Regulation

Using reserves in an SMSF

By AMP Capital

In March, the ATO released a bulletin in relation to the use of reserves by SMSFs, driven by the ATO’s concerns of an SMSF using reserves to potentially circumvent restrictions imposed by the new contribution rules and the transfer balance cap.

On 15 March 2018, the ATO released the first of the new SMSF Regulator’s Bulletin, SMSFRB 2018/1, in relation to the use of reserves by SMSFs. This publication has come about from the ATO’s concerns of an SMSF using reserves to potentially circumvent restrictions imposed by the new contribution rules and the transfer balance cap.

Overall it appears that the ATO sees the use of reserves in an APRA regulated fund very differently from an SMSF. Whilst they see the use of reserves, such as an Administration Reserve, Investment Reserve and Operational Reserve as appropriate for APRA regulated funds, they do not, in the main, believe that such reserves should be part of an SMSF. Consequently, they will scrutinise an SMSF who has these types of reserves, particularly where the reserving strategy is used to reduce a member’s total super balance so they have access to a higher contribution cap or to reduce the amount that will count towards the transfer balance cap. In the bulletin, it says “it is expected that the use of reserves by SMSFs will be in limited circumstances and only for specific and legitimate purposes”.

It is also the ATO’s view that you cannot allocate an amount from a reserve to a member’s account-based pension – contrary to what has been industry practice. Such an allocation is viewed as circumventing the transfer balance cap and consequently is required to be allocated to the member’s accumulation account.

Another scenario that’ll come under scrutiny is where there is a reserve to back an account-based pension. The bulletin states “A pension reserve account cannot be maintained to support an account-based pension”. Benefit payments from an account-based pension are determined by the balance of the member’s pension account and is not a fixed payment, as is the case with defined benefit pensions. Strategies, such as allocating from a so called ‘pension reserve’ direct to an account-based pension account, or deducting the account-based pension payment from the ‘pension reserve’, would attract ATO attention. Consequently, in an SMSF, only defined benefit pensions will be backed by a pension reserve.

An SMSF may, however, already have an existing reserve that was in place at 30 June 2017, for example, the balance of capital that was supporting a non-reversionary lifetime complying pension, after the member’s death. The ATO says that they will not apply compliance resources to review these pre-1 July 2017 reserve arrangements provided that:

  • The reserve was permitted by section 115 SISA and the governing rules of the fund; and
  • The facts and circumstances do not indicate that the use of the reserves by the trustee was a means of circumventing the super reform restrictions, for example, the contribution and transfer balance caps.

It should also be remembered that an allocation from a reserve to a member is counted towards their concessional contribution cap, unless one of the exceptions applies.

  • Regulation
  • SMSF News
  • Self Managed Super Funds (SMSF)

Important notes

While every care has been taken in the preparation of this article, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455)  (AMP Capital) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This article is solely for the use of the party to whom it is provided and must not be provided to any other person or entity without the express written consent of AMP Capital.

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