SMSFRB 2018/1: The Use of Reserves by Self-Managed Superannuation Funds

The Commissioner of the Australian Taxation Office (ATO) has recently placed greater attention on the use of reserves by self-managed superannuation funds (SMSFs). Reserves are funds that are set aside for a particular stated purpose and are permitted for use under Section 115 of the Superannuation Industry (Supervision) Act 1993 (Cth) (SIS Act).

In taxation determination SMSFRB 2018/1, the Commissioner expresses concern over the use of reserves for non-legitimate purposes, to overcome or avoid certain restrictions on the use of reserves in the Government’s superannuation reform measures announced in the 2016-17 Budget. These reform measures were announced with the objective of improving the integrity of the Australian superannuation system by limiting the ways in which SMSFs can be used for tax minimisation as opposed to the central purpose of providing income to Australian retirees.

Subject to scrutiny by the ATO is the following non-exhaustive list:

1. ‘The intentional use of a reserve to reduce a member’s total superannuation balance to enable them to make non-concessional contributions without breaching their non-concessional contributions cap.’
2. ‘The intentional use of a reserve to reduce a member’s total superannuation balance below $500 000 in order to allow the member to access the catch-up concessional contributions arrangements.’
3. ‘The intentional use of a reserve to reduce the balance of a member’s transfer balance account below the member’s transfer balance cap.’
4. ‘The intentional use of a reserve to reduce a member’s total superannuation balance below $1.6 million in order to allow the SMSF to use the segregated method to calculate its exempt pension income.[1]’

The Commissioner considers it unnecessary for SMSFs to hold: administration reserves, investment reserves, operational risk reserves, reserves that hold unallocated contributions, the use of a reserve to back an account-based pension, self-insurance reserves, reserves as part of an arrangement involving insurance cover for a member of the fund, and anti-detriment reserves in certain cases.

The ATO clearly intends to closely scrutinise the use of reserves to ensure that they are being used for legitimate purposes. In lights of this, the ATO strongly recommends that those considering the use of reserves in a SMSF to either seek independent legal advice, or contact the ATO directly.

[1] Australian Taxation Office, The Use of Reserves by Self-Managed Superannuation Funds, Taxation Determination SMSFRB 2018/1 (2018).