Making personal deductible contributions into super is a great way to minimise your personal tax liability. The only problem is, you are restricted as to how much you can put in each financial year.
However, there is a way to double your contributions in a single financial year to get a much larger tax deduction. This is known as the “double-contribution strategy” or also referred to as the “contribution reserving strategy”.
The current cap limit on concessional contributions is $27,500 in the 2021/22 financial year. Any employer superannuation guaranteed contributions or salary sacrifice will be included in this cap limit along with any personal deductible contribution that you make yourself and claim as a tax-deduction.
To implement the double-contribution strategy, essentially allowing you contribute up to $55,000 in a single financial year, you need to time your contributions appropriately and have them allocated in the correct financial year.
With regards to timing, the standard cap limit of $27,500 needs to be contributed into your super fund prior to June. The fund will then allocate this money into the member’s account in the current financial year.
The second contribution, which can also be up to $27,500, can then be deposited into the super fund during the month of June but before 1 July (you have a one-month window). The trustee of the super fund then has the option to sit that contribution in a contribution reserve account. It can sit in the reserve account for up to 28 days from the end of the month in which the contribution was deposited.
By reserving the funds before allocating to a member’s balance, the trustee can then push the allocation into the next financial year and have it count towards the next year’s cap limit.
This strategy is possible because the contribution only counts towards a member’s cap limit in the year it is allocated to the members account, but deductible in the year the contribution is made.
This can be a particularly beneficial strategy if you know you are going to have a high assessable income in a given year. For example, maybe you sold an investment property, realised a significant capital gain, and need a way to offset some of that gain. This is where this strategy will come in very handy.
Obviously, there are some things you need to be aware of before implementing this strategy. In particular, you should consider the following:
- The double-contribution strategy is only available to self-managed super funds (SMSF). Public offer funds won’t allow you to implement this strategy.
- Your SMSF trustees must meet and agree to strategy, putting together a trustee resolution. Your SMSF trust deed must also allow for reserves.
- As already discussed, the timing of your contributions and allocation into member accounts is important.
- If you use this strategy, you will limit the amount you can contribute in the next financial year as a concessional contribution. You are essentially bringing forward the use of next year’s cap limit and therefore you need to be aware that this may lead to breaching the concessional contributions cap limit in the following year, particularly if you are getting employer contributions. This may lead to excess contribution penalties.
- You need to meet the eligibility requirements in order to make a personal deductible contribution to super.
This can be a fairly tricky strategy to implement and therefore if you are thinking of implementing a double-contribution strategy then I would suggest you seek advice from your Financial Adviser.