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Wealthy clients faced with 'serious' tax consequences

Confusion about the use of reserves in superannuation is putting some high net worth clients in the ATO's firing line, as common misconceptions create accidental breaches. 

SMSF Miranda Brownlee 10 November 2017
— 2 minute read

While the ATO has recently raised concerns about SMSFs using reserve amounts to circumvent the recent superannuation reforms, DBA Lawyers director Daniel Butler explained that one of the bigger issues is practitioners treating amounts as reserves when they are not truly reserves.


“Often we see accountants, advisers and actuaries who jump to the conclusion that it’s a reserve when it’s not well-founded in law,” said Mr Butler.

“There's a lot of misinformation about reserves, because with reserves, the starting point of the reserve is that it’s not a member benefit, so if a reserve is not a member benefit, it is a general fund resource. So the question really is, are people properly accounting for their funds, with respect to legacy pensions,” said Mr Butler.

The law saw a fundamental change in May 2004, he explained, when it became more difficult to set up a reserve.

“You couldn't just simply set up a reserve, [from that point]. You could reserve from earnings, but you couldn't just take money from a member's account to create a reserve,” he explained.

“In May 2004, basically the law changed to say that in an accumulation fund, which most SMSFs are, every benefit you have is a minimum benefit. So, what they effectively eliminated or prohibited in May 2004, was forfeiture; you could not shift an amount from your account to an reserve account, so therefore, if your pension commenced before May 2004, you could have a pension reserve. If your pension, being a legacy pension, commenced after May 2004, you could have a reserve but it depends,” he said.

Mr Butler said for pensions commenced after May 2004, this would depend on the legal documents, how the pension has been administered and the pension documents.

“It's a more detailed analysis to get to the end result, but a lot of people who we see, who are administering these legacy pensions are just saying it's a reserve amount and it’s not strictly correct. They may be under a misapprehension, and it may be that by calling it a reserve, [it will cause] a problem in respect of the fact that once you apply a reserve in a member account, it's then seen as a concessional contribution,” he said.

“By treating an amount as a reserve when its not, it may mean that you can get into serious tax consequences.”

Once the member has dealt with this, if the amount is more than 5 per cent that is applied to a member, he said, then it will be treated as a concessional contribution, which could give rise to excess concessional contributions tax.

“With excess concessional contributions tax, this also gives rise to an excess concessional contribution charge, which is between 4.7 and 5 per cent per annum. So you’re starting to get into penalties as well.”

Wealthy clients faced with 'serious' tax consequences
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