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ATO to apply Part IVA to reserve scrutiny

The ATO has made known its intention of determining whether there are any breaches of the Income Tax Assessment Act 1936 Part IVA rule when examining the use of reserves in an SMSF.

During a recent webinar on the use of reserves, ATO SMSF technical issues manager Mary Simmons said: “We are concerned with the potential use of reserves by SMSF trustees as a means of circumventing restrictions imposed in the super and income tax legislation introduced by the super reform measures in the 2016 budget.

“In this context we need to consider whether the use of a reserve is a step in a scheme to which Part IVA may apply.

“Part IVA applies to a scheme if a tax benefit has been obtained in connection with the scheme and the main purpose of a person who participated in the scheme, or part of it, was to enable a taxpayer to obtain that tax benefit.”

Specifically, Simmons stated the regulator would be trying to establish if an SMSF member reduced their total super balance through the use of a reserve which subsequently allowed them to make additional non-concessional contributions they would not have otherwise been entitled to make.

“The benefit obtained by the taxpayer in this case is that the earnings from these non-concessional contributions may be taxed at a lower tax rate than would have been the case if the earnings were derived from a source outside of the concessionally taxed superannuation environment,” she noted.

According to Simmons, the tax office will be using the interpretation to see if Part IVA is applicable to situations where a reserve was used to ensure a member’s balance was below $500,000, enabling them to make additional concessional contributions via the catch-up provisions contained in the super reforms.

“The benefits in this instance may include allowing the member to either claim a higher personal superannuation contribution deduction or have a higher amount of their salary and wage income subject to a salary-sacrifice arrangement for an income year,” she said.

“The other benefit is the concessional tax treatment of the earnings from these concessional contributions when compared to the rate of tax applicable if the earnings were made outside of the superannuation environment.”

With regard to other types of scrutiny, she said examinations of SMSFs will be made to see if reserves were used to lower a member’s transfer balance cap with the effect of allowing a greater asset balance into the pension account, resulting in a higher level of exempt current pension income.

“And the final arrangement I’d like to mention today [that we will be looking at] is the intentional use of a reserve to reduce a member’s total superannuation balance below the $1.6 million cap in order to allow the SMSF to use the segregated method to calculate its exempt current pension income,” she warned.

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