Business News

Reserves underused by trustees

The use of reserving strategies within SMSFs was not very common, despite the opportunities now available following the aftermath of the global financial crisis (GFC), according to a sector expert.

“You’d be surprised that clients understand reserves quite simply,” NowInfinity principal Grant Abbott said during a webinar.

“When you look at reserves it’s simply a surplus of funds to which no member is entitled and, of course, one of the key components is to have a look at the trust deed [in regards to] how to get a surplus of funds inside an SMSF.

“Between the determination of the earnings of the fund and then the allocation of investment returns, it must be understood that the earnings and investment returns may not be the same inside an SMSF.

“After the GFC, there were so many years of minuses [in the markets] that it was hard to establish or maintain a reserve, but what we’ve got now is an ability to establish a reserve with underlying investment accretions sitting inside that fund.”

Abbott said reserves were a “once in a many year opportunity” for advisers to recommend to their clients.

He added using investment reserves for smoothing and flexibility were the most common strategies.

“But they’re not greatly utilised in SMSFs, but certainly utilised to a great extent in industry funds and retail funds,” he said.

Other types of SMSF reserves included contribution reserves for year-end shifts, anti-detriment reserves for lump sum death benefit bonuses, self-insurance reserves for deduction plays only for pre-2014 funds with existing provisions and pension reserves for contribution cap escapes.

“One of the reserves I like and certainly worthwhile looking at for inside your clients’ funds are funeral reserves,” Abbott said.

“They’re simply a reserve set up inside the fund primarily to pay a funeral benefit when a member of the fund has died.

“Generally when someone dies, under the Superannuation Industry (Supervision) Regulations you can pay an interim lump sum, but rather than that, it’s far better to pay a funeral benefit to pay for funeral expenses.”

The federal government had finally indicated it would look at anti-detriment benefits, he said.

“One of the things I’ve certainly talked about quite considerably is the use of anti-detriment reserves in order to fund anti-detriment payments,” he said.

“It’s something that has only raised its head just generally, but my preference is to get it in before any changes are made [and we lose the anti-detriment deduction].”

Copyright © SMS Magazine 2024

ABN 43 564 725 109

Benchmark Media

Site design Red Cloud Digital