With only a month to go until the end of the financial year, and the beginning of the $25,000 concessional limit for all superannuation members, you need to be very careful if you’re used to using contribution reserves.
Contribution reserves are only useful during the month of June. If your business has done particularly well, or you could use a larger tax deduction than is available to you under the current contribution caps, you have the option of contributing more (above the cap amount) in June. This amount is then placed within a contribution reserve (not allocated to a particular member) until after the end of the financial year. It is then allocated to the member within the first 28 days of next financial year.
Under this strategy, the contributor will still get a tax deduction in the current year, the SMSF will still pay contributions tax in the current year, but the amount will not count against the member’s contribution cap until the 2012-2013 year.
Herein lies the trap if you are over 50 years of age. Make sure in your planning that you allow for the drastic reduction in concessional contribution cap that comes into force for you next year. Don’t forget that next year you may still have SGC payments that you can’t avoid. Just as importantly, don’t contribute an additional $50,000 in June (or any amount above $25,000) because it will still be allocated to you in July, leaving you with an immediate excess contributions problem.
Contribution reserving is, and will continue to be, a useful tool in the SMSF member’s planning. However in times of change, particularly significant change where mistakes invoke punitive taxation measures, more care than normal is required. Of course, don’t forget to check your trust deed to ensure you can reserve contributions before using the strategy.