Why Should Your Super Fund Have Reserves?

July 30, 2011 - PRLog -- 1.  Supplementing members’ account balances

Self managed super fund Members’ accumulation accounts may be supplemented with reserves during times of poor investment performance, in order to ensure that members receive consistent growth in their benefits.

2.  Providing benefits to those who cannot make contributions

Self managed super fund members who are at least 65 years of age must be gainfully employed on at least a part-time basis in order to make contributions (or have contributions made on their behalf) to their superannuation fund.  ‘Part-time’ employment in respect of a financial year is defined as employment for at least 40 hours in a period of not more than 30 consecutive days in that year.  Note that an allocation of earnings from an investment reserve account is not a ‘contribution’ and can therefore be made to a member’s account, regardless of whether they satisfy this test or not.

3.  Estate planning advantages

Investment reserves may assist a superannuation fund trustee to make what is commonly referred to as an ‘anti-detriment’ payment, in order to ensure the dependants of a deceased member (typically spouse and children) can receive a greater lump sum after death to which they are entitled.

Broadly, a superannuation fund may claim a deduction when it pays out a superannuation lump sum, on the death of a member to the member’s estate or their dependants, if it increases the lump sum by an amount equal to the additional amount it could have paid out if contributions tax had not been payable on the contributions which funded the lump sum payment.  Specific formulae are prescribed for calculating this amount.

However, this increased lump sum must be paid out before the deduction can be claimed.  Superannuation funds with reserves may fund this additional amount from the reserve account.  Those funds without reserves may have difficulty making the extra payment beyond the deceased member’s benefits, especially if an SMSF has only one member.

4. Temporary incapacity benefits

Self managed super fund members who are temporarily unable to perform normal employment duties due to ill-health (physical or mental) may receive an income stream from their super fund.  Broadly, ‘temporarily’ means that the member is not suffering permanent incapacity.

The income stream that the member receives is non-commutable.  It must be paid for the purpose of continuing the remuneration the member was receiving before the temporary incapacity, and must end when the period of temporary incapacity ceases.  Generally, such an income stream can only be paid from employer contributions that are above the superannuation guarantee level, insurance proceeds or reserves.  The income stream is taxable to the member at marginal tax rates and there is no 15% pension rebate.

Thus, reserves can provide resources to fund a person’s temporary incapacity, especially as many people do not carry insurance for this risk within their superannuation fund.

5. Other reasons

There may be unexpected or unforeseen expenses that arise from time to time within a fund, eg a loss suffered on an investment which diminishes the member’s account just before they are paid their benefit.  Having moneys in reserves may assist in managing these types of unforeseen expenses.  http://self-managedsuperfund.com.au/

For all your self managed super fund requirements call our team of SMSF Specialists on 1300 587 673

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Self Managed Super Funds Specialists can help to review your superannuation and if beneficial can establish a Australian self managed super fund with SMSF administration and SMSF strategies. Visit the Self Managed Super Specialists for more information.