A Contribution Reserving Strategy is unique to self-managed superannuation funds (SMSF).
Firstly, a reserve can assist with doubling your superannuation deductions for eligible members without exceeding your concessional contribution cap.
This is an effective but complex strategy. Therefore, it is imperative that you discuss this with your SMSF adviser.
TWO IMPORTANT FACTORS
SMSF deed must provide for Reserves
Timing. The right timing of your contributions into your SMSF is vital to ensure you do not exceed your concessional contribution cap.
Reserving strategies allow you to make a concessional contribution in one income year but have it recognised in your member account the following year. The contributions are effectively “parked” in the reserve for up to 28 days before it is allocated to your member account.
Ted is a 51-year-old sole trader. Ted’s 2017 taxable income was $205,000 after deductible super contributions of $25,000. His tax payable is $70,082.
With planning, Ted decides to contribute a further $25,000 to his super before 30 June 2017. This reduces his taxable income to $180,000 with a tax payable of $57,832.
As a result, Ted is able to claim another $25,000 in super deductions. Ultimately, saving $12,250 in tax.
Ted’s tax liability
Taxable income $205,000
Tax on $205,000 (plus Medicare levy and Budget repair levy) $70,082
Ted’s tax liability with the additional contribution
Assessable income $205,000
Less: Deduction for additional contribution made on 15 June 2017 ($25,000)
Taxable income $180,000
Tax on $180,000 (plus Medicare levy) $57,832
After-tax income tax saving (i.e. $70,082 – $57,832) $12,250
This strategy is most beneficial when you have an abnormally high level of taxable income for an income year. An analysis of your income profiles across multiple years is critical.
If you foresee a spike in your annual income from events such as a large capital receipt from the sale of investment(s) or employee share schemes, this strategy could be very tax-effective for you.
Keeping in mind, planning is key to the success of this strategy, please speak to your adviser to further assess the appropriateness of this strategy applied to your personal circumstance.
Contact us to find out more.
This advice is general and does not take into account your objectives, financial situation or needs. You should consider whether the advice is suitable for you and your personal circumstances.