SMSF Technical Education & Strategies

Use of a contributions reserve around 30 June

Many SMSF trustees make large contributions to their fund near the end of the financial year. If this applies to you, then the first thing to do is work out what transactions have been “counted” towards your contribution caps prior to making more contributions.

So what do you do if you want to make a contribution (or an employer wants to make a contribution for you) prior to 30 June, but your already at your contribution cap limits?

One way is via a contributions reserve (or a suspense account), whereby a contribution can be made to the reserve prior to 30 June (and claimed as a tax deduction in that year if it is a concessional contribution) but the amount is not credited to your member account until (up to) the 28th July, which is when the amount will be counted as a contribution and counted against the later financial year's contribution caps.

Lets have a look at how it works via an example:

John is 49 years old and self employed, and due to the sale of a property asset, he is wanting to make a $40,000 concessional contribution to his SMSF and claim it as a tax deduction this financial year. This is due to the fact that he will have a lower income next year and hence the deduction will be more valuable to him by claiming it this financial year.

The problem is this - he has already used up his $25,000 concessional contribution cap limit this year. So what does he do ?

1. He makes the contribution to his SMSF this financial year in June, and claims the deduction for this year. The amount will count as an assessable contribution this year and will count as taxable income of the super fund this year.

2. John (as the member) provides the fund / trustee with notification of his intent to claim the amount as a tax deduction.

3. The fund does not allocate this money to his member account, but rather allocates this money to a 'contribution reserve' or a 'suspense account' in the SMSF, thereby deferring until the next month (July , and hence new financial year) the contribution being counted against his concessional contributions cap.

4. In the following month of July (but prior to the 28th of the month), the money is then allocated to John's account and it counts as a concessional contribution in that new financial year where he again has a full $25,000 cap to play with. After this $40,000 amount is allocated, he will only have $10,000 of the cap left for concessional contributions that financial year. Note that the contribution will not be counted as assessable income of the fund for this new financial year as it has already been counted in the previous year.

Note that you should generally check that your trust deed allows the use of reserves, and in particular, does not prohibit their use, and that you have a reserve management policy in place if using reserves.

One other point to note is that there may be some practical difficulties with regard to having the same contribution assessable in one year and concessional in the next as most software/accounting systems may have difficulties with this. Check with your fund administrator.