Reducing investment reserves in an SMSF by adding new members and creating allocations to them is possible, but unlikely to make a huge difference unless significant balances are introduced into the fund to take current allocation limits into account, according to a technical specialist.
Heffron head of SMSF technical and education services Lyn Formica said any plans to add new members to an SMSF, where a member has died, to drawdown unpaid reserves are valid but may come up against a number of hurdles within the trust deed and under law.
Addressing a question at a webinar today as to whether those new members could drawdown reserves via allocations into their accumulation accounts and then roll out and wind up the fund, Formica said the SMSF trust deed would be the first document to check for a number of reasons.
“I would be checking the trust deed to see what the rules are in terms of adding new members and also making sure the deed allows for reserve allocations to the people that I want to add,” she said.
She also advised the fund’s reserving policy should be examined and whether the allocations fall outside the contribution cap rules.
“In this situation [where the reserves are $150,000] it would probably not be possible to comply with the rule which states the amount of the allocation is within 5 per cent of the member’s interest in the fund at that particular point in time unless those new members are rolling in significant balances,” she said.
“So it may be that the entire amount that we’re going to allocate to these two new members is going to be counted towards their concessional contribution cap.
“Depending on that person’s assessable income position that might be a fairly valid strategy.
“It may be worth paying a little bit of extra tax on an excess concessional contribution simply to be able to get rid of these reserved monies and be able to wind up the SMSF rather than eking out the reserves for many years.”
