A technical specialist has recommended practitioners review the administration software their SMSF clients are using to determine if its treatment of reserves in relation to the fund’s earnings is compliant with the law.
“When you run your accounts and finish off the accounts, and the system automatically does the allocation of earnings for you, does it allocate amounts [to an existing] reserve? Does it give a share of the earnings to a reserve?” Accurium head of education Mark Ellem told delegates at the recent Accurium 2023 Compliance Day.
“Well there is no need [for this to happen]. The law doesn’t require it because the law talks about a fair and reasonable allocation of earnings to members. A reserve is not a member.
“So just watch that. Some systems may automatically calculate [and allocate] a proportion of the earnings to a reserve.”
Ellem pointed out this method of accounting for revenue may arise as a result of trustees and advisers having to manipulate the use of administration software because reserves are present.
“It also may depend on how you account for that reserve. You might set up that reserve as a dummy member account and so the system thinks it is a member called Mr Reserve or Miss Reserve and allocates a portion of earnings to it,” he said.
While the use of reserves in an SMSF is no longer permitted, he noted they may still be present within a fund for a variety of purposes.
“An SMSF reserve might be a leftover reserve because a member had a defined benefit pension and died with leftover amounts in there, it might be an old anti-detriment reserve, an old self-insurance reserve or an old investment fluctuation reserve,” he said.
The ATO has stipulated contribution reserves allowing a tax deduction to be claimed in one financial year but allocated to a member in the subsequent financial year are not considered reserves in its view.