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Those who watched Get Smart back in the 70’s and 80’s would know about Agent 86’s classic one liners!  Well, as he said in the classics, “the old – 2 years of Concessional Contributions in the 1 year trick” can be a clever strategy, but one that came with some painful ATO paperwork!  Not anymore….

A contribution reserve is one of the more popular reserving strategies as it allows for a member to make up to double their annual concessional contribution cap in the one year. This can allow the member to save a significant amount of tax personally.

Requirements to Establish a Reserve

• Trust deed must allow for a reserve to be established
• Separate investment strategy required to be created
• Paperwork documenting the establishment of a contribution reserve

Details of a Contribution Reserve

• Can accept any member or employer contribution
• Entire amount contributed needs to be allocated to the reserve
  (i.e. if contributing $30k twice, two separate deposits must be made)
• Until allocated, the contributions must be held in the reserve
• Must be allocated to the member within 28 days of the end of the following month
• Where the contribution is a concessional contribution, the tax deduction must be taken in the year the contribution was made, not when it is allocated
• Contributions tax will be accounted for in the year the contribution was made
• When the allocation to the member account is made, the amount credited will be the net of contributions tax, however, the amount counted against the concessional cap of the member will be the grossed up amount

So here is where the problems would arise…… The ATO would issue an Excess Contribution Notice – Not any more!

TD 2013/22 and ATOID 2012/16 (now withdrawn) have historically been the two main focus points in providing us with guidance surrounding contribution reserves and excess contributions.  However, the ATO have now released new guidance surrounding how to treat contributions when using a contribution reserve strategy.

It is important to know that the SMSF annual return does not have a provision that allows for you to notify the ATO that contributions have been made, but not allocated.  Previously, where a contribution reserve was established, the trustees would then receive an excess concessional contribution notice.  In this case, the trustees would then need to object to this notice and explain that a contribution reserve has been established.

To remove confusion being sent to the ATO when lodging the SMSF annual return, the ATO have now released a form (NAT 74851) that allows the trustees to provide the ATO with the appropriate information so that they can adjust contribution information at their end, resulting in the trustees not receiving an excess concessional contribution notice. Phhheeww…this is great news!

Note – This form applies from 1 July 2014

Process to use with your clients

1. Trust deed reviewed to ensure a reserve is allowed to be established
2. Member makes first concessional contribution (i.e. $30k or $35k)
3. Member makes second contribution in June
4. Tax is accounted for both concessional contribution in the year the contributions were made
5. Net contribution amount allocated to reserve
   (i.e. $35k contribution less 15% tax, $29,750 allocated to reserve)
6. Deduction claimed for both contributions in the year contributions were made
7. Contribution allocated no more than 28 days after contribution was made
   (i.e. contribution to be allocated in July, to ensure no excess contributions)
8. In the SMSF annual return, the amount allocated to the reserve is not reported in Section H, Label X (Reserves). The amount is included under Section H, Label W (Total member closing account balances).
   Although a reserve has been established, the amount is included under the members closing balances to ensure  various totals on the annual return are reconciled
9. Complete NAT 74851. It is recommended the form is submitted to the ATO at the same time the SMSF annual return is lodged.
10. Additionally, ensure the following paperwork is kept on file:
    1. A resolution by trustees in year 1 in accordance with the SMSF’s governing rules not to allocate the contribution when it is made but to accept it into a reserve
    2. Evidence of receipt of the contribution by the SMSF
    3. A resolution by trustees to allocate the contribution from the reserve in the subsequent year
    4. Documentation in relation to any deductible personal contributions (notices and acknowledgements).

Further information on the ATOs recently published information can be found here.

So…this is fantastic news for Accountants, Trustees, and yes…the ATO. 

Everyone wins, so if there is any uncertainty in relation to this please contact our team at SuperAA on 03-5226 3599 or email [email protected].  For other technical and business growth ideas, follow us on….