End of financial year checklist

 

 

With the end of the 2014/15 financial year upon us, it’s time to get your SMSF in order. Below are a select number of important considerations heading into tax time. These are by no means the only issues that trustees need to consider, simply some of the more common ones.
 

Maximise ‘before tax’ contributions for the year

 
Before tax, or ‘Concessional’ contributions can also be an effective way to contribute to superannuation as they are made from pre-tax income up to an annual cap. They can also help you reduce taxable income in the current year which could reduce your overall tax liability. Importantly the cap is based on the age of a person as at 30 June of the previous financial year.

However, you must be careful not to exceed concessional cap as there will be increased tax liabilities.
 

Maximise your ‘after-tax’ contributions for the year

 
Superannuation can be a tax-effective way to help you build wealth for your retirement.

It makes sense to look at whether you have assets that can be contributed to superannuation to help maximise future earnings on those amounts.

After tax, or ‘non-concessional’, contributions are one way to get more money into the superannuation system. These contributions are capped at $180,000 for the 2014-15 financial year.

If you are under age 65 on 1 July of the financial year, you can ‘bring forward’ two years of after-tax contributions giving you a total non-concessional contribution cap of $540,000 for the three years.
 

Co-Contribution

 
Check your eligibility for the co-contribution and if you are eligible take advantage. It is important to note that with the recent rule changes, it’s not as appealing as it was previously.
 

Spouse Contributions tax offsetting

 
Spouse contributions are after tax contributions that you can make on behalf of your spouse. A key feature of this type of contribution is that the contributing spouse may be eligible for a tax offset of 18% on contributions up to $3,000.

To be eligible:

  • you must make a non-concessional contribution into your spouse’s complying super fund in the financial year and not claim a tax deduction for the contribution ;
  • your spouse must be under age 65 or if has reached age 65 but is under age 70, must meet the work test ;
  • you and your spouse must be Australian tax residents ;
  • at the time of making the contribution you and your spouse are not living separately and apart on a permanent basis; and
  • your spouse’s total income must be less than $13,800 in the financial year. Spouse contributions count towards the spouse’s non-concessional contributions cap.

 

Capital Gains Review

 
If the SMSF is not in pension mode and has realised capital gains over the financial year it may pay to review any investment holdings that carry capital losses. Realising capital losses will offset against the capital gain and therefore lower any tax payable by the fund. If you are in pension phase, then consider triggering some capital gains regularly to avoid building up an unrealised gain that may be at risk to government changes in legislation.
 

Review and Update the Investment Strategy

 
Every year you should review your investment strategy and ensure all investments have been made in accordance with it, and the SMSF trust deed. This is something that is often overlooked by trustees and when investments have been made that aren’t in accordance, it can take a significant amount of work to rectify the issues. Also, make sure your investment strategy has been updated to include consideration of insurances for members.
 

Market Valuations – Now required annually

 
Regulations now require assets to be valued at market value each year. It is important that assets, particularly property and collectible, are re-valued this accordingly. For more information, you can refer to the ATO website and their publication; Valuation guidelines for SMSFs.

Changes to excess super contributions

 

 

Extract from ATO – Refund of excess non-concessional contributions

From 1 July 2013, individuals had the option of withdrawing their excess non-concessional contributions (ENCC) along with 85% of associated earnings for those excess contributions from their superannuation fund.

The full associated earnings amount will be included in their assessable income and taxed at their marginal tax rate in the year the excess contributions were made. The individual will also receive a 15% tax offset to recognise that the associated earnings are taxed in the fund.

Over the coming weeks, the ATO expect to start issuing elections to individuals with ENCC in 2013-14. The election allows individuals to tell the ATO how they would like their ENCC to be treated.

Upon receipt of an election, where the choice is to have their ENCC (and associated earnings) withdrawn from their super fund, the ATO will issue the nominated super fund with a release authority to have the money withdrawn.

Individuals who leave their excess contributions in the fund will continue to be taxed on these contributions at the top marginal rate.

Funds can expect to start receiving release authorities in July 2015.

 

Excess concessional contributions

Individuals who exceeded their concessional contributions cap in 2013-14 will have the excess amount included in their assessable income, and taxed at their marginal tax rate, plus an excess concessional contributions charge. Assessments and determinations have started to issue, giving individuals the choice to release up to 85% of their excess contributions from their super fund. When they make this choice, the ATO issue their nominated super fund with an excess concessional contributions release authority.

Funds are required to return the release authority statement and payment to the ATO within seven days of receiving the release authority. When funds have taken reasonable steps to return the release authority statement and payment within the legislative timeframe and have not been able to do so, the ATO will apply a practical risk based approach in applying administrative penalties.

 

This information has been provided for information purposes only. You should not rely solely on this information when making any investment or tax driven decision. Please refer to the ATO website for full details of the article and obtain advice tailored to your individual financial needs and objectives, from a professional adviser authorised to provide personal investment and taxation advice.  The ATO copyright disclaimer states: You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products). Neither the ATO nor the Commonwealth has endorsed us, or any of the services or products we offer.

 

Dividend stripping arrangements and the ATO’s concerns

 

 

Taxpayer Alert – TA 2015/1

The ATO recently released a Taxpayer Alert concerning the arrangements where a private company with accumulated profits channels franked dividends to a self-managed superannuation fund (SMSF) instead of to the company’s original shareholders. As a result, the original shareholders escape tax on the dividends and the original shareholders or individuals associated with the original shareholders benefit as members of the SMSF from franking credit refunds to the SMSF.

The issue, as the ATO sees it, is that contrived arrangements are being entered into by individuals (typically SMSF members approaching retirement) so that dividends subsequently flow to, and are purportedly treated as exempt from income tax in, the SMSF because the relevant shares are supporting pensions. The intention is for the original shareholders of the private company and/or their associates to avoid ‘top-up’ income tax on the dividend income; and for the SMSF to receive a refund of the unused franking credit tax offset, which is available for tax free distribution to its members.

This arrangement has features of dividend stripping which could lead to the ATO cancelling any tax benefit for the transferring shareholder and/or denying the SMSF the franking credit tax offset.

The ATO says these arrangements may trigger anti-avoidance provisions and “the ATO considers that arrangements of this type may also give rise to non-arm’s length income for the SMSF”.

The transactions may give rise to other compliance issues, including acquiring assets from related parties and not dealing on an arm’s length basis.

The Taxpayer Alert applies to arrangements that display all or most of the following (please note that this information has been taken directly from the ATO website: http://law.ato.gov.au/atolaw/view.htm?DocID=TPA/TA20151/NAT/ATO/00001&PiT=99991231235958)

    1. A private company (the company) has significant previously taxed accumulated profits, which are available to be paid to shareholders as franked dividends (subject to ‘top-up’ tax at marginal individual rates).
    2. A shareholder in the company transfers their shares (the shares) in that company to a SMSF of which the shareholder or their associate is a member. There may be more than one shareholder who transfers shares to the SMSF.
    3. The trustee of the SMSF treats the shares as supporting the payment of pensions to the member(s) of the SMSF (and therefore all or part of the income from the shares is regarded as exempt income of the SMSF).
    4. After the SMSF satisfies the 45 day holding period rule, the company distributes its accumulated profits to the SMSF as fully or partially franked dividends.
    5. The trustee of the SMSF treats the franked dividends and the attached franking credits as exempt income, which entitles the SMSF to a refund of the unused franking credit tax offsets.
    6. The company may be liquidated or deregistered after the value of the shares is substantially reduced (or reduced to nil) by the payment of the franked dividends.

The arrangement may also include one or more of the following characteristics or variations:

  1. The shareholder may transfer the shares to the SMSF as an in specie contribution and/or the SMSF may purchase the shares from the shareholder using:
    1. existing SMSF assets
    2. funding obtained from a limited recourse borrowing arrangement (LRBA) or some other form of financial accommodation, including paying for the shares using dividends received under the arrangement, or
    3. a combination of the above.
  2. The company may make one or more distributions of franked dividends to the SMSF.
  3. Distributions of franked dividends may also be made to other shareholders, if the SMSF does not hold 100% of the shares in the company.
  4. The SMSF may receive franked dividends indirectly from the company, such as through a unit trust.
  5. The SMSF (or another superannuation fund) may pay a superannuation benefit to enable the members to repay any outstanding shareholder or associate loans from the company prior to the acquisition of the shares by the SMSF.
  6. A member of the SMSF may be in the accumulation phase and not receiving a pension, meaning that relevant franked dividends and attached franking credits will be assessable at 15%, resulting in a partial refund of the unused franking credit tax offsets to the SMSF.

 

The ATO has previously warned trustees to be wary of arrangements involving the transfer of shares in a related private company with substantial retained profits and franking credits to an self-managed super fund (SMSF).

The TA above outlines their concerns with these types of arrangements.

The ATO goes onto to suggest that if your SMSF has entered into, or is thinking about entering into, this type of arrangement, you should independent professional advice from an advisor not involved with the arrangement. Furthermore, If you need to correct something in your annual return they direct trustees to the following; Amending your SAR.

 

This information has been provided for information purposes only.  You should not rely solely on this information when making any investment or tax driven decision.  Please refer to the ATO website for full details of the article and obtain advice tailored to your individual financial needs and objectives, from a professional adviser authorised to provide personal investment and taxation advice.  The ATO copyright disclaimer states: You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products). Neither the ATO nor the Commonwealth has endorsed us, or any of the services or products we offer.

What to expect in 2015

 
 
 
Geoff Saffer, Head of Equities at Australian Stock Report, recently sat down with Steen Jakobsen to discuss the global market and what to expect in 2015.

Steen Jakobsen is the Chief Economist, Saxo Bank A/S. Steen has more than 20 years of experience within the fields of proprietary trading and alternative investment.

Every year, Saxo Bank puts together a number of potential scenarios that may seem “outrageous” today but could come true in the following year.

Late last year Steen predicted oil would fall rapidly to US$80 a barrel, the Aussie dollar would soften significantly, Germany’s economy would struggle and certain US tech companies would plummet.

Be amongst the first to hear what Steen thinks is in store for next year, including;

  • Why the RBA could cut rates to as low as 1.5%
  • What will drive the AUD/USD in 2015
  • Why most investors are too bullish on the US market
  • Why investors will be best served piling into fixed interest in early 2015
  • The prospect of the market facing a major turning point mid-year
  • How to position your portfolio to take advantage of these developments

SMSF Trustees: What’s in a DRP?

 

 

Using Dividend Reinvestment Plans (DRPs) can be an effective method of growing your super or speeding up wealth accumulation outside super.

When DRPs were originally introduced, some companies offered discounts of 5% or even 10%. These days, generous discounts are rare. Expect to see a discount of around 2.5% or less with many companies offering no discount at all.

Calculating capital gains on DRPs can cause headaches when you go to sell the shares. You need to weigh up whether the administration effort or accounting bills is worth the benefit you would get.

Of course if you or your SMSF owned shares in a company but didn’t want to invest more money in that stock, it would be silly to sign up to that company’s DRP.


 

How do DRPs work?

Some companies offer their shareholders the opportunity to participate in a DRP. Under these plans, shareholders can choose to use their dividend entitlement to acquire additional shares in the company instead of receiving a cash payment.

Let’s say you (or your SMSF) own 20,000 shares of XTY Limited, which last traded at $1. XYZ now declares a three-cent dividend.

For your 20,000 shares, you are entitled to receive $600 in dividends.

If XYZ offered a DRP and you had selected this as your preferred method of payment, the company would effectively use the $600 to buy more shares for you – giving another 600 shares @ $1 each (DRP purchases also attract no brokerage).

Note, of the 400 or so companies paying dividends, just over half (225 at last count) offered a form of DRP and almost a third of these are ETFs or listed investment companies (LICs).

The new accountant’s “limited AFSL”, how it works, and what will change from 2016

 

 

This is the final part of a 4 part series in which we explore the thin (sometimes, very thin) line that accountants can inadvertently cross when giving advice to their clients. The “line” is of course the need to hold an Australian Financial Services License (AFSL) to cover the provision of that advice.

 

For the purposes of this series, we’re assuming that the client is a retail client under the Corporations Act 2001 (Cth) (Corporations Act).

 

In Part 1, we discussed the “accountant’s exemption”, which has the effect of permitting a “recognised accountant” to recommend that someone establishes their own SMSF or dispose of their existing superannuation interest (perhaps to transfer the benefits to an SMSF), where that advice is given in the course of providing advice on the “establishment, operation, structuring or valuation” of the SMSF.

 

We also flagged, however, the forthcoming removal of the “accountant’s exemption”, and the new licensing regime that will apply for accountants from 1 July 2016.

 

This Part 4 will discuss the new licensing regime from 1 July 2016, and the “transitional” arrangements which apply for the period 1 July 2013 to 30 June 2016.

 

Why remove the “accountant’s exemption”?

 

The removal of the “accountant’s exemption” is essentially a product of the “Future of Financial Advice” (FOFA) reforms, which largely took effect from 1 July 2013. In a nutshell, FOFA prescribes a statutory “best interests” duty on AFS licensees and their representatives, and bans a number of payment arrangements involving licensees and their representatives.

 

As we discussed in earlier articles in this series, accountants are able to provide advice on SMSFs under the “accountant’s exemption”, courtesy of Regulation 7.1.29A of the Corporations Regulations.

 

By way of background, let’s recall how the “accountant’s exemption” operates:

 

Section 766A(2)(b) of the Corporations Act provides that the Corporations Regulations may set out the circumstances in which a person is taken not to provide a financial service. This takes us to Reg 7.1.29 of the Corporations Regulations, which states that a person who provides an eligible service in the context of conducting an exempt service is taken not to provide a financial service.

 

“Eligible service” is defined by reference to the definition of financial service in s766A(1) of the Corporations Act. It therefore includes (as is relevant for accountants) providing financial product advice in relation to SMSFs.

 

“Exempt service” includes (as relevant to accountants giving advice in relation to SMSFs) the following (Reg 7.1.29(5)(a) and (b) of the Corporations Regulations):

 

“…advice in relation to the establishment, operation, structuring or valuation of a superannuation fund…[where] the person advised is, or is likely to become…a trustee…or director of a trustee…or a person who controls the management…of the superannuation fund.”

 

However, Reg 7.1.29(5)(c)(ii) of the Corporations Regulations requires that the advice does not include a recommendation that a person acquire or dispose of a superannuation product.

 

So, if we were to stop there, we’d see that a person cannot – without an AFSL – recommend that someone establishes their own SMSF or dispose of their existing superannuation interest (perhaps to transfer the benefits to an SMSF), even if that advice is given in the course of providing advice on the “establishment, operation, structuring or valuation” of the SMSF. The establishment of an SMSF would be considered the acquisition of a financial product.

 

However, Reg 7.1.29A of the Corporations Regulations provides that Reg 7.1.29(5)(c)(ii) (which is the regulation which provides that advice cannot include a recommendation that a person acquire or dispose of a superannuation product), does not apply if the advice/recommendation is given by a recognised accountant in relation to an SMSF. This is the “accountant’s exemption”.

 

Once this Regulation is removed on and from 1 July 2016, however, accountants will generally be unable to advise a person to acquire or dispose of an interest in an SMSF without being licensed in their own right, or an authorised representative of a licensee.

 

What is the “limited AFSL”?

 

The “limited” AFSL is essentially a transitional measure, which permits accountants to apply for an AFSL, but with reduced application and compliance requirements. It therefore affords the opportunity to obtain an AFSL but under a less stringent application process and with reduced license conditions which would otherwise apply to “full” licensees. From 1 July 2016, accountants who propose to give advice in relation to the establishment or disposal of an SMSF will need to hold either a “full” or “limited” AFSL, or be the representative of a licensee.

 

It should be noted, however, that the “limited” AFSL, whilst having less stringent application and compliance requirements, does also limit the types of “financial services” which are able to be provided under the license. Specifically, financial services under a “limited” AFSL are limited to the following:

 

  • providing advice on SMSFs;

 

  • providing advice on superannuation products in relation to a client’s existing holding in a super product but only to the extent required for making a recommendation that the person establish an SMSF or advice on contributions or pensions under a super product;

 

  • providing ‘class of product’ advice on a range of financial products; and

 

  • arranging for a person to deal in an interest in an SMSF.

 

There are other significant differences between a “full” and “limited” AFSL as well.

 

Here’s a table outlining some key differences between the “limited AFSL” and the “full” AFSL.

 

Issue Full AFSL  Limited AFSL
Does the “organisational competence” requirement apply? The applicant must have responsible managers who hold the qualifications and have the experience set by ASIC in RG 105.There are five options which the nominated responsible managers can meet.

Commonly, responsible managers meet the option which requires the responsible manager to have an undergraduate degree in a relevant discipline and a short industry course to meet the knowledge requirements, and three years out of the last five years’ experience as a representative of an AFS licensee

If the responsible managers nominated are ‘recognised accountants’, then they do not need to meet ASIC’s experience requirements. They will, however, need to meet the knowledge requirements.If an entity obtains a limited AFSL and nominate ‘recognised accountants’ as the responsible managers, then the entity is subject to a condition that three years after receiving its licence, ASIC can call on the entity to prove its responsible managers have the appropriate knowledge and skills.

 

Audit requirements A registered company auditor must be appointed to undertake an annual audit of the licensee. A licensee must lodge its profit and loss statement and balance sheet annually. If client money is not handled, then the limited AFS licensee can lodge a compliance certificate rather than an audit.However, the licensee will still need to lodge its profit and loss statement and balance sheet annually.
Application process Lodgement of prescriptive Form FS01, core proofs and additional proofs. No difference, other than the omission of the requirement that responsible managers lodge two business references with ASIC where those responsible managers are ‘recognised accountants’ and the application is made during the transition period (i.e. 2013 to 2016).

 

Conclusion

 

With the forthcoming removal of the “accountant’s exemption”, an opportunity exists for accountants to consider the transitional measures currently available, and obtain a “limited” AFSL. It should be noted, of course, that whilst the “limited” AFSL has less stringent application and compliance requirements, it does limit the types of “financial services” which are able to be provided under the license.

 Cristean Yazbeck - Head of Financial Services

Cristean Yazbeck

Head of Financial Services

+61 02 8263 6663

E cyazbeck@ro.com.au

© Copyright in this content and the concepts it represents is strictly reserved by Rockwell Olivier, Pty Ltd

Should your SMSF own your business premises? The pros and cons

More SME owners will focus much more closely in coming months on the pros and cons of buying and gearing their businesses premises through their self-managed super funds.

Specialists in superannuation, investment and business advice expect SME owners to consider accelerating any existing plans to gear their business premises through their self-managed super funds. This follows renewed debate about whether to bar future gearing.

The interim report of the Australian government’s inquiry into the financial system calls for views about whether superannuation gearing should be prospectively prohibited because it “may create vulnerabilities for the superannuation and financial systems”.

Here are 10 critical points to consider when deciding whether your SMSF should acquire business premises, typically through gearing, to rent to your family business:

PROS

1. FAMILY BUSINESSES MAY MAKE EXCELLENT TENANTS

Sue Prestney, a partner at PwC Private Clients, says that in her experience, family businesses tend to make “excellent” tenants for their SMSF-owned business premises.

Again speaking in regard to her own clients, Prestney says their family businesses typically pay their rent on time to their SMSF. “They look after the premises like it was their own.”

Martin Murden, a director of SMSF consulting and auditing with the Partners Wealth Group, says family businesses make “great” tenants provided the business is successful.

And Murden says dealings between a family SMSF as landlord and a family business as tenant can be smoother – regarding such things as rent reviews – than with an arm’s-length tenant.

2. EXCEPTION FOR BUSINESS PROPERTY

Business real estate is one of the limited types of assets that SMSFs are allowed to acquire from related parties including members.

And business real estate is one of the few types of assets that SMSFs can lease to related parties, including the members’ businesses, without a limit on its value under the in-house asset rules in superannuation law.

3. CONCESSIONAL TAX TREATMENT

During an SMSF’s accumulation or saving phase, rents are taxed at 15% within the fund while capital gains are taxed at an effective 10% if the property is held for more than 12 months.

And once the business premises are backing the payment of a superannuation pension, fund income and capital gains are tax-free. This means that the SMSF may eventually be able to sell a property in the pension phase without paying CGT on any profits

SMSFs in the accumulation phase can claim the same types of tax deductions as individual investors who buy properties in their own names including negative-gearing deductions for the shortfall between the deductible expenses, including interest payments, and rental income.

4. BUSINESS SUCCESSION AND ESTATE PLANNING

SMSF trustees aim to keep the premises of their family businesses in their super fund through generations, with the aim of gaining greater security of tenure for the business as well as business succession and estate-planning benefits.

Under this strategy, an SMSF will need sufficient other assets to pay member superannuation benefits when necessary for older members such as a business’s founders.

5. ASSET PROTECTION

Business premises held in an SMSF are generally out of the reach of creditors if individual fund members are declared bankrupt – subject to claw-back provisions in the Bankruptcy Act.

CONS

1. POTENTIAL CONFLICTS IF FAMILY BUSINESS STRUGGLES TO PAY RENT

While the principals of a troubled family business may need the premises to keep trading, the family SMSF’s trustees – who are often the same people – must maintain the fund for the core or sole purpose of paying member benefits.

Additionally, funds are prohibited from providing financial assistance to members, says Murden. This includes giving rent relief to family businesses in financial difficulties.

2. HIGH-COST BUSINESS PREMISES CAN DOMINATE AN SMSF’S PORTFOLIO

This can make it to diversify a fund’s portfolio to spread investment risks and opportunities.

When preparing their mandatory investment strategies, SMSF trustees must consider such factors as investment risk, portfolio diversification, liquidity of investments, ability to pay member benefits and the members’ circumstances.

Peter Crump, superannuation strategist for ipac South Australia, says that super funds are not legally required to diversify their investments but emphasises that trustees must consider diversification when preparing their investment strategies.

Indeed, some fund trustees specifically decide to have SMSF portfolios dominated by a single property asset, such as the premises of their businesses, perhaps after considering the diversification of their other super and non-super investments.

3. IT MAY BE MORE TAX-EFFECTIVE TO GEAR BUSINESS PREMISES OUTSIDE SUPER

Much will depend on the circumstances.

First, the superannuation tax rate is much lower than most personal marginal tax rates, thus providing potentially lower tax deductions for negative gearing. Second, lenders usually require a much higher deposit for SMSF gearing, which means a property is likely to remain negatively-geared for a relatively short period – if at all.

As well, SMSF trustees should be cautious about relying too much on the possibility that the business premises will eventually be sold when the asset is backing the payment of a pension and thus becomes exempt from CGT.

Crump suggests that trustees recognise that the fund may well sell the property before it becomes exempt from CGT.

4. POTENTIAL COSTLY TRAPS IN CONDITIONS FOR SUPER GEARING

SMSFs should gain quality professional advice to ensure compliance with the strict conditions allowing funds to borrow. Mistakes can be costly.

SMSF Trustees must enter a limited recourse borrowing arrangement and a geared asset must be held in a separate trust until the load is repaid. Lenders cannot make a claim against any other assets of the super fund in the event of a default on the loan.

5. SMSF COULD FACE SEVERE FINANCIAL SETBACK FOLLOWING LOAN DEFAULT

Despite the requirement for a limited recourse loan, an SMSF that defaults on a loan to buy business premises could lose its sizeable deposit plus capital repayments and payments of interests and costs.

Upon a property’s forced sale, a defaulting fund would be paid whatever is left after the lender recovers any outstanding amounts including the cost of a forced sale and the discharge of the mortgage.

A “walk through” of a typical accountant’s SMSF advice, including tips & traps for the unwary.

 

 

This is the third in a 4 part series, in which our Head of Financial Services, Cristean Yazbeck, explores the thin (sometimes, very thin) line that accountants can inadvertently cross when giving advice to their clients. The “line” is of course the need to hold an Australian Financial Services License (AFSL) to cover the provision of that advice.

 

For the purposes of this series, we’re assuming that the client is a retail client under the Corporations Act 2001 (Cth) (Corporations Act).

 

Typically, an accountant providing any form of assistance to a client in relation to an SMSF is likely to be asked to give at least some of the following (and probably, all) in relation to their clients’ SMSF:

  • Strategic advice
  • Tax & structural advice
  • Asset allocation advice
  • Investment advice
  • Execution advice/services.

Each of the above services has potential AFSL implications. In part 1, we discussed the “accountant’s exemption” and the scope under which an accountant could provide SMSF advice without an AFSL. In part 2, we canvassed the fine line between “financial product advice” and “factual information”. In this article, we’ll walk through the “typical” SMSF-related services that an accountant may be asked to provide, and the licensing implications (if any) of each of those services. We’ll look at some tips and common traps that accountants may fall into, and consider some potential opportunities to restructure existing advice templates to ensure no potential adverse AFSL implications arise.

 

Let’s examine each of the above “typical” SMSF-related services.

 

Strategic Advice

 

Invariably, an accountant will wish to discuss their clients’ strategic objectives, including on matters such as wealth creation, wealth preservation, income needs, risk appetite, and estate planning. These discussions will likely take place at the start of the engagement and as part of the initial client dialogue, and to assist the accountant in determining the scope of his or her engagement.

 

To what extent do these discussions constitute the provision of “financial product advice” which require an AFSL, or to which an exemption applies?

 

To the extent that the initial client dialogue merely serves to scope, understand and restate the clients’ objectives and is documented accordingly, and that dialogue in itself contains no recommendations, then there is unlikely to be any financial product advice given which would necessitate an AFSL. Refer to part 2 for further information on the distinction between a “recommendation” and “factual information”.

 

Tax & Structural Advice

 

No accountant-client interaction will be complete if “tax” wasn’t discussed. Indeed, tax is likely to be a key motivating factor for investing through an SMSF.

 

Typical “tax” advice in relation to an SMSF will include at least the following:

 

  • Tax rates that apply
  • Contributions caps and excess contributions tax
  • Restructuring of assets or creation of entities to minimise tax.

 

Surely such advice is financial product advice?

 

Fear not! Accountants should consider the following:

 

  1. Tax Agents’ exemption under the Corporations Act 2001 (Cth) (Corporations Act)
  2. “Exempt” services under the Corporations Act as they apply to tax advice.

 

We talked about each of the above in part 1, but we’ll consider them again here.

 

Tax Agents’ Exemption

 

Section 766B(5)(c) of the Corporations Act 2001 (Cth) (Corporations Act) provides that advice given by a registered tax agent, which is given “in the ordinary course of activities as such an agent and that is reasonably regarded as a necessary part of those activities“, is not financial product advice.

 

“Exempt” services under the Corporations Act as they apply to tax advice

 

In part 1, we identified s766A(2)(b) of the Corporations Act, which provides that the Corporations Regulations 2001 (Cth) (Corporations Regulations) may set out the circumstances in which a person is taken not to provide a financial service (and thus not require an AFSL covering the provision of that service). This takes us to Reg 7.1.29 of the Corporations Regulations, which provides that a person who provides an eligible service in the context of conducting an exempt service is taken not to provide a financial service.

 

“Eligible service” is defined by reference to the definition of financial service in s766A(1) of the Corporations Act. It includes (as is relevant for accountants) providing financial product advice in relation to SMSFs.

 

“Exempt service” includes (as relevant to accountants giving advice in relation to SMSFs) the following (Reg 7.1.29(5)(a) and (b) of the Corporations Regulations):

 

  “…advice in relation to the establishment, operation, structuring or valuation of a superannuation fund…[where] the person advised is, or is likely to become…a trustee…or director of a trustee…or a person who controls the management…of the superannuation fund.”

 

However, Reg 7.1.29(5)(c)(ii) of the Corporations Regulations also requires that the advice does not include a recommendation that a person acquire or dispose of a superannuation product. The “accountant’s exemption, though, kicks in (Reg 7.1.29A of the Corporations Regulations) to enable a recognised accountant to provide such advice.

 

In addition, Regulation 7.1.29(4)(a) of the Corporations Regulations provides that “advice to another person on taxation issues including advice in relation to the taxation implications of financial products“, is also an exempt service. However, to be able to rely on this exemption, further conditions need to be met:

 

  1. The accountant must not receive a benefit such as a fee or commission (other than from the client) as a result of the client establishing the SMSF.

 

  1. The advice must be accompanied by a written statement that the accountant is not licensed under the Corporations Act to provide financial product advice, and that tax is only one of the matters that must be considered when making a decision, and that the client should consider taking advice from someone who holds an AFSL before making a decision on the SMSF.

 

Asset Allocation Advice

 

Once an SMSF is established and funds are either contributed or transferred/rolled over to the SMSF, decision making will of course turn to investing those funds. Accountants will invariably be asked for advice on how funds could or might be allocated: should the client purchase property using a limited recourse borrowing arrangement? What about shares? Managed funds? Should the client hold insurance within their SMSF? And so on…

 

It’s not uncommon for accountants to recommend that their clients speak with a licensed financial adviser to deal with such questions. Accountants should bear in mind, however, that there is some scope to advise on such matters without it constituting financial product advice.

 

Regulation 7.1.33A of the Corporations Regulations provides that a circumstance in which a person is taken not to provide a financial service under the Corporations Act is “the provision of a service that consists only of a recommendation or statement of opinion provided to a person about the allocation of the person’s funds that are available for investment among 1 or more of the following“:

 

  • shares
  • debentures;
  • debentures, stocks or bonds issued, or proposed to be issued, by a government;
  • deposit products;
  • managed investment products;
  • investment life insurance products;
  • superannuation products;
  • other types of asset.

 

The Regulation covers “superannuation products”, which would include SMSFs.

 

The note to Regulation 7.1.33A also provides, though, that the exemption “does not apply to a recommendation or statement of opinion that relates to specific financial products or classes of financial products.

 

In essence, this regulation exempts what is often referred to as “broad asset allocation advice” from being a “financial service”. So long as it deals with the asset type as a whole, and does not refer to specific financial products or classes of financial products, then the exemption can apply.

 

Investment Advice

 

Investment advice in relation to a specific financial product or class of financial product will invariably require an AFSL authorisation.

 

Execution Services

 

As we know, persons generally need to hold an AFSL to cover the provision of a “financial service”. We’ve discussed “financial product advice” so far, which is one type of “financial service”. Another “financial service” under the Corporations Act is what is referred to as “dealing” in a financial product.

“Dealing” is defined in s766C of the Corporations Act to include (among other things):

  • applying for or acquiring a financial product;
  • issuing a financial product;
  • disposing of a financial product.

Where a person arranges for a person to engage in any of the above, that will also constitute “dealing”.

Accordingly, execution-type services provided by an accountant in relation to their clients’ SMSFs will need to be examined to determine whether they constitute a “dealing” which requires an AFSL.

Here are some specific examples of common advice/recommendation scenarios involving SMSFs which may fall within some of the exemptions discussed above, and how they might cross the line and require AFSL authorisation.

 

Category Common Question Exempt From AFSL  AFSL Authorisation Required
Strategic Advice Can you review my existing investments and determine whether an SMSF is appropriate for me? If the review serves to scope, understand and restate the clients’ objectives and is documented accordingly, and that dialogue in itself contains no recommendations, then there is unlikely to be any financial product advice given which would necessitate an AFSL. If, in the course of the review, recommendations are made, for example, that other investments may be more appropriate, an AFSL may be required (unless an exemption applies)
Tax & Structural Advice Should I contribute additional funds to my SMSF to tax advantage of concessional contributions caps? If the advice is given by a Tax Agent in their ordinary course of business, and/or the advice is limited to the tax implications of contributing to super, the advice will likely be exempt. 

Note the disclosure obligations which apply.

 

If the advice goes beyond merely considering the tax implications of contributing to super, it may fall outside the statutory exemptions are require an AFSL authorisation.
Asset Allocation Advice How can I structure my holdings within my SMSF? Broad asset allocation advice, which does not identify specific financial products or classes of financial products, will not be a “financial service” (eg if it refers to “shares” or “superannuation” generally).  AFSL authorisation required if the advice is in relation to a financial product or class of financial products (eg XYZ managed fund). 
Investment Advice Where should I invest my SMSF assets? No AFSL authorisation required unless the advice is in relation to a financial product or class of financial products. AFSL authorisation required if the advice is in relation to a financial product or class of financial products (eg shares, managed funds). 
Execution Services Can you set up my SMSF for me? Advising a client to establish an SMSF, or on how to establish an SMSF, should be exempt from being a “financial service”.  Setting up an SMSF on the client’s behalf will likely constitute “dealing” in a financial product.

 

Conclusion

 

To the extent that advice-related services are to be provided in relation to a client’s SMSF, accountants should be aware of the specific AFSL implications of each of those services, and the available exemptions. In addition, advice documentation should be drafted in such a way which is reflective of the exemption on which the accountant is relying.

 

For example, if relying on the “Tax Agents’ Exemption” on the basis that the advice is given by the agent in the ordinary course of activities as such an agent and that is reasonably regarded as a necessary part of those activities, the factual bases to support such reliance should be clear from the advice. This would entail, for instance, making it clear that the advice is in relation to liabilities, obligations or entitlements which may arise under tax law. Such matters would objectively be seen as being within the ambit of the ordinary course of business of a tax agent.

 Cristean Yazbeck - Head of Financial Services

Cristean Yazbeck

Head of Financial Services

+61 02 8263 6663

E cyazbeck@ro.com.au

© Copyright in this content and the concepts it represents is strictly reserved by Rockwell Olivier, Pty Ltd

Divorce, Tax, the Family Company and Section 109J

 

 

When the real life upheavals of relationship breakdowns come face to face with complex business arrangements and even more complicated tax rules it can be almost impossible for the parties to know which way to turn.

Business owners often have significant wealth sitting in the Family Company for a whole range of good reasons, including the lower company tax rate. One of the many challenges at Family Law property settlement time is to work out a way of dividing up the pie without triggering unnecessary tax bills.

In recent times the Australian Tax Office has adopted the practice (at least in many private rulings it issued on the operation of section 109J ITAA 1936) that taking cash out of the Family Company pursuant to Family Law orders would not trigger the usual tax costs that arise under Division 7A of the Income Tax Assessment Act. Those rules basically say that if you take money out of the Family Company it will be taxed as a “deemed” dividend. The ATO practice meant that because Division 7A didn’t apply there was the potential for very large tax savings.

Unfortunately, the Tax Commissioner has now changed his mind and says that money or property coming out of the Family Company as part of Family Law property settlements will be taxed as dividends. This “new” taxation treatment will generally apply where Family Law orders are entered into from 30 July 2014.

This is a major change to the tax considerations that need to be taken into account when working out Family Law property settlements. Professional advisors and parties to Family Law proceedings should take extra care to ensure they don’t inadvertently trigger a tax nightmare by overlooking this important change, or not understanding the maze of other tax rules that need to be considered when they are dealing with family business assets and other property.

If you are a detail person, you can read the Commissioner’s new position on Section 109J and some other tax consequences of Family law property settlements in Taxation Ruling TR 2014/5, on the ATO website

If you need practical advice about how to navigate the tax issues that arise in relationship breakdown property settlements, the team at Rockwell Olivier are here to assist.

Written by Damian O’Connor, Tax Principal at law firm Rockwell Olivier.  For practical advice about tax issues relating to your SMSF, please contact Damian on +61 3 8673 5523 or email doconnor@ro.com.au.

Dividend washing – Is your SMSF at risk?

 

 

Over the past few months the Australian Tax Office (ATO) has been scrutinising “dividend washing”, with a focus on self-managed super funds (SMSF).

Dividend washing is a fancy name for a relatively simple arrangement where taxpayers, including SMSFs try to claim two sets of franking credits on what the Australian Tax Office says is a single parcel of shares.

How is dividend washing supposed to work?

Dividend washing aims to take advantage of exchange rules that allow shares to be traded ex-dividend and cum dividend during the same period. The seller (eg, the SMSF) of a share ex dividend gets the benefit of the dividend and the franking credits attached to it. The SMSF, as buyer of the cum dividend share, also aims to get the benefit of the dividend and franking credits attaching to the newly bought share so they get two lots of franking credits – at least that is the plan. This cum dividend market may be attractive to foreign sellers who would not be able to benefit from franking credits in any case.

The Taxation Commissioner does not like these arrangements and says that existing anti-avoidance rules prevent the double franking credits benefits from arising in the first place, but just to be sure the Government has changed the law for distributions made after1 July 2013.

Whether or not the ATO position is technically correct is another question, but given the ATO’s strong public statements, taxpayers, including SMSF trustees, should carefully consider their positions and if they decide to take action to undo franking benefits they may have received from dividend washing transactions they should act within the relatively short time frames the Tax Commissioner has given before he puts these transactions under further scrutiny.

Taxpayers who have undertaken dividend washing transactions but self-modify their tax returns will escape penalties if they amend their tax returns by 22 September 2014 or by the deadline specified in any correspondence sent to them by the ATO.

As with any difficult tax or superannuation problem, it pays to consult with your professional advisors before you engage with the ATO.

Written by Damian O’Connor, Tax Principal at law firm Rockwell Olivier.  For practical advice about tax issues relating to your SMSF, please contact Damian on +61 3 8673 5523 or email doconnor@ro.com.au.