The ATO will be looking for SMSFs that try to use reserves to circumvent new superannuation rules such as the Transfer Balance Cap.
“For some months now we’ve been flagging caution in relation to the use of reserves for SMSFs,” ATO Deputy Commissioner for Superannuation James O’Halloran told the SMSF Association national conference.
Mr O’Halloran said, in his speech to the conference, that the ATO Commissioner considers the use of reserves in SMSFs as distinct from the need to maintain reserves in APRA-regulated funds, though many SMSF reserves are the legitimate result of legacy pensions.
The ATOs concerns about SMSF reserves has grown following the recent changes to superannuation.
“Following the introduction of the government’s super reform measures announced in the 2016–17 Budget, we’re concerned that some SMSFs may implement strategies utilising reserves that are designed to circumvent restrictions imposed in the super and income tax legislation and thereby weaken the integrity of these measures,” said Mr O’Halloran.
The ATO expects SMSFs to only use reserves in “limited circumstances and for specific and legitimate purposes”.
“Where an SMSF purports to hold an amount in a reserve as opposed to allocating directly to a member’s super interest for the benefit of the member and their beneficiaries, we will consider whether the trustee is acting in accordance with their obligations under the SISA.”
The ATO’s data, as at September 2016, shows that the number of reserves hasn’t grown and the average balances is around $160,000. Though a small number of funds have much larger reserves – 9 SMSFs have reserve balances over $5 million and 132 have balances over $500,000.
The ATO has received “preliminary feedback” that SMSFs may be thinking of using reserves as part of a strategy to circumvent the new rules.
“We will closely scrutinise any arrangements that arise unexpectedly or are out-of-pattern vis-a-vis the 2016 data I have shared. In suitable cases we would consider the potential application of the sole-purpose test under section 62 of SISA and Part IVA of the Income Tax Assessment Act 1936,” said O’Halloran.
“Of course, while we think there is a need to warn SMSFs, the best-case scenario is that this doesn’t become a concern and that trustees appropriately manage existing reserves and can explain the creation of new ones.”
Mr O’Halloran said the ATO won’t apply compliance resources to review SMSF use of reserves prior to 1 July 2017, “unless there is clear evidence of an attempt to circumvent the 2016 Budget super reform measures”.
“So, if you are considering using reserves in your SMSF, I strongly encourage you to seek independent professional advice or approach the ATO for advice before doing so.”