An SCRS works well when a member of a self managed superannuation fund (“SMSF”) is about to retire or has made a large capital gain in a tax year and in the following financial year will have little or no taxable income. The ATO allows eligible individuals to make tax deductible contributions up to a maximum of $25,000 in a financial year. An SCRS allows individuals to make a further tax deductible super contribution into super up to $25,000 bringing the total tax deductible contributions in any one financial year to $50,000. The first contribution of $25,000 will be taxed at 15% by the receiving SMSF with a further 15% tax payable by the individual where their adjusted taxable income is in excess of $250,000 commonly known as Division 293 tax.

 

The second contribution of $25,000 must be made by the individual in June in the year of retirement or capital gain. The individual is able to claim a second tax deduction of $25,000 bringing total tax deductions to $50,000. The ATO allows the SMSF 28 days from the date of the second contribution to allocate the contribution to a members account.

 

The SMSF elects to allocate this second contribution in the new financial year but within 28 days of the contribution being made. The result is the individual obtains a second tax deduction of $25,000 in a financial year where taxable income is high that is in the retirement year or year of capital gain. The SMSF pays 15% tax on the second contribution in the year the contribution is made. The SMSF then allocates the contribution to the members account in the next financial year and, as the member has little or no taxable income in this following financial year, avoids paying a further Division 293 tax of 15%. We estimate this strategy will save individuals up to $8,000 in tax where they are on the top marginal tax rate in one year and are paying little or no tax in the following financial year. Please note to undertake this strategy you require a self managed super fund and have a high taxable income in one year with little or no taxable income in the following year.