The ATO has released ATO ID 2012/16 which addresses the timing issue of when a concessional contribution is made on behalf of a member in one financial year but is allocated in the following financial year for the purposes of the contribution caps.
Until the release of this ATOID, the industry has been relying on minutes from the ATO NTLG Superannuation Technical Sub-Group dating back to June 2009 regarding the Commissioner’s interpretation of calculating a member’s concessional contributions under section 292-25 of the Income Tax Assessment Act 1997 (ITAA 1997). This strategy to effectively ‘park’ concessional and/or non-concessional contributions made in June has become popular to:
- manage potential excess contributions problems; or
- use as a strategy to transfer assets into a fund where the value may be greater than the cap but can be amortised over two financial years (e.g. business real property transfer)
ATO ID 2012/16 confirms that an amount made in June is not counted as a concessional contribution in the financial year it is made, but the year it is allocated. Importantly the deduction for the taxpayer is available in the year the contribution is made. In addition, the concessional contribution is subject to contributions tax in the year the payment is made. The allocation of the contribution for member reporting purposes is reported in the following financial year.
Can a member ‘double dip’ on the concesssional contribution limit?
Yes they can. The taxpayer (assume under 50) could have $25,000 concessional contributions made during the year, then make an additional $25,000 in June, enabling a $50k tax deduction. $25k is allocated to the member in the current financial year, with the $25k in June taxed within the fund, but the allocation not occurring until the following financial year (before 28 July). For those over 50, the timing of notices can be very important in particular if members are commencing a pension. Furthermore, you need to be conscious amounts to be held over for the 2012/13 year with the transitional period of the contribution caps ceasing. You may also need to determine whether the member’s account balance is under $500,000 to see whether an income to be allocation in the following year can be $25k or $50k.
Does it need to be a Contribution’s reserve?
No, interestingly in both the ATOID and NTLG minutes the ATO make reference to the amount being temporarily held within a ‘holding account’ or suspense account. There is no requirement for a reserve to be created to hold the contribution. It would be fair to say that the ATO aren’t too fond of the word “reserve’ and their use within the SMSF environment. You may see many deeds referencing the use of a reserve to hold the contribution. Therefore, whilst not preferred by the ATO, you still need to remember that the fund must comply with the requirements of its governing rules (trust deed).
With the ‘once-off’ refund of Excess contribution for concessional contributions available for the current financial year, we now have a couple of mechanisms to assist in dealing with potential excess contribution problems. There are also opportunities to use this strategy to reduce the impact of large capital gains from the disposal of assets through having two bites of a contribution limit in the one financial year.
As they say…. it is all in the timing!!