Sent: 17-04-2012 13:40:02
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Beating the Concessional Contributions Cap
This article first appeared in The Australian on 10 April 2011.
Would you like to double your concessional super contributions this financial year and also avoid excess contributions tax?
Here I'm going to show you how to do it and how to avoid getting into trouble.
Some important details about this strategy are found in a Tax Office Interpretative Decision (2012/16) which was published in early March. I encourage you to read this document.
It's my guess that because of the way many large super funds are set up and their need to standardise administration and operations, they'll find it too hard to execute this strategy. This means if you want to use it you'll need a Self Managed Super Fund.
Don't get carried away with this strategy - it isn't some magic pudding for everyone. It allows you to claim a tax deduction this year but have some of the contributions counted towards your concessional contribution cap next year. If you need access to your concessional contribution cap next financial year for contributions made in that year then please factor that in to anything you do before 30 June.
The strategy might be suitable for people who know they won't be employed next year or will be unable to make contributions next year.
So how does the strategy work?
Firstly I think most SMSF trust deeds will need to be amended before executing the strategy.
For the sake of simplicity and ease of administration and audit you should make contributions up to you relevant contribution cap during the financial year. You super fund can then allocate these contributions immediately to your member account.
Quite close to the end of the financial year you make additional concessional contributions to your super fund which are above this year's concessional contributions cap but below next year's concessional contribution cap.
It's essential to make sure this contribution can be treated as a contribution this financial year by your super fund. For example if you elect to use electronic funds transfer then make sure you leave enough time for the money to hit your super fund's bank account before 1 July.
The trustee of your super fund needs to elect hold these contributions in an "unallocated contributions account".
Assuming that you can actually claim the contributions as a tax deduction this year then all the contributions made this year can be claimed as a tax deduction,.
Early in the next financial year - in fact within 28 days of the contributions being made - your super fund's trustee should elect to allocate these contributions to your member's account and once allocated these contributions will then be reported to the ATO for concessional contributions tax purposes in the year they're allocated.
The management of the "unallocated contributions account" is important. Before the release of the ATO's Interpretative Decision mentioned above it was assumed that this account had to be a reserve account. Super fund trustees have to run reserve accounts according to the super laws. For example reserves must have their own investment strategy and money can only be distributed from them using specific tax rules.
The ATO's Interpretative Decisions makes no mention of these reserve requirements. Your trust deed however may impose specific requirements and you need to follow them.
On obvious outstanding issue is whether this strategy could be used for non-concessional contributions. On the face of it there doesn't appear to be any reason why the concepts mentioned here wouldn't apply to non-concessional contributions. However I suggest that to be on the safe side you should consider applying for a Private Binding Ruling from the Tax Office so you have official documentation that contributing above the contribution caps is acceptable.
One final word about Interpretative Decisions - they're not bullet proof documents. If you rely on a particular ID that has circumstances that are materially the same as those described in the ID and it's subsequently found to be incorrect, then penalties won't apply on the outstanding tax. However, the ATO might impose penalty interest. It's often necessary to check that there has been no amendment in the law after an ID has been published.
This email is general in nature only and does not constitute or convey specific or professional advice. Legislation changes may occur quickly. Formal advice should be sought before acting in any of the areas discussed. Be aware that the information in these articles may become innaccurate with time. Responsibility is disclaimed for any inaccuracies, errors or omissions. Particular investments are neither invited nor recommended and hence this publication is not "financial product advice" as defined in Section 766B of the above legislation. All expressions of opinion by contributors are published on the basis that they are not to be regarded as expressing the official opinion of any other person or entity unless expressly stated. No responsibility for the accuracy of the opinions or information contained in the contributor's articles is accepted by any other person or entity. Copyright: This publication is copyright. If you wish to reproduce this article you require a license, which can be purchased here, to do so.