SMSF Contributions Reserving?

@Paul@PFI, @Ross Forrester, @MikeLivingTheDream or others just wondering what your views are on Contributuon reserving? It's been popular over the years to help reduce lumpy CGT liability in a given year. I'm surprised the ATO hasn't given it more attention. Or are they nowadays?

 

Correction - A SMSF can still maintain a contributions reserve IF it is able to according to its rules.

The problems arising from reserves are expanded now that concessional caps of $25K apply and the $1.6m transfer cap. The proportionate risk has expanded as excess contributions are now even easier to trigger.

There can also be benefits of deferring contributions at 30 June 2017 as a far larger class of taxpayer can make tax deductible contributions. There can be benefits of personally claiming deductions v's a company claiming them for some. In which case a contributions reserve would fail. They are generally only for employer source contributions. How can a member make a contribution and then its not fully allocated ??

 

For other non-prossionals here who do not understand how this strategy worked (used to work?) the following might be useful:

Using the Contributions Holding Account for 30 June Tax Planning

Pit bull @Paul@PFI I'm sure will be able to teat it apart. Sic 'em Pit Bull Paul.

And yes of course as Paul corrected my title, check your deed first. However it's highly likely it will allow for the SMSF to maintain a Contributions Reserve. If it doesn't I'd suggest one find a better Deed Provider.

 

And this, it would appear some SMSF professionals are still keen on the strategy?:

Contribution Reserving Strategy - Henderson Maxwell

Reserving Strategy - Double Your Contributions and Save Tax? - Redwood Advisory SMSF

Ivan (@Redwood) used to post here in the past.

 

Contribution reserving can work really well in a few limited circumstances so I like it for that. The truth is that a lot of our clients are either earning money consistently high or consistently low.

For a one off CGT event it can work.

I think it is a strategy that is not often employed which is why the ATO are comfortable with it.

And yes - always read the deed. But if I came across one that did not allow it I would be quite annoyed with the SMSF lawyer who wrote it up - they are quite generic these days mostly.

 

Thanks Ross.

A one off CGT event is what I could be experiencing soon with the sale of my last IP. Although I'm over the maximum $1.6 mil Transfer Balance cap which Paul mentioned these are obviously Concessional Contributions so I didn't think that was relevant (unless it was poorly implemented and ATO rejected it)?

I'm permanently retired receiving Account Based Pensions and like most superannuants since 1 July I can make a Personal deductible Concessional Contribution up to $25k. Ideally in June I'd like to bring forward next year's Concessional Contribution using the Contribution Reserve strategy to help reduce a lumpy CGT bill this F/Y. After this I don't expect any future large CGT situations for quite some time.

If I understand @Paul@PFI correctly (which may well not be the case) his view seems to be contrary to what I've seen from numerous other SMSF professionals?

 

Sorry for the delay. Crook as a dog and my wife made me promise to "get better and stay off the phone!". And I am not a pure SMSF guy - we have a technical dude I chat to on this stuff.

The reserving strategy is a good option for people like yourself. Yes there are mechanical items to go through but it is fine.

I had a chat to our technical guy in the office and he is pretty relaxed - and he is a SMSF Specialist Advisor.

And I found an article by RedWood Advisory going over it as well - Reserving Strategy - Double Your Contributions and Save Tax? - Redwood Advisory SMSF

Just a point about your age and the account based pension. I am not sure of your circumstances but make sure it is an ABP and not a TTR or your will pay tax on the investment income.

 

Does the deed prohibit reserving ? Depends how its drafted. A good deed may be permissive without listing all the things permitted. Leave one out its hard to argue its allowed. Bad deed providers sell "parrott deeds"... These try to repeat what the law says. How to tell if its a parrott ?? Thickness...Often 50+ pages. The law changes and its A4 loo paper. Nobody reads them. eg How many deeds say a member can request a pension of any amount ?? If its contrary to tax law which limits a pension to $1.6m it may be a problem. But then technically a pension can exceed $1.6m too.

A deed that says that the trustee can do anything permitted or contemplated by a tax or super law or ruling may be more effective. And means that all these changes dont require costly amendment or replacement.

Naming something a contributions reserve isnt strictly what a contributions reserve is. A well know SMSF author suggested them as the fix to excess benefits then when RBLs were ended in 2007 it became a SMSF Strategy to call them a pension reserves. Now they are a problem. Some pension reserves may now be in breach and will trigger cap issues if they werent cleared out

 

Thanks Ross. Hope your well now.

I already posted that Redwood article above thanks.

My age and pension should be fine. 57 with an "account based" pension. So simply looking to bring forward next F/Y's Personal Concessional Contribution in June for allocation in the next financial year. Hence able to apply the $50K CC (double contribution) against a potential lumpy capital gain this F/Y.

I've read into the Contributions Reserving strategy quite a bit over the years and seen it often recommended by high profile SMSF professionals. I was just wanting to see if the accounting / SMSF posters here had noticed any extra attention from ATO in recent times. It surprised me that Paul seemed negative about it in my circumstances whereas my research suggested it's an ideal strategy for what I'm intending to do.

I'm actually looking to move the SMSF from our current accountant to a SMSF professional shortly. Still need to decide on someone. But as always I like to do my own research as that has proven to be advantageous in the past. I ideally want someone familiar with this Reserving strategy at least and a good reputation which most SMSF professionals who have a reasonable number of clients should be the case.

 

That's embarrassing...

You should probably PM Paul direct to ask about his concerns. Otherwise you might spend a lot of time looking around.

The ATO did a lot of sabre rattling re SMSF at 30 June. I am not sure if that will translate into action.

Cheers mate.

 

Thanks Paul.

The deed was upgraded just a few weeks ago. It allows for Contributions Reserving and is very flexible. And yes The deed allows the trustee to do anything permitted or contemplated by a tax or super law or ruling.

I understand that Contribution Reserving is not an accurate name for the process where in reality the Contribution is allocated to a suspense Account in June before being allocated to the members Account in the following month that just happens to be July in the next F/Y.

To date the ATO have been fine with this from what I understand.

I do however value your views based on the exceptional level of skill and reputation you have.

 

ATO's view on the matter:

Legal database - View: Determinations (Including GST Bulletins): TD 2013/22

Request to adjust concessional contributions

 

Great thread @austing, I had no idea this was a strategy. I will have to use it if I offload any other Sydney properties in the future....

 

And now that the 10% rule is gone I suspect it may become more popular. Unfortunately popularity can sometimes result in legislation or ATO scrutiny to eliminate the practice. But given that the concessional contribution limit is so small now ($25k) I don't think it will be a problem.

Of course if you use this strategy in a given year you obviously can't claim any deduction in the following year. So it's an opportunity to reduce a larger lumpy CGT bill every second year.

 

This is why it is good to get advice from a financial planner if you are contributing to super - or even if you are not you might better to start - because you don't know what you don't know.

 

A suspense account is NOT a reserve. It is an accounting issue. Take care.
There are tax aspects to consider if you use this strategy. The ATO WILL miscount the contribution in the wrong year and there is a complex process to fix it.

I dont advocate the strategy other than by exception where the person gets legal and financial / tax advice prior to 30 June for all these reasons. Recommending a strategy like this requires a AFSL and tax qualifications

 

Honestly I'm struggling to understand what the fuss is all about. I won't be doing this myself, a SMSF professional will. It's a widely known strategy used by many SMSF professionals as my research both now and historically has shown.

Of course the ATO system is likely to miscount the Contribution in the wrong year but this is well known, anticipated and not difficult to correct. That's why even the ATO has written the following instruction guide to explain what needs to be done:
Request to adjust concessional contributions

I still can't find anything to support your earlier comment again shown below which I don't believe is correct. Can you please direct me any sources of information to prove otherwise?

 

The trustee remains liable whether negligent, misunderstood or mistake.

Members cannot use a reserve where they know what the nature of the amount added to the fund is. A feature of a SMSF is that the member is a trustee and vice versa and they possess greater capacity and knowledge than other funds. A contributions reserve for a member contribution is also likely to be affected by other laws relating to deduction notices, age declarations, working status declarations and other matters which would impose a contribution NOT a reserve amount. Note i did say "generally"".......

I sought a ruling from the ATO on this very issue and they refused verbally acknowledging these issues and more which could be open to misuse. (There is a complex scheme that can be used if a ruling was allowed. I wont discuss it however)

 

Thanks again Paul.

I can understand your concerns if they related to ATO ID 2012/16 but since ATO released "public ruling" TD 2013/22 and a recent standardised form the process is clear and outcome much more predictable.

Here's some articles by DBA lawyers:

Latest on reserving — TD 2013/22 | Leading SMSF Law Firm

Used contributions reserving? New ATO materials impact you! | Leading SMSF Law Firm

I've spoken to a very experienced SMSF professional this morning about this issue. We consulted with him a few weeks ago about all the recent changes and had him update our deed and arrange all necessary paperwork relating to the new legislation. He is very comfortable in using this strategy having been through the process numerous times and considers what I'm wanting to do quite straightforward.

I'll update this thread of the outcome when it occurs.

 

Hi guys, I am a big fan of contributions reserves. You have to be careful with your documentation otherwise you will get stung with excess contributions tax.

Here is an article I wrote for SMSF Adviser on the topic Exploring contribution strategies for the self-employed

Note - risk of self promotion so mods can edit. Its linked to smsf adviser not my own website.

Cheers Guys