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  • Writer's pictureAnnette Dunlop

Can a Contribution Reserve Strategy Reduce Your Tax?

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Contribution reserves have become more commonplace in recent years as self managed super fund (SMSF) members have become more aware of the tax benefits of the strategy. Let’s learn how to implement their awesome strategy.

Contribution reserves are “suspense” accounts which can be used to maximise your contributions in a financial year, minimise your tax and increase your super balance for your retirement. It’s not too late to implement a contribution reserve strategy for FY24.

How do Contribution Reserves work?

If a contribution is received by an SMSF in June of a Financial Year, then the SMSF Trustee can make an election to allocate the contributions to a specific member in the next Financial Year subject to meeting certain requirements.

Contributions must be allocated to the member’s account within 28 days of the month following the month in which the contribution was received by the SMSF. For instance, a contribution made on 15 June, must be allocated to the member account by 28 July.

The reserved contributions are reported to the ATO in the SMSF’s tax return in the receiving year and subject to the 15% Contributions tax in the same year.

For personal concessional contributions, the tax deduction must be claimed in the personal tax return in the receiving year. However, the contributions will count towards the concessional contributions cap in the year in which the contributions are allocated to the member’s account.

A real-life Contribution Reserve Strategy Example

Jeannie is 41 years of age and a member of Major Nelson SMSF. Jeannie’s concessional contribution cap for the 2024 financial year is $27,500. In the 2024 financial year, Jeannie has made a significant personal capital gain on a sale of property and is looking to minimise her tax.

On 2 September 2023, Jeannie made a contribution of $27,500 to Major Nelson SMSF. It would seem that if Jeannie makes any further contributions, she will exceed her 2024 concessional contribution cap. That’s where the contribution reserve strategy can be applied.

On the 15 June 2024, Jeannie makes another personal contribution of $30,000. Using the contribution reserve strategy, the fund is able to allocate Jeannie’s contribution to a contribution reserve.

Accordingly, Jeannie can claim a deduction in the 2024 year for $57,500, yet not exceed her concessional contribution cap for the 2024 year. The additional $30,000 will be counted to Jeannie’s contribution cap in 2025. This is particularly effective for Jeannie to minimise the large capital gain in the 2024 year and may result in a significant tax saving.

Jeannie has checked her Trust Deed to ensure it allows the use of Reserves and provides Major Nelson SMSF with the notification of her intent to claim the $57,500 as a deduction.

This example shows that contribution reserves are awesome for the right SMSF member at the right time. Contribution reserves can be used to increase a member’s deduction in a financial year and increase their Superannuation balance. It is important to remember that consideration is provided to the tax benefit provided in the current year as well as the year following the allocation.

How can ABA help you with Contribution Reserves

The team at ABA Advice Beyond Accounting can help you assess your current tax situation and advise whether contribution reserves would be an effective tax strategy for you. In addition, we will ensure that the correct legal accounting and member records are maintained and the ATO’s specific reporting requirements are adhered to.

We work proactively to reduce the stress involved in managing your SMSF. Contact us today to speak with an ABA SMSF client advisor and improve your financial future.

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