When the Australian Taxation Office (ATO) introduced interpretative decision ATO ID 2012/16 (though it's since been withdrawn, it's still pertinent) and Tax Determination 2013/22, we fielded numerous inquiries from individuals with substantial one-time capital gains or sporadic contract income, eager to employ a contributions holding account strategy affectionately dubbed "Double-up" approach. I avoid the term "reserving strategy" as the ATO has reservations about the term "reserves".
The crux of the strategy, detailed in the ATO's interpretative decision, permits taxpayers to effectively 'double-up' on claiming a tax deduction for superannuation contributions. This involves crediting June contributions no later than 28 July in the following financial year, as stipulated in SIS Reg. 7.08(2).
However, it's worth noting that the ATO's systems aren't equipped to handle this strategy, requiring a workaround as an integral part of its implementation.
Here's a breakdown of the steps involved:
Review your Deed to ensure there are no clauses impeding the operation of a contributions holding account.
Familiarize yourself with Tax Determination 2013/22 to grasp the intricacies of effectively executing this strategy across personal and SMSF tax entities.
Report the entirety of contributions within your SMSF Annual Return, ensuring the accountant/administrator pays the requisite contributions tax on the entire sum.
For self-employed individuals (or those substantially self-employed), ensure the Notice of intent to claim or vary a deduction for personal super contributions (NAT 71121) is accurate for the current year and submit the form as per s290-170 of the ITAA 1997.
Given that contribution tax was paid in the initial year, gross up the amount to be allocated in the subsequent financial year.
Complete a Request to adjust concessional contributions (NAT 74851) concurrently with your SMSF and Personal tax return, adhering to the instructions provided to accurately account for the contributions reported on the form.
Document the operation and movement of funds in this strategy meticulously to maintain comprehensive and accurate records.
Here's an illustrative example:
Jamie, a 59-year-old self-employed mechanic, recently sold a property in Sydney, resulting in a substantial capital gain. To minimize his tax liability, his SMSF Specialist Advisor (yours truly!) and tax agent advise him to employ the "Double up" contribution strategy. Jamie intends to make $57,500 worth of concessional contributions to his SMSF and claim them as a tax deduction this financial year. Given his projected lower income next year, claiming the deduction this financial year proves more advantageous.
Having already contributed $27,500, Jamie makes an additional $30,000 contribution to his SMSF in June, claiming the deduction for this year. The entire $57,500 counts as an assessable concessional contribution for this year and as taxable income for the super fund.
The initial $27,500 is allocated to Tony's member account before 30 June, while the remaining $30,000 is allocated to a 'contribution holding account' or 'suspense account' in the SMSF, to be credited to his member account in July, thus falling into the new financial year and counting against his concessional contributions cap for that year.
Jamie then completes his Notice of intent to claim or vary a deduction for personal super contributions (NAT 71121) and submits it to the fund trustee(s), ensuring proper accounting and tax treatment.
Documentary evidence, including the fund's trust deed, trustee minutes, and bank statements, may be required to support the taxpayer's election, should the ATO request additional evidence post-lodgement.
It's crucial to note that once the cap is utilized, further contributions cannot be employed to reduce income in the new financial year unless the reserve strategy is continued each June. And for dedicated SMSF enthusiasts, seeking professional advice and meticulous execution is paramount.
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