Be Prepared with these 9 SMSF Audit tips

There is no doubt that additional emphasis was being placed on the annual SMSF Audit before Covid-19 and I believe we need to be prepared for more extensive requirements from fund auditors going forward for them to be able to complete the work they do to satisfy the ATO and best practice.

This blog has been prepared by the the Audit team at Super Records and I am grateful for them for some good advice on what additional information/documentation SMSF Trustees and their advisers will be required to provide their Auditor this year. This is not meant to be an exhaustive list but it’s pretty damn good. Not all the requirements listed are obligatory but do reflect best practice so discuss these with your accountant or administrator.

1. Early Release of Superannuation – In the case where the lump sum payment made from an SMSF due to the receipt by the Trustee of a copy of a “Coronavirus – early release of super benefits” approval letter issued by the ATO, we will require below documents for audit:

• A copy of the letter received from ATO
• A copy of the signed application made to the super fund by members for lump sum withdrawal
• A copy of the signed minutes of the meeting of trustees approving the lump sum payment
• A copy of the signed confirmation letter sent to members by trustees.

2. Minimum Pension Withdrawal – Any additional documents are not required to be prepared and provided for this. However, we will be reviewing and making sure that if a pensioner has already drawn more than their reduced minimum, it was not returned to super fund as there is no mechanism to return surplus pension payments. However, if the member was eligible for a contribution, it is possible to contribute additional pensions as contributions.

3. Rent Relief provided by SMSF – In the case where SMSF provides rent relief, as an auditor we need to make sure that the rent relief looks reasonable. We will be using the National Cabinet’s Mandatory Code of Conduct – Commercial Leasing Principles to verify the reasonableness for commercial properties. The code provides that:

• The amount of relief should be proportionate to the tenant’s loss in turnover.
• Rent relief can take the form of:

a. a rent waiver which must be at least 50% of the total rent relief and cannot recouped by the landlord over the lease term and/or
b. a rent deferral for the remaining rent relief with this amount amortised over the remaining lease term or at least 24 months (whichever is greater).

We will require the following documents for audit purpose for all type of properties

• A written request by tenant to SMSF for a rent relief listing the adverse economic effects of COVID-19.
• A minute of meeting of SMSF trustees for the relief to be provided and reasons or basis on which the relief to be provided.
• If the arrangement is not as per above mentioned code and if tenant is a related party, the commercial justification based on which the alternate arrangement was negotiated.
• A lease variation document to confirm the agreed updated lease terms.

4. Loan relief provided by SMSF to borrower – In the case where SMSF provides loan relief to a borrower, as an auditor we need to make sure that the loan relief looks reasonable. We will be using the relief offered by commercial lenders to business as per https://www.ausbanking.org.au/covid-19/the-business-relief-package/. This provides that:

• If your business or not-for-profit has been adversely impacted by COVID-19 your bank will allow you to defer principal and interest repayments for all loans attached to the business for a period of six months. While the interest will be capitalised and paid off over the life of the loan.

We will require the following documents for audit purpose

• A written request by borrower to SMSF for a variation of the loan terms listing the adverse economic effects of COVID-19.
• A minute of meeting of SMSF trustees for the relief to be provided and reasons or basis based on which the relief to be provided.
• A loan variation document to confirm the agreed updated loan terms.

5. LRBA relief provided to SMSF by lender – In the case where SMSF receives loan relief from a third party lender, we will require document related to loan relief offered by lender and new accepted loan terms agreed by SMSF and Lender.

In case where SMSF received loan relief from a related party lender, as an auditor we need to make sure that the loan relief looks reasonable. We will be using the relief offered by commercial lenders to business as per https://www.ausbanking.org.au/covid-19/the-business-relief-package/. This provides that:

• If your business or not-for-profit has been adversely impacted by COVID-19 your bank will allow you to defer principal and interest repayments for all loans attached to the business for a period of six months. While the interest will be capitalised and paid off over the life of the loan.

We will require the following documents for audit purpose:

• A written request by SMSF to lender for a variation of the loan terms listing the adverse economic effects of COVID-19.
• A loan variation document to confirm the agreed updated loan terms.

6. In-house asset exceeding 5% due to current market fall – The downturn in the share market may result in the fund’s in-house assets being more than 5% of the fund’s total assets.

We will require the following documents for audit purpose:

• A written plan by trustee setting out the amount of the excess and the steps trustee proposes to take to reduce the market ratio of in-house assets to 5% or below.
• This plan must be prepared before the end of the next following year of income. If an SMSF exceeds the 5% in-house asset threshold as at 30 June 2020, a plan must be prepared and implemented on or before 30 June 2021 to make sure that excess is removed by 30 June 2021.

Provided the in-house asset limit was not exceeded at “acquisition” time, this situation in itself will not cause a breach of SIS. If we are provided with above mentioned information, we as an auditor will not be taking any actions for FY 2020.

7. Financial Statement Disclosure – For SMSFs who have not yet completed financial statements for FY 2019 and if the value of the assets of an SMSF at the time of issue of financial statements is materially lower than the asset value reported in FY 2019 financial statement, please add Subsequent Events Notes to the financial statement regarding FY 2019.

If asset values continue to fall, a similar disclosure may be required in financial statements of FY 2020.

8. Effect on investment strategy due to current market fall – The downturn in the share market may result in the fund investing outside the asset allocation ranges outlined in the strategy. For audit purpose we will require either an updated investment strategy or a minute for review of investment strategy stating reasons for investments outside the ranges and reasons for not changing the investment strategy.

9. New Investment Strategy Guidelines issued by ATO – ATO has released a new investment strategy guideline this year. As an auditor we will review the investment strategy to make sure that on top of the existing requirements of an investment strategy, investment strategy also covers below mentioned guidelines of ATO.

• Investment strategy should be based on the relevant circumstances of the fund. Relevant circumstances may include (but are not limited to) personal circumstances of the members such as their age, employment status, and retirement needs, which influence your risk appetite. Your strategy should explain how your investments meet each member’s retirement objectives.
• When formulating your investment strategy, it is not a valid approach to merely specify investment ranges of 0 to 100% for each class of investment. You also need to articulate how you plan to invest your super or why you require broad ranges to achieve your investment goals to satisfy the investment strategy requirements.
• Investing the predominant share of your retirement savings in one asset or asset class can lead to concentration risk. In this situation, your investment strategy should document that you considered the risks associated with a lack of diversification. It should include how you still think the investment will meet your fund’s investment objectives including your fund’s return objectives and cash flow requirements.

Please find below the ATO guideline link for guidance.

https://www.ato.gov.au/super/self-managed-super-funds/investing/your-investment-strategy/ 

If investment strategy provided is not as per the guidelines, we may need to qualify the audit report and lodge the contravention with the ATO. Also, in that case each trustee/director may face a penalty upwards of $4,200 from the ATO for a breach of the investment strategy requirements.

SOURCE, All Rights Reserved – Smsf Coach, Liam Shorte, Be Prepared with these 9 SMSF Audit tips, 2020, https://smsfcoach.com.au/2020/05/22/be-prepared-with-these-9-smsf-audit-tips/

HOW CAN OUR TEAM AT SMSF AUDITS HELP YOU?

The SMSF Audits team’s extensive experience means we can assist with advice regarding all SMSF issues. We have assisted a large number of SMSF Trustees deal with compliance issues and still retain their complying status.

Provide technical information and articles for any of your technical events and seminars and newsletters or email alerts.

We have also assisted numerous Trustees in negotiating a compliance plan with the ATO and have successfully had penalties reduced and remitted.

Our website has a lot of useful information www.smsfaudits.net

We have a tax specialist on our staff who can prepare and lodge private ruling requests for you or your clients and who can assist with any ATO tax review or audit.

SMSF Audits is about more than just cost effective audits. We provide complying, timely audits and offer support to solve potential problems. Let us be your competitive advantage.

Want to find out more? Call us on (07) 3368 2794 or email [email protected]
Follow us on LinkedIn for articles, advice and more https://www.linkedin.com/company/smsf-audits/

What happens when the minimum pension is not paid?

Not paying the minimum pension – ECPI v TBC conundrum

Post 2017 super reforms, where a fund fails to pay the minimum pension for the year, there are two major consequences. However, this provides a challenge for accountants and administrators when dealing with both these consequences to ensure that the correct reporting and tax outcomes are achieved.

What happens when the minimum pension is not paid? 

Assuming that the fund cannot utilise the relevant ATO guidelines for a small shortfall or be successful in applying for discretion, the two major consequences are:

  1. No claim for exempt current pension income (ECPI) in relation to the failed pension for the relevant financial year; &
  2. The pension ceases to be a superannuation income stream in retirement phase.

Whilst these two consequences appear to be straight forward, it’s the timing of each of the above that can cause an accounting challenge to ensure the correct reporting and tax outcomes.

No claim for ECPI

Where the minimum pension is not paid, the fund cannot claim ECPI in relation to that failed pension. From a timing perspective, the relevant pension is deemed to have ceased at the start of the financial year.

A standard approach by accountants and administrators would be to affect a commutation of the failed pension back to accumulation from the start of the financial year. This would ensure that the failed pension would not be included in any claim for ECPI, under either the segregated or unsegregated method. Further, when the pension was re-commenced on 1 July of the following financial year, the tax components would be re-calculated under the proportioning rule. The tax components of the re-started pension would be different from the original pension due to:

  • All net earnings for the income year (allocated to the pension) being effectively allocated to the taxable component; &
  • Mixing of the original components of the failed pension with a member’s accumulation account.

TBAR event

Where a pension, that is in retirement phase, fails to comply with the minimum pension standard it is deemed to cease being in retirement phase. Consequently, there is a transfer balance account reporting event, which will raise a debit (reduction) to the affected member’s transfer balance account.

However, for this purpose, the pension is deemed to cease to be in retirement phase at the end of the financial year in which it failed to meet the minimum pension standard and the TBA debit, to be reported on the TBAR, is the value of the pension at the end of the financial year. This contrasts to the pension ceasing at the start of the financial year for ECPI purposes.

The accounting challenge

Where the failed pension is transferred back to accumulation at the start of the financial year, so as to ensure that it is not included in the calculation of ECPI, it will be difficult to determine the value of that pension as at the end of the financial year to be able to report such on the required TBAR. This may not be difficult where the member did not have an accumulation account prior to the pension failing to meet the minimum pension standard as it would simply be the value of the accumulation account at the end of the financial year. However, it would be difficult where the member did have an existing accumulation account, which would be common for those members who were affected by the introduction of the $1.6m transfer balance cap or where contributions were received by the fund from or on behalf of the member during the financial year.

If the approach is changed and the failed pension is not transferred back to accumulation at the start of the financial year, but kept in place to be able to determined the TBAR reportable value at the end of the financial year, then procedures must be implemented to ensure:

  • The failed pension is not included in the claim for ECPI; &
  • When the pension is re-commenced on 1 July of the following financial year, the tax components have been correctly re-calculated.

It should also be noted that the re-commencement of the pension on 1 July of the following financial year is also a TBAR reporting event.

Review procedures and admin systems

Those who are responsible for the preparation of financial statements, SMSF annual returns and TBARs, should review their procedures and SMSF administration systems for this scenario to ensure that correct treatment, calculation and reporting is being done. This is particularly so where the SMSF administration system has automated functionality for claiming ECPI and generating TBAR files. A particular approach may work for one of the consequences, but not the other. For example, ceasing the pension at the start of the financial year may ensure that the automated ECPI data submission and certificate generation is correctly implemented, but may result in the auto generation of a TBAR with the debit value being the value at start of the financial year, rather than the value at the end. A thorough understanding of how SMSF administration system work will help determine the best approach for SMSFs in this scenario.

SOURCE, All Rights Reserved – SuperConcepts, Mark Ellem, What happens when the minimum pension is not paid?, 10 Feb 2020, https://www.superconcepts.com.au/Insights-and-support/blog/smsf-insider/2020/02/10/what-happens-when-the-minimum-pension-is-not-paid

HOW CAN OUR TEAM AT SMSF AUDITS HELP YOU?

The SMSF Audits team’s extensive experience means we can assist with advice regarding all SMSF issues. We have assisted a large number of SMSF Trustees deal with compliance issues and still retain their complying status.

Provide technical information and articles for any of your technical events and seminars and newsletters or email alerts.

We have also assisted numerous Trustees in negotiating a compliance plan with the ATO and have successfully had penalties reduced and remitted.

Our website has a lot of useful information www.smsfaudits.net

We have a tax specialist on our staff who can prepare and lodge private ruling requests for you or your clients and who can assist with any ATO tax review or audit.

SMSF Audits is about more than just cost effective audits. We provide complying, timely audits and offer support to solve potential problems. Let us be your competitive advantage.

Want to find out more? Call us on (07) 3368 2794 or email [email protected]
Follow us on LinkedIn for articles, advice and more https://www.linkedin.com/company/smsf-audits/

Be Prepared with these 9 SMSF Audit tips for June 30 2020

There is no doubt that additional emphasis was being placed on the annual SMSF Audit before Covid-19 and you need to be prepared for more extensive requirements from fund auditors going forward for you to be able to complete the work we do to satisfy the ATO and best practice.

Not all the requirements listed are obligatory but do reflect best practice so discuss these prior to June 30..

  1. Early Release of Superannuation– In the case where the lump sum payment made from an SMSF due to the receipt by the Trustee of a copy of a “Coronavirus – early release of super benefits”approval letter issued by the ATO, we will require below documents for audit:
  • A copy of the letter received from ATO
    • A copy of the signed application made to the super fund by members for lump sum withdrawal
    • A copy of the signed minutes of the meeting of trustees approving the lump sum payment
    • A copy of the signed confirmation letter sent to members by trustees.
  1. Minimum Pension Withdrawal– Any additional documents are not required to be prepared and provided for this. However, we will be reviewing and making sure that if a pensioner has already drawn more than their reduced minimum, it was not returned to super fund as there is no mechanism to return surplus pension payments. However, if the member was eligible for a contribution, it is possible to contribute additional pensions as contributions.
  2. Rent Relief provided by SMSF– In the case where SMSF provides rent relief, as an auditor we need to make sure that the rent relief looks reasonable. We will be using the National Cabinet’s Mandatory Code of Conduct – Commercial Leasing Principlesto verify the reasonableness for commercial properties. The code provides that:
  • The amount of relief should be proportionate to the tenant’s loss in turnover.
    • Rent relief can take the form of:
  1. a rent waiver which must be at least 50% of the total rent relief and cannot recouped by the landlord over the lease term and/or
    b. a rent deferral for the remaining rent relief with this amount amortised over the remaining lease term or at least 24 months (whichever is greater).

We will require the following documents for audit purpose for all type of properties

  • A written request by tenant to SMSF for a rent relief listing the adverse economic effects of COVID-19.
    • A minute of meeting of SMSF trustees for the relief to be provided and reasons or basis on which the relief to be provided.
    • If the arrangement is not as per above mentioned code and if tenant is a related party, the commercial justification based on which the alternate arrangement was negotiated.
    • A lease variation document to confirm the agreed updated lease terms.
  1. Loan relief provided by SMSF to borrower– In the case where SMSF provides loan relief to a borrower, as an auditor we need to make sure that the loan relief looks reasonable. We will be using the relief offered by commercial lenders to business as per https://www.ausbanking.org.au/covid-19/the-business-relief-package/. This provides that:
  • If your business or not-for-profit has been adversely impacted by COVID-19 your bank will allow you to defer principal and interest repayments for all loans attached to the business for a period of six months. While the interest will be capitalised and paid off over the life of the loan.

We will require the following documents for audit purpose

  • A written request by borrower to SMSF for a variation of the loan terms listing the adverse economic effects of COVID-19.
    • A minute of meeting of SMSF trustees for the relief to be provided and reasons or basis based on which the relief to be provided.
    • A loan variation document to confirm the agreed updated loan terms.
  1. LRBA relief provided to SMSF by lender– In the case where SMSF receives loan relief from a third party lender, we will require document related to loan relief offered by lender and new accepted loan terms agreed by SMSF and Lender.

In case where SMSF received loan relief from a related party lender, as an auditor we need to make sure that the loan relief looks reasonable. We will be using the relief offered by commercial lenders to business as per https://www.ausbanking.org.au/covid-19/the-business-relief-package/. This provides that:

  • If your business or not-for-profit has been adversely impacted by COVID-19 your bank will allow you to defer principal and interest repayments for all loans attached to the business for a period of six months. While the interest will be capitalised and paid off over the life of the loan.

We will require the following documents for audit purpose:

  • A written request by SMSF to lender for a variation of the loan terms listing the adverse economic effects of COVID-19.
    • A loan variation document to confirm the agreed updated loan terms.
  1. In-house asset exceeding 5% due to current market fall– The downturn in the share market may result in the fund’s in-house assets being more than 5% of the fund’s total assets.

We will require the following documents for audit purpose:

  • A written plan by trustee setting out the amount of the excess and the steps trustee proposes to take to reduce the market ratio of in-house assets to 5% or below.
    • This plan must be prepared before the end of the next following year of income. If an SMSF exceeds the 5% in-house asset threshold as at 30 June 2020, a plan must be prepared and implemented on or before 30 June 2021 to make sure that excess is removed by 30 June 2021.

Provided the in-house asset limit was not exceeded at “acquisition” time, this situation in itself will not cause a breach of SIS. If we are provided with above mentioned information, we as an auditor will not be taking any actions for FY 2020.

  1. Financial Statement Disclosure– For SMSFs who have not yet completed financial statements for FY 2019 and if the value of the assets of an SMSF at the time of issue of financial statements is materially lower than the asset value reported in FY 2019 financial statement, please add Subsequent Events Notes to the financial statement regarding FY 2019.

If asset values continue to fall, a similar disclosure may be required in financial statements of FY 2020.

  1. Effect on investment strategy due to current market fall– The downturn in the share market may result in the fund investing outside the asset allocation ranges outlined in the strategy. For audit purpose we will require either an updated investment strategy or a minute for review of investment strategy stating reasons for investments outside the ranges and reasons for not changing the investment strategy.
  2. New Investment Strategy Guidelines issued by ATO– ATO has released a new investment strategy guideline this year. As an auditor we will review the investment strategy to make sure that on top of the existing requirements of an investment strategy, investment strategy also covers below mentioned guidelines of ATO.
  • Investment strategy should be based on the relevant circumstances of the fund. Relevant circumstances may include (but are not limited to) personal circumstances of the members such as their age, employment status, and retirement needs, which influence your risk appetite. Your strategy should explain how your investments meet each member’s retirement objectives.
    • When formulating your investment strategy, it is not a valid approach to merely specify investment ranges of 0 to 100% for each class of investment. You also need to articulate how you plan to invest your super or why you require broad ranges to achieve your investment goals to satisfy the investment strategy requirements.
    • Investing the predominant share of your retirement savings in one asset or asset class can lead to concentration risk. In this situation, your investment strategy should document that you considered the risks associated with a lack of diversification. It should include how you still think the investment will meet your fund’s investment objectives including your fund’s return objectives and cash flow requirements.

Please find below the ATO guideline link for guidance.

https://www.ato.gov.au/super/self-managed-super-funds/investing/your-investment-strategy/ 

If investment strategy provided is not as per the guidelines, we may need to qualify the audit report and lodge the contravention with the ATO. Also, in that case each trustee/director may face a penalty upwards of $4,200 from the ATO for a breach of the investment strategy requirements.

The other common issues that should be reviewed prior to June 30 include:

  • Ensure ownership records are correct for all assets; it is common for banks to make errors on term deposits and bank accounts.
  • Ensure ownership records on all life insurance policies are correct; it is common for life insurance companies to fail to record the correct trustee on policy ownership documents.
  • Review all unpaid entitlements owed to the SMSF by related unit trusts. Beware of the borrowing regulations.

All good accountants are engaging with their trustees to ensure all regulations are being met and trustees understand their responsibilities. A smooth audit is the result of a good accounting process and trustee engagement.

HOW CAN OUR TEAM AT SMSF AUDITS HELP YOU?

The SMSF Audits team’s extensive experience means we can assist with advice regarding all SMSF issues. We have assisted a large number of SMSF Trustees deal with compliance issues and still retain their complying status.

Provide technical information and articles for any of your technical events and seminars and newsletters or email alerts.

We have also assisted numerous Trustees in negotiating a compliance plan with the ATO and have successfully had penalties reduced and remitted.

Our website has a lot of useful information www.smsfaudits.net

We have a tax specialist on our staff who can prepare and lodge private ruling requests for you or your clients and who can assist with any ATO tax review or audit.

SMSF Audits is about more than just cost effective audits. We provide complying, timely audits and offer support to solve potential problems. Let us be your competitive advantage.

Want to find out more? Call us on (07) 3368 2794 or email [email protected]
Follow us on LinkedIn for articles, advice and more https://www.linkedin.com/company/smsf-audits/

Walking the tightrope – SMSFs and related parties

This article deals with some of the misunderstanding around the in-house asset rules and the related party acquisition rules in relation to SMSFs.

The combination of consistent growth in self-managed superannuation funds (SMSFs) and a desire for people to maximise their retirement benefits in an environment where investment returns are hard to obtain through some traditional asset classes, means many SMSF investors are turning towards alternative investments, such as private equity.

Those with existing exposure to these alternative assets can be tempted to consider using their SMSF to increase their exposure. This can cause them to inadvertently breach some of the rules SMSFs must follow.

Based on our recent observations, there is some misunderstanding around both the in-house asset rules and the related party acquisition rules. We will revisit these rules and consider how they interact in the case of certain alternative investments.

In-house assets

Under s71 of the SIS Act, restrictions are placed on super fund trustees lending money to, investing in, or creating a lease over a fund asset where the other party to the transaction is a ‘related party of the fund’. To understand whether an asset is an in-house asset, we need to look at the party who is receiving the loan, investment or lease, and then determine if that entity is connected to the fund.

A related party is defined within s10 of the SIS Act to mean any of the following:

  1. A member of the fund.
  2. A standard employer-sponsor of the fund – generally not relevant to SMSF arrangements.
  3. A Part 8 associate of an entity referred to above in a or b.

This means we must consider the definition of Part 8 associates of the members of the fund, which is provided in s70B, to include:

  1. A relative of the member, where a relative is defined in s10 to include parents, grandparents, siblings, uncles, aunts, nephews, nieces or children of the member or their spouse – or the spouse of any of those people.
  2. Each other member of the fund and each trustee of the fund.
  3. If the member is involved in a partnership, any other partners and the children and spouses of individual partners.
  4. A trustee of a trust where the member controls the trust.
  5. A company that is sufficiently influenced by the member, such as another entity that is a Part 8 associate of the member or a group thereof.

The control of a trust is further defined in s70E and considers whether a ‘group’ in relation to the member has a fixed entitlement to more than 50 per cent of the income or capital of the trust, or if the trustees are used to act under the directions of a group, or a group has the power to remove or appoint trustees of the trust. ‘Group’ in this context means the member themselves, a Part 8 associate, or any combination of the Part 8 associates and/or the member acting together.

Overall, the related party rules are designed to capture a wide group of people and entities that may be in a position to be directed by the member or operate in conjunction with the member. This is to prevent people using their SMSF to capture extraordinary investment gains in a concessionally-taxed environment.

In addition to the wide capture of who a related party of a fund may be, there are also a number of exceptions to the in-house asset rules. The following arrangements are not considered in-house assets:

  • A business real property subject to a legally-enforceable lease.
  • An investment in a widely-held unit trust.
  • Property owned as tenants in common with a related party.
  • A closely held unit trust established within the rules of SIS Regulations 13.22C, which broadly relates to ungeared unit trusts owning business real property.

A widely held trust is a unit trust where no fewer than 20 entities have fixed entitlements to 75 per cent or more of the capital or income of the trust. These exceptions provide some limited scope for a SMSF to enter into long-term financial arrangements with related parties. The most frequent exemption to the rule is the leasing of business real property.

Importantly, the in-house asset rules do not place a blanket restriction on the acquisition of any specific in-house asset. Instead, they act to ‘cap’ the amount of in-house assets a SMSF is exposed to at no more than 5 per cent of the total assets of the fund. At the end of each year, a SMSF with in-house assets must ensure the ratio of in-house assets to total assets is under this limit. If the limit is breached, the trustee must document and implement a plan which states what in-house assets are to be disposed to bring the fund back under the 5 per cent cap.

The legislation in s82 is very specific, the plan must focus on disposal of an asset – it is not enough to add additional capital or restructure the fund to attempt to satisfy the cap.

Example 1: Residential property

Pharrell operates a SMSF that owns a residential property and limited cash reserves. During the year, his brother, Basil, finds himself in a housing crisis and Pharrell agrees to lease the property in the SMSF to Basil until he can get himself ‘back on his feet’. Basil pays the SMSF a rent that is market rate and conducts himself as an arms-length tenant.

At the end of the year when completing the SMSF’s annual return, the auditor identifies the residential property is subject to a lease to a related party of the fund and therefore the property is treated as an in-house asset under s71.

Compounding the pain, since the value of the property is greater than 5 per cent of the fund’s total assets, under s82, Pharrell must set out a plan to ensure that the in-house asset is disposed of within the financial year. Pharrell believes that if Basil moves out then no asset of the fund is subject to a lease with a related party. Sadly, however, the damage is done. The only rectification available to Pharrell is the sale of the residential property.

Related party acquisitions

Section 66 of the SIS Act also places a general restriction on SMSFs acquiring assets from related parties as previously defined. This restriction is not concerned with what the asset is, but rather who owns the asset the SMSF wants to acquire.

This restriction comes with several exceptions, which include:

  • listed securities acquired at market value;
  • business real property acquired at market value; and
  • certain in-house assets.

The last exception relating to in-house assets starts to blur the lines between the in-house assets rules and the related party acquisition restriction. This exemption provides that an in-house asset can be acquired, but only if the acquisition is completed at market value and would not result in a breach of the 5 per cent in-house asset cap.

Additionally, a super fund can acquire an asset from a related party that would be an in-house asset but for certain exemptions to the in-house asset test. In a SMSF context, this allows a widely held unit trust or 13.22C trust units to be acquired from related parties.

Unlike the in-house rules, the s66 restriction is a hard ‘ban’ on acquiring assets from a related party, unless an exemption is met. Further, there is effectively an anti-avoidance provision that catches schemes which would look to transfer an asset to an unrelated third party, and then have the fund acquire the asset from that third party. In these cases, the regulator has the power to ‘see through’ the transaction in determining whether the acquisition is a breach of the related party rules.

Combining these rules, we now have four scenarios a SMSF may encounter:

  1. Acquiring an asset from a third party, where the asset is not an in-house asset.
  2. Acquiring an asset from a third party, where the asset is an in-house asset.
  3. Acquiring an asset from a related party, where the asset is an in-house asset.
  4. Acquiring an asset from a related party, where the asset is not an in-house asset.

Scenario 1 is simple, it is how most SMSFs would be acquiring their traditional assets. No special SIS Act rules relate to assets acquired from third parties that are not in-house assets. Therefore, the fund is able to do as it wishes, subject to its standard trustee obligations, the SMSF trust deed and the fund’s investment strategy.

Scenario 2 is also relatively simple to adhere to. As the asset is owned by a third party, there is no restriction on acquiring the asset. However, since the asset meets the in-house asset criteria, the SMSF’s ability to continue holding the asset is subject to the 5 per cent cap.

Example 2: Related company purchased from third party

Nick is a member of a SMSF which has a total asset base of $2 million. One of Nick’s friends, Tim, previously made a small investment of $10,000 in a private company controlled by Nick. This company owns patents for specific medical devices. The company has successfully licensed the patents and Tim now wants to sell his investment. The current value of Tim’s holding is $80,000.

Nick does not have sufficient liquid funds to purchase the holding himself, however, he does have surplus cash in the SMSF and purchasing Tim’s holding would meet the SMSF’s investment requirements. Tim accordingly decides to sell his holding in the private company to Nick’s SMSF.

As Tim is not a related party of the fund, the acquisition is able to occur under s66, however, once the SMSF owns the asset, it now has an investment in a related party of the fund since the company is controlled by Nick. This $80,000 holding is therefore an in-house asset.

As the total value of the SMSF is $2 million, the company represents 4 per cent of the fund’s assets, so the cap is not breached by the acquisition. Nick will have to review this ratio each year and if it breaches 5 per cent, he will need to partially dispose of the private company shares.

The considerations in Scenario 3 are relatively simple. In-house assets can be acquired from a related party subject to the 5 per cent in-house asset cap.

Example 3: Purchasing units in related trust

James operates a cray fishing business and uses a SMSF to save for his retirement. The family trust owns a number of fishing licences and James believes these would make an appropriate investment for his retirement. The licences are currently owned through a unit trust, which is controlled by James.

The current balance of James’ SMSF is $1 million. In discussion with his administrator and adviser, he decides to have the SMSF purchase $40,000 worth of units he currently holds. The unit trust, being controlled by James, is a related party to the fund and so these units, if acquired by the SMSF, would be in-house assets.

Although the units are being acquired from a related party, because the asset is considered an in-house asset, it falls into one of the acquisitions from a related party exemption, so the transaction can proceed. James will have to monitor the ratio of in-house assets in the future to ensure the 5 per cent cap is not breached.

Scenario 4 can create some interesting outcomes. As the acquisition is being made from a related party, the restrictions in s66 apply. As the asset is not an in-house asset, the acquisition can only occur if the asset is business real property, a widely held unit trust or a 13.22C trust. When compared to Scenario 3, this seems to produce a strange outcome.

Example 4: Private equity investment

Susan has a family trust that made a private equity investment a number of years ago in a small medical company. The investment has performed very well. Susan is happy with the future prospects of the company but she wants to wind up the family trust and instead use her new SMSF as her primary investment vehicle. Susan therefore wants to sell the private equity shares to her SMSF.

The company is not a related party to the fund, as Susan or her Part 8 associates do not have any control or influence over the company – so the investment is not an in-house asset. However, as the family trust (being the current owner of the shares) is a related party to the trust, for the SMSF to acquire the shares it would have to meet one of the exemptions to the related party transfer rules. The company is not listed, nor is it specifically excluded from being an in-house asset, so no exemptions apply.

The SMSF cannot acquire the asset from the family trust, and if the SMSF acquires the same number of shares from a third party, and the family trust sells its shares to that same third party, the related party anti-avoidance provisions may be triggered which would result in a breach.

Summary

Overall, when advising SMSFs who want to acquire specific assets, it is critical to understand both the relationships around the asset and the current owner of the asset. Once that is established, both the in-house asset rules and the related party transfer rules must be applied to consider whether the SMSF is able to acquire the asset, and if so, whether the 5 per cent in-house asset cap will apply to the holding.

SOURCE, All Rights Reserved – Money & Life, Josh Rundmann, Technical Services Manager, IOOF TechConnect. 09 April 2019, https://www.moneyandlife.com.au/professionals/financial-planning/learn/walking-the-tightrope-smsfs-and-related-parties/

HOW CAN OUR TEAM AT SMSF AUDITS HELP YOU?

The SMSF Audits team’s extensive experience means we can assist with advice regarding all SMSF issues. We have assisted a large number of SMSF Trustees deal with compliance issues and still retain their complying status.

Provide technical information and articles for any of your technical events and seminars and newsletters or email alerts.

We have also assisted numerous Trustees in negotiating a compliance plan with the ATO and have successfully had penalties reduced and remitted.

Our website has a lot of useful information www.smsfaudits.net

We have a tax specialist on our staff who can prepare and lodge private ruling requests for you or your clients and who can assist with any ATO tax review or audit.

SMSF Audits is about more than just cost effective audits. We provide complying, timely audits and offer support to solve potential problems. Let us be your competitive advantage.

Want to find out more? Call us on (07) 3368 2794 or email [email protected]
Follow us on LinkedIn for articles, advice and more https://www.linkedin.com/company/smsf-audits/

 

SMSFs, real estate and tax deductions

With SMSF-owned real estate, there are tax deductions and concessions available, but these vary depending on the property type and how it’s used.

Residential property

If your SMSF owns residential property, such as a free-standing home, terrace or apartment, the lease will usually be for set periods under a written lease for six months, a year or longer period as agreed. The tenant will usually pay a bond as part of the lease and it will be held by the relevant government organisation until the lease has been terminated. Expenses relating to the property can be claimed from the day the property becomes available for lease. In many cases, your SMSF may employ a property agent to collect the rent and look after the day to day administration.

Any rent your SMSF receives less the relevant allowable deductions is included in the fund’s taxable income. Deductions can be claimed for rates and taxes, administration costs and maintenance of the property.

Deductions for residential property can include the following.

Rates and taxes 

  • Body corporate fees and charges
  • Council rates
  • Water and electricity paid by landlord, but not those paid by the tenant
  • Land tax

Property administration

  • Insurance (building, contents, public liability)
  • Advertising for tenants
  • Property agent’s fees and commission
  • Some legal expenses
  • Interest expenses – if the property is part of a limited recourse borrowing arrangement

Property maintenance

  • Cleaning the property
  • Gardening and lawn mowing
  • Pest control
  • Repairs and maintenance but not the cost of improvements
  • Capital works deductions
  • Travel expenses to inspect property, not deductible after 1 July 2017

Don’t forget, just like all taxpayers, SMSFs cannot claim a deduction for the total cost of improvements to a rental property when they are incurred. Capital improvements such as the cost of adding a new room, remodelling a kitchen or bathroom or adding a pergola will be used to calculate the cost base of the property for CGT purposes. However, your SMSF can claim a capital works deduction based on the estimated cost of wear and tear to the property and any qualifying improvements.

Since 1 July 2017 there are restrictions on claiming tax deductions for depreciating second-hand goods, but it is still possible to claim deductions on depreciating new assets.

Holiday house

If your SMSF owns a ‘holiday house’, it’s like owning a residential property but it’s more likely to be in an area which attracts holiday makers.

The holiday house will have many expenses common to a residential property. However, because the property is usually leased short-term, more servicing and upkeep may be required. Also, your SMSF’s holiday house may include kitchen utensils, bed linen and furniture. A deduction is usually available for replacement of utensils, bed linen, depreciating furniture and more regular cleaning of the property.

There’s always the temptation that a fund member, trustee or one of their relatives may wish to use the property in the off season. This can be a problem for the fund as the value of the property will be included in the fund’s in-house assets. Your SMSF’s in-house assets are limited to no more than 5% of the value of its total assets at market value. A breach of the in-house assets test can result in penalties being imposed by the ATO and could require the sale of the holiday house.

Bed and breakfast

A bed and breakfast (B&B), as the name suggests, is usually short-term residential accommodation with breakfast included in the price. The standard of accommodation differs from place to place, however, the property is usually serviced and restocked regularly.

In addition to expenses incurred for a residential property, your fund’s B&B may incur some of these expenses:

  • Tea, coffee, milk, biscuits, bread and other consumable items
  • Paper towels, soap, detergent, bath gel etc.
  • Magazines, books, newspapers etc.
  • Energy costs such as gas and electricity
  • Internet, Wi-Fi and similar expenses
  • Depreciation on kitchen appliances, heaters, air conditioners etc.
  • Laundry and cleaning expenses

It is worthwhile keeping payment receipts to substantiate deductions. Any expenses relating to the B&B should be paid by the fund where possible, say, using its own credit or debit card. However, this may not be practical, and if the trustees pay the expenses personally, reimbursement should be made as quickly as possible.

Commercial property

Commercial property comes in all shapes and sizes from small shops to factories etc. You may end up leasing the property from the fund on an arm’s length basis. Many expenses relating to the commercial property may be the tenant’s responsibility and you may be required to make good the property after it is vacated.

In some situations, any plant and equipment that is installed in the commercial building may be unique to the tenant’s business and may require a special fit-out. The cost of the fit-out would usually be incurred by the tenant as part of any lease agreement. However, if you or a related party are the tenant and pay for the cost of the fit-out, care needs to be taken so that the cost incurred is not treated as a ‘contribution’ on the termination of the lease. The ATO’s taxation ruling TR 2010/1 provides information on whether certain expenses incurred on behalf of the fund could be treated as a contribution because the fit-out has resulted in an improvement to the commercial property owned by the SMSF.

Vacant land

Your SMSF may own vacant land for various purposes, such as a parking space for a business, farming land leased to a family business, or for property development.

If the land is used for genuine income-earning business purposes, the SMSF is entitled to a tax deduction for expenses. These could include rates and taxes, repairs to gates and fencing or other structures on the land such as roads.

If the land is not held for income earning purposes – such as the intention to sell or develop it at a later stage – tax deductions are not permissible. Generally, under this scenario, expenses are added to the cost base of the property for capital gains tax purposes.

Vacant land – proposed legislation

Whether it can be substantiated that a fund holds vacant land for future income-earning purposes is a matter of contention between taxpayers and the ATO.

Draft legislation was released last year to ban deductions for expenses, effective 1 July 2019. The legislation would apply to all vacant land owned by SMSFs and individuals, regardless of when the land was purchased.

The legislation has some exceptions that continue to allow deductions: for expenses relating to vacant land which is used to carry on a business by a related party; or where the land is used in a business of leasing and where an unrelated party is involved.

Here are some examples of how the legislation could work if passed:

Example 1: The Nguyen Family Super Fund, an SMSF, owns a block of land on which the trustees intend to build a rental property. The block of land is fenced and has a large retaining wall, but it currently doesn’t include any permanent structure. As there is no permanent structure on the land the fund cannot deduct any holding costs for the land.

Example 2: The Crown Family Super Fund, an SMSF, owns vacant land which is rented to the son of a fund member who uses it in his farming business. As the son is carrying on a business to earn assessable income and is a related party for purposes of the proposed legislation (spouses, children under 18 years old, affiliates and connected entities), the fund can deduct costs of owning the land.

The interesting thing about the proposed legislation denying expenses for non-income producing vacant land is to clarify the income tax law as it currently stands. However, if it is passed the amended law will apply to SMSFs and individual taxpayers.

SMSFs are permitted to own property, either directly or indirectly, or even one that is financed under a limited recourse borrowing arrangement. However, whether a tax deduction is available for expenses depends on the purpose and use of the property – whether its residential, commercial, a B&B or vacant land.

SOURCE, All Rights Reserved – Super Concepts, By Graeme Colley, 7 Jul, 2019, https://www.superconcepts.com.au/Insights-and-support/blog/smsf-insider/2019/07/07/smsfs-real-estate-and-tax-deductions

HOW CAN OUR TEAM AT SMSF AUDITS HELP YOU?

The SMSF Audits team’s extensive experience means we can assist with advice regarding all SMSF issues. We have assisted a large number of SMSF Trustees deal with compliance issues and still retain their complying status.

Provide technical information and articles for any of your technical events and seminars and newsletters or email alerts.

We have also assisted numerous Trustees in negotiating a compliance plan with the ATO and have successfully had penalties reduced and remitted.

Our website has a lot of useful information www.smsfaudits.net

We have a tax specialist on our staff who can prepare and lodge private ruling requests for you or your clients and who can assist with any ATO tax review or audit.

SMSF Audits is about more than just cost effective audits. We provide complying, timely audits and offer support to solve potential problems. Let us be your competitive advantage.

Want to find out more? Call us on (07) 3368 2794 or email [email protected]
Follow us on LinkedIn for articles, advice and more https://www.linkedin.com/company/smsf-audits/

Changing SMSF trustee from individuals to a company

There are a number of reasons why you should make the decision about changing SMSF trustee from individuals to a company, but what exactly needs to happen?

There are two main areas that need to be addressed as part of the change:

  1. The legal change
  2. Investment name changes

The legal change

Changing SMSF trustee from individuals to a company must be completed with the oversight of a legal practitioner. It involves the detailed review of the clauses or rules of the SMSF trust deed to determine exactly how a new company trustee must be appointed.

A new special purpose company needs to be registered with the Australian Securities & Investments Commission and all members of the SMSF have to be directors of the company. Special purpose companies that will only act as trustee of a SMSF pay reduced annual registration fees. It is not recommended that an existing company be used as trustee.

A legal document will be prepared to firstly appoint the newly formed company as a new trustee of the SMSF and secondly remove the existing individual trustees. This document will need to be correctly executed by all members of the SMSF for the change of trustee to be valid.

It is also recommended that the existing SMSF trust deed is amended / upgraded after the appointment of the new company trustee. This ensures the SMSF is up to date with any changes to superannuation laws and new strategies that may be available.

From a practical sense it also means that there is one document containing the details of the SMSF and the new company trustee, rather than the trust deed with the old trustees and a separate document outlining the change to the new company trustee.

Investment name changes

Superannuation laws require any accounts and investments owned by the SMSF to be recorded in the name of the trustee(s) of the fund. When changing SMSF trustee from individuals to a company, the name recorded on the investment accounts also needs to be changed.

For example:

John Smith & Jane Smith as trustees for (ATF) Smith Family Super Fund
would need to change to
Smith Super Pty Ltd ATF Smith Family Super Fund

What needs to happen in a practical sense will be determined by the actual investments and accounts held by the SMSF. The following is a brief guide of what to expect.

Bank Accounts

In almost all cases your bank will need to be provided with either originals or certified copies of the change of trustee documentation.

Some banks will require a new account to be established and will get you to complete an entirely new application form and will issue a new account number. Depending on the bank they may assist you with this process and link the account number of the new account to the old account number so any deposits / direct debits will be moved to the new account.

Some banks and credit unions have more flexibility and will enable the name to be changed on an existing account. Macquarie and Bank of Queensland for example will do this when provided with a copy of the change of trustee documentation.

Tip: Phone your bank or check their website to determine what needs to happen to get your SMSF account into the correct name.

Tip: Take the opportunity to review the bank accounts you are using within your SMSF and see whether you can reduce the number of accounts to make the management and administration easier.

Term Deposits

Most banks will not enable you to change the name on a term deposit without breaking the deposit and placing a new deposit. It is suggested that any term deposits in the name of the individual trustees be left to mature and any re-investments be made in the name of the corporate trustee.

Where the maturity date of any existing term deposits is after the end of the financial year, an additional declaration may be requested from the auditors of the SMSF to ensure that there is no debate on the beneficial owner of the deposit, especially when the name of the actual SMSF is not recorded.

Some Banks will also require one account to remain in the name of the individual trustees for the payment of the interest and principal on maturity.

Listed Shares / Broker Accounts

Where there is a broker (CHESS Sponsor) attached to your shareholdings, you have a few options in regards to how you go about transferring the shareholdings into the correct name when changing SMSF trustee from individuals to a company.

Most traditional ‘full service’ stockbrokers will action the transfers on your behalf. They may charge additional fees for this service.

If you are using an online broker such as Commsec it is possible to transfer all shareholdings from the existing account (in the name of the individual trustees) to a new account (in the name of the corporate trustee) however there will be a fee attached to each share transfer ($54 for Commsec). This option becomes expensive if you have a significant number of shareholdings to be transferred. However it’s recommended you contact your broker to discuss these transfers as often they will change a single fee for each ‘batch’ of transfers.  For example if your portfolio includes 13 companies that use both Link Market Services and Computershare as the registries, you may only incur 2 x transfer fees, rather than a transfer fee per company.

It is possible to simply close your broker account. This will trigger the removal of the CHESS Sponsor (broker) and the share registries will issue new holding statements with an SRN (Security Holder Reference Number)  i.e. the shares will become ‘issuer sponsored’.

Once the shares are issuer sponsored, they can be transferred via an off-market transfer form to the name of the new trustee company. The share registries will charge a small fee – $50 for Computershare and $55 for Link Market Services to process all transfers (regardless of the number of holdings).

Once this transfer is complete your shares will be in the correct name and can be transferred to a broker using an ‘Issuer to Chess’ conversion form. Many brokers enable this conversion for free.

Tip: Take the opportunity to review your SMSF portfolio and dispose of any non-performing shares prior to undertaking transfers to minimise transfer fees.

Managed Funds

Managed funds held under a wrap account are easy to transfer into the correct name as the wrap account acts as the custodian, so a request to the wrap account provider via your adviser enables the name change.

Where managed funds are owned directly (not via a wrap account), each managed fund provider will need to be contacted and they will provide specific instructions on how to transfer the units. In most cases a transfer form accompanied by a certified copy of the change of trustee documents will be required.

Unfortunately some managed funds will require stamp duty to be assessed and paid on the transfers when changing SMSF trustee from individuals to a company.

Tip: Review the managed fund investments with your financial adviser to determine whether they are still suitable for your portfolio or whether the opportunity should be taken to sell the units and invest the proceeds elsewhere.

Property

The process for transferring property from the names of the individual trustees to the new corporate trustee will vary depending on the State the property is located in; however the following steps are typical:

  1. The change of trustee document should be stamped by the relevant state revenue office.
  2. Transfer for with the title office completed and also stamped with any required declarations completed (in most cases there should be $0 stamp duty on the transfer).
  3. Stamped transfer forms provided to the titles offic and the applicable transfer fees paid.

Tip: Engage a solicitor to undertake the forms and work required for the transfer to save you time and potential aggravation as revenue and titles offices can be extremely specific with their requirements.

Don’t forget to inform the ATO about changing SMSF trustee from individuals to a company

It’s essential that when you are changing SMSF trustee from individuals to a company, your accountant or SMSF administrator updates the ATO regarding the change.

This can be completed online.

More information on the ATOs website here: https://www.ato.gov.au/super/self-managed-super-funds/administering-and-reporting/notify-us-of-changes/

Superfund Partners are experts at assisting you in making the change from individual trustees to a special purpose corporate trustee.  If you would like to speak to us about how to make the change, please contact us to discuss.

SOURCE, All Rights Reserved – Kris Kitto, Superfund Partners, March 2020, Changing SMSF trustee from individuals to a company.

https://www.superfundpartners.com.au/blog/changing-smsf-trustee-from-individuals-to-a-company/

HOW CAN OUR TEAM AT SMSF AUDITS HELP YOU?

The SMSF Audits team’s extensive experience means we can assist with advice regarding all SMSF issues. We have assisted a large number of SMSF Trustees deal with compliance issues and still retain their complying status.

Provide technical information and articles for any of your technical events and seminars and newsletters or email alerts.

We have also assisted numerous Trustees in negotiating a compliance plan with the ATO and have successfully had penalties reduced and remitted.

Our website has a lot of useful information www.smsfaudits.net

We have a tax specialist on our staff who can prepare and lodge private ruling requests for you or your clients and who can assist with any ATO tax review or audit.

SMSF Audits is about more than just cost effective audits. We provide complying, timely audits and offer support to solve potential problems. Let us be your competitive advantage.

Want to find out more? Call us on (07) 3368 2794 or email [email protected]
Follow us on LinkedIn for articles, advice and more https://www.linkedin.com/company/smsf-audits/

Super & divorce – a split in the ranks

When a relationship ends, splitting and rebuilding your super can be difficult, especially if it happens later in life. Here are the things to be aware of, including those that will make the division of super as pain free as possible.

Family law and superannuation

In the event of a relationship breakdown the treatment of super is governed by family law, which generally applies to married, formerly married and de-facto couples.

Getting info about your spouse’s super

You are entitled to request information about your spouse’s super, provided the request is for purposes of a separation. It needs to be made in writing to the fund trustees – and you will need to sign a declaration confirming your interest in the superannuation benefit and that you have a right to obtain the information.

In fairness, these requests can be tough, particularly in the face of a bitter divorce, where one party wants to conceal information, and where one person is much more active than the other in managing the finances.

Dividing your super

The law enables superannuation belonging to you and your spouse to be divided, although the proceeds are still subject to the normal superannuation rules such as preservation.

There are three formal methods enabling super to be split, all of which require the involvement of lawyers:

  • A binding financial agreement, which includes verification by a lawyer that both parties have received independent legal advice.
  • A consent order which is a written agreement approved by a court with the orders made with consent of the parties.
  • A court order, which is an order made by an officer of the court and sets out how the property of the marriage will be split if both parties cannot reach agreement.

You also have options in terms of the actual division of superannuation money.

You could take super into account but agree to leave it untouched, with each member holding on to their own benefit.

Or you could flag the benefit, which is a freeze on the benefit at a certain point in time, to be paid at a later date. This is commonly used for defined benefit pensions which are not common in SMSFs.

Otherwise, you could arrange for a superannuation split. This can be done via a ‘payment split’, where the split occurs once a member has full access to their super, typically when they retire. Or there’s an ‘interest split’, where the benefit is split without delay.

Minimise the risk of disputed transactions

It may be wise to implement a process requiring joint sign-off on fund decisions and payments. This could be done as part of an agreement/order. And it’s probably not a bad thing to implement in any event, relationship breakdown or not.

Superannuation as part of a settlement agreement

Where you decide to strike a settlement agreement, it should cover superannuation and how it is to be treated. The agreement should be drafted with the assistance of an experienced family lawyer who’s proficient with SMSFs.

It may be the case that a member has multiple accounts within an SMSF, such as an accumulation account and one or more pension accounts. The agreement should take into consideration the taxable and tax-free components of each account as it may have future tax implications.

The agreement should also cover off the fund investments. For example, a couple may seek to split the fund on a 50/50 basis, yet the fund may own a property. Here, an agreement should consider the property in practical terms, for example, will it be sold or will there be a joint ownership arrangement?

A new SMSF?

Some agreements/orders may call for the establishment of a new SMSF for one or both spouses, and for assets to be divided and transferred between funds.

This will require a decision being made on which assets will be transferred between funds, in line with each person’s member balance (and/or agreed entitlement).

One thing to be mindful of is timing: if you act too early and establish a new SMSF prior to any agreement/order, the sale or transfer of assets between funds may involve a capital gains tax event. However, if a new fund is established as part of the agreement/order, then there is no capital gains tax event.

In addition, the assets transferred to the new fund must be able to satisfy the SIS investment standards. These place a cap on in-house assets that a fund can hold: no more than 5% of the fund’s total holdings.

Resignation of fund trustee

If one trustee is resigning from the SMSF, the fund’s trust deed should be taken into account. In some trust deeds the consent of all members is required in respect of a resignation. This of course may be difficult in an acrimonious environment.

Once the trustee resigns, the trustee structure should be reviewed. It may be that the current structure continues together with the appointment of another trustee (or director). Or it may be appropriate to change the structure from individual trustee to corporate trustee, or vice versa depending on the circumstances.

Death benefit nominations

A review should be made of each member’s binding death benefit nomination (or nominated reversionary beneficiary) to ensure they are consistent with the relevant member’s wishes subsequent to the family law split.

Superannuation benefit roll-over statements

On transfer of the relevant assets between SMSFs, the appropriate rollover benefits statement(s) should be completed so that the correct components of the departing member’s benefit are identified.

Prompt implementation is important

Usually, any agreement/order would need to be implemented promptly, otherwise penalties can apply.

What to remember

The splitting of superannuation and family assets as part of a family law settlement is never easy, even if the separation is amicable. What must be remembered is that the legislation is designed to draw a line in the sand, provide for an equitable split of assets and let both parties get on in life with a fresh start.

SOURCE, All Rights Reserved – Superconcepts, Graeme Colley, 15 Mar, 2019, Super & divorce – a split in the ranks

https://www.superconcepts.com.au/Insights-and-support/blog/smsf-insider/2019/03/14/super-divorce-a-split-in-the-ranks

HOW CAN OUR TEAM AT SMSF AUDITS HELP YOU?

The SMSF Audits team’s extensive experience means we can assist with advice regarding all SMSF issues. We have assisted a large number of SMSF Trustees deal with compliance issues and still retain their complying status.

Provide technical information and articles for any of your technical events and seminars and newsletters or email alerts.

We have also assisted numerous Trustees in negotiating a compliance plan with the ATO and have successfully had penalties reduced and remitted.

Our website has a lot of useful information www.smsfaudits.net

We have a tax specialist on our staff who can prepare and lodge private ruling requests for you or your clients and who can assist with any ATO tax review or audit.

SMSF Audits is about more than just cost effective audits. We provide complying, timely audits and offer support to solve potential problems. Let us be your competitive advantage.

Want to find out more? Call us on (07) 3368 2794 or email [email protected]
Follow us on LinkedIn for articles, advice and more https://www.linkedin.com/company/smsf-audits/

Ensure your SMSF investments are in the right name

The reason to have an SMSF is to build wealth for your retirement. So, it’s important to make sure the fund’s investments are purchased in the right name. If something goes wrong, others could get their hands on an asset they’re not entitled to.

Ownership of an SMSF investment is required to be in the name of the fund’s trustee. This is the case for both types of trustee structure – individual trustee and corporate trustee (in which the company directors are the fund members).

For individual trustees, each trustee’s name must be recorded on the investment. If there’s a change in membership, say one trustee is replaced with another, then the ownership of the investment will need to be updated. This may incur stamp duty and possibly other charges with the registry.

A corporate trustee, in contrast, is simpler for investment ownership. Fund investments are held in the name of the company trustee. Any changes to the company directors (resignations & replacements) do not impact investment ownership.

There is a protocol in recording investment ownership, illustrated by the following example. ATF is short for ‘as trustee for’.

Individual trustee example:
John Smith and Jane Smith ATF Smith Family Super Fund

Corporate trustee example:
Smith Co Pty Ltd ATF Smith Family Super Fund

If the fund asset is shares in a publicly listed company, it would be common for the share registry to record ownership as:

Individual trustee example:
John Smith and Jane Smith <Smith Family Super Fund>

Corporate trustee example:
Smith Co Pty Ltd <Smith Family Super Fund>

Sometimes the register of the fund’s investment will have enough space to record the names of each individual or the company trustee. But in some cases, the registry may limit the number of characters and may record the names of only one or two of the trustees. Sometimes the name of one trustee may be recorded but there will be an indication that the investment is owned jointly or as trustee. Make sure the fund records recognise that the investment is registered in the names of all individual trustees in case you are ever questioned by the fund’s auditor or a regulator.

Some assets such as real estate are also subject to state-based laws. These laws can be restrictive in how the fund can show its ownership of the asset. As a result, you may need to prepare additional paperwork, such as a caveat or declaration of trust to support the fund’s ownership of fund assets. Legal advice should be obtained concerning the appropriate documents.

When it comes to real estate, the land titles registry will permit only the names of the individual trustees or corporate trustee to be recorded and not permit the name of the super fund to be included. In this situation the name of the super fund can be included on the contract of sale or other documents for the purchase or sale of the property.

It would be common for the land titles office to record ownership as:

Individual trustee example:
John Smith and Jane Smith

Corporate trustee example: 
Smith Co Pty Ltd

The land titles office will only record the legal owner of the real estate rather than the superannuation fund which is the beneficial owner of the real estate. However, the contract of sale would usually refer to the fund – e.g. John Smith and Jane Smith ATF Smith Family Super Fund or, in the case of a company trustee, Smith Co Pty Ltd ATF Smith Family Super Fund. In some states the contract for sale may allow nominee arrangements which allow the trustees of the fund to be nominated prior to the settlement of the property.

In some cases, the fund may purchase or sell investments such as shares in private companies, units in private unit trusts and even artworks and collectables. Where there is no registry for a particular investment it should be ensured that the documents relating to the purchase of the asset or the loan clearly indicate the names of the trustees ‘as trustee for the [name of superannuation fund]’. If the fund has entered into a limited recourse borrowing arrangement the investment should be held in the name of the holding trust or custodian and not in the name of the trustees ‘as trustee for the superannuation fund’.

The advantage of having fund investments in the correct names is that it clearly indicates the owner of the investments especially if it is required to be registered with an independent third party. First, the SIS Act requires the fund investments to be kept separate from personal assets of the fund. This means that you need to manage your SMSF assets independently of your own personal or business affairs. Second, where there is an individual trustee who is having business troubles and goes bankrupt, the investments should be clearly identified in the name of the trustee. Third, clear separation of fund investments from those owned personally will help to reduce disputes for family law purposes and when benefits become payable from the fund.

For compliance purposes under the SIS Act, each year investments are required to be valued on a market basis. There are ATO guidelines on how to value investments and other assets at market value for tax and SIS purposes which helps ensure the investment is valued correctly.

Information about a particular investment is important especially when it is unique. Those investments registered on the various exchanges or with regulators such as the land titles office are easier to identify compared to those investments which may be boutique and unconventional.

At a glance – what you need to do

  • Make sure the investments of the SMSF are in the names of the trustee and recognise they are held in trust for the SMSF;
  • Where there is a register of a particular investment, such as listed shares or real estate, make sure the trustee’s name is recorded on the relevant documents including contracts of sale;
  • Where there is no register for a particular investment, such as private company shares, units in a private unit trust or loans, make sure the name of the trustee is recorded as holding the shares or units in trust for the SMSF, or the loan documents are in the trustee(s) name as trustee of the relevant superannuation fund;
  • Check to see that the income and expenses which relate to non-arm’s length transactions comply with the legislation or seek advice to find out whether they comply.

SOURCE, All Rights Reserved – Super Concepts, Graeme Colley,8 March 2019, Ensure your SMSF investments are in the right name, https://www.superconcepts.com.au/Insights-and-support/blog/smsf-insider/2019/03/08/ensure-your-smsf-investments-are-in-the-right-name

Should you include the kids in your SMSF?

It’s on the cards that the maximum number of members in an SMSF will increase from four to six members, as of 1 July 2019. And this raises the question: is it worthwhile having a family SMSF that includes the kids?

The jury’s out

Many media commentators recommend against including the children. However, in some cases I’ve seen it done exceptionally well. Here, the children play an important role in the fund, there’s a high level of respect amongst the family and decisions are made collaboratively to the benefit of everyone.

On the down side, have a look at the ever-increasing number of court cases. Some involve children taking money from the family fund for their own purposes, and others where the children have weaselled their way in and have taken over their parents’ super.

Whether to include children depends on the reasons for doing so, their ages, personal situation and their sense of responsibility.

Each family is different and so is each child within that family. Only the right type of person should be allowed as a member of a family super fund. A child who has difficulty managing their own personal finances will probably have the same issues within an SMSF. They may be better off as members of a retail or industry fund, where professional managers look after the fund investments.

As I see it, children can be split into three categories by age and circumstance. Those under 18, single adult children and those children in a relationship, possibly with their own family.

Children under 18

A child under 18 can be a member but not a trustee of an SMSF.

Super can be provided for them usually by a parent or relative as child contributions up to $300,000 over a fixed three-year period. If the child is working, contributions may be made by an employer or the child. Any contributions will help the fund provide a bigger pool of money for investing.

18 and over

A child 18 or older has legal capacity in most cases to be an individual trustee of the fund or director of the corporate trustee. Along with the other trustees or directors they are responsible for the operation of the whole fund, not just themselves. This can be a catalyst to get your child involved in the investment of their super savings and understand the workings of an SMSF.

Whether you would allow any of your children with a spouse but no dependants themselves as a member of an SMSF depends on the situation. In many cases it may be worthwhile to include the child until they have enough to start an SMSF for themselves and their spouse.

Children with their own family

The time may come when your child has their own family. Whether the child should be a part of your SMSF or have their own depends on the situation. The same outcomes can be achieved by the child having their own SMSF, as the child’s fund can make investments jointly with the parents’ fund.

Want to incorporate the children? Here are some considerations

You may wish to consider segregating investments amongst the fund members. Investments supporting the children’s super balances can be segregated from their parents’ investments. This could be done by using separate bank and investment accounts, with record keeping left to an SMSF accountant or administrator who has the skills and systems to handle segregated investments.

Having children in the family SMSF may also enable an inter-generational transfer of family assets – such as a commercial property used in the family business or other real estate. However, a word of warning, if this strategy is used it must be structured and handled correctly otherwise compliance problems can occur. There are several ways in which the investment could be owned by the fund, either jointly, as a company or a unit trust. The strategy can allow ownership of real estate by one SMSF or split across different SMSFs and allows flexibility if one fund wishes to purchase units or the property in future.

Case study

Mal, Irene and their two adult children are members of an SMSF. The fund wishes to purchase a shop from which the family business will operate. The shop currently has a mortgage over it. The members’ balances in the fund are just about high enough to purchase the property outright, thus doing away with the need for a mortgage. Having sought professional advice here are the options available to the fund:

  1. The fund could purchase 100% of the property, but it’ll leave the members with a very lumpy asset and the fund’s cash flow will be tight for some years. If the children decide to rollover their super to another fund the shop may have to be sold.
  2. The fund could purchase part of the property as tenants in common with the current owners, which would make sense from a cash flow perspective. However, as an SMSF can’t directly own property that’s mortgaged (as opposed to a limited recourse borrowing arrangement), part of the purchase price will need to be used to pay out the mortgage.
  3. A fixed unit trust or private company could be established and providing there is no mortgage over the property the fund could purchase units in the trust as well as other family members who would own the units personally.

Whatever strategy is decided on, the purchase is helped by family members combining their resources from the SMSF to purchase the shop. In addition, the tax-deductible rent from the shop is paid to the owners, which would include the SMSF either directly or indirectly. If the children wished to run the business after the parents retire, then having the shop in the SMSF can mean an intergenerational transfer of the asset which is seamless.

A word of caution

I’ve looked at some of the positives of incorporating children, but unfortunately there are some negatives to consider.

Dipping into the fund

Children who become members and trustees of a family SMSF can be in a position to access the fund’s resources. This type of access without proper controls in place can have tragic consequences.

There was a court case some years ago involving an SMSF setup by a husband and wife and which incorporated their adult son. Unfortunately the son was drug addicted and left the fund almost penniless and non-compliant for tax purposes. If better control had been exercised over the operation of the fund, and the trustees understood their responsibilities, the loss may have been stemmed or avoided altogether.

Relationship breakdown

In a relationship breakdown superannuation forms part of the asset pool which is to be divided between the parties. This means that as part of a settlement one party may have access to the other’s super. It could mean having to sell the family’s business assets to free up cash as part of the agreement. And the situation is not isolated to just the parents – children as members of the fund may also be going through a relationship breakdown.

Control on death

When it comes to estate planning and SMSFs, who’s in control is an important factor, determining whether the wishes of the deceased are correctly carried out, or not.

There’ve been court cases where children have been appointed as trustees of an SMSF, as the legal personal representative of their parents, and where things have gone south.

In one case, a father and daughter were members and trustees of an SMSF. The father completed a non-binding nomination for his super balance to be split 50/50 to his daughter and son. At the time of his death, the son was not a member or trustee of the SMSF, so the daughter appointed her husband and proceeded to pay 100% of her father’s benefits to herself. The court found in her favour. As trustee she (and her husband) had discretion, as the original nomination was non-binding. Even if the nomination was binding, the fact that the daughter was in control of the SMSF could have caused a protracted and costly legal battle between the beneficiaries.

To include or not to include, that is the question

There can be many benefits by admitting children and other family as members of an SMSF. But considerable thought should be given to the potential risks that can arise when family and money are combined.

Weigh up the pros and cons before making your decision. The needs and motivations of family members may be different to your own and could lead to conflict.

SOURCE, All Rights Reserved – Graeme Colley, SuperConcepts, 19 Feb, 2019,  Should you include the kids in your SMSF?

https://www.superconcepts.com.au/Insights-and-support/blog/smsf-insider/2019/02/19/should-you-include-the-kids-in-your-smsf

HOW CAN OUR TEAM AT SMSF AUDITS HELP YOU?

The SMSF Audits team’s extensive experience means we can assist with advice regarding all SMSF issues. We have assisted a large number of SMSF Trustees deal with compliance issues and still retain their complying status.

Provide technical information and articles for any of your technical events and seminars and newsletters or email alerts.

We have also assisted numerous Trustees in negotiating a compliance plan with the ATO and have successfully had penalties reduced and remitted.

Our website has a lot of useful information www.smsfaudits.net

We have a tax specialist on our staff who can prepare and lodge private ruling requests for you or your clients and who can assist with any ATO tax review or audit.

SMSF Audits is about more than just cost effective audits. We provide complying, timely audits and offer support to solve potential problems. Let us be your competitive advantage.

Want to find out more? Call us on (07) 3368 2794 or email [email protected]
Follow us on LinkedIn for articles, advice and more https://www.linkedin.com/company/smsf-audits/

The impact of penalty interest on SMSF loans

An SMSF trustee that is considering repaying an LRBA early or refinancing an LRBA should review the loan agreement. Consider carefully the potential effect of any penalty interest provision, including its tax treatment.

Taxation Ruling TR 2019/2 Income tax: whether penalty interest is deductible provides the Australian Taxation Office’s (ATO’s) view on the deductibility of penalty interest. It replaces Taxation Ruling TR 93/7W Income tax: whether penalty interest payments are deductible, which has been withdrawn. This article highlights the relevance of TR 2019/2 for self managed superannuation funds (‘SMSFs’).

(All section references are to the Income Tax Assessment Act 1997 (Cth) unless otherwise stated.)

TR 2019/2

Penalty interest

‘Penalty interest’ is defined in TR 2019/2 as follows:

  1. ‘Penalty interest’ is an amount payable by a borrower under a loan agreement in consideration for the lender agreeing to an early repayment of the loan. The amount payable is commonly calculated by reference to a number of months of interest payments that would have been received but for the early repayment.

Summary of TR 2019/2

Broadly, the ATO’s view is that penalty interest may be deductible in certain circumstances under the following two key sections (and we will assume the SMSF is fully in accumulation mode unless stated otherwise):

  • It is generally deductible under s 8-1 (general deductions) where the borrowings are used for gaining or producing assessable income or in a business carried on for that purpose. It is incurred to rid the taxpayer of a recurring interest liability that would itself have been deductible if incurred. However, it is not deductible under s 8-1 to the extent that it is a loss or outgoing of capital, or of a capital, private or domestic nature.
  • It is deductible under s 25-30 (expenses of discharging a mortgage) to the extent the loan moneys were used for producing assessable income. Note that, unlike s 8-1, deductibility is not affected by whether the expenditure is capital or revenue in nature.

Further, penalty interest is not deductible to the extent that it is used to derive exempt income.

However, according to the ATO, penalty interest is not deductible under s 25-25 (borrowing expenses) as it is not incurred for borrowing money.

Penalty interest that is an incidental cost (eg, a borrowing expense such as a loan application fee or a mortgage discharge fee) incurred in relation to a capital gains tax (‘CGT’) event or to acquire a CGT asset is included in the cost base or reduced cost base (refer to ss 110-35(9) and 110-55(2) (incidental costs for CGT asset)). In contrast, penalty interest is not included in the cost of a depreciating asset under s 40‑190(2)(b) (element of cost of holding a depreciating asset).

Application and protection offered by TR 2019/2

TR 2019/2 applies retrospectively and prospectively. However, it will not apply to taxpayers to the extent that it conflicts with the terms of a settlement of a dispute agreed to before 22 May 2019 (ie, the date of issue of TR 2019/2).

TR 2019/2 is a public ruling. If TR 2019/2 applies to a taxpayer (eg, an SMSF), and they correctly rely on TR 2019/2, the ATO will apply the law to them in the way set out in the ruling. Further, if the ATO thinks that the ruling disadvantages the taxpayer, the ATO may apply the law in a way that is more favourable to the taxpayer.

TR 2019/2 in the context of SMSFs

Relevance for SMSFs

SMSFs are generally prohibited from borrowing money. The only exception to this prohibition is if the SMSF borrows money under a limited recourse borrowing arrangement (‘LRBA’) that satisfies the criteria in s 67A of the Superannuation Industry (Supervision) Act 1993 (Cth). Accordingly, TR 2019/2 is most relevant for SMSFs in the context of LRBAs. In particular, some loan agreements may contain a penalty interest provision. The penalty interest provision could be triggered if the SMSF (ie, the borrower) repays the entire loan balance early or refinances the loan.

Due to the subdued property market, many SMSFs that have purchased property with LRBAs may now be in difficult territory in meeting their repayments, especially if the property is not yet income-producing.

We illustrate the application of TR 2019/2 in this context with an example.

EXAMPLE

Toby is the sole member of the Toby Superannuation Fund (‘SMSF’) he is the sole director of Toby Pty Ltd, which acts as the trustee of the SMSF. Toby only has an accumulation interest in the SMSF.

The SMSF purchased a commercial property using an LRBA with a bank lender, eg Bank #1. The SMSF leases the commercial property to an unrelated third-party tenant and derives assessable income.

After the first year of the loan, the SMSF decides to refinance this property at a lower interest rate and use a different lender, eg, Bank #2. In order to refinance, the SMSF pays out the loan (from Bank #1) early. Further, the refinance results in the discharge of the mortgage that was given to Bank #1. A new mortgage is given to Bank #2.

The SMSF incurs penalty interest calculated on the basis of one month’s interest for each year of the fixed loan period remaining.

The advantage sought in practical terms by repaying the loan (from Bank #1) early and incurring penalty interest is future interest savings from a lower interest rate. Penalty interest is of a revenue character and is deductible under s 8-1.

Alternatively, since the refinancing affects the discharge of a mortgage securing the loan (from Bank #1), the penalty interest is also deductible under s 25-30.

Naturally, if two or more sections allow for a deduction in respect of the same amount, s 8-10 requires the SMSF to deduct under the provision that is the most appropriate. Accordingly, the SMSF chooses to deduct the penalty interest under s 25-30.

Alternatively, if Toby also had a pension interest in the SMSF, the penalty interest is not deductible to the extent that it is used to derive exempt income.

For LRBAs involving unrelated lenders such as a bank, it will often be the lender or the lawyers acting for the lender who prepare the loan agreement. Accordingly, whether a penalty interest provision is included in the loan agreement will be determined by the lender. The SMSF will not have much influence on whether a penalty interest provision is included in the loan agreement.

LRBAs involving related party lenders

For LRBAs involving related party lenders, there is more scope for the SMSF to influence the terms of the loan agreement. Many SMSFs want the terms of their loan agreement to comply with the ATO’s safe harbour terms as described in Practical Compliance Guideline PCG 2016/5. We note that PCG 2016/5 does not require penalty interest to be payable by a borrower to a lender in relation to the early repayment of the loan. Accordingly, related party loan agreements that comply with PCG 2016/5 are not required to include a penalty interest provision. (For completeness, the related party loan agreement drafted by DBA Lawyers does not include a penalty interest provision for the early repayment of the outstanding loan balance.)

Naturally, the parties to a related party loan agreement may still decide to include a penalty interest provision. If such a decision is made, the parties must be able to demonstrate that the LRBA was entered into and maintained on terms consistent with an arm’s length dealing. This could involve benchmarking and maintaining evidence to show that the LRBA (including the penalty interest provision in the loan agreement) is established and maintained on terms that replicate the terms of a commercial loan that is available in the same circumstances.

Conclusion

An SMSF trustee that is considering repaying an LRBA early or refinancing an LRBA should review the loan agreement and consider carefully the potential effect of any penalty interest provision, including its tax treatment.

The law in relation to the taxation of SMSFs is a complex area of law and where in doubt, expert advice should be obtained. Naturally, for advisers, the Australian financial services licence under the Corporations Act 2001 (Cth) and tax advice obligations under the Tax Agent Services Act 2009 (Cth) need to be appropriately managed to ensure advice is appropriately and legally provided.

SOURCE, All Rights Reserved – Joseph Cheung, lawyer and Daniel Butler, director, DBA Lawyers, 19 July 2019 , https://www.smsfadviser.com/strategy/17809-the-impact-of-penalty-interest-on-smsf-loans

HOW CAN OUR TEAM AT SMSF AUDITS HELP YOU?

The SMSF Audits team’s extensive experience means we can assist with advice regarding all SMSF issues. We have assisted a large number of SMSF Trustees deal with compliance issues and still retain their complying status.

Provide technical information and articles for any of your technical events and seminars and newsletters or email alerts.

We have also assisted numerous Trustees in negotiating a compliance plan with the ATO and have successfully had penalties reduced and remitted.

Our website has a lot of useful information www.smsfaudits.net

We have a tax specialist on our staff who can prepare and lodge private ruling requests for you or your clients and who can assist with any ATO tax review or audit.

SMSF Audits is about more than just cost effective audits. We provide complying, timely audits and offer support to solve potential problems. Let us be your competitive advantage.

Want to find out more? Call us on (07) 3368 2794 or email [email protected]
Follow us on LinkedIn for articles, advice and more https://www.linkedin.com/company/smsf-audits/