Heffron | My client’s SMSF has a reserve account and the trustee made an allocation from it on 1 July 2017 to a pension account.

My client’s SMSF has a reserve account and the trustee made an allocation from it on 1 July 2017 to a pension account.

Given such action is now contrary to the ATO’s new position expressed in SMSF Regulator’s Bulletin 2018/1, is the ATO likely to take action in relation to the fund?

As you have mentioned, the ATO’s new position is that reserve allocations may not be made to pension accounts (this includes both retirement phase pension accounts and transition to retirement pensions).  Where allocations are made from a reserve, they must be made to accumulation accounts only.

However, many trustees made reserve allocations in the 2017/18 financial year before the release of SMSFRB 2018/1 in March 2018.  If these reserve allocations were made to pension accounts, is the ATO likely to take action?

In a welcome move, the ATO has now confirmed that they will not devote compliance resources to funds where:

  • the establishment of the reserve was permitted by SIS and the fund’s governing rules,
  • the facts do not indicate that the reserve was used by the trustee as a means of circumventing the Government’s 1 July 2017 reforms (eg the establishment of the reserve was a consequence of the cessation of a defined benefit pension arrangement),
  • there was an established practice to make reserve allocations on a fair and reasonable basis to all member accounts (including pension accounts) prior to 30 June 2017, and
  • no further reserve allocations have been made to pension accounts since the release of SMSFRB 2018/1 on 15 March 2018.

For further explanation of the ATO’s new views on reserves, refer to Issue #4 of Super Insights.

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