As we approach 30 June, some individuals are keen to make large one-off contributions to superannuation. However, individuals are also wary of the contributions caps and the penalties associated with exceeding those caps.
When claiming a deduction for a superannuation contribution, the contributions caps generally do not impact on whether a deduction is available to the contributor. Provided the contribution is made to a complying superannuation fund by 30 June, the contributor (such as an employer) can generally claim a tax deduction in that financial year.
Despite the possibility that a deduction could be claimed for a large contribution to an employee’s superannuation fund, contributions caps exist which limit the amount of contributions which can be concessionally taxed within the superannuation fund. Individuals currently have a concessional contributions cap of $25,000 (regardless of age).
Although the concessional contributions cap is $25,000, it may be possible for individuals to make an additional contribution in June this financial year without breaching their concessional contributions cap. One method to achieve this is by using what is commonly referred to as a ‘contributions reserve’ (although it is probably more appropriately called a holding account or suspense account).
The Superannuation Industry (Supervision) Regulations 1994 (“SIS Regs”) clearly state that the trustee of a superannuation fund must allocate contributions within 28 days after the end of the month in which the contribution is received. It is therefore possible for a contribution made on 1 June 2013 to be ‘held’ by the trustee (in the reserve or holding account) until 28 July 2013. Importantly, whilst the contribution is held by the trustee in this manner, it does not count towards the member’s contributions cap until it is ‘allocated’ by the trustee. Hence a contribution made in the 2013 financial year may not be allocated to the member until the 2014 financial year.
The ATO released an interpretative decision ATO ID 2012/16 Superannuation Excess Contributions Tax: concessional contributions – allocation of contributions confirming the abovementioned view. The ATO also confirmed that a deduction is permitted in the year in which the concessional contribution is made, despite the contribution not being allocated to the member’s superannuation fund account until the following financial year.
By utilising the reserve or holding account strategy, it may allow individuals to make additional contributions to superannuation prior to 30 June, without breaching their contributions cap. Importantly though, this strategy is generally only effective in the context of a contribution to a self-managed superannuation fund (“SMSF”).
Take the following example.
Bob is a member of a SMSF. Bob’s concessional contributions cap for the 2013 financial year is $25,000.
Bob made a personal concessional contribution of $25,000 to the SMSF on 1 February 2013. The SMSF trustee allocated this contribution to Bob’s member account as required by the SIS Regs (i.e. by 28 March 2013).
On 2 June 2013, Bob makes a further personal concessional contribution of $25,000 to the SMSF.
Bob meets the conditions to claim a personal deduction for the full $50,000 superannuation contribution in the financial year ended 30 June 2013.
The SMSF trustee allocates the $25,000 concessional contribution made on 2 June 2013 to Bob’s member account on 27 July 2013.
Accordingly, it is possible for Bob to claim a deduction in the 2013 financial year for $50,000, yet not exceed his concessional contributions cap for the 2013 financial year. The contribution made in June 2013 would instead count toward Bob’s 2014 contributions cap.
If this strategy is used, it is important that you consider the following factors:
- check what contributions have been made during the financial year prior to making an additional contribution before 30 June;
- consider the implications that will arise in the following financial year as a result of ‘bringing forward’ a contribution;
- whilst the trustee’s obligations to allocate contributions is outlined in the SIS Regs, you should still check the SMSF trust deed to ensure the use of ‘reserves’ or holding accounts in this manner is permitted;
- prior to making concessional contributions, ensure the entity meets the conditions to claim a tax deduction (for example, in the case of an individual seeking to claim the tax deduction, aspects such as the ‘10% test’, ensuring the member has enough taxable income, and notification of intent to claim the deduction would all need to be addressed); and
- consider the practicalities of your software correctly recording and reporting contributions which are received in one year yet allocated in the following year.
Should you require any further information regarding superannuation matters, please contact the Tax Services team at William Buck.