Last month, the ATO announced it would be monitoring the use of reserves by SMSFs following the introduction of new limits and restrictions including the transfer balance cap and total super balance.
The ATO warned that any unexplained increases in the creation of new reserves or in the balances of existing reserves maintained by SMSFs was “likely to attract close scrutiny”.
Speaking in a webinar, SMSF Academy director Aaron Dunn said the use of reserves was one of the key aspects that the government failed to address when it drafted the legislation for the superannuation reforms.
“If we look back at what the government was trying to do, particularly around the objective of super, one of the things that was clearly missed was reserve amounts. Reserve amounts were not covered in any way, shape or form [in relation] to whether they could be used or applied in respect to a member’s total superannuation balance,” said Mr Dunn.
“Off the back off that we have seen individuals contemplating whether they can apply reserves inside an SMSF to try and keep an individual under certain thresholds.”
In order to eliminate concerns around individuals using these types of strategies, Mr Dunn said the government could look at introducing a requirement similar to what the Labor government did when introduced an additional cap for super funds with balances below $500,000.
“The Labor government, when they were looking at introducing the additional $25,000 cap for individuals that have balances under $500,000, they had a requirement in that bill that if there were reserves inside in the fund, then there was a proportionate allocation of those reserves based upon the member’s balance,” he explained.
“That to me would nip this issue in the bud very quickly but in reality we exist in a landscape where we have clouds hanging over whether reserves can or can’t be used.”
Mr Dunn said SMSF practitioners will need to tread carefully with reserves.
“Make sure that if you are running reserves that there is a purpose and you have those appropriately documented and correlating back to what the governing rules of the fund ordinarily say,” he said.
Once again the ATO as regulator of SMSFs is in conflict with the ATO as tax collector. At the moment all comments from the ATO are purely based upon its role as revenue collector with no regard to retirement plans of members.
There are valid reasons for an SMSF to operate reserves, particularly in the areas of blended families and pensions paid to dependent children.
The operation of reserves is permitted by SISA. Arbitrarily limiting transfers from reserves to a flat dollar amount would be unworkable it penalises HNW members unfairly. A better solution is to introduce an anti-avoidance provision into the TBC legislation.