Reserves – basics you need to know

Reserves in a superannuation fund can be regarded as monies which form part of the net assets of the fund and which have been set aside for a clearly stated purpose.

Before setting up a reserve account, trustees need to be mindful of the following requirements:

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A separate reserving strategy must be formulated (Section 52 and Reg 4.09). The strategy must be comprehensive, objective and measureable.

The reserving strategy should incorporate the following aspects:

  • Purpose of the reserve (e.g. anti-detriment, investment smoothing, maintenance of income stream or contribution allocation);
  • Identify a target reserve amount or range;
  • Determine a term over which the reserve target amount is to be achieved;
  • An investment strategy to identify how the target amount will be achieved e.g. investment in cash or shares; and
  • Periodic review to ensure the appropriateness of the reserve.

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Provided the fund’s trust deed allows, reserves can be created from the following:

  • By allocating a portion of the funds income;
  • From realised and unrealised growth;
  • Contributions (if contribution reserve); or
  • Insurance proceeds.

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No specific limitations have been placed within SISA or SISR unless as required by the deed.

However, guidance from SCR 1999/1 suggests reserve balance should be no more than 15% of opening balance of the fund assets.

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Reg 292-25.01 of Income Tax Assessment Regulation (ITAR) 1997 provides that amounts allocated from reserves will be counted as concessional contributions unless the allocation meets either one of the following two requirements:

  • The amount allocated is on a “fair and reasonable” basis (allocated to each account within the fund and allocated amount less than 5% of member’s interest at the time of allocation); or
  • The amount allocated is used to discharge income stream liabilities.

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  • If members’ account is in accumulation, the allocated amount will increase the taxable component, unless it is a non-concessional contribution.
  • If members’ account is in pension, the allocated amount will be applied proportionately in accordance with the tax free percentage of the account.

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RELIANCE AUDITING SERVICES

Reliance Auditing Services is a specialist independent auditing services firm providing quality audits to SMSFs, companies, not-for-profits and AFS licensees all over Australia. Reliance Auditing places a huge emphasis on educating our clients to ensure they fulfil their reporting obligations.Call: 1300 291 060 or email info@relianceauditing.com.au.

DISCLAIMER: This information is an interpretation of rules, regulations and standards. It should not be considered as general or specific advice and neither purports, nor is intended to be advice on any particular matter. No responsibility can be accepted for those who act on the contents of this publication without first obtaining specific advice. Liability limited by a scheme approved under Professional Standards Legislation.