Contributions, Legislation, Tax

Reserve allocations a $3m cap issue

Reserve allocations Total superannuation balance Contributions $3 million soft cap tax Concessional cap

The treatment of reserve allocations to members for the purpose of the $3 million soft cap is problematic and can have significant adverse outcomes.

An SMSF specialist has highlighted a significant issue with the treatment of reserve allocations to members with regard to the calculation of a person’s total super balance for the proposed $3 million soft cap.

To this end, Colonial First State head of technical services Craig Day noted in general reserves allocated to member balances are treated as contributions, but this does not mean all of these amounts can be deducted from the individual’s total super balance for the purposes of the new superannuation tax.

“A reserve allocation [can only be deducted from a member’s total super balance] when that reserve allocation counts towards the concessional cap. Now there are a number of types of reserve allocations that do not count towards the concessional cap,” Day revealed.

Further, he pointed out any reserve allocation performed on a fair and reasonable basis that does not cause any member’s balance to increase by 5 per cent or more will not count towards a person’s concessional cap. As such, a person will not have the ability to deduct any reserve allocation satisfying these conditions from their earnings calculation for the $3 million soft cap.

“When you think about that, it does have some hairs on it … let’s say I’ve got a lifetime pension running inside a self-managed super fund and I don’t want that anymore. What I can do is I can commute that and I can allocate all of the reserve amounts, which the ATO tells us is all of the amounts supporting that pension, I can allocate all of that back to the member [and] as long as [it involves starting] a term-allocated pension or a market-linked income stream or some sort of complying pension, then that reserve allocation doesn’t count,” Day noted.

“That’s potentially $200,000 now that we’re allocating back to the client that won’t count towards their concessional cap and therefore will increase their total super balance [for the $3 million soft cap].”

According to Day, lifetime pension reserve allocations will cause a similar problem as well.

“We’ve picked [this issue up] and have talked to the SMSF Association about it and hopefully it gets brought up with Treasury,” he said.

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