Bryce Figot, special counsel for DBA Lawyers, said SMSFRB 2018/1 [13] states that the term “reserve” is referred to in both the superannuation regulatory provisions and income tax provisions and can have different implications on how they are treated regarding the new legacy pension regulations.
“This causes a real problem. For example, as a matter of superannuation law, unallocated monies are not a reserve. They’re also not for tax law. Contribution reserves are not a reserve for super law but they are for tax law,” he said.
“Amounts supporting SISR reg 1.06(2) defined benefit pensions or complying lifetime pensions are not a reserve for super law purposes, but are for tax law purposes and flexi pension are not a reserve for super law purposes, but are for tax law purposes.”
More specifically for super law purposes, reserves are monies forming part of the net assets of the super fund that have been set aside for a clearly stated purpose.
Under the regulations, the super law states that reserves are “largely concerned with contingent events as opposed to accrued expenses and provisions for administration expenses and taxation which are liabilities of the fund that arise from past events”.
“Unallocated monies that are not reserves include defined benefit fund surpluses and ‘accounting constructs’ such as suspense accounts used to record contributions and roll-overs pending allocation to members [SMSFRB 2018/1 [17]–[19]]”.
Figot said that for tax law purposes they have a wider meaning than for the purposes of the SISA and SISR [SMSFRB 2018/1].
“This becomes a big problem upon death. Let’s consider an SMSF with $3 million all supporting one complying lifetime pension. The member dies, and the ATO says that these are reserves for tax but not super law purposes. Why is that a big deal?” he said.
“Because then presumably that $3 million would have to be cashed out as soon as practicable. However, allocations from reserves are concessional contributions under the law as it currently stands.”
Figot continued that when the member dies, the fund will have almost $3 million of accessible income.
“A lot of this is not expressly stated in SMSF RB, 2018/1, but it is what I believe is the logical extrapolation of what the ATO says and that’s why it’s such a problem,” he said.
“So, how do you get money out of reserves? Well, allocations from reserves are concessional contributions under current law but there are exemptions that apply.”
He said the most well-known exemption is in regulation ITAR 291-25.01(4)(b) that states “an allocation from a tax law reserve is not a concessional contribution if] the amount that is allocated for the financial year is less than 5 per cent of the value of the member’s interest in the complying superannuation plan at the time of allocation”.
Another exemption [reg 291-25.01(5)(b) states that “an allocation from a tax law reserve is not a concessional contribution if on the commutation of a superannuation income stream … the amount is allocated to the recipient of the superannuation income stream, to commence another superannuation income stream, as soon as practicable”.
