SMSF reserves: what counts as a reserve, why the ATO scrutinises them, and the strategies it warns against

A reserve is an account inside a super fund that holds money not yet allocated to a member. Some large funds use them to smooth costs across members. In a self-managed super fund (SMSF), the ATO says a reserve is the exception, and it has warned that it will scrutinise reserves used to get around the super reforms. This article summarises SMSF Regulator's Bulletin SMSFRB 2018/1, "The use of reserves by self-managed superannuation funds", read on 9 October 2026, together with section 52B of the Superannuation Industry (Supervision) Act 1993 (SIS Act). It is general information; the bulletin's dollar thresholds are quoted as the bulletin states them, so check the current figures before relying on them.

What is a reserve?

The bulletin says a reserve is commonly understood to be "an account held within a superannuation fund that holds amounts that have not been allocated to a particular member". Under super law, subregulation 1.03(1) of the SISR defines reserves as those maintained under section 115 of the SIS Act, which lets a trustee maintain a reserve for a particular purpose provided the governing rules do not prohibit it. So an SMSF that uses a reserve must be able to clearly articulate its purpose.

The ATO applies the APRA view of the term. It says an account that is not consistent with APRA's description, "monies forming part of the net assets of the RSE that have been set aside for a clearly stated purpose", is not a reserve for SIS purposes. Not all unallocated money is a reserve: the bulletin gives suspense accounts used to record contributions and rollovers pending allocation as examples that are not. The ATO adds that the income tax meaning of "reserve" for excess concessional contributions is wider than the super law meaning.

The trustee's strategy duty

Where reserves are kept, section 52B(2)(g) of the SIS Act requires the trustee to "formulate, review regularly and give effect to a strategy for their prudential management, consistent with the fund's investment strategy and its capacity to discharge its liabilities (whether actual or contingent) as and when they fall due" (ATO Legal Database). See our article on the investment strategy annual review duty.

Why the ATO is wary of SMSF reserves

The bulletin says any need for reserves in SMSFs is distinct from large APRA funds, where reserves may spread costs across generations of members, and that SMSFs "by their nature only have a small membership". It therefore expects reserves in SMSFs "in limited circumstances and only for specific and legitimate purposes". Where an amount is held in a reserve rather than allocated to a member, the ATO says it will consider whether the trustee is meeting its SIS Act obligations, including:

• whether a "general" reserve receiving earnings without a clearly stated purpose is permitted by section 115
• whether the sole purpose test in section 62 is met; see our article on the sole purpose test
• whether the trustee has met the section 52B(2)(g) strategy duty.

The strategies the ATO says it will scrutinise

The bulletin was written after the 2016-17 Budget super reforms. It says the ATO is concerned about reserves used to circumvent the new limits, and that it will consider the sole purpose test and Part IVA of the Income Tax Assessment Act 1936, the general anti-avoidance rule. It lists these examples of intentional use of a reserve:

• to reduce a member's total superannuation balance so they can make non-concessional contributions without breaching the cap
• to reduce a member's total superannuation balance below $500,000 to access the catch-up concessional contributions arrangements
• to reduce a member's transfer balance account below the transfer balance cap, so a greater amount can go into retirement phase and earnings are exempt current pension income
• to reduce a member's total superannuation balance below $1.6 million so the SMSF can use the segregated method to calculate exempt current pension income.

These figures are as stated in the bulletin; thresholds are reviewed over time, so check the current ones. For background see our articles on the total superannuation balance and on segregated and proportionate methods.

What the ATO says it will do

The bulletin says the ATO will not apply compliance resources to arrangements entered into before 1 July 2017, provided the reserve was permitted by section 115 and the governing rules, and the facts do not indicate it was used to circumvent the reforms. It also warns that an amount allocated from a reserve, before or after 1 July 2017, "will generally be counted as a concessional contribution unless otherwise excluded". And: "Any unexplained increases in the creation of new reserves, in the balances of existing reserves maintained by SMSFs or allocation of amounts from a reserve directly into the retirement phase is likely to attract close scrutiny from us." The ATO's advice to anyone considering a reserve is to seek independent professional advice or approach the ATO first.

Practical points for trustees

1. If your fund's accounts show a "reserve", check what it is. A suspense or contributions "reserve" holding amounts awaiting allocation is not a section 115 reserve.
2. If it is a genuine reserve, write down its purpose and the prudential strategy, and review it with your investment strategy each year.
3. Do not use a reserve to hold back earnings from a member's balance to manage the contribution or pension limits; that is the pattern the ATO says it targets.
4. Get advice before creating or releasing a reserve, because allocations out of a reserve can count as concessional contributions.

Worked example

Illustrative only, not personal advice.

Colin and Sue's SMSF has a line in its accounts called "general reserve" with $120,000 that has accumulated from fund earnings over several years, with no written purpose. At their review, the trustees realise they have never documented why the money is held there or how it fits their investment strategy. Following the bulletin, they decide the sensible course is to get specialist advice on whether it is a valid section 115 reserve at all, and whether the amount should be allocated to their member accounts, bearing in mind that an allocation from a reserve can count as a concessional contribution. They do not move it to manage either member's balance or pension limits, which is the kind of arrangement the ATO says it will look at closely.

Sources

• ATO — SMSF Regulator's Bulletin SMSFRB 2018/1: The use of reserves by self-managed superannuation funds
• ATO Legal Database — SIS Act section 52B