Maximising PDCs: SMSFs and contribution reserving

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Leading into the end of financial year, now is the time to review superannuation contribution arrangements, including strategies that make the most of personal deductible contributions (PDCs).

Making a PDC into superannuation can deliver tax advantages, and self-managed superannuation fund (SMSF) members have more opportunities to benefit than members of pooled superannuation funds.

For example, one option available to SMSF members is known as the 'double deduction' or 'contribution reserving strategy'. When executed correctly, this strategy takes advantages of timing factors to achieve an even more favourable tax outcome from PDCs.

This strategy has its perks, but there are possible pitfalls to avoid.

This paper outlines some of the essential aspects to help effectively navigate this process.

Double deductions or contribution reserving

A double deduction or contribution reserving strategy allows an SMSF member to contribute to their fund and claim a tax deduction for that contribution in one financial year (year 1), while having the contribution allocated to their account and counted against their contribution cap in the subsequent financial year (year 2). The Australian Taxation Office (ATO) confirmed that this is allowed in Taxation Determination TD 2013/22 (under section 291- 25(3) of the Income Tax Assessment Act 1997.

There are several requirements to achieving this outcome.

1. Time is of the essence when making and allocating contributions

Personal superannuation contributions made into a fund must ordinarily be allocated to a member's account within 28 days after the end of the month in which the contribution was made. For example, a contribution on 10 April would need to be allocated by 28 May.

It is these timing factors that open the double deduction strategy up to SMSFs. If a contribution is made in June, it must be allocated to a member's account before 28 July (unless it is not reasonably practical to allocate within this timeframe). SMSF trustees can decide to reserve the contribution in an unallocated account between the time the contribution is made into the fund, and the time it is allocated to the member's account (within 28 days after the end of the month in which it was made).

To this end, a double deduction strategy typically relies on the contribution being made in June. If a contribution is made before June, it will not ordinarily be possible to allocate the contribution in the following financial year.

While the contribution will typically have to be made in June to allow the strategy to work, SMSF members should not leave it too late in the month. For a contribution to be claimed as a deduction in a particular financial year, the contribution must be 'made' to the fund in the relevant financial year. Members wanting to make last-minute, end-of-year contributions, should be careful that their contribution is not treated as having been 'made' in the new financial year.

Note that the full amount of the contribution must be allocated in one financial year. It is not possible to allocate part of one contribution in one year and the other part in the next financial year. This has been the industry's understanding since the ATO Superannuation Technical Subgroup meeting of 5 June 2012 where it was suggested the regulation governing the allocation of 'a contribution' (Superannuation Industry (Supervision) Regulations 1994, regulation 7.08(2)) requires the whole amount of each contribution to be allocated at one time.