SMSF STRATEGY GUIDE
THE USE OF RESERVES
A strategy that you may come across when looking into SMSFs is that of the use of reserves. Now we have to state upfront that the use of reserves has not been a common practice for the vast majority of SMSFs, but more importantly since 2018 when the ATO came out with their directive that reserves shouldn’t really be used in SMSFs anyway apart from some legacy lifetime pensions, they don’t really figure as an issue unless you already have one. But for the sake of completeness, we’ll briefly step you through reserves in case you come across someone promoting them as something you should have in your fund.
WHAT ARE THEY
A SMSF reserve is simply money or assets inside your SMSF that are not
part of any member’s account, or where no one has any entitlement to it
yet. Reserves are not part of any member’s account balance until
they are actually credited or allocated to the member.
HOW HAVE THEY BEEN USED
Historically this included things like investment reserves for smoothing of investment returns, warehousing contributions over the 30 June period for a particular contribution strategy, insurance reserves, admin reserves, and something that was known as the anti-detriment payment reserve.
Now whilst some of these reserves are appropriate for large APRA regulated funds, the ATO has stated they do not see them as appropriate or necessary for SMSFs.
The two exceptions being the contributions reserve, which they don’t see as being a reserve anyway, but rather a suspense account, and the other being reserves for the old complying lifetime or term pensions.
So the bottom line here is that reserves are not really a consideration for your SMSF anymore, however if you already had one prior to 1 July 2017, they don’t have to be wound up. They can continue as long as they were setup according the laws at the time.
If you are in that boat of already having a reserve, then a few other notes regarding reserves:
The trust deed of the fund needs to allow the use of reserves.
The earnings of the money in the reserve are taxed at 15%, just like any other accumulation account.
There needs to be a reserve management strategy put in place.
Reserves require a bit of extra admin by your end of year administrator.
Allocations from the reserve need to be no more than 5% of a membersbalance, and need to be paid in proportion for all members so no member is disadvantaged. If this is not followed, then the allocations from the reserve will be treated as a concessional contribution.