What is contribution reserving?

What is contribution reserving?

It’s basically a strategy whereby contributions to superannuation in one financial year (Year 1) are reallocated to the following financial year (Year 2). The benefit is that those contributions count in Year 2 rather than Year 1.

However, the ‘reserving’ is temporary. The contribution can only be reserved (or temporarily unallocated) for up to 28 days after the end of the month.

Thus contributions can only really be ‘reallocated’ to Year 2 where they are made in June of Year 1. You can’t reallocate contributions to Year 2 which were made during Year 1 between July and May of Year 1.

Thus contributions can only really be ‘reallocated’ to Year 2 where they are made in June of Year 1.

How are Concessional Contributions treated for tax purposes?

The contribution is included as assessable income in the financial year of Year 1 when the contribution is made (even though for contribution cap purposes it will count for Year 2) – providing for the opportunity to claim a much larger tax deduction in Year 1.

When is the best time to consider using contribution reserving?

For Concessional Contributions: when your income levels are unusually high in a financial year due to perhaps a bonus or a capital gains tax event (such as selling shares or an investment property) and you wish to consider tax minimisation in Year 1.

It may also be worthwhile considering where you are scaling down work commitments in Year 2 and/or considering retiring so as to reduce your tax liability in Year 1 and get more into super over the 2-year period.

For Non Concessional Contributions: it could be considered when attempting to transfer larger amounts into super.

What about Year 2, what contributions can be made?

Naturally in the following year the taxpayer needs to be aware that they may need to adjust their salary levels when salary sacrificing to reflect the contribution reserving amounts (which count in Year 2) so as not to exceed the concessional contribution cap.

Is there much administration to doing this?

A taxpayer needs to advise the ATO by completing paperwork to adjust the contributions that the ATO has on record.

The taxpayer should lodge this straight after completing their personal return and their SMSF Annual return for Year 1.

Which super funds can use contribution reserving?

The strategy is limited to super funds whose governing rules permit which are primarily SMSFs and needs to be checked with the Deed etc. that it is permitted before implementing.

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