Leigh Mansell, director SMSF technical and education for Heffron, has said in a recent webinar that even with the recent changes to the tax law, the rule of thumb has always been that any allocation from reserves will count towards the contribution cap of the recipient.
“The default position is an allocation from a reserve is going to count towards the recipient’s contributions cap, and maybe there’ll be a cap-free pathway, so that default position hasn’t changed,” she said.
“In relation to cap-free pathways, we’ve had a few previous ones that have come over from the old tax regulations into the new tax rates such as the 5 per cent rule.
“In addition, we’ve got this concept of anybody who’s got a defined benefit pension that’s still in place, any pension payments that are paid out to the member, they’re technically an allocation from a reserve to that member.”
There were now also some expanded or changed cap-free pathways when dealing with defined benefit pensions and it was critical for advisers to look for an allocation from a pension reserve in order to get that cap-free pathway.
“We’ve got this new concept of pension reserves in the law as well as a change to the cap, so if we’re in that default position, there’s no cap-free pathway that applies to the reserve allocation,” Mansell said.
“Prior to 7 December 2024, those allocations used to count towards the concessional cap, but now we’ve got a situation where allocations that are cap-free are going to count towards the member’s non-concessional contributions cap.”
She continued that essentially, the new tax regulations mean reserves will be used in different ways and in different contexts.
“The ATO has confirmed that they’re [reserves] just an accounting construct and the same rules apply. That is if it was a concessional contribution that’s been deferred, the allocation of it will count towards next year’s concessional cap. If it was a non-concessional where the allocation was deferred to next year’s non-concessional cap, there are no changes to those particular things.”
“There is also a definition of reserves for SIS. The way it works is, if you’ve got any investment reserves or anti detriment reserves, where the fund has siphoned off some of the investment return every year, parked it for a particular purpose, maybe to pay an old anti-detriment deduction and top up a death benefit, all things that don’t exist anymore, they form part of a reserve for SIS.”
In addition, she said there are also some other changes to reserves for the purposes of SIS.
“If you’ve got a defined benefit in pension in play, that bucket of money is considered a reserve for SIS, but as soon as that pension stops, it’s no longer a reserve for SIS,” Mansell said.
“One of the things that you need to watch out for regarding SIS reserves is that you have to have a reserving strategy for the money that is being held by the trustee for whatever particular purpose. It gets a little bit confusing in an SMSF environment because people often think, ‘Well, I’m a member of the fund, therefore those reserves belong to me with my member hat on’. Instead, you should think of it in a slightly different way.
“On the one hand, the member is a member, and on the other hand, they’re a trustee or a director of the corporate trustee. When we’re talking about reserves, the reserves are owned by the trustee of the fund, not the members. They may be the same people, but remember, they’re wearing two different hats and have different responsibilities and rights. Reserve money does not belong to a member until such time that it gets allocated to them.”
