While the ATO has been closely scrutinising the creation of new reserves due to concerns they may be used as a way of circumventing the 2016 reforms, Heffron SMSF Solutions director Meg Heffron said it is highly likely that a lot of these reserves were created in 2016–17 simply because the trustees were getting out of defined benefit pensions.

“It’s just an outcome of getting rid of the defined benefit pension. For example, if you have a pension that goes for a specific number of years such as a life expectancy pension and you stop it early, then there’s a cap on the amount that you’re allowed to take as a commutation value. This is also the same for flexi-pensions,” she explained.

“The ATO doesn’t call it a reserve when the pension is still running even though you’ve got a pot of there that’s being used to pay the pension. Your actuary may have been telling you for years that it’s more than you need but the ATO doesn’t call it a reserve until you’ve switched that defined benefit pension off and then they call whatever is left over a reserve.”

Given the complexity of these types of pensions, a lot of SMSF trustees would have been looking to switch these pensions off. In many cases, these pensions are also starting to run out or the person receiving the pension has now died.

“They were only allowed to go for 15 years (or longer if you had a longer life expectancy), so let’s say you started one in 2004 that was going to go for 15 years, well it will run out in 2019, and there will probably be money left. So as soon as it ends, whatever is left over will be called a reserve.”