Technical expert outlines reserve strategies for legacy pensions
With the regulations to allow the rollover or cessation of defined benefit pensions likely to increase issues relating to residual reserves, a technical expert has highlighted some potential strategies.
For SMSFs with legacy pensions, SMSF Alliance practice principal David Busoli said residual reserves could pose a challenge to trustees wishing to distribute them.
“It is expected that [once] the regulations allow the rollover/cessation of legacy SMSF defined benefit pensions, the number of funds with this issue will increase,” said Mr Busoli in an online article.
One solution, said Mr Busoli, is to make a reserve distribution to member accounts.
“Provided the distribution is prorated across all eligible members, and is less than 5 per cent of the value of the member’s interests in the fund at the time of allocation, the distribution will be fine,” he said.
“If either of these conditions is not satisfied then the distribution is counted against the recipient’s concessional contribution cap. There are no age or work test limitations, and no contributions tax is levied, but any breach of the cap will require the amount to be paid out of the fund to the member and assessed as income in the year of distribution, or remain in the fund and be assessed against the non-concessional cap as well.”
Rather than being a disadvantage, Mr Busoli said breaching the concessional contribution cap can be a reserve distribution solution, provided it coincides with a recipient’s low taxable income year.
“The assessable income also contains a 15 per cent tax offset, even though no contributions tax was levied, so the opportunity to deliberately exceed the concessional contributions cap can be a useful strategy,” he explained.
Mr Busoli said there is another reserve strategy that works slightly differently.
“Subject to the deed, it should be allowable to exclude reserves from earning allocations with any such earnings being allocated, pro-rata, to members’ accounts,” he explained.
“A private binding ruling (PBR 1051731834033), as well as an analysis of the relevant legislation, supports this approach. As earnings have not been allocated to the reserve, there is no reserve allocation to a member so there is no concessional cap consequence.”
This would effectively prevent the reserve from growing, he said.
“SMSF software does not easily accommodate this process so documented work-arounds would be required,” he noted.
Miranda Brownlee
Miranda Brownlee is the deputy editor of SMSF Adviser, which is the leading source of news, strategy and educational content for professionals working in the SMSF sector.
Since joining the team in 2014, Miranda has been responsible for breaking some of the biggest superannuation stories in Australia, and has reported extensively on technical strategy and legislative updates.
Miranda also has broad business and financial services reporting experience, having written for titles including Investor Daily, ifa and Accountants Daily.
