The Australian Taxation Office has cautioned trustees of self-managed super funds against using reserve accounts in their funds to try and get around the restrictions introduced with the new super rules on July 1.
James O’Halloran, the ATO’s deputy commissioner, superannuation, says the tax office will be monitoring the use of reserves in SMSFs.
“While the establishment of a reserve in an SMSF is not strictly prohibited, the ATO considers there are very limited circumstances when it’s appropriate for a reserve to be established and maintained in an SMSF,” he says.
A reserve is an amount of capital in a super fund that is not allocated to any member.
Large super funds use them to smooth returns, allocating a portion of a fund’s gains to the reserve in good years and drawing on them in the bad years.
They use them for other contingent purposes, such as smoothing operational expenses and to meet the cost of rectifying operational errors.
Graeme Colley, executive manager, SMSF technical and private wealth, at SuperConcepts, says reserves are less common in SMSFs but have a couple of applications.
One use is to bring forward employer deductions on contributions. In a year when they have a high level of income the employer might make additional contributions, allocating some to the member and some to the reserve.
The employer can claim a deduction for the total amount. The amount in the reserve can be transferred into the member’s account the following year, with no excess contribution tax to pay. To access this concession, the timing of the contribution and the transfer to the member’s account from the reserve is important.
A tax determination published by the ATO in 2013 (TD 2013/22) makes specific reference to the use of reserves in super fund contribution arrangements.
In another application, when assets are revalued and a capital gain arises, the increase in value can be credited to a reserve account.
“With an asset like property there could be a large capital gain. The reserve may be used to keep the member’s balance under $1.6 million. However, this practice may be what the ATO is referring to,” Colley says.
“With the July 1 changes, trustees might be encouraged to use reserves more for capital revaluations. One reason for keeping the balance under $1.6 million is to allow the member to keep making contributions.
“The ATO might consider that those capital amounts should be in the member’s account.”
O’Halloran says: “The use of reserves beyond particular circumstances may suggest they’re being used as part of broader strategies to circumvent the new limits and restrictions that apply under the super changes.
“Any unexplained increase in the balance of existing reserves or the creation of new reserves is likely to attract our scrutiny.”
Colley says that where reserves are maintained the trustee is expected to have a management strategy, including the objectives for which the reserve is established.
APRA guidance says superannuation legislation allows trustees to maintain reserves provided that the trust deed does not prohibit it.
