The ATO has issued an official warning on the use of reserves by SMSFs, as part of concerns that they are being used to circumvent the superannuation changes from the 2016/17 Budget and other tax laws.
The ATO has issued SMSFRB 2018/1: The use of reserves by self-managed superannuation funds, an ‘SMSF Regulator’s Bulletin’ – seemingly the first use of this type of document.
“It is expected that the use of reserves by SMSFs will be in limited circumstances and only for specific and legitimate purposes,” says the ATO in the Bulletin.
The ATO says it is concerned that some SMSFs may use reserves to implement strategies aimed at circumventing the Government’s Superannuation Reforms, announced in the 2016/17 Budget.
“The use of reserves by SMSFs outside limited and legitimate circumstances may suggest that they are being used as part of a broader strategy to circumvent these restrictions.”
The ATO will “closely scrutinise” such arrangements, but also has broader concerns. The SMSFRB says using a reserve in an SMSF may raise regulatory issues, including:
- if a general reserve, without at “clearly articulated purpose” is allowed under section 115 of the SIS Act.
- if the use of the reserve satisfies the Sole Purpose Test, and
- if the requirement to “formulate, review regularly and give effect to a strategy for the prudential management of reserves consistent with the fund’s investment strategy and its capacity to discharge liabilities” is met
The ATO will also be “scrutinise carefully” arrangements for breaches of Part IVA, giving examples of the use of reserves to make non-concessional contributions without breaching the cap, reducing a members’ balance below $500,000 to allow catch-up contributions, reducing the members’ Transfer Balance Account below their Transfer Balance Cap to allow a higher balance in retirement phase, or reducing a members’ Total Superannuation Balance below $1.6 million so the SMSF can use the segregated method for ECPI.
The ATO says it won’t apply compliance resources to review arrangements described in the SMSFRB entered into before 1 July 2017, provided it was permitted by section 115 of the SIS Act and the governing rules of the fund and the “facts and circumstances” do not indicate the reserve is a means of circumventing the 2016/17 Budget superannuation reform measures.
“We will continue to monitor the use of reserves by SMSFs. Any unexplained increases in the creation of new reserves, in the balances of existing reserves maintained by SMSFs or allocation of amounts from a reserve directly into the retirement phase is likely to attract close scrutiny from us,” says the ATO.
“If you are considering using reserves in your SMSF, we strongly encourage you to seek independent professional advice or approach us for advice before doing so.”
This is seemingly the first use by the ATO of an SMSF Regulator’s Bulletin. The SMSFRB includes the following statement on relying on the Bulletin:
Self-Managed Superannuation Fund Regulator’s Bulletins outline our concerns about new and emerging arrangements that pose potential risks to SMSF trustees and their members from a superannuation regulatory and / or income tax perspective. To the extent that this Bulletin provides guidance to you, and you apply it in good faith to your own circumstances, the Commissioner will administer the law in accordance with the guidance outlined in this Bulletin.
Update: The ATO has confirmed that the SMSF Regulator’s Bulletin is new guidance product, saying:
We have created a new public advice and guidance product specifically for self-managed super fund (SMSF) trustees and their advisors, called an SMSF Regulator’s Bulletin (SMSFRB). This product will provide targeted and timely updates about new, or emerging, superannuation regulatory and income tax arrangements that pose potential compliance risks for the SMSF sector.