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  • Reserve allocations

    A trustee of a super entity may maintain reserves, provided the governing rules of the fund allow this. If reserves are maintained, the trustee must develop and implement a strategy for their prudential management consistent with the entity's investment strategy and its capacity to discharge liabilities.

    An amount allocated from a reserve will generally be counted as a concessional contribution for the member, unless otherwise excluded because certain conditions are met.

    Certain allocations from reserves risk the integrity of the ECT system and therefore measures were put in place to make sure the policy objectives of the legislation were met.

    In accordance with subsection 292-25(3) certain amounts that are allocated from a reserve to a member are treated as concessional contributions and, therefore, count towards the concessional contributions cap.

    Regulation 292-25.01 of the Income Tax Assessment Regulations 1997 (ITAR 1997) contains the rules that specify which reserve allocations are to be included as concessional contributions.

    Specifically, sub regulations 292-25.01(2) and (3) of the ITAR 1997 cover allocations made in accordance with Superannuation Industry (Supervision) Regulations 1994 (SISR) Division 7.2 and that are assessable income of the super fund.

    ITAR 1997 subregulation 292-25.01(4) states that certain allocations from a reserve are not concessional contributions. These exceptions apply when both the following apply:

    • An amount is both  
      • allocated on a fair and reasonable basis to all members, or class of members, of the fund
      • less than 5% of the member's interest at the time.
    • An allocation is used solely for the purpose of discharging super income stream liabilities that are currently payable, and it either  
      • is used to satisfy a pension liability paid during the same income year
      • arises in the event of commutation to a pension during a pension's life and is allocated to start another pension for that person
      • arises in the event of commutation of a pension as a result of the death of a primary beneficiary, and is allocated to pay a death benefit.

    Division 7.2 of the SISR requires a trustee who receives a contribution for an accumulation interest to allocate that contribution to the member's account within 28 days after the end of the month in which it is received.

    Find out about:

    • For more information, refer to ATO Interpretative Decision ATO ID 2012/16 Superannuation Excess Contributions Tax: concessional contributions - allocation of contributions

    Example: reserve allocation to one member

    Henry, Anne and Bill are the members (and trustees) of an SMSF and all have been members for the same length of time.

    Over the years the fund has built up a reserve of $100,000. Henry is approaching retirement.

    The trustees decide to allocate half of the reserve to Henry's SMSF account balance, which is currently valued at $500,000.

    The trustees must report the reserve allocation to the ATO in the statement detailing their contributions, as required by section 390-5 of Schedule 1 of the Taxation Administration Act 1953 (TAA).

    The allocation will be included in Henry's concessional contributions as it was not made to all the members or a class of members at the same time.

    It is also greater than the 5% threshold (a $50,000 allocation is 10% of Henry's $500,000 account balance) and is counted as a concessional contribution.

    End of example


    Example: reserve allocation to numerous members

    Further to the above example, instead of only making an allocation to Henry, the trustees decide to allocate half of the reserve to all three members.

    The $50,000 will be proportionately allocated to each member on the basis of their current account balances in the SMSF.

    All have been members of the fund for the same length of time. In each case the 5% allocation threshold is not exceeded.

    This allocation meets the conditions in ITAR 1997 subregulation 292-25.01(4). As a result the allocation is not included in the fund's statement in which they report all other contributions to the ATO.

    It is therefore not included in the member's concessional contributions.

    End of example

    For more information on concessional contributions, refer to 'Concessional (before-tax) contributions' in Super contributions - too much super can mean extra tax.For more information on concessional contributions, refer to 'Concessional (before-tax) contributions' in Super contributions - too much super can mean extra tax.

    Excluded contributions

    Paragraph 292-25(2)(c) specifically excludes the following amounts from a person's concessional contributions (even though these contributions might be assessable income of the fund):

    • roll-over super benefits to the extent that they consist of an element untaxed in the fund, and is not an excess untaxed rollover amount for the person
    • the amount of a super benefit transferred from a foreign super fund to an Australian complying super fund specified in a choice made by the former member of the foreign fund under section 305-80 - for more information, see Foreign super fund transfers  
      • this amount generally reflects investment earnings on overseas super benefits while the person was an Australian resident
      • there may be an assessable component of the transfer that does count towards the person's concessional contributions
      • any contributions made to CPFs.

    The taxable component of a super benefit made by a CPF can only consist of an element untaxed in the fund, which is subject to separate tax arrangements.

    In addition to these exclusions, section 292-25 of the Income Tax (Transitional Provisions) Act 1997 (IT(TP)A) states that the following components of a directed termination payment are not included as concessional contributions:

    • tax-free component
    • taxable component to the extent it does not exceed $1 million.

    The $1 million is a lifetime cap and is reduced by the taxable component of each transitional termination payment made to a person during the period:

    • starting on 1 July 2007
    • ending just before the directed termination payment is made.

    This provision applies only until 30 June 2012. Employer termination payments will not be able to be rolled over into super from 1 July 2012.

    See also:

      Last modified: 06 Sep 2017QC 34181