Contributions reserves have become more commonplace in recent years as SMSF members have become more aware of the tax benefits of the strategy. Let’s learn how to implement this awesome strategy pre 30 June as time is running out to take advantage of this awesome strategy.
Contribution reserves are “suspense” accounts which can be used to maximise your contributions in a financial year, minimise your tax and increase your super balance for your retirement.
So how does it work? Well it’s quite simple. You can contribute to a reserve within the relevant contribution caps and allocate to a member within 28 days in the following month of the contribution being made. This is an effective pre-30 June strategy where for example, in 2016, if you are under 50 years of age, you can effectively contribute $60,000 and if over 50, contribute up to $70,000 per eligible member. This can be an effective tax minimisation strategy, where you can double your deduction for contributions in the current year, minimise your tax and bump up your superannuation balance. It’s not too late to implement a contribution reserve.
What is Contribution Reserves?
A contribution reserve is simply a “suspense” account as it holds contributions for a short period of time before they can be allocated to the relevant members account within 28 days of the following month of the contribution being made.
Why use a contributions reserve?
Contribution reserves have the obvious benefit of doubling your contribution and claiming a deduction for the equivalent of double the contribution cap in each financial year. Therefore, the member can bring forward the tax deduction from the next financial year to the current financial year – without breaching the concessional contribution caps. This is a “win-win” where you can claim a deduction and minimise your tax and also increase your superannuation balance. This is particularly effective for members with a large capital gain and is looking to minimize their tax bill.
When to use the contributions reserving strategy?
A contribution can be made to the reserve prior to 30 June – usually after 2 June as the contribution must be allocated to the member account within 28 days of the following month. For instance, a contribution made on 15 June, must be allocated to the member account by 28 July.
How does the contribution effect my contribution cap?
Contribution reserves can be used within the specified concessional contribution caps. Firstly, remember the concessional contributions are made from before tax income for which a tax deduction can be claimed. How much you can contribute to an SMSF in a financial year depends on your age; if you are under 50 years of age, you can contribute up to $30,000 per year. If you are over 50 years of age, you can contribute up to $35,000 per year – in accordance with current concessional contribution caps.
A real life example
Jack is 51 years of age and a member of ABC SMSF. Jack’s concessional contribution cap for the 2016 year is $35,000. In the 2016 year, Jack has made a significant capital gain on a sale of property and is looking to minimise his tax.
On 2 September 2015, Jack made a contribution of $35,000 to ABC SMSF. It would seem that if Jack makes any further contributions, he will exceed his contribution cap for the 2016. That’s where the Contribution Reserve strategy takes effect. On the 15 June 2016, Jack makes another personal contribution of $35,000. Jack can allocate the contribution within 28 days of the following month of the contribution (i.e. July 2016).
Accordingly, Jack can claim a deduction in the 2016 year for $70,000, yet not exceed his concessional contribution cap for the 2016 year. The additional $35,000 will be counted to Jack’s contribution cap in 2017. This is particularly effective for Jack to minimise the large capital gain in the 2016 year and may result in a significant tax saving.
Jack has checked his Trust Deed to ensure it allows the use of Reserves and provides ABC SMSF with the notification of his intent to claim the $70,000 as a deduction.
The example of Jack shows that Contribution Reserves are awesome for the right client at the right time. Contribution Reserves can be used to double your deduction in a financial year and increase your Superannuation balance. It is important to remember that consideration is provided to the tax benefit provided in the current year as well as the year following the allocation.
Please note this article is for information purposes only and does not constitute financial or legal advice. Should you have any queries or require more information, please contact the team at Redwood on 1300 790 110.