• Any non-pension reserves (investment reserves, anti-detriment reserves etc).
• Pension reserves where the pensioner died some time ago.
• Pension reserves where the pensioner dies “now” but the pension stops on their death and the trustee has no further obligation to make payments. For example, Carol has a complying lifetime pension that is not reversionary. If she dies “now”, the trustee will simply stop making payments (there is no further liability).

There is no cap-free pathway to deal with any of these reserves.

But, of course, the new rules allow these reserves to be allocated and checked against the non-concessional contributions cap. We have five tips for managing this process effectively.

Have the cash ready to release any excess. An individual’s non-concessional contributions cap in any given year ranges from $nil to $360,000. So, for many people, the ability to use this cap rather than the concessional cap might mean there is no excess. But if there is, it’s important to be ready. That’s because releasing an excess (rather than paying tax on it) is almost always the better option. But releasing an excess requires a cash payment of both the excess itself and an associated earnings amount (less 15 per cent tax). Even worse, the cash payment goes via the ATO rather than directly to the member concerned. It will be critical the fund is ready to make a large payment promptly when the time comes. (Remember to follow the right process. Simply withdrawing the excess from the fund as soon as the allocation is made won’t stop an excess from occurring and won’t satisfy the requirement to “release” the excess contribution.)

Minimise associated earnings – lodge the return quickly. This is probably a good tip any time a fund has a member with an excess non-concessional contribution. Remember, one of the consequences of exceeding this cap is that a notional earnings amount is calculated as if the excess contribution was received at the start of the financial year. The interest rate used to work out the earnings is generally very high – currently around 11.4 per cent p.a., compounding daily. It keeps accruing until the ATO notifies the member of the excess. Since the ATO won’t even know about it until the fund’s annual return for the year has been lodged, it makes sense to do this as quickly as possible. The higher the earnings amount, the more tax paid by the member.

There’s no need for the allocation to be fair and reasonable. Of course, it depends exactly what the trustee / family wish to achieve, but there is nothing to prevent the trustee from (say) allocating all of the reserve to just one member. This might, in fact, be the perfect solution in some cases. For example, Lex and his two adult children are members of their SMSF and have historically received small reserve allocations under the 5 per cent rule. The reserve was created when Lex’s wife died and her defined benefit pension stopped. Any larger allocations (i.e., above the 5 per cent limit) will count towards the recipient’s non-concessional contributions cap because the cap-free pathway for pension reserves doesn’t apply in this case. The trustee decides to allocate the full $500,000 reserve to Lex (despite the fact that some of this amount will exceed his non-concessional contributions cap). The logic is that Lex has met a full condition of release and can withdraw the entire amount from superannuation at any time.

Don’t forget the allocation will form part of the member’s taxable component. Sound counterintuitive? It might feel like an amount that uses up a member’s non-concessional contributions cap should become part of their tax-free component. But remember, a reserve allocation isn’t a contribution. It’s certainly not a personal contribution for which no tax deduction has been claimed. So it will be added to the member’s accumulation account and form part of their taxable component.

And finally, don’t forget there is no obligation to add earnings to a reserve. Any reserve can be held as a fixed amount with (effectively) its “share” of earnings being included in the amounts credited to other member accounts. The ATO considered this extensively in a private binding ruling back in 2020 and concluded that even though this naturally meant more money ended up in the members’ accounts, that process didn’t constitute a reserve allocation.