The ins and outs of contribution reserving

Self-managed superannuation fund (SMSF) clients wishing to make a large concessional contribution over and above the concessional contribution cap should split it over this financial year and the next.

Speaking to Super Review, Tim Howard, BT advice technical and regulatory, said one of the main questions he had been receiving from advisers this end of financial year was about the best process to do contribution reserving.

This tends to be used where a client is looking to make a larger, concessional contribution over and above the concessional contribution cap, he said.

This financial year’s general concessional cap was $27,500 and next year’s cap was the same.

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“The outcome, when done correctly, is that they'll get a deduction for both contributions this year and the entire contributions won’t count towards this year’s cap.

“What you're effectively doing is getting a greater deduction this year.”

Howard said it was important that two separate transactions were made rather than splitting one lump sum.

“You also need to be careful with your timing. The Australian Taxation Office has a special contribution form that the SMSF trustee lodges to say we're doing this strategy, we're allocating some of these contributions to next year.

“If you don't do that, the client can end up in an excess concessional contribution position and then there's a lot of work required to actually unwind that and get them back to where you want them to be.”

He said this strategy was beneficial for clients with unused contribution cap space and less than $500,000 who were eligible for carry forward concessions.

“The clients who have greater than $500,000 in super can still use this strategy in a way to bring forward or make a high concessional contribution this year, but allocate it to next year's cap.”