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Indexation of contributions caps provides an increase in tax deduction

Mar 9, 2021, 21:14 PM

By Nicholas Ali
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From 1 July 2021 the concessional and non-concessional contribution caps are set to increase due to indexation.

The release of the Average Weekly Ordinary Times Earnings (AWOTE) figure for the December 2020 quarter mean the concessional contribution cap and the non-concessional contribution caps are set to increase due to indexation from 1 July 2021.

The concessional contribution cap is set to increase from $25,000 p.a. to $27,500 pa and the non-concessional cap in 2021–22 will see the standard cap increased from $100,000 to $110,000.

In addition, the maximum amount a member who was under 65 at the start of the year can contribute under the non-concessional contribution cap bring-forward rule is also set to increase from $300,000 to $330,000 from 1 July 2021.

It is important to note that the proposal announced in the 2019 federal budget to extend access to the bring-forward rule to people under age 67 at the start of the first financial year is not yet law.

So, what does this mean for contribution strategies where members are claiming a tax deduction for concessional contributions?

Use of an unallocated contributions account

An unallocated contributions account (or ‘contributions reserve’ as they are sometimes called) entitles the trustee to "warehouse" contributions for up to 28 days after the end of the month in which the contribution was made. This is enshrined is the Superannuation Industry (Supervision) Regulations 1994 (SIS Reg 7.08(2)).

As explained by the Australian Taxation Office (ATO) in Taxation Ruing TR 2010/1, contributions are eligible for deductibility in the year they are received by a superannuation fund; however, they are not counted towards the member’s contribution cap until they are allocated to the member.

This means if a contribution to an SMSF is received in June 2021 but not allocated to the member until July 2021, it will:

· Be eligible for deductibility in the 2020/21 financial year, but

· Count towards the relevant cap in the 2021/22 financial year.

Let’s have a look at a case study to illustrate the concept.

Case Study - Trevor

Trevor, 66 and retired, wishes to maximise his tax-deductible contribution to super in the 2020/21 financial year to offset his assessable income. He has not used any of his concessional cap for 2021 financial year.

As the concessional cap will increase to $27,500 from 1 July 2021, Trevor can make a $25,000 concessional contribution in 2021, as well as a $27,500 concessional contribution in the month of June 2021, which will remain in an unallocated contributions account for the remainder of 2021 financial year, to then be allocated to him by the 28th of July 2021.

Trevor will be able to utilise the tax deduction of $52,500 ($25,000 + $27,500) in the year of contribution (2021 financial year), but will not have an excess concessional contribution, as the $27,500 will be allocated to him by the trustees in the following year (2022 financial year).

Keeping it all compliant

Where a member of an SMSF wishes to utilise such a strategy, the following are essential to ensure the strategy is successful:

· The fund’s trust deed allows for an unallocated contributions account strategy

· The contribution is allocated within the 28-day requirement

· There must be evidence of the receipt of the contribution

· A Trustee Resolution detailing the trustee’s decision to defer the allocation of the contribution until the next financial year as per Regulation 7.08(2) of the SIS Regulations

· A Section 290-170 Notice of intent to claim or vary a tax deduction for personal super contributions form [NAT 71121] (this is an ATO form required to claim personal deductible contributions).

Trustees should also ensure the ATO is notified of the use of the strategy by completing and lodging a Request to Adjust Concessional Contributions [NAT 74851] by the time the fund’s SMSF Annual Return and the individual’s income tax return are lodged. This is important, otherwise the contribution will be reported in the SMSF Annual Return in the year in which it was received, which may mean the ATO may believe the member has exceeded their concessional contributions for the year.