How to boost your SMSF balance with contributions reserving

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What is contributions reserving?
How does it work?
Dotting your i’s and crossing your t’s
Tips and traps
The bottom line

From 1 July 2021, the annual cap for concessional (tax-deductible) contributions increased to $27,500, up from $25,000, while the cap for non-concessional contributions increased to $110,000 from $100,000.

This provides opportunities for all super fund members to boost their account balance and receive a tax deduction for their concessional contributions to sweeten the deal. But SMSFs have even more room to add to their retirement savings. Using something called contributions reserving, and combining this with the higher contribution caps, SMSF members can potentially get $55,000 in tax-deductible contributions into their super this year. That’s double the normal annual cap amount.

What is contributions reserving?

Under the superannuation regulations, when a fund member makes a concessional contribution to their SMSF it must be allocated to a member within 28 days after the end of the month

This raises timing issues and opportunities when the contribution is received by the SMSF in June of a financial year but not allocated to a specific member until July the following financial year.

Personal contributions made in June are reported to the ATO in the SMSF’s tax return in the year they are received, making them tax deductible to the member that year regardless of when they are allocated. However, those same contributions will only count towards the member’s concessional contributions cap in the year they are allocated, which may be in July the following financial year.

How does it work?

In its simplest form, contributions reserving allows you to bring forward one year’s concessional contributions cap, effectively doubling your concessional contributions cap in a single year.

The contributions made into your SMSF bank account in June are placed into a contributions reserve account, before being allocated to your member account by 28 July of the following financial year at the latest. You can then claim two years’ concessional contributions as a tax deduction in the year they are received.

Here’s how it works.

Case study

Elias is aged 60 and makes total employer and salary sacrifice contributions to his SMSF of $27,500 in the 2021-22 financial year, using up his concessional contributions cap for the year. Then in June 2022 he makes a further personal concessional contribution of $27,500 and elects to use contributions reserving.

This means Elias must report total concessional contributions of $55,000 in his SMSF’s 2021-22 tax return and pay 15% contributions tax, or $8,250, in the same year (15% x $55,000 = $8,250). He then claims a tax deduction for the $55,000 in his 2021-22 personal tax return. He must also complete a Request to adjust concessional contributions form and send it to the ATO.

The $27,500 in employer and salary sacrifice contributions will count towards Elias’ concessional contributions cap for the 2021-22 financial year as normal. However, the $27,500 contribution he makes in June 2022 will count towards his concessional contributions cap for the 2022-23 financial year. As this means he will have used up his 2022-23 concessional contributions cap, he won’t be able to make any further concessional contributions that year.

There is also potential for high income earners hovering around the $250,000 Division 293 tax threshold to use a contributions reserving strategy, especially where they have earnings that fluctuate significantly from year to year. Under the Division 293 rules, if your income and concessional contributions total more than $250,000 you may be liable for an additional 15% tax on your super contributions.

Take the example of Gino.

Case study

Gino owns an orchard and earns $275,000 in 2021-22 but expects a poor harvest and a big dip in his income in 2022-23 to below $220,000. Gino makes a $27,500 personal contribution to his SMSF in the 2021-22 financial year, using up his concessional contributions cap for the year. Then in June he makes a further $27,500 personal concessional contribution and allocates this second contribution to his account in July 2022.

This means Gino’s taxable income in 2021-22 is $220,000 ($275,000 – $27,500 – $27,500). As only the first concessional contribution is added to Gino’s taxable income for Division 293 purposes, he does not exceed the $250,000 threshold for 2021-22 ($220,000 + $27,500 = $247,500) and does not incur any additional 15% tax liability on his concessional contributions.

If his income falls as expected the following year, he won’t exceed the $250,000 threshold or incur additional Division 293 tax in 2022-23 either.

Note: While Gino’s strategy falls within the rules and is mentioned in articles by SMSF specialists, it is not explicitly mentioned in the ATO guidance on contributions reserving. Therefore, it would be prudent to seek professional advice or an ATO ruling before going ahead.

Dotting your i’s and crossing your t’s

As for everything to do with SMSFs, as a member and trustee you need to keep records to back up your contributions reserving activity.

For starters, your fund’s trust deed must include provisions to enable contributions reserving.

The ATO provides these examples of records you need to keep:

A resolution by trustees in year 1 in accordance with the SMSFs governing rules not to allocate the contribution when it is made but to accept in into a reserve
Evidence of a receipt of the contribution by the SMSF
A resolution by trustees to allocate the contribution from the reserve in year 2
Documentation in relation to any deductible personal contributions (notices and acknowledgements).

Tips and traps

While contributions reserving can be a useful way to boost your super in a tax-effective manner, there are some issues to watch out for.

Non-concessional contributions. The ATO provides clear instructions and a Request to adjust concessional contributions form for SMSFs wanting to use contributions reserving to bring forward concessional contributions, it is silent on non-concessional contributions.

That doesn’t mean you can’t use contributions reserving to bring forward next year’s non-concessional contributions cap of up to $110,000. In recent years, this strategy may have been attractive for members aged over 67 who were planning to retire and wished to bring forward the following year’s non-concessional contributions cap to a year in which they still met the work test.

However, in the May 2021 Budget the government announced it planned to repeal the current work test for making super contributions for people aged 67 to 74. Although not yet law, it the change is expected to apply from 1 July 2022. If so, the appeal of a non-concessional reserving strategy may diminish.

Graeme Colley, executive manager of technical support and training at SuperConcepts says the record-keeping for non-concessional contributions subject to a reserving strategy is the same as for concessional contributions, but there is an additional administrative hoop to go through.

“When you complete your tax return you will need to notify the ATO that your non-concessional contributions are subject to a reserving strategy,” says Colley.

Total super balance. Keep an eye on your total super balance (TSB) as the size of your TSB on June 30 could impact your ability to take advantage of a number of super measures the following financial year.

For instance, your TSB is used to determine eligibility for the carry forward of unused concessional contributions cap amounts, the non-concessional contributions cap and bring forward of future non-concessional contributions cap amounts, and whether your SMSF can use the segregated method to calculate exempt current pension income.

The bottom line

A contributions reserving strategy can help SMSF trustees boost their retirement savings and bring forward a tax deduction for the following year’s concessional contributions. The benefits of a reserving strategy are less clear cut for non-concessional contributions. As the rules around record-keeping and reporting are complex, we urge trustees to seek independent professional advice.