ATO, Strategy

Delayed allocations not Part IVA

Contributions reserves Part IVA

The use of contributions reserves has a very low probability of having the ATO consider it a tax avoidance arrangement.

The ATO is highly unlikely to deem tax benefits gleaned through the use of contributions reserves as a tax avoidance arrangement under the Part IVA provisions of the Income Tax Assessment Act, an SMSF expert has said.

“From all of my experience in [the use of contributions reserves] I’ve never seen it raised necessarily as a Part IVA issue directly. Now that’s not to suggest that the conversation piece hasn’t been raised indirectly with clients who have approached the ATO about the use of a reserving strategy,” SuperGuardian education manager Tim Miller explained.

He said interpreting the application of Part IVA in this fashion is sound given the guidance the ATO issued about the use of contributions reserves in SMSFs.

“The ATO addressed contribution reserves specifically in its reserving ruling that was released out in 2018. [In doing so] it was very specific to say that these are not reserves for the broader superannuation purposes [and] they can be reserves for taxation and allocation purposes,” he noted.

“[Further it said] they are more akin to a holding account and a holding account that is then distributed within that 28-day period following  the month in which the contribution is received, so I think it’s important to recognise that the ATO appreciates what the law suggests and what the law says.

“So as long as people follow the process, then the likelihood of [a contribution reserve] being raised as a Part IVA issue to me is fairly minimal.”

Miller also alerted trustees to the fact indexation of the concessional contributions cap can create an opportunity to gain a tax advantage in the 2021 financial year.

To action this tax benefit, SMSF members need to make a contribution of $27,500 to their fund, make sure the fund receives it before 30 June 2021, hold the money in a contribution reserve until after 1 July 2021 and have it allocated to the relevant member account within 28 days, he said.


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