ATO guidance on the use of reserves by SMSFs

Friday 16 March 2018

The Australian Taxation Office (ATO) has issued guidance confirming that there are limited circumstances in which it is appropriate for self managed superannuation funds (SMSFs) to use reserves.

The circumstances in which the ATO considers an SMSF is able to use a reserve include to hold unallocated contributions, to enable the fund to pay complying pensions and to facilitate anti-detriment payments until 1 July 2019. However, it is considered unnecessary for SMSFs to use reserves in the following circumstances:

  • to fund future administration and operational expenses
  • for investment smoothing
  • for Operational Risk Financial Reserve target amounts
  • to back account based pensions
  • for self-insurance purposes
  • to pay insurance premiums and receive insurance proceeds

The ATO is concerned that SMSF trustees are using reserves to circumvent superannuation reform measures by reducing a member's total superannuation balance or transfer balance account. SMSF trustees that use reserves inappropriately may be in breach of superannuation law, particularly the sole purpose test, and may also be subject to Part IVA anti-avoidance provisions.

The ATO has indicated it will not apply compliance resources to review arrangements entered into by SMSFs prior to 1 July 2017 provided the reserve was permitted by the superannuation law and the governing rules of the fund, and it was not used by the trustee to circumvent the superannuation reforms.

Further information

Australian Taxation Office, SMSF Regulator's Bulletin SMSFB 2018/1 The use of reserves by self managed superannuation funds, 15 March 2018

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