SMSF Reserves
The Superannuation Industry (Supervision) legislation has only ever provided minimal guidance on the operation of reserves. All it says is that the Superannuation Industry (Supervision) Act 1993 (SIS Act) permits the use of reserves unless the governing rules of the fund prohibit the maintenance of reserves. That is, the fund trustee is allowed to establish one or more reserve accounts provided the trust deed doesn’t specifically prohibit the maintenance of reserves.
This is the case even if the trust deed is silent. However, most modern trust deeds outline procedures for their operation and use. If reserves are maintained, then the trustee must also implement and give effect to
an investment strategy which deals with the prudential management of those reserves.
Investment strategy The SIS Act does require that super funds maintaining reserves implement and affect a separate investment strategy for the prudential management of those reserves. This
strategy must complement the primary investment strategy of the fund and its capacity
to discharge its liabilities (whether actual or contingent) as and when they fall due.
Consistent with the primary investment strategy of the fund, the trustee is obligated to:
> establish a written reserving strategy
> implement the strategy
> review the strategy on a regular basis.
Size of the reserve
There is no specific law which restricts the amount of assets backing a reserve account. At one time, the super surcharge legislation did implement a cap on the amount that could be maintained in investment reserves, and the ATO reinforced this in SCR 1999/1 by limiting the opening balance of any investment reserves to the lesser of the total surplus or 15% of the net market value of assets at the opening balance date. However, the notion of a reserving limit appears to have no basis in law.
Tax treatment
Generally speaking, the investment earnings on amounts attributed to or placed into a reserve account is taxable income. For instance, if 10% of fund assets are held in reserves, 40% are held in accumulation accounts and the remaining 50% are held in pension accounts, we could expect 50% of the assessable income of the fund to be
taxable, assuming the fund operates on a pooled basis. Interestingly, there is some debate about whether reserves attributed to ‘segregated current pension assets’ would benefit from the tax exemption on the basis that the underlying assets are ‘invested, held in reserve, or otherwise dealt with’ for the sole purpose of discharging liabilities in respect of superannuation income stream benefits. This argument would appear to gain more strength if the fund is wholly a pension fund and there is automatic reversion of the income streams.
Forfeiture
Following changes to legislation in 2004, super funds were prevented from forfeiting large chunks of member benefits to a reserve account. This was achieved by redefining minimum benefits which must be maintained to include all of a member’s benefits. Previously, there was a loophole concerning salary sacrificed amounts. More recently, there have been suggestions that a pension account can be forfeited to a reserve account on the premise that the benefit has already been cashed and as such the minimum benefit rules no longer apply to the account. Just be aware this approach may attract ATO scrutiny.
Contributions reserve
Contributions to super funds generally need to be allocated within 28 days of the month following the time of contribution, unless it was reasonably practicable to allocate the contribution at a later time. Allocating contributions to a reserve account can allow contributions to be spread across two separate tax years and bring forward one lot of tax deductible contributions.
For an appointment, or a confidential discussion of your needs, please contact our Tax Accountants today, or call 1300 627 829.
