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.

When a recommendation by an accountant constitutes financial product advice, and where to draw the line.

 

 

This is the second in a 4 part series, in which Rockwell Olivier’s 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).

 

In part 1 of this series, we commented that, to the extent a person gives an opinion or a recommendation which is intended to influence another person to make a decision in relation to an SMSF (or could be seen to be so intended), that will constitute financial product advice, and hence a financial service for which an Australian Financial Services License (AFSL) is required (unless exemptions apply, such as the “accountant’s exemption”).

 

Conversely, it must be the case that if a communication falls short of being an opinion or a recommendation, it must not be financial product advice which would necessitate an AFSL (putting aside whether an exemption applies).

 

Communications which are merely the provision of factual information are generally recognised by the regulators as falling short of being an opinion or recommendation.

 

So, what’s the difference between a “recommendation” and “factual information”?

 

Recommendations

ASIC takes the view that (Regulatory Guide 36 (RG 36), para. 23):

 

If a communication is a recommendation or a statement of opinion, or a report of either of those things, that is intended to, or can reasonably be regarded as being intended to, influence a client in making a decision about a particular financial product or class of financial product (or an interest in either of these), it is financial product advice. Communications that consist only of factual information (i.e. objectively ascertainable information whose truth or accuracy cannot be reasonably questioned) will generally not involve the expression of opinion or recommendation and will not, therefore, constitute financial product advice.” (emphasis added)

 

The key aspect of “factual information” (from ASIC’s perspective) is that the communication consists of objectively ascertainable information whose truth or accuracy cannot be reasonably questioned. In the context of SMSFs, this would probably include things such as the following:

 

  • how to establish an SMSF
  • information about tax rates that apply with SMSFs
  • what “salary sacrifice” means when it comes to SMSFs

 

ASIC does, however, offer the following caution (RG 36, paragraph 24):

 

…in some circumstances, a communication that consists only of factual information may amount to financial product advice. Where factual information is presented in a manner that may reasonably be regarded as suggesting or implying a recommendation to buy, sell or hold a particular financial product or class of financial products, the communication may constitute financial product advice (e.g. where the features of two financial products are described in such a manner as to suggest that one compares more favourably than the other).”

 

ASIC takes the view (RG 36) that a communication is likely to be “factual information” where there is no value judgement about the communication. “Value judgements” would include things such as:

 

  • the merits of salary sacrificing into an SMSF
  • whether an SMSF is more desirable than other investments for tax purposes.

 

In this regard, ASIC comments that (RG 36, paragraph 31):

 

Factual information may be likely to be advice if it is presented in a way that is intended to, or can reasonably suggest or imply an intention to, make a recommendation about what a client should do.”

 

Sounds simple in theory, but in reality most communications between an accountant and their SMSF clients will draw close to the line on whether a value judgement is being made by the accountant in relation to their clients’ circumstances, even where factual information is being provided. Moreover, could it be also be said that the mere fact that the accountant sets out “factual” matters about various investment options (for example, an SMSF versus an alternate investment), is itself an implication of what the client should do, and therefore a recommendation? The line is thinner than most people think.

 

ASIC does offer some assistance in this regard. In one of its “frequently asked questions” (QFS 123), ASIC comments as follows in the context of accountants giving SMSF advice:

 

Merely setting out options and discussing the benefits and disadvantages of each option will not necessarily involve a recommendation…It is more likely that a recommendation may be inferred where an option is presented as the only option, or other options are described in terms that indicate that the adviser considers that they will not be suitable for the investor.

 

For example, the regulations allow a recognised accountant to give financial product advice in relation to the establishment of an SMSF where the client has already decided to set up the SMSF and dispose of interests in another superannuation fund…in order to do this. In this instance, you would only be asked for advice on administrative issues in establishing the SMSF and arranging for the rollover of funds from the…fund to the SMSF. You would not be providing a recommendation about disposal of the client’s interest in the…fund.

 

However, if the client has not yet made the decision to dispose of interests in the…fund, and you explain the superannuation options available, and the general benefits of the different types of fund, you should be careful that you do not imply that it would be appropriate for the client to dispose of their interests in the…fund in order to set up an SMSF. In this instance, you could be making a recommendation about the disposal of interests in the…fund, and would require an AFSL to engage in that conduct.

 

Let’s look at a hypothetical example of an accountant’s advice to their client about an SMSF, and the differences between a recommendation and factual information.

Mary, a “recognised accountant”, is Peter’s accountant. She sets up the business structure for Peter and prepares the accounts and tax returns of the business. She reminds him that the law requires certain payments to be made for superannuation. Peter asks whether she can recommend what to do. Mary says that there are a number of options open, including establishing an SMSF or contributing to a public offer fund, and there are a number of considerations in deciding what to do. For example, SMSFs may suit people who have the capability and interest to play an active role in decisions about the assets underlying their superannuation interests (subject to compliance with investment restrictions) and public offer funds may suit those who want to rely on professional management expertise for those decisions.

Mary says that, as she is not an AFS licensee, she cannot make a recommendation about what kind of superannuation fund Peter should arrange for contributions to be made to, and suggests he speaks to a holder of an AFSL. However, as a recognised accountant, Mary can recommend whether Peter should or should not establish an SMSF.

Mary informs Peter that she knows an AFS licensee named Paul who is able to provide financial advice. Mary informs Peter that she does not receive any commissions or other benefits from Paul. Peter then goes to see Paul for advice about retirement planning. After a detailed analysis of Peter’s personal circumstances, Paul recommends that Peter should establish an SMSF. Peter is concerned that he will not have the time or the skills to run an SMSF. Paul informs Peter that an SMSF does require time and effort on the part of the trustees and that all members of the SMSF must be trustees. Peter and Paul agree that Paul will advise Peter on the underlying investments of the SMSF, but Peter will get taxation and accounting advice from a suitably qualified person. Peter decides to retain Mary as his accountant and tax adviser.

Peter asks Mary to set up an SMSF for him, and provide accounting and taxation advice in relation to establishment and operation of the SMSF. Peter explains that Paul has advised him to set up an SMSF and that he is satisfied that an SMSF is the best option for his superannuation. Mary, as a recognised accountant, also recommends that Peter establish an SMSF and informs him of his obligations as a trustee. She does not give advice about what investment strategies the SMSF should adopt.

 

“Recommendation” vs “factual information”

The provision of factual information about the features of different kinds of superannuation products or the skills needed to be a director of the trustee of an SMSF will also not, of itself, be financial product advice. Mary may also give her opinion about the advantages and disadvantages of different kinds of superannuation products or about what qualities a trustee director should have, provided this opinion is reasonably necessary to, and an integral part of, advice about the establishment, operation or structure of the SMSF (see part 1).

If Mary had recommended that Peter should not set up an SMSF, Mary could still provide factual information about the different types of superannuation fund structures, but could not make any recommendation about which type of superannuation fund Peter should join.

 

What if Peter does not consult Paul?

Peter may decide that he does not wish to see Paul about retirement planning. He may make his own decision to establish an SMSF. If Peter has decided himself to establish an SMSF he can still ask Mary to set up the SMSF and provide accounting and taxation advice in relation to the establishment and operation of the SMSF. Mary does not need an AFSL to provide these services if she makes no recommendations about what investment strategies the SMSF should adopt.

 

Conclusion

Accountants should be aware of the differences between a “recommendation” and “factual information”, the latter usually falling short of requiring an AFSL authorisation. However, and as ASIC warns, factual information may be likely to be considered financial product advice if it is presented in a way that is intended to, or can reasonably suggest or imply an intention to, make a recommendation about what a client should do.

 When a <em>recommendation</em> by an accountant constitutes <em>financial product advice</em>, and where to draw the line.

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

Who should act as the trustee of your SMSF?

 

 

If you are thinking about establishing a self-managed superannuation fund (SMSF), one of the most important factors to consider is who will act as trustee of the Fund.

Most people think the easiest option is to appoint themselves as trustee or another individual with them, in the case of a sole member fund, because they think that using a corporate trustee seems too expensive.

The cost of establishing a company is in the range of $500 to $1000 which includes the ASIC registration fee.  A corporate trustee for a SMSF is a special purpose company, therefore the annual review fee charged by ASIC is approximately $45.

These fees are relatively modest compared with the benefits of appointing a corporate trustee of the Fund.  Let’s explore some of the benefits.

The most important concern for most people is who will remain in control or take over control of the Fund when they are no longer able to act.

In the case of a sole member fund, you don’t need to involve another person either as a member of the Fund or to be in control of the Fund. But, if you appoint the wrong person as a co-trustee, they could make decisions about the payment of your benefits against your wishes after your death.

The case of Katz v Grossman [2005] NSWSC 934 shows what can go wrong.  The father, Mr Katz, appointed his daughter as co-trustee of his SMSF after his wife died.  After Mr Katz’s death, his daughter appointed her husband as co-trustee of the Fund.  Her brother challenged the appointment but the Court held that the appointment was valid.  The superannuation benefits of the Fund were then paid directly to the daughter, rather than according to Mr Katz’s wishes, which was equally between his son and his daughter.

If, after the death of his wife, Mr Katz had used a company as the trustee of his Fund, where he was the sole director and sole shareholder then his daughter would not have been left in control of the Fund after his death.  Mr Katz’s Will appointed both his daughter and his son as Executor, and as the legal personal representatives of his estate, both his son and his daughter would have been in control of payment from the Fund instead of the daughter alone.

These unplanned outcomes can arise in a range of circumstances. In the case of Wooster v Morris [2013] VSC 594, Mr Morris had two daughters from his previous marriage that he wanted to receive his superannuation benefits from his SMSF.  Mr Morris and his “new” wife were members and trustees of the SMSF.  Approximately two years before his death, Mr Morris made a binding nomination for the payment, on his death, of his superannuation benefits to his two daughters.

After his death, his “new” wife appointed her son as co-trustee of the SMSF.  After seeking advice that the binding nomination was invalid, they subsequently appointed a company controlled by the wife, and this company as trustee of the Fund, made a decision to pay Mr Morris’ superannuation death benefits to the “new” wife.  After extensive litigation, his daughters succeeded in arguing that the binding nomination was valid.

If Mr Morris retained his superannuation benefits in a separate Fund, in which he was the sole member, and appointed a company as trustee of the Fund, where he was the sole director and sole shareholder then his “new” wife would not have controlled the Fund after his death.  As Mr Morris had prepared a Will that appointed both of his daughters as his Executor, and as the legal personal representatives of his estate, they would have been in control of payment from the Fund in these circumstances.

There can be other benefits of appointing a corporate trustee.  On the death of one spouse/partner, the surviving spouse/partner does not need to consider who to appoint as a replacement/co- trustee, or to change the ownership of assets, as the ownership will remain registered in the name of the company, which continues as trustee.

The Katz and Wooster cases tell us that something as simple as the choice of an appropriate trustee can have very expensive consequences, if appropriate advice is not obtained when estate plans are being made.

Melissa Krajacic is a Senior Associate at Rockwell Olivier practising in estate planning, estate litigation and estate administration. For further enquiries please contact 8673 5500.

Accountants, SMSFs and financial advice: drawing a (thin) line?

 

 

What advice can accountants give in relation to SMSFs without needing an AFSL?

This is the first in a 4 part series by Cristean Yazbeck, Head of Financial Services at Rockwell Olivier. In this series Cristean 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.

First up, we’ll explore what types of advice accountants can give in relation to Self-Managed Superannuation Funds (SMSFs) without needing an AFSL. Follow-up articles will cover:

  1. When a recommendation by an accountant constitutes financial product advice, and where to draw the line.
  1. A “walk through” of a typical accountant’s advice, including tips & traps for the unwary.
  1. What is the accountant’s “limited AFSL”, how it works, and what will change from 2016.

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

 

Financial Advice

As a general rule, a person who provides “financial services” in Australia (as defined under the Corporations Act) is required to hold an AFSL. “Financial services” includes providing financial product advice. An SMSF is itself a financial product, so to the extent that a person gives an opinion or a recommendation which is intended to influence another person to make a decision in relation to an SMSF (or could be seen to be so intended), that will constitute financial product advice, and hence a financial service for which an AFSL is required.

Sounds pretty glum if you’re an accountant, right?

The Corporations Act and the Corporations Regulations 2001 (Cth) (Corporations Regulations), however, provide some relief, particularly to accountants, though there is some complexity to navigate. What follows is a brief explanation of what has otherwise been referred to as the “accountant’s exemption”.

Part 4 of this series will look at the forthcoming removal of the “accountant’s exemption” from 1 July 2016, and the new “limited” AFSL that can be obtained in the meantime.

 

Accountant’s Exemption

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 to accountants) providing financial product advice in relation to SMSFs.

“Exempt service” includes (as similarly 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.

The “accountant’s exemption” kicks in, however, as follows:

Reg 7.1.29A of the Corporations Regulations provides that Reg 7.1.29(5)(c)(ii) (ie the regulation outlined above which prohibits a person giving advice (without an AFSL) that someone establishes their own SMSF), does not apply if the advice/recommendation is given by a recognised accountant in relation to an SMSF.

“Recognised accountant” is defined to include members of CPA, ICAA or the Institute of Public Accountants.

This last regulation is the one which will be removed from 1 July 2016, but we’ll say more about that in part 4 of this series.

To be able to properly rely on Reg 7.1.29 and the corresponding “accountant’s exemption”, there are other requirements which need to be met.

  1. The client is, or likely to become, a trustee or director of the trustee (and therefore a member of the SMSF), an employer-sponsor or a person who controls the management of the SMSF.
  1. No advice is given which relates to the acquisition or disposal by the SMSF of specific financial products (as defined in the Corporations Act) or classes of financial products, unless the advice is given for the sole purpose of ensuring compliance with the Superannuation Industry (Supervision) Act 1993 (SIS Act) or Superannuation Industry (Supervision) Regulations 1994 (SIS Regulations), and is reasonably necessary for that purpose.
  1. No recommendation is made in relation to a client’s existing holding in a superannuation product to modify an investment strategy or contribution level, unless the advice is given for the sole purpose of ensuring compliance with the SIS Act or SIS Regulations, and is reasonably necessary for that purpose.
  1. Any advice which constitutes financial product advice is accompanied by a written warning that the accountant is not licensed under the Corporations Act to provide financial product advice and that the client should consider taking advice from someone who holds an AFSL before making a decision on the SMSF.
  1. The advice is not for inclusion in an exempt document or statement under s766B(9) of the Corporations Act (for example, an expert report).

If the advice is being provided in the course of providing advice on the tax implications of SMSFs, the following additional restrictions apply:

  1. The accountant will 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 is 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.

What about accountants who are also tax advisers?

Invariably, advice by an accountant in relation to a person’s SMSF will lead to a discussion of tax, in particular the taxation implications of investing via an SMSF and other related matters such as contributions caps and excess contributions tax risks.

So, to what extent does such tax advice constitute financial product advice, and are there AFSL exemptions under the Corporations Act or Corporations Regulations?

 

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 

As noted above, s766A(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.

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. This would cover things such as:

  • Tax rates that apply in relation to SMSFs
  • Contributions caps and excess contributions tax.

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.

 

Conclusion

The various AFSL exemptions available to accountants in relation to their clients’ SMSF dealings no doubt provide significant opportunities. However, not only do the legislative complexities need to be navigated, but accountants should also be aware of the conditions and restrictions which apply to particular exemptions, especially where client disclosures are required.

 Accountants, SMSFs and financial advice: drawing a (thin) line?

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

Insurance cover changes are here

 

 

When setting up a SMSF, insurance is not usually the item on the top of the ‘to do’ list.

As of July 1 this year however, new rules came into force for insurance inside super.

SMSF trustees need to be aware of these rules, if for no other reason than changing insurance now could mean a forced reduction in the quality of cover that can be taken out.

Superannuation funds, including SMSFs, now can’t offer insurance that won’t pay claims in line with the Superannuation Industry Supervision Regulations. That means that insurance offered inside superannuation must meet the conditions to be paid out of super under the “condition of release” rules.

There are no great changes to life (death) insurance cover. Qualification for a payout doesn’t change and no insurers have signalled any major changes to their policies as a result. However, some of the smaller ancillary benefits offered by insurers will have to be dropped.

The issue with total and permanent disability insurance has always been that insurance companies have been able to offer claim conditions based on market pressures. As a result, insurance companies have competed to offer more generous policies regarding payouts.

Super funds can no longer offer the higher standard of “own” occupation. All TPD insurance contracts must now be “any” occupation policies. This occasionally (in less than 5 per cent of cases) has led to situations where an insurer has paid out a claim to a super fund but the super fund then has been unable, according to the SISA, to make the payout to the member.

For example, a member has taken out a $2 million TPD insurance policy with an “own” occupation definition. The member’s current occupation is as a brain surgeon, but before that they had worked as a general practitioner. The member suffers an injury that means he cannot work as a brain surgeon. However, the accident was such that he could continue to work as a GP (“any occupation for which the member was reasonably qualified by education, training or experience”).

The insurer would pay out to the super fund the $2m. However, under the new regulations, because the member could still work as a GP the payout would have to remain in superannuation until another condition of release was met.

TPD contracts offered inside super will now have to meet the definitions of “permanent incapacity”, as defined by the Superannuation Industry Supervision Act, so that if a TPD contract is paid out, it will also qualify to be paid out of the super fund to the member under a condition of release.

If you have an existing TPD contract with, for example, an “own” occupation condition, at some stage you may need to weigh up whether you keep the contract, with the possibility of having a payout by the insurer that may have to stay in the fund (for potentially decades) until another condition of release is met.

Another immediate change is that trauma insurance can no longer be taken inside super. Trauma insurance is generally designed to cover major illnesses, such as heart attack, cancer and stroke. Income protection is another area where competition has meant that policies inside super have often been more generous than could actually be paid out to the member under SISA restrictions.

Income protection policies are more complex (and are generally best taken outside super), but the benefits payable under a super policy have been reduced, because the policies will need to be able to be paid out under the “temporary incapacity” definitions in the SIS Regulations.

Insurance arrangements that were in place as at June 30 this year will be grandfathered.

SMSF Snapshot

 

 

The ATO recently released the latest SMSF numbers up until the end of the March quarter. The following infographics highlights some of the key takeaways.
SMSF Snapshot
SMSF Snapshot
As can be seen above, there are now nearly 1 million SMSF trustees in Australia across more than 500,000 funds.
SMSF Snapshot
Asset allocation remains heavily weighted towards listed shares and cash.
SMSF Snapshot
Total assets are now reaching close to $600 billion.
SMSF Snapshot
SMSF Snapshot
SMSF Snapshot
SMSF Snapshot
Australian Tax Office (Self-managed super fund report) Last modified: 29 May 2014

SMSF Trustees: Review your investment strategy

 

 

Coming up to the end of the financial year, it is worth reviewing your investment strategy for your SMSF.

The ATO requires that SMSF’s have a documented investment strategy that considers:

  • investing in a way to maximise member returns taking into account the risk associated with the investment
  • diversification and the benefits of investing across a number of asset classes (for example, shares, property and fixed deposit) in a long-term investment strategy
  • the ability of your fund to pay benefits as members retire and pay other costs incurred by your fund
  • the needs of members (for example, age, income level, employment pattern and retirement needs)
  • whether the trustees of the fund should hold a contract of insurance that provides insurance cover for one or more members of the fund

 

Many funds these days have investment strategies which are very general and/or unchanged from the original strategy when the SMSF was established.

 

They have not been updated to reflect market volatility over recent years or the changed financial circumstances of the SMSF members themselves.

 

Upon further examination, it is clear trustees have amended their strategies and asset allocations in response to changing circumstances but have failed to update their strategy documents accordingly.

 

In such instances it is prudent good practice to revisit the Investment Strategy and document the current SMSF Investment strategy, addressing in particular, the ATO requirements outlined above.

 

To make this process easier, our partner Australian Stock Report have provided a sample Investment Strategy template which you can download here.

EOFY Checklist

 

 

With July 1 almost here, The SMSF Review team have compiled the following checklist to ensure you’re making the most of your self-managed super fund and how you can avoid being hit by the tax man.

1. Be aware contribution caps are changing

The 1 July 2014 increase in superannuation contribution caps means that from age 50 you’ll soon be able to contribute $35,000 at a concessional tax rate and $180,000 out of after-tax money.

Using the bring-forward rule, this means a person with spare cash could put up to $540,000 into super and never have to pay tax on what the money earns or what the super fund pays out to them. Or up to $1.15 million for a couple!

The bring forward rule enables a fund member under age 65 to contribute up to three times the non-concessional contributions cap over a fixed three year period. But beware if you exceed the limit – excess non-concessional contributions are taxed at 46.5%.

In planning for financial year end, remember that once the ‘bring forward’ rule is triggered, the non-concessional contributions cap is fixed for the three year period and is based on the cap applicable in the first year. If this takes place on or before 30 June 2014, the maximum aggregate amount that can be contributed over the three years covered is $450,000 and access to the higher cap will not be available until the fixed three year period has been exhausted.

 2. The superannuation guarantee rate is also going up

Currently, employers must pay a minimum of 9.25% super guarantee to SMSFs. From July 1, the rate will increase to 9.50%.

Subsequently, you need to factor in that your employer will be obliged to contribute 9.5% instead of 9.25% and with an increased obligation on your employer to contribute, your voluntary component may reduce.

If you want to maximise your contributions before June 30, you need to talk to your accountant or professional adviser to make sure your salary sacrifice agreement with your employer allows the maximum to be salary sacrificed.

3. Watch out for the new penalty regime from July 1

New penalties will apply for breaches from 1 July 2014. These breaches include

  • bank accounts going into overdraft
  • failure to get accounts and returns prepared
  • providing loans to family members from your SMSF
  • investments being made into in-house assets which are not solely for the SMSF
  • SMSF assets not being separated from personal assets
  • taking money from the fund for living
  • incorrect borrowing structures being established for the purchase of assets by a SMSF

 

Previously, if trustees breached the rules, the ATO could declare the fund non-complying and subject the fund to a 45 percent tax on the value of assets.

From 1 July 2014 the ATO will have the power to penalise the fund without declaring it non-compliant, depending on the type of breach that is involved.

It is important to note that any penalties cannot be paid for or reimbursed from assets of the fund – they will be payable by the trustee personally.

See the table below for a summary of some of the estimated penalties:

BREACH Penalty
Requirement to prepare financial statements $1,700
Requirement to keep records $1,700
Operating standards e.g. contributions and preservation rules $3,400
Prohibition on lending money to relatives $10,200
Prohibition on trustees borrowing $10,200
Requirements to comply with in-house asset rules $10,200

 

The ATO can still, in addition to penalties, declare the fund non-compliant. However, the change provides the ATO with a variety of enforcement options at their disposal.

The penalty that will apply will ultimately depend on the nature and severity of the fund breach.

The penalty for lodging your SMSF accounts by 30 June has also increased.

If you haven’t done your 2013-14 accounts by 30 June, there’s a possibility that the ATO will be imposing a penalty on trustees that could be up to $1700.

At the moment the non-lodgement fee is a few hundred dollars, and in fact the ATO will probably be looking to impose that and then they’ll come along and impose this new penalty.

4. Don’t risk being declared a non-person

Non-lodging SMSFs will be declared a non-person for tax purposes if they’ve been slack with their lodgements.

If you have a SMSF and you haven’t lodged a tax return for two or more years, the ATO will classify your fund as a non-person.

That means your fund won’t be able to receive contributions, rollovers or transfers.

In other words, if you’re in that situation and you’re well behind on your reporting, your fund will effectively stop being able to operate.

5. Don’t exceed your minimum or maximum pension withdrawals

If you’re on a pension in your super fund, make sure you withdraw your minimum pension that you’re required to take out each year.

In some cases, there’s also a maximum limit.

Minimum and maximum pensions from SMSFs have to be paid by June 30 if you want to avoid paying tax on them.

If you don’t pay by 30 June, the risk is the government will take away the tax exemption on the fund and that can be significant, there can be thousands of dollars at risk.

If you are eligible to draw amounts from superannuation, you may be able to defer receiving the amount until after you reach age 60, or until a later financial year when you may end up paying a lower rate of tax.

6. Employers beware of SuperStream by 2015

The ATO is putting in place a new system that aims to standardise the way employers pay super.

The new SuperStream standard will require all SMSFs to be paid electronically and is being phased in gradually over the next few years.

Many employers still lodge their employee’s super by sending checks or banking it at the local bank.

Large and medium-sized employers, or those with 20 or more employees, must complete the implementation of SuperStream by no later than 30 June, 2015.

If you’re a larger employer, you should have looked out for the SuperStream changes and made arrangements by 31 May.

Large employers were supposed to get new electronic service numbers to pay their employees electronically by the end of May.

Small employers, or those with 19 or fewer employees, have another year starting from July 1, 2015 but must complete their implementation no later than 30 June, 2016.

Small businesses may be eligible to use the Small Business Superannuation Clearing House, which is a free online service provided by the ATO that allows you to pay contributions to a single destination in one simple electronic transaction.

ATO set to tighten noose on auditors

 

 

The ATO has outlined its continuing and new areas of focus in the SMSF sector and has warned of increased scrutiny of self-managed super funds and their auditors as it gears up to impose penalties of up to $10,200 on funds found breaking the law from July.

Speaking at the Institute of Chartered Accountants’ 2014 Business Forum, the ATO’s SMSF assistant commissioner Matthew Bambrick reiterated the regulator’s focus on auditor contravention reports for the coming year.

“Every single auditor contravention report that comes into us, we’ll do something about. So we’ll risk-rate every single one that comes in the door on the basis of what’s in there but also everything else we know about the fund and the trustees,” Mr Bambrick said.

“For medium-risk [funds], we are going to call to them and talk to the ­trustee directly,” he said.

“We’re going to gauge from that conversation whether it sounds like they know what they are doing. On the basis of that phone call we will decide whether to say ‘thanks very much’ or we will bump them into the high risk category – which means we will be doing a comprehensive audit on them.”

Mr Bambrick said the ATO is also focusing more on high-risk funds, and is placing an increasing focus on looking for “problem areas” in relation to SMSFs.

“We’re also focusing more on people who are promoting schemes, looking more at the high-risk areas like [non-arm’s length income] and LRBAs and so forth,” he said.

The ATO is also looking to auditors who only do a “low number” of audits per year, and low-cost audits.

“With the very low cost audits being offered, it does make you wonder how they’re able to do it for that kind of price. There might be good reasons, but there might not be,” Mr Bambrick said.

From July 1, the tax office will be able to impose a range of fines up to $10,200 that it hopes will provide better targeted deterrents.

“Until now, what we’ve been able to do is say ‘please don’t do it again’ or, ‘that’s a contravention, we’ll take away half your assets because your fund is non-compliant’. That doesn’t give us a lot of flexibility,” Mr Bambrick said.

Since July 2013, SMSF auditors have had to register with the Australian Securities and Investments ­Commission. There are now about 7000 registered auditors – 3000, or 25 per cent, less than were auditing SMSFs before the requirement.

The ATO believes those that are now registered – which were already doing 90 per cent of the audits – will provide higher quality audits and be a more ­reliable source of contravention ­notifications.

Mr Bambrick said they will be using the auditors themselves to tell them the funds they should be ­targeting. The tax office also wants auditors to tell them every fund they have audited to prevent SMSFs using the new list of registered auditors to lie about which firms have audited them.