SMSF advisers recommending reserving strategies for their clients need to be aware the reserves in question must be set out for a specific purpose, according to an industry expert.
Speaking at last week’s selfmanagedsuper/NowInfinity 2015 SMSF Strategies Day, NowInfinity director Grant Abbott said: “The Australian Prudential Regulation Authority has come out and said you must name a reserve and have a specific purpose for it.
“It means you can’t set up general reserves anymore.”
Abbott said the main reserves being used included anti-detriment reserves, investment reserves and pension reserves.
He emphasised advisers recommending the use of reserves needed to be aware of the treatment of funds being allocated from reserves to the members’ accounts.
“A reserve itself is not a contribution, but allocations from reserves to SMSF members are treated as concessional contributions unless it qualifies for an exemption,” he explained.
“However, there is a rule that dictates if 5 per cent of a reserve is allocated across all members’ accounts in the SMSF, as long as it is 5 per cent and it’s an equivalent amount across all members’ interests, then that allocation is excluded from the concessional contribution rules,” he said.
He pointed out the use of reserves inside an SMSF could be invaluable when looking at asset protection.
“The beautiful thing about having a reserve is it’s protected from bankruptcy and it’s also protected from the Family Law Act,” he said.
“So the Family Law Act can only ever access specifically the assets that are sitting in a member’s account.”