Because concessional contributions to superannuation allow you to claim a tax deduction against personal income, they are a valuable entitlement for anyone wanting to minimise their taxable income. While the annual opportunity to make concessional contributions is restricted to just $25,000, there is an advanced strategy available where you can double this to $50,000 using a bring-forward strategy.
If you satisfy the work test and are under 70, you are able to make two tax-deductible concessional contributions in the same tax year to superannuation, including your SMSF, as long as the first is paid in by March of the tax year.
A person who is eligible to make tax-concessional contributions to super – without a work test if they are under 65 or between 65 to 75 if they satisfy the “40 hours in 30 days” employment test – can make two sets of up to $25,000 tax-deductible contributions in one financial year. This obviously is a very effective way to manage a tax liability or event for funds held outside superannuation.
The timing of the first contribution is not relevant, but that of the second is most important. It must happen in June to allow it to be allocated before July 28 in the following financial year.
Super legislation requires member contributions to be applied to a member’s account within 28 days after the end of the month in which the contribution is made.
The employment or work test requires someone to be gainfully employed – meaning they are paid for the work they do – for at least 40 hours in a period of 30 consecutive days in each financial year in which the contributions are made.
It needs to be executed in the right order
A fund can only split two concessional contributions between two financial years. If it is made in any other month it can’t be allocated to the next financial year.
Where the second contribution is made to an SMSF in June, it is higher marginal tax rate applies relative to a normal year.
For instance, say a couple owns a $2 million investment property purchased in joint names in 1990 with a cost base of $1.6 million. After applying the 50 per cent CGT discount, each member faces a taxable capital gain of $100,000.
If they are both eligible to make $50,000 of personal concessional contributions to super through the reserving strategy, although the super fund will pay 15 per cent tax on these, the strategy can help manage this.
What is very important about this strategy is that each contribution should fall within the concessional contribution cap of $25,000 per annum, which also includes any employment-related contributions that have been received.
Care needs to be taken with any employment-related contributions which might be received in the subsequent financial year to ensure the $25,000 concessional cap is not breached.
Both contributions can be claimed as tax deductions in the year in which they are made. As far as the second contribution that is carried over to the next financial year, it is counted against the concessional cap in that year.
Don’t forget the paperwork
Appropriate Australian Taxation Office forms need to be completed to acknowledge the carryover of the contribution. The relevant form in this instance is a Request to adjust concessional contributions (NAT 74851-07.2015).
When reviewing the strategy as part of the annual audit, an SMSF auditor will firstly make sure any second contribution was made in June and then allocated to a member by the following July 28.
That an SMSF can claim both contributions in the year they are made is confirmed in an ATO interpretive decision (ATO ID 2012/16) and a subsequent tax determination (TD 2013/22).
According to a guide that comes with the necessary ATO Request to adjust concessional contributions form, an SMSF must record and keep documents to support the strategy.
This includes a resolution by trustees that states they have decided not to allocate the contribution when it is made but to accept it into a reserve in accordance with their fund’s governing rules.
This must be followed up with a resolution by trustees to allocate the contribution from the reserve in the next year.
In its guide to the strategy, the ATO says the form may be completed any time after the contributions have been made and allocated. It recommends it be lodged either before, or at the same time as, both the fund’s SMSF annual return and a member’s own individual income tax return.
By following this recommendation a member may avoid needing to deal with incorrect assessments.
This makes it another strategy where the more information you provide, the less chance there is of having the strategy queried by the ATO.
Vanessa Cullen is an associate adviser at Wattle Partners