Meaning of reserves differs under law

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What constitutes SMSF reserves under law differs under superannuation law and tax law.

All reserves maintained in SMSFs for superannuation law purposes will be counted as reserves for tax law purposes, but not vice versa, according to DBA Lawyers.

Referring to the ATO’s recent SMSF Regulator’s Bulletin, “The use of reserves by self-managed superannuation funds”, DBA Lawyers special counsel Bryce Figot said the tax office had formally confirmed that while the term reserve is referred to in both super regulatory provisions and income tax provisions, what constitutes a reserve under these provisions may differ.

“Broadly, everything that is in reserves for super law purposes is a reserve for tax law purposes, but not vice versa. So reserves can mean two different things,” Figot told a DBA Lawyers SMSF Reserves Webinar last week.

The tax office bulletin noted under sub-regulation 1.03(1) of the Superannuation Industry (Supervision) (SIS) Regulations, an SMSF trustee who uses a reserve must articulate the purpose of the reserve and must formulate a prudential management strategy that is consistent with the entity’s investment strategy and its ability to discharge its liabilities as and when required in accordance with the SIS Act.

Figot said any and all unallocated monies whatsoever were not necessarily reserves for super law purposes.

“The mere fact that it is unallocated does not necessarily make it a reserve for super law purposes,” he noted.

He said accounts used to record contributions pending allocation to members, or contributions reserves, are not reserves for super law purposes.

Amounts supporting SIS regulation 1.06(2) defined benefit pensions, that is, complying lifetime pensions, and amounts supporting SIS regulation 106(6) defined benefit pensions, that is, flexi-pensions, are not reserves for super law purposes, he pointed out.

“Reserves are monies forming part of the net asset of the super fund that have been set aside for a clearly stated purpose. This is an important idea. It’s new,” he said.

“So if you’re putting aside money to pay for future things, that could be a super reserve; you’re putting aside money to pay for liabilities already accrued, that’s probably not a reserve.”

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