your contribution then make sure you leave enough time for the money to hit your super fund’s bank account before July1.

The trustee of your super fund needs to elect to hold these contributions in an unallocated contributions account. Assuming 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 within 28 days of the contributions being made your super fund’s trustee should elect to allocate these contributions to your member’s account and, one allocated, these contributions to your member’s account and, once allocated, these contributions will then be reported to the Australian Taxation Office for concessional contributions tax purposes in the year they’re allocated.

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.

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 be distributed from them only using specific tax rules.

The ATO’s interpretative decision makes no mention of these reserve requirements. However, your trust deed may impose specific requirements and you need to follow them.

One 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 the concepts mentioned here wouldn’t apply to non-concessional contributions.

However, to be on the safe side, I suggest applying for a private binding ruling from the tax office so you have official documentation that contributing above the contribution caps is acceptable one final word about interpretative decisions: they’re not bullet proof documents. If you rely on an interpretative decision that deals with circumstances similar to yours but that decision is found to be incorrect then the ATO won’t impose penalties. It would, however, impose penalty interest for the late Payment of any overdue tax.

Finally, just remember that it is often necessary to check that there has been no amendment in the law after an interpretative decision has been published.

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