Estate Planning Update – Summer 2013
What is a contribution reserve?
A reserve exists when the value of the net assets of the fund exceed the value of the account balances of the fund’s members. The reserve is an amount that has not been specifically allocated to any member of the fund.
Section 115 of the SIS Act provides that a Trustee may create a reserve in a fund, so long as the Trust Deed allows it.
Reg. 7.08(2) of the SIS Regs permits allocating contributions 28 days after the end of the month in which the contribution is made. Where a contribution is made in June of a financial year that would potentially result in excess contributions, the contribution is able to be allocated to a contribution reserve, and then allocated from the reserve to the member’s account in July.
As a result of the use of the contribution reserve, the contribution will count towards the contribution cap for the financial year in which the contribution is allocated – section 292-25(3) ITAA97 – not the financial year in which it was paid.
Reg 7.08 provides that the trustee must allocate a contribution to a member not later than 28 days after the end of the month. This regulation does not distinguish between concessional and non-concessional contributions, therefore this would suggest that contributions cannot remain indefinitely in the reserve.
Where a fund has a reserve, section 52(2)(i) of the SIS Act provides that the Trustee must formulate, review and give effect to a strategy to manage the reserves.