ATO zones in on hundreds of newly created reserves

ATO deputy commissioner James O’Halloran

         

 

As part of its ongoing compliance focus on the use of reserves by SMSFs, the ATO will be paying close attention to reserves that were created in the last financial year totalling $65 million.

ATO deputy commissioner James O’Halloran said the ATO estimated that there are approximately 1,900 SMSFs with reserves with an average value of $192,000.

“Of these funds, 35 per cent or 690 have not previously reported reserves. To date, new reserve amounts equate to approximately $65 million, with the average value of these new reserve amounts equalling $95,000,” he said.

Mr O’Halloran said the ATO is closely scrutinizing any unexplained increase in new reserves, increases in the balances of existing reserves, or allocation of amounts from a reserve directly into the retirement phase.

“Our work in the coming year will focus on examining new or increased reserves in the 2016–17 income year, where the facts and circumstances indicate the reserve was used as a means of circumventing the 2016 reforms,” he said.

“Where SMSFs implement strategies using reserves designed to circumvent restrictions in the super and income tax legislation, thereby weakening the integrity of these measures, we will consider the potential application of the sole-purpose test under section 62 of the Superannuation Industry (Supervision) Act 1993 (SISA) and Part IVA of the Income Tax Assessment Act 1936,” he said.

Where an SMSF does have reserves, he said the ATO will be looking to see whether they’re being maintained by a trustee in line with the sole-purpose test.

“Section 62 of SISA requires the trustee of an SMSF to ensure the fund is maintained solely for legislated core or ancillary purposes, most commonly the provision of retirement benefits,” he explained.

Before establishing a reserving strategy, Mr O’Halloran said it was important that SMSF professionals and their clients have carefully reviewed the SMSF’s trust deed to ensure it has the ability to create and manage the limited type of reserves identified as being appropriate in an SMSF.

“In any event, where reserves are kept, the trustee must formulate and put in place a strategy for their prudential management. These must be consistent with the entity’s investment strategy and its ability to discharge its liabilities as and when they fall due as required by paragraph 52B(2)(g) of SISA,” he said.

 

Miranda Brownlee
27 September 2018
smsfadviser.com

 

More Articles

SMSF succession planning part 1 – getting started

  Part 1 examines the key characteristics of a sound SMSF succession plan including planning for control...

Read full article

ATO reviewing all new SMSF registrations to stop illegal early access

The ATO said it is reviewing and assessing all new SMSFs before they can receive a registered or complying...

Read full article

20 Years of Silicon Valley Trends: 2004 – 2024 Insights

Check out the 20 years of Silicon Valley...

Read full article

Compliance documents crucial for SMSFs

Failure to create, execute, perform and retain documents for an SMSF can leave a fund and its trustees unable...

Read full article

The biggest assets growth areas for SMSFs

What five years’ worth of SMSF asset allocation data reveals. . The Australian Tax Office (ATO...

Read full article

Investment and economic outlook, October 2024

The latest forecasts for investment returns and region-by-region economic outlook. . The upturn in...

Read full article

Caregiving can have a retirement sting

Around 3 million Australians are unpaid caregivers. Most face a super risk.  . National Carers Week runs...

Read full article

Leaving super to an estate makes more tax sense, says expert

It is more tax effective to leave superannuation to an estate rather than a binding death benefit nomination...

Read full article

Sofie Korac is an Authorised Representative (No. 400164) of Prudentia Financial Planning Pty Ltd, AFSL 544118 and a member of the Association of Financial Advisers.

Financial Advice Sydney and the North Shore Office based in Gordon NSW

Financial Services Guide - Disclaimer & Privacy Policy

^