ATO, Compliance, Regulation

Extra caution needed for reserves strategies

The use of reserves by SMSFs must be approached by advisers with greater prudence as the strategies the ATO will tolerate are now very limited, an industry lawyer has warned.

At the Chartered Accountants Australia and New Zealand National SMSF Conference 2018, DBA Lawyers director Dan Butler said in the context of using a reserve for superannuation law purposes, for example, an investment reserve, advisers must ensure there is a clearly articulated purpose for it.

“Baseline number one is to have a proper investment and reserving strategy. You can get hammered by the ATO if you don’t have that,” Butler told the conference in Melbourne today.

“They have to be articulated and particular. They must also be truly designed for the client, not the stuff you see on the internet that says you’ve got legal sign-off.

“And if you’re using something that’s a super law reserve, like an investment reserve, then ensure the deed will stack up. Ensure you’ve got the reserving strategy, which is in addition to your investment strategy, and make sure when you’re allocating earnings across that you’re looking at that stash of cash over on the sidelines called a reserve.

“Again, the ATO will hammer you if you haven’t got a clear purpose – so if it’s a general reserve, you’ll go down on the sole purpose test.”

If allocating from reserves, both for super law and tax law purposes, he said to bear in mind the trust deed resolution and have trustees document the reserving strategy and allocation.

He said he believes there will probably be no new creation of SMSF reserves and no new allocations to existing SMSF reserves, apart from unallocated contribution accounts, which are typically still okay.

“That may mean you need to turn off all earnings to the reserve, but before you do that make sure you check the deed and revise your strategies,” he said.

“I think that’s consistent with what the ATO wants.

“So if you have a super law reserve, for example, an anti-detriment reserve or an investment strategy reserve, start allocating and shovelling across. Use the 5 per cent [fair and reasonable exception] rule.”

He also urged advisers to monitor clients with total super balances getting close to $500,000, $1.4 million, $1.5 million and $1.6 million, but not to address the situation with reserves.

Lastly, it is necessary to ensure contribution reserving does not manipulate a total super balance or transfer balance cap advantage, he said.

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