SMSF Reserves – The Devil is in the Detail
Many practitioners may disagree with much of the ATO’s interpretation of the law and their use of the Sole Purpose Test and Part IVA provisions however, to ignore it, is to place your clients in an invidious position. No one wants to be the test case. So, what is the ATO’s position?
Reserves cannot be used to circumvent the super reform caps.
Reserves with no specific purpose or for a purpose which the ATO regards as in breach of the sole purpose test or unnecessary for SMSFs will not be allowed. This includes General, Miscellaneous, Administration, Operational Risk, Self Insurance and Investment reserves.
Insurance cover cannot be held by a reserve.
Reserves must have a strategy for their prudential management consistent with the fund’s investment strategy. This is unchanged but a timely reminder to ensure that reserves are not ignored in the fund’s investment strategy.
The ATO will not apply resources to review pre 1 July 2017 arrangements provided they were valid and not used to circumvent the Super Reforms. Any unexplained increases in the creation of new reserves, the balances of existing reserves or allocations from a reserve into the retirement phase may attract scrutiny.
The payment of general fund expenses from reserves will incur negative attention whilst the aggressive strategy of paying account based pension payments directly from a reserve is out.
Contribution reserves are unaffected as they are suspense accounts, not reserves
Reserves supporting complying life time pensions are not affected.
Existing anti-detriment reserves may be progressively distributed to member accumulation accounts bearing in mind the implications of allocations from ‘reserves’, as defined for the purposes of concessional contributions.
Reserve allocations to existing account based pensions are regarded as a strategy to intentionally reduce the member’s total superannuation balance and/or the balance of the member’s transfer balance account so are prevented. This is not reasonable. Such allocations may even be necessary to deal with legacy reserves such as existing anti detriment reserves. A more acceptable position would be to allow such allocations but require that they be credited to the member’s transfer balance account. I expect this will be subject to further consideration.