Adjunct Professor, Dr Brett Davies
Founder, Legal Consolidated
The wealth in a superannuation fund belongs to a member. You can't have money in a superannuation fund not earmarked for a person. An exception is SMSF reserves.
'Reserve accounts' are assets in your SMSF that is not part of any member’s account. No one has any entitlement to it yet. Reserves do not make up part of any member’s account balance. This is not until they are allocated to a member.
Why have SMSF reserves?
SMSF reserves have been in all my SMSF Deeds since 1994. They are not new. SMSF reserves have many uses:
1. Smooth out returns
Markets go up and down. Your investments can fluctuate widely from year to year. Smoothing Reserves are allocated to a member when leaving if it was a bad year. SMSF Reserves smooth out the return. In contrast, when there is a good return in your SMSF then some of that good return is put into the Smoothing Reserves. It is money for a rainy day. It is for those years when returns are poor.
2. Warehousing contributions
For up to 28 days you can warehouse SMSF reserves. This is 28 days from the end of the month in which the contribution is made. What happens if you have already maxed out your Superannuation contributions for the year?You are at your concessional contribution limit by May or June. Your SMSF Reserves, until allocated, don't form part of your member benefit. Therefore, you warehouse temporarily the excess contributions. You wait for the end of the financial year to pass. You then allocate this part of your SMSF Reserves to your member account in the new financial year.
So let's say you made a concessional contribution in June. However, you have already reached your concessional contribution limit. You put these new contributions into contributions reserve. By 28 July, in the new financial year, you then allocate that contribution reserve to yourself.
In Legal Consolidated Barristers & Solicitors SMSF Deeds and Deeds of Variations, the SMSF Reserves have many categories. One such category is the 'contribution reserve account'. You can see Samples of all our documents. Have a look at how we structure the SMSF Reserves in our Deeds here.
Insurance Reserves are useful to self-insure. What happens where a member suffers temporary incapacity, permanent incapacity and death? My doctoral thesis, in tax law, was on this subject. It is a passion of mine. Insurance reverses pay the injured member, family and estate. Our Deeds' Insurance Reserves also allow for 'temporary incapacity reserves'. This is quite unique, and we are proud of that innovation. The members receive an income from the fund. This is to meet temporary incapacity condition of release.
4. Leave money for your children
Your super is for your retirement. When you die it is no longer required. The Government forces your super to be taken out at death. There are two exceptions to this rule: reversionary pension and SMSF Reserves. Here we are only talking about SMSF Reserves. We have other articles on reversionary pensions.
Your adult children pay up to 32% non-dependancy tax on your Super. Reserves going to children are, in contrast, tax-free. The only other way to get rid of the 17% or 32% non-dependancy tax is to set up a ' Superannuation Testamentary Trust' in your Will.
The money you have put aside in the SMSF Reserves does not belong to you. Reserves belong to all members. Therefore, when you die the SMSF Reserves continue on. You can leave the SMSF Reserves for your children, and their children. The only more tax-effective gift is putting a 3-Generation Testamentary Trusts in your Will.
Can I update my SMSF Deed to allow reserves?
If you have a Legal Consolidated or Brett Davies Lawyer's Self-Managed Super Fund Deed then you can put money into SMSF reserves. If not update your SMSF Deed. This has many benefits. For example, the money in the reserve account does not belong to any particular member and therefore it can remain in your SMSF at your death for the benefit of your children.
New rules for SMSF Reserves
The ATO has changed the way that reserve accounts are operated and recorded:
- SMSF annual return instructions guide the accountant
- TD 2013/22.
- Follow examples 1 and 2 when completing the Request to adjust concessional contributions form (NAT 74851), and follow the SMSF annual return 2016 instructions.
Legal Consolidated's SMSF Deeds and Deeds of Variation fully comply with the above 3 requirements.
For more information telephone us.