ATO expects gradual drop in SMSF reserves

The ATO has revealed the number of SMSFs with reserves has decreased and anticipates the trend will continue, with the SMSF regulator looking to benchmark this data year by year.

“We have had concerns around reserves in the context of the post-reform landscape we’re now in, so what the ATO undertook was a project based on SMSFs. We wanted to know what reserves looked like before the reforms and now we are monitoring what reserves look like as they change over time in a post-reform environment,” ATO SMSF segment assistant commissioner Dana Fleming told selfmanagedsuper.

“To flesh that out, we looked at the number of SMSFs that have reserves and the average balance of those reserves.”

Following the lodgement of SMSF annual returns last year, the ATO assessed the data.

“What we have seen is a decline in SMSFs with reserves from about 2500 to 1900,” Fleming revealed.

“Interestingly, from 2016 to 2017, the average balance did go up from $167,000 to $192,000.

“But what we’re expecting is that reserves should decline over time. We don’t believe there is a significant reason to have reserves in SMSFs other than for income tax purposes, contributions reserves, for example.”

She also highlighted an area of interest off data revealing there were 690 new funds with reserves, which represented about $65 million of a total $375 million in reserves.

“So we are concerned and we will be looking at where there has been an unexplained increase in the creation of new reserves or if there have been increases in the balances of existing reserves, and, of course, these new reserves will also be of great interest to us,” she said.

“We will continue to re-benchmark this as we get our annual data every year.”

In March, the ATO issued its “SMSF Regulator’s Bulletin 2018/1”, clarifying its approach to reserves created before and after 1 July 2017 after it identified it was a key area of confusion.

During the Chartered Accountants Australia and New Zealand National SMSF Conference 2018 in September, DBA Lawyers director Daniel Butler warned advisers must approach the use of reserves by SMSFs with greater prudence as the strategies the ATO will tolerate are now very limited.

In the context of using a reserve for super law purposes, for example, an investment reserve, advisers need to ensure there is a clearly articulated purpose for it or risk “being hammered by the ATO”, he said.

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