Superannuation, Tax

Reserves captured by earnings tax

reserves earnings tax

SMSFs with reserves are unlikely to be able to use those funds to pay the proposed higher earnings tax and will have them allocated to members when assessing the tax.

SMSFs with reserves will probably not be able to use those funds to pay any additional tax bills arising from government plans to introduce a 30 per cent tax on the earnings of superannuation balances above $3 million, an SMSF technical expert has predicted.

Smarter SMSF chief executive Aaron Dunn said reserves have probably been considered by the government when applying the tax to SMSFs as the ATO had already raised concerns about their use.

“People have said to me we may be able to use reserves and the ATO put out an SMSF Regulator’s Bulletin [SMSFRB 2018/1] on the use of reserves and their concerns with those,” Dunn revealed during a recent online presentation.

SMSFRB 2018/1 noted the ATO “expected that the use of reserves by SMSFs will be in limited circumstances and only for specific and legitimate purposes” and “some SMSFs may implement strategies utilising reserves that are designed to circumvent restrictions imposed in the superannuation and income tax legislation”.

According to Dunn the Labor Party had in the past proposed a proportionate attribution of reserves back to members within SMSFs and this type of move was likely to resurface.

“What we see with a lot of this stuff that we are seeing now is that it is not new. These are things that Treasury pull off the shelf of what they have looked at in the past, blow the dust off it and kind of reconfigure it,” he said.

“The concept we have got now around this $3 million threshold was looked at in the context of fund earnings previously as part of the proposal that was cut by government in 2016 -2017, when the coalition [government] introduced the $1.6 million cap, so these things always float around.

“With reserves, I would suspect that we will see an actual proportionate attribution of any reserves within a SMSF back to individuals so that we don’t see individuals trying to attribute earnings to a reserve to avoid having to pay that tax bill.”

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