The ATO has recently issued its first guidance on reserves in SMSFs via a brand new series of publications called "SMSF Regulator's Bulletins". The new Bulletins (SMSFRBs) allow the ATO to flag compliance issues it is concerned about or actively monitoring relatively quickly without the formality of other publications such as SMSF or Tax Rulings etc. It also explains how the Commissioner would apply particular legislation if asked via a formal process such as a private binding ruling. In that sense it is perhaps similar to a Taxpayer Alert but with a regulatory focus as well as a tax one.
This first publication (SMSFRB 2018/1) provides some contentious views (and reversals of previous views) on reserves in SMSFs.
We covered these in detail in the March edition of our Super Insights publication. If you are not already a subscriber, see here for our technical support packages to sign up today.
One of the highlights was the ATO's complete reversal of their position when it comes to making reserve allocations to pension accounts. In the past, the Regulator has taken the view that for a reserve allocation to be "fair and reasonable" it is necessary that all member accounts in the fund (including both pension and accumulation accounts) receive the same reserve allocation in relative terms. In other words, a trustee wishing to allocate reserves via (say) an extra interest rate of 4% in a fund with two members would simply apply an additional 4% to all their member accounts - both pension and accumulation accounts alike.
The new position (expressed in SMSFRB 2018/1), however, appears to be that the total reserve allocation would be calculated as 4% of all the various member accounts but it would only be allocated to accounts not yet in retirement phase (eg accumulation accounts). If one or both of the members didn't have an accumulation account, we asume a new one would need to be created.
While this issue has (not surprisingly) grabbed the headlines in SMSF publications, what is perhaps even more interesting is the very strong language the ATO adopts when talking about reserves in SMSFs generally. It signals a clear focus by the Regulator on asking SMSF trustees to defend any practice that involves creating, adding to or removing funds from a reserve. This is despite the fact that many SMSFs have legally operated reserves for a number of years and some funds have little choice but to have one if they have terminated a defined benefit pension.
We raised a number of issues on this publication with the ATO during the consultation process and will continue to do so now that it has been published. These, together with some thoughts on how existing reserves can be dealt with are all covered in our March 2018 Super Insights publication.