Making the most of SMSFs ― the double tax deduction strategy

Introduction

For the 2023/24 income year the cap on ‘concessional contributions’ (typically includes employer contributions and personal contributions for which a tax deduction is claimed) is $27,500.

While there’s technically nothing stopping someone making larger contributions from claiming a tax deduction for them, the problem is that usually this means they go over their cap. The way the tax rules work for people who exceed their cap is that they end up getting taxed on the ‘excess’ anyway – so there’s no point in claiming the deduction in the first place.

Some people have higher concessional contribution caps because they haven’t used up their full cap in previous years and can use it ‘now’. But unfortunately not everyone can use this rule. There are two key requirements to use old unused cap amounts in 2023/24: their total super balance must have been less than $500,000 at 30 June 2023 and the concessional contributions made in 2023/24 must exceed the general contributions cap.

So what about everyone else that is stuck with the $27,500 cap? There’s another strategy that allows any SMSF member to access more than one year’s worth of concessional contribution caps. Doing so is often called the ‘double deduction’ or ‘deferred allocation’ strategy because it involves making up to two years’ worth of contributions in the same year and using next year’s cap in advance. This fact sheet explains how the strategy works and who might find it useful.

A key concept to understand

Contributions are tax deductible in the year they are ‘made’ and in this context, a contribution is generally made when it actually appears in the super fund’s bank account.

For example, Mary is 60 and retired so she’s no longer receiving concessional contributions from an employer. But she is expecting significant taxable income in 2023/24 (she’s selling an investment property) and is on the lookout for tax deductions this year.

If she makes a personal contribution to her super fund in June 2024 and does all the right paperwork, it’s tax deductible in 2023/24. She has to make sure it actually arrives in the fund’s bank account on or before 30 June 2024 – if it’s late and doesn’t show up until 2 July, it’s not tax deductible until 2024/25.

But no matter when the tax deduction is claimed, the contribution is only checked against the member’s concessional contributions cap in the year it’s actually allocated to their super account. If that happens to be in the following financial year, it will be checked against the next year’s cap, not the cap in the year it’s made.

How is it possible to delay allocating a contribution to a member’s account?

Normally, particularly in SMSFs, contributions are allocated to the right member’s account as soon as they land in the fund. But that’s not actually the legal requirement. In an SMSF, the trustee has until the 28^th of the following month to do this.

That long delay is critical. It means it’s possible to have a contribution ‘made’ in June 2024 (and tax deductible in 2023/24) but not allocated until 28 July 2024 (so checked against the 2024/25 cap).

If we return to Mary, she could:

• make personal concessional contributions of up to $27,500 as normal throughout 2023/24 – using up her 2023/24 concessional contributions cap;
• contribute up to an extra $27,500 at any time during June 2024; and
• ensure the trustee deliberately defers allocating this extra $27,500 to her account until 1 July 2024.

As long as she does the relevant paperwork to claim a tax deduction for both of her contributions in 2023/24, she will have a total tax deduction of $55,000 (2 x $27,500) in 2023/24 without breaching her concessional contributions cap. She’s effectively used her 2024/25 cap in advance.

Why can’t this be done in a large fund?

Other funds must allocate contributions within 3 days of their arrival. That makes it impractical to try this strategy in any fund other than an SMSF.

Who could consider this?

Mary was an ideal candidate:

• Her age means she is eligible to make tax deductible personal contributions even though she’s not working (more on this below);
• She’s not receiving any employer contributions and so has her full concessional cap to play with in both 2023/24 and 2024/25; and
• she has a lot of taxable income this year (2023/24) but not necessarily next year (2024/25). If she was going to have a lot of taxable income next year as well this might backfire – because remember she’s going to use next year’s concessional contributions cap in advance.

There’s nothing to stop someone who is working from also using this strategy. It would just mean their concessional contributions cap (in both years) would be partially used up by their employer contributions.

For example, Dale is also 60 but still working. His employer will contribute $17,500 to super in 2023/24 and about the same amount in 2024/25 but he’d like to maximise his personal tax deductions in 2023/24. Dale could make personal contributions of $10,000 at any point in 2023/24 and a further $10,000 in June 2024 (which is not allocated until 1 July 2024). He could claim tax deductions for both in 2023/24. The amounts are just smaller than Mary’s to reflect the fact that he knows his employer contributions will use up some of his cap in each year.

What if the cap goes up next year?

Remember this strategy is all about using next year’s cap in advance. So if the cap increases to $30,000 for 2024/25 (and we’ll know in February 2024 what the new cap will be), it just means there’s an extra $2,500 that can be contributed in June 2024 and allocated between 1 July – 28 July 2024.

What paperwork is required?

The usual paperwork to claim a tax deduction is required – a notice from the member to the trustee (called a ‘Notice of Intent to Claim a Deduction’), followed by acknowledgement from the trustee. Any SMSF accountant or administrator will be able to provide these.

But it’s also important to document the deferred allocation of the contribution. Trustee minutes for this purpose should clearly identify the contribution, highlight that the trustee won’t be allocating it until a particular date and then document the allocation. There is also an extra form for the fund’s accountant or administrator to send to the ATO. These tell the ATO that there are some contributions being reported for the member that weren’t actually allocated until the following year. If this form is not done, the ATO will naturally assume the contributions were allocated immediately.

Timing is also important. For example, the paperwork about the tax deduction needs to be done before:

• 30 June the following year (ie 30 June 2025 in Mary’s case); or
• when Mary lodges her tax return for 2023/24 (if this is earlier).

It might even need to be earlier if Mary is withdrawing money from her account or starting a pension.

Is there anything else Mary needs to know?

If Mary is under 67 when she makes her contributions in 2023/24, all she needs to worry about is:

• doing the right paperwork; and
• having enough taxable income to make full use of the tax deduction in 2023/24.

It doesn’t matter how much she already has in super or how much of her cap she’s used in previous years – this is all about using next year’s concessional contributions cap in advance.

If she is over 67 when she makes the contributions in 2023/24, there’s one extra check to do.

She can only claim a tax deduction for contributions made after her 67^th birthday if she meets a ‘work test’ at some point during the year (in this case, 2023/24 – the year the contribution is actually made and the tax deduction is claimed). That involves doing paid work for at least 40 hours in any 30 day period during the year.

And once she’s over 75 she can’t make contributions at all.

Any contributions that are going to be deferred should be made quite separately to contributions that will be allocated straight away. The ATO has taken the view that it’s an ‘all or nothing’ decision to defer contributions.

And finally, Mary might need to know her ‘total super balance’ at 30 June 2024. For example, if she’s going to make non-concessional contributions in 2024/25, the amount she can contribute will depend on how much she already has in super.

When she’s working out her total super balance at 30 June 2024, she needs to add in any of these deferred contributions (after allowing for the normal 15% tax paid by the fund on concessional contributions). While it doesn’t seem quite right to have these added back to her account when they haven’t officially been allocated to her yet, it’s necessary in this case. That’s because her total super balance is technically whatever the trustee would have given her if she’d left the fund on 30 June 2024. Under that scenario, the trustee would have been forced to allocate the contributions earlier.

We’re only talking about personal concessional contributions here – what about other sorts of contributions?

Technically this ability to defer allocating contributions applies to any type of contribution. For example:

• Dale could ask his employer to increase his salary sacrifice contributions during 2023/24 and ensure that $10,000 of this occurred in June 2024. The trustee of his SMSF could still elect to defer allocating this amount until July 2024 and achieve the same outcome (while it would be Dale’s employer rather than Dale receiving the tax deduction the result is the same for Dale – less income to pay tax on)
• Personal contributions for which no tax deduction is claimed (non-concessional contributions) can also be deferred. In fact this used to be more common when a work test was required for these contributions. The strategy allowed extra contributions to be made in a year when the member did meet the work test but allocated in a subsequent year when they weren’t able to meet it. Now that the work test has been dropped for non-concessional contributions it’s less relevant.

Conclusion

The ability to defer allocating super contributions until the next financial year can be invaluable in helping clients maximise their tax deductions. It’s unique to SMSFs and one of the many benefits of using them to help clients save for retirement.

---

Disclaimer

The information on this website is produced by and on behalf of HUB24 Limited (ABN 87 124 891 685) and its subsidiaries (HUB24 Group). HUB24 Custodial Services Ltd (ABN 94 073 633 664, AFSL 239 122) is the operator of HUB24 Invest (an investor directed portfolio service), promoter and administrator of HUB24 Super which is a regulated superannuation fund. The trustee and issuer of interests in HUB24 Super is HTFS Nominees Pty Limited (ABN 78 000 880 553, AFSL 232 500, RSE Licence No. L0003216).

The information on this website is general in nature only and does not take into account any person’s objectives, financial situations or needs. Accordingly, before acting on any information on this website, the viewer should consider the appropriateness of the information having regard to their objectives, financial situation and needs, read the HUB24 Financial Services Guide and the relevant disclosure documents, and seek independent professional advice before making any decision to acquire or hold a financial product. HUB24 Limited and its subsidiaries disclaim all liability for any loss suffered by any person arising from their reliance on, or otherwise use of this information.