An SMSF reserve is any monies or assets inside your SMSF that are not yet part of any Member’s Account. Reserves form part of the net assets of the Fund. Reserves are calculated as the total value of your SMSF minus the total value of all Member Account Balances.
The SIS Act allows Trustees to maintain reserves provided that the Fund’s Trust Deed does not prohibit the use of reserves. The main reasons for creating reserves and types of reserves are as follows:
- Investment reserves: Allow the Trustees to allocate earnings of the fund from this reserve to SMSF Members’ accounts in a year where investment returns are poor, or back to the reserve in a year where returns are good. Thus enabling smooth investment earnings for your Fund.
- Contributions reserves: You can warehouse your contributions in this reserve for up to 28 days after the end of the contribution month.
- Pension reserves: This reserve provides solvency for income streams to ensure payment at an agreed rate.
- Anti-detriment reserves: This reserve augments a lump sum death benefit payment to a beneficiary.
- General reserves: This reserve includes benefits transferred from a defined benefit pension.
- Expense reserves: Allows for Trustees to pay for general and specific expenses of the Fund.
Ways to create Reserves
- Fund Earning: Income, realised and unrealised growth within the Fund
- Insurance Proceeds: If the Fund’s Trust Deed allows for discretion, Trustees can allocate insurance proceeds to a reserve
- Contributions: Concessional Contributions need to be allocated to Member accounts within 28 days following the month in which the contribution was made
ATO Guidance on Reserves
The ATO issued some guidance on using reserves for contributions and also issued a form to note the unallocated concessional contributions.
Implementing a Reserving Strategy
A reserving strategy is when an SMSF keeps unallocated funds in the Fund and do not allocate it to Members. Superannuation Warehouse does not use Reserving strategies and all income is allocated to Members at the end of the year using a weighted average daily Member balance. The result is that the Member balances at the end of the year will agree to the total assets held by the SMSF at the end of the year.