The decision handed down from a recent ATO private binding ruling has shown the regulator’s discretionary powers over the treatment of allocations from reserves to be extremely limited.
The matter involved a situation where an SMSF wanted to know if the ATO had any discretionary powers to prevent certain allocations from a reserve being treated as concessional contributions for its members.
The events in question had seen an SMSF set up separate 13-year complying pensions for each of its two members and then commute the pensions before their maturity dates. Once the pensions had ceased, an investment reserve was established in the fund.
The trustees then wanted to distribute the monies in the investment reserve equally to each member, but were wondering if the ATO could use its discretionary power to have the allocations not count against each member’s concessional contribution cap even though the conditions of paragraph 291-25.01(4) of the Income Tax Assessment Act 1997 (ITAA) had not been satisfied.
Subsection (a) of the aforementioned paragraph dictates allocations from reserves can escape treatment as concessional contributions if the amounts in question are allocated in a fair and reasonable manner to an account for every fund member, and the amounts allocated for the financial year are less than 5 per cent of the value of the member’s interest in the SMSF at the time of allocation.
The ATO ruled the allocations had to be treated as concessional contributions as it did not have the discretionary power to allow the fund members to do otherwise if the exception contained in paragraph 291-25.01(4) of the ITAA had not been met.
However, the ATO made its ruling on the strength of paragraph 291-25.01(4)(b) of the ITAA, which states for an allocation from a reserve to not be considered a concessional contribution, the amount has to be distributed from a reserve used solely for the purpose of enabling the fund to discharge all or part of its liabilities as soon as they become due.
“In your case the reserve was created following the cessation of pensions, therefore, it is not a reserve maintained solely for the purpose of enabling the trustees to discharge their liabilities in respect of pensions that are payable by the fund,” the regulator said.
“As the reserve from which the proposed allocation to Member 1 is to be made is not a reserve which meets the requirements of paragraph 291-25.01(4)(b) of the ITAR (Income Tax Assessment Regulations) 1997, the exception in that provision to the allocation being a concessional contribution does not apply.
“There is no discretion available to the commissioner to not treat an allocation from a reserve as a concessional contribution where that allocation does not meet the requirements of subregulation 291-25.01(4) of the ITAR 1997.”
