Reserves for your Superannuation

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Grant AbbottReserves for your Superannuation – Grant Abbot

Reserves have had a long history within the insurance and superannuation industries.  Used by trustees of employer superannuation funds to self insure, smooth investment returns, pay temporary incapacity pensions and even hold onto surplus contributions they have become a mainstay of industry based superannuation funds.  Long the preserve of life insurance companies reserves were determined each year by actuaries as surplus to the needs of the insurance company to meet all potential claims given the mortality and other risks of its policy holders.

Self managed superannuation funds (“SMSFs”) have also been in the reserve game since 1994 when these small mum and dad controlled superannuation funds were first introduced into Australia.  But it is with the introduction of the Simpler Super regime in 2007 that SMSF reserving strategies have become important for tax and estate planning purposes.

What is a Superannuation Fund Reserve?

A reserve in a SMSF is simply an amount or an asset or assets in the fund to which no member is presently entitled.  In old superannuation talk it was an amount that was not vested in any member until the happening of a specific event – say the member turning age 65, retiring, becoming permanently incapacitated or commonly, on the death of a member.  In modern day SMSFs, the trustee of a fund may create a surplus – say out of the earnings of a fund and allocate it to a reserve.  When a specific event happens the trustee may allocate from a reserve to a member account or to a member’s dependant beneficiaries.

SMSF Reserve Case Study

The Smith family SMSF has two members – George and Janet Smith with George’s member’s balance sitting at $500,000 and Janet’s – $450,000.  In the last income year the trustee earned $50,000 on its investments.  Normally the trustee of the fund allocates these earnings to George and Janet’s member’s account on a fair and reasonable basis.  However this year the trustee has decided to implement a reserving policy in the fund.  Instead of allocating earnings to fund members, the trustee instead decides to allocate the $50,000 to an anti-detriment reserve in the fund (more on this reserve later).  Alternatively the trustee could have allocated the earnings to a number of reserves including an investment or self insurance reserve.

The Importance of the SMSF Trust Deed

SMSF reserves can be used for a wide variety of purposes.   Some reserves are also very tax effective thereby increasing the long term capital and strategic value of the SMSF.  However before considering reserve strategies the trust deed of a SMSF must be updated to:

¬     Allow the creation of a reserve

¬     Specifically allow a reserve type such as an anti-detriment, pension, investment or self- insurance reserve

¬     Enable the trustee of a fund to provide a purpose and rules around a reserve

¬     Provide for a means of allocating to a reserve

¬     Detail when amounts may be allocated from a reserve to a member’s superannuation account, another reserve or a member’s beneficiaries.

The Chan & Naylor/SMSF Strategies trust deed has long been at the forefront of SMSF reserving strategies providing trustees with a strong, secure platform for creating, building, maintaining and allowing the trustee to allocate from reserves.  If you are using a SMSF Strategies trust deed already there is no need to upgrade your trust deed simply contact us to see how reserves may be used for your fund.

SMSF Reserves

Examples of some reserve accounts that may be created under the Superannuation Laws and the SMSF Strategies trust deed include:

¬     A Pension Reserve – where current superannuation pension liabilities such as a guarantee to pay an agreed rate of return on a pension may be met.

¬     An Anti-Detriment Reserve – where a bonus or additional payment is made directly from the fund to a dependant of a deceased member or the deceased member’s legal estate to compensate the deceased member’s estate for any contributions tax paid by the deceased member.

¬     A General Reserve – where the trustee can allocate earnings of the fund – from this reserve the trustee can populate other reserve accounts or make member superannuation benefit payments.

¬     A Self Insurance Reserve – where the trustee can fund temporary and permanent incapacity payments to members as well as death benefit payments to dependants and/or the legal estate of deceased members.

¬     An Expense Reserve Account – where the trustee can use the reserve account to fund general and specific expenses of the fund; and

¬     A Contributions Reserve Account – for short term warehousing of contributions for a term no greater than 28 days after the end of the month in which the contribution was made.

SMSF Reserves and Chan & Naylor

Chan & Naylor are a leading SMSF specialist advising firm and can help structuring reserves to fit your family super fund circumstances.

Got a question regarding SMSF Reserves?
Please visit http://www.chan-naylor.com.au/ask-the-experts/ to send your question to “Ask the Experts” or phone 1300 250 122

 

Important notice and general advice warning:

This information is of a general nature only and is not intended to represent investment or professional advice. This information does not take into account your individual objectives, financial situation and needs. You should assess whether the information is appropriate for you and consider talking to a financial adviser before making an investment decision. A Product Disclosure Statement (PDS) for the products mentioned in this communication should also be obtained and you should consider the PDS in deciding whether to acquire, or to continue to hold, any investment.

The information contained in this document is given in good faith and is believed to be correct at the time of publication, but no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors or omission (including responsibility to any person by reason of negligence) is accepted by Chan & Naylor Pty Ltd, its officers, employees, directors and agents.

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