Reserving strategies used to be a hot topic but it appears to have dropped away lately. We thought we would remind you about the benefits this strategy can have for you as June is the month in which to take action.
A reserve is simply an amount of money or assets inside an SMSF that does not yet form part of a member’s account. A common type of reserve is a contribution reserve and they can be used at any time if the deed allows it. Accessing the reserving strategy is now also even easier with the legislation changes around claiming a deduction for personal contributions. Read our blog here for more information: Making Personal Contributions to Super
It is very important however to keep in mind the timing of each step as getting it wrong may result in exceeding your contributions cap. Review our blog to confirm the contribution caps relevant to you: Changes to Contribution Caps
A contribution made into a SMSF must be allocated to a member account 28 days after the end of the month in which the contribution was made.
So what does that all mean and where is the benefit?
Well, firstly the deduction for the contribution is claimed in the year in which it was made. But the good thing here is it doesn’t count towards the cap until it has been allocated to a member. That’s like having your cake and eating it too! Let’s take a closer look:
Stephen plans to retire on his 64th birthday in August. As a result he expects his income next year to be substantially lower than this financial year. His employer has already contributed $14,250 to his super fund and won’t be making further contributions before 30 June. After receiving advice from his trusted advisor Stephen makes a top up contribution of $10,750. He has now contributed $25,000 in the 2019 year. On the 20th June Stephen makes an additional $20,000 contribution with the intention of claiming a deduction in his personal tax return. His super fund holds this $20,000 in a contribution reserve and allocates it to his member account on the 28th July 2019.
So what are the numbers? See the table below for the tax savings resulting from this strategy:
|Without strategy||With strategy|
|Taxable income||$ 150,000.00||$ 150,000.00|
|Additional contributions to super||$ –||$ (10,750.00)|
|Contributions reserve||$ –||$ (20,000.00)|
|Tax on contributions (15%)||$ –||$ 4,612.50|
|Tax payable on income||$ 46,132.00||$ 34,004.50|
|Net tax saving||$ 7,515.00|
Now in 2020 Stephen can only make a further $5,000 of concessional contributions to super but he is OK with this as he will only be working for 2 months and has no other income.
Although Stephen has received a great tax benefit there are other reasons why this can be beneficial:
Puts cash sooner rather than later into a potentially more tax effective environment
Can be used for both concessional and non-concessional contributions
Does not count towards that year’s cap
Allows for a larger deduction in the year in which it was made (for concessional contributions)
Gives us access to a future increase in a contribution cap a year early
Who may benefit most from considering this strategy?
Those that expect their income to reduce next year
Those with a very large taxable income this year (for example a large capital gain)
Those with excessive cash outside of super that are looking to place it in a more tax effective environment
Anyone with a SMSF that wants to review their taxable position
Anyone approaching age 65 or 75 and still working
Business owners who are wrapping up next year
Those considering contribution splitting with their spouse
And as an added bonus this strategy can be used in conjunction with the catch-up contribution rules. Read our blog for more information on Catch-up of Concessional Contributions
But beware: As the contribution counts towards the cap the year in which it is allocated you must be mindful not to exceed next year’s cap. Ensure you seek professional advice prior to utilising this strategy or contact us here.
This information has been prepared without taking into account your objectives, financial situation or needs. Because of this, you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation or needs.