Use of reserves by SMSFs

SMSF trustees have utilised reserves for many purposes over the years, whether it be for investment smoothing, strategic purposes or anti-detriment.

Information available on the operation and compliance stance on the use of reserves by SMSFs has been limited.

Following the Superannuation Reform measures announced in the 2016-17 Budget, the ATO was concerned that some SMSFs may utilise reserves to circumvent the rules.

To provide some clarity on the use of reserves, the ATO has released regulator’s bulletin SMSFRB 2018/1

Within the bulletin, the ATO comments about the use of reserves for certain applications and whether it is acceptable. If the application is not acceptable, the ATO will expect that the reserve is closed or a plan implemented to wind up the reserve.

Some of the key responses to the use of reserves are as follows:

It is unnecessary for an SMSF to hold reserves for the purposes of:

  • Administration reserves
  • Anti-detriment
  • Insurance reserve
  • Investment reserve

It is still acceptable for an SMSF to utilise reserves for unallocated contribution purposes.

The ATO have advised that no compliance action will be taken in relation to the use of reserves before 1 July 2017, provided that the reserves where not established to circumvent the rules for transfer balance cap or total superannuation balance purposes.

Trustees should document and have a clearly articulated purpose for existing and new reserves. The ATO have advised that any new reserves created or large increases or decreases in existing reserves will be scrutinised.

If you or your clients are uncertain or the compliance stance of reserves in their SMSF, please seek a private ruling from the ATO or professional advice. Contact us today. 

This article contains information that is general in nature. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs before making any decisions based on this information.