Industry chatter about ways to cheat the new $1.6 million pension account balance cap has prompted the Australian Tax Office to issue a warning about the use of reserves.
A reserve is an amount of money or assets inside an SMSF that is not part of any member’s account.
The ATO says there are very limited circumstances in which reserves are appropriate and it will be scanning the industry for any suspicious surge in their number or balances following the July 1 changes.
A key change is that no more than $1.6 million can be transferred into tax-free pension accounts. Anything above this will attract extra tax and will need to be transferred back to an accumulation account.
An ATO spokesman said the use of reserves as a means to circumvent the new cap had been suggested in some SMSF-related commentary and forums.
“Whilst many of the existing reserves in SMSFs have arisen legitimately in the context of legacy pensions that are no longer available, the ATO does consider that there are very limited circumstances where it is appropriate for new reserves to be established and maintained in SMSFs,” he said.
“The establishment and maintenance of reserves by SMSFs beyond these very limited circumstances may indicate that they are being used inappropriately as part of a broader strategy to inappropriately circumvent the new limits and restrictions that apply under the recent superannuation changes.”
The average SMSF has assets of $1.12 million, according to the latest ATO data.
“Reserves are used by a very small percentage of self-managed funds and those assets and money held in reserve aren’t allocated to any particular member of the fund,” he said.
“That means you could use that potentially to artificially reduce your transfer balance cap or your total super balance below $1.6 million.
“If the ATO starts to see a whole bunch of people start to use reserving then they’ll be looking very closely into why people are doing that.”
Mr George said the ATO had updated the Q&A section of its website but was expected to issue more formal guidance in coming week.
The balance cap is designed to limit the big tax concessions afforded to self-funded retirees.
“Superannuation tax concessions are intended to encourage people to save for their retirement,” the government said when it announced the measure in the 2016 federal budget.
“They are not intended to provide people with the opportunity for tax minimisation or for estate planning.”
The government is saving $1.8 billion over four years.
Anybody with a balance of more than $1.7 million on June 30, 2017, will be subject to the consequences of their fund removing the excess and a tax on notional earnings on the excess capital.
Superannuates have six months from July 1 of this year to remove excess capital from their pension account if the total value of income streams is between $1.6 million and $1.7 million.
Those who fail to comply will have to pay extra tax on the notional earnings on excess capital, beginning at 15 per cent for an initial breach and rising to 30 per cent for repeated offences.
By Joanna Mather in Financial Review, ‘ATO’s warning for SMSFs trying to cheat $1.6m cap’
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