The ATO has warned it will take firm action either under Part IVA of the Income Tax Assessment Act or the sole purpose test if it finds artificial arrangements where SMSF members attempt to utilise reserves to circumvent caps.
ATO assistant commissioner Dana Fleming emphasised to The Tax Institute 2018 National Superannuation Conference last week the ATO continues to have concerns around SMSFs using reserves to circumvent caps introduced in the super reforms in the 2016 federal budget.
“In our view in a modern superannuation environment there are very limited circumstances in which there would be a need to establish and maintain a reserve,” Fleming told delegates.
“The majority are income tax reserves for a member such as for contributions or legacy pensions, or in a regulatory context, in relation to flexi pensions.”
Fleming also revealed analysis by the ATO on SMSFs using reserves, which shows the average value of the reserve amount has increased from $167,000 in 2016 to $192,000 in 2017.
ATO’s analysis further reveal the actual number of SMSFs reporting reserves has declined from around 2500 to 2000 and the amount of cash sitting in those reserves has declined from around $400 million to $375 million.
However what piqued ATO’s interest in the analysis is the first time reporters of reserves, which showed in the 2017 year there were 690 first time reporters, which represents around $65 million of that $375 million in funds in reserves.
“There’s a real role here in relation to reserves for trustees and their advisers to ensure that they are being established in line with expectations and the obvious factors like they are complying with their trust deed, that they are genuine, section 115 of the SIS (Superannuation Industry (Supervision)) Act in terms of their purpose, and importantly that they’re also appropriately reflected in the investment strategy of the fund and comply with it,” Fleming said.
The ATO compiled the figures after doing a stocktake from its 2016 annual return, which it used as it baseline as those returns fall prior to the implementation of the new reforms. This is the first baseline comparison the ATO has undertaken for the 30 June 2017 data.
“So what are we expecting in relation to reserves in this new landscape? We will expect that reserve balances will decrease over time and the use of reserves by SMSFs will only occur in those limited circumstances,” Fleming said.
She warned the ATO will be closely monitoring increases in reserve balances of those SMSFs reporting they have reserves in their annual return, an increase in the creation of new reserves, and an allocation from reserves directly to the retirement phase.
