If you have ever wanted to contribute more money to your Self-Managed Super Fund, the Double Contribution Strategy might be for you. It is a way by which you can effectively double your level of tax-deductible superannuation contributions without exceeding the superannuation contribution caps. So what is the double contribution strategy?
If you or your employer contribute to your super fund and claim a tax deduction this is known as Concessional Contributions. Concessional Contributions also include Super Guarantee payments from your employer, salary sacrifice payment made via your employer or personal tax-deductible contributions made personally.
There are caps on the amount you can contribute to your super. For concessional contributions, the cap is $25,000 per person per financial year.
The ATO can impose tax penalties (known as an Excess Contributions Notice) if you exceed the $25,000 cap.
However, with careful planning and thought, there is a way to contribute up to $50,000 in a financial year and not exceed the cap. ATO Tax Determination 2013/22 confirms that contributions are able to be claimed as deduction by the contributor in the financial year they are received by the super fund, however they are only counted towards the member’s cap in the year they are allocated to the member.
This strategy takes into consideration ATO’s requirement for contributions to your super fund to be allocated to a member within 28 days. It works because from a super fund viewpoint, contributions don’t count towards the cap until they’re allocated. Note that this strategy only works for SMSFs.
Double Contribution Strategy
You can use the Double Contribution strategy to ‘double’ your concessional contributions (currently up to a total of $50,000). This means you or your employer may be able to claim a tax deduction for up to $50,000 and your super fund will not be liable for any excess tax for breaching the cap. For this strategy to work, the contributions must be made at the right time and allocated within the correct time frame.
What It’s Used For
Remember how we said concessional contributions to your super fund can be claimed as a tax deduction? There may be an instance where you want to contribute as much as possible in a particular financial year so you can claim a tax deduction. Using the strategy above, the taxpayer (company or individual) may be able to claim the $50,000 as a tax deduction for the current financial year, yet the super fund only allocates up to $25,000 to your member account each year. For super purposes, you stay under the cap in both financial years, yet the taxpayer gets to double their tax deduction in the year the contributions are made.
Rose sold her investment property in April 2017 and as a result has a capital gain of $200,000 which means she will likely pay income tax in the 2017-18 year.
Rose has not made any contributions to her SMSF this financial year. Therefore, Rose’s concessional contributions cap is $25,000.
Rose meets the conditions to claim a personal deduction.
She uses the double contribution strategy by first making a $25,000 contribution on 30 May 2017. This contribution is immediately allocated to her account within her SMSF. Rose has then maximised her concessional contribution cap for 2017-18.
Rose then makes a second contribution of $25,000 on 28 June 2017. The SMSF Trustee meets and agrees to defer the allocation of the contribution until a later date. On 10 July 2018, the Trustee meets and decide to allocate the contribution received on 28 June 2017 to Rose’s account. From a super fund viewpoint, this means the second concessional contribution is then counted towards Rose’s 2018-19 cap.
Rose lodges her tax return and claims $50,000 as a tax deduction.
This can be a complex strategy to administer and we highly recommend you seek professional advice. You must check your caps, check your eligibility to contribute, check your SMSF Trust Deed permits reserves and a range of other factors.
If you would like more information about using this strategy, please contact us.
What Can Align Financial Do For You? Visit our homepage to learn more about our service. If you would like to speak to us about your financial circumstance, please feel free to give us a call on 02 9913 9995. We are located in Narrabeen on the Northern Beaches of Sydney.
Disclaimer: This post has been prepared for general information purposes only. It is not specific advice to any particular person. You should consult an authorised Align Financial adviser before making financial decisions. Align Financial | Financial Planner Northern Beaches | Servicing North Narrabeen, Narrabeen, Mona Vale, Elanora Heights, Newport, Avalon, Palm Beach | Enquire with us online