Transcript
Changing Face of SMSFsWebinar:
THE CHANGING FACE OF SMSFsDecember 2013
© The SMSF Academy 2013
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HOUSEKEEPING
This presentation provides general advice only. No direct or implicit recommendations aregiven in this presentation. This means that the general advice provided has not beenprepared taking into account any individual’s financial circumstances (i.e. investmentobjectives, financial situation and particular investment needs).
The SMSF Academy Pty Ltd believes that the information in this presentation is correct at thetime of compilation but does not warrant the accuracy of that information. Save for statutoryliability which cannot be excluded, The SMSF Academy disclaims all responsibility for any lossor damage which any person may suffer from reliance on this information or any opinion,
conclusion or recommendation in this presentation whether the loss or damage is caused byany fault or negligence on the part of presenter or otherwise.
© The SMSF Academy, 2013
GENERAL ADVICE WARNING
GOVERNMENT MEASURES
Webinar – Changing Face of SMSFs
• Federal Budget measure announced on 5 April 2013 to make changes
to deeming provisions to align income streams with other financial
assets for Centrelink/DVA entitlements
• Social Services and Other Legislation Bill (2013) currently before the
Senate will extend the deeming provisions to any asset-tested income
stream that is an account-based pension or equivalent annuity
product
• Measure to treat people with similar financial assets consistently under
the income support system
• Amendments to take effect from 1 January 2015
CENTRELINK DEEMING OF PENSIONS
• Account-Based Pensions held by income support recipients
immediately before 1 January 2015 will continue to be assessed under
the current rules
• Can choose to change product to be assessed under new rules
• To qualify:
1. The person was receiving income support payment immediately prior to 1
January 2015;
2. The person was receiving asset-tested income stream (i.e. account-
based pension) immediately prior to 1 January 2015;
3. The person has been continuously receiving an income support payment
since 1 January 2015; and
4. That income stream has continued to be provided to that person since 1
January 2015
GRANDFATHERING PROVISIONS
• Where the income ceases to be payable
and subsequently recommenced, individual
will be subject to new deeming rules from
the day of the cessation of the pension
• A pension may cease in several ways that
could impact an income support payment,
including:
− Failure to comply with the pension rules (e.g.
not meeting the minimum pension payment)
− Full commutation of the income stream
− Death of a member
IF PENSION CEASES…
Active role required in
managing pension payment obligations
• Where an individual is already in receipt of an account-based pension,
these amendments will not apply to a reversionary beneficiary where:
− the primary beneficiary died during a time while the amendments were
being made having satisfied the grandfathering provisions;
− the qualifying income stream (grandfathered) reverts to the reversionary
beneficiary on the primary beneficiary’s death;
− at the time of that reversion, the reversionary beneficiary is receiving an
income support payment;
− the reversionary beneficiary has been continuously receiving an income
support payment since the time of that reversion; and
− that income stream has been provided to the reversionary beneficiary
since the time of that reversion.
REVERSIONARY INCOME STREAMS
CENTRELINK DEEMING OF PENSIONS
Source: IOOF, July 2013
Coalition Government announced on 6 November 2013 that they will not be proceeding with the measure to tax earnings on superannuation assets supporting retirement income streams
Media Release
“The complexity and compliance costs associated with this initiative are extreme and
essentially undeliverable. This is a demonstration of the Government's commitment to
provide certainty for superannuation fund members by making no adverse unexpected
changes to superannuation during our first term. The Government acknowledges that not
proceeding with these and other measures will negatively impact on the underlying cash
balance by $2.4 billion over the current forward estimates period.”
Assistant Treasurer, Senator Arthur Sinodinos
TAX ON SUPER PENSION EARNINGS
ATO RULINGS & DETERMINATIONS
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• Release of TD 2013/22 considers timing of allocation of concessional
contributions after the end of financial year in which contributions
were made
• Follows application of ATOID 2012/16 and use of unallocated
contributions holding account (contribution reserving)
• Benefit of a public ruling, providing greater certainty in adopting
strategy for clients
• Updated guidance reflects changes in Superannuation Data &
Payment Standards, plus operation of Division 291 of the ITAA 1997
CONTRIBUTION RESERVING
• Ruling confirms that amounts paid in June can be ‘held over’
and remain unallocated at 30 June – amount to be allocated
to member by 28 July
− APRA Regulated Funds in complying with Data & Payment Standards must
now allocate to a member within 3 business days after receiving the
contribution
• Contribution is not counted twice for contribution cap purposes, rather it will count once on the effective date of the
allocation
CONTRIBUTION RESERVING
Concessional contributions are assessable in year made – allocation to be grossed-
up for member contribution reporting purposes in following income year
• Release of draft ruling, TR 2013/D7
• Considers apportionment for purposes of section 8-1 of the ITAA 1997 in respect to a loss or outgoing incurred by a super fund in gaining or producing assessable income and partly in gaining or producing non-assessable income
• Distinct & severable expenses, indifferent expenses
• Similar views expressed previously within ATOID 2012/47
APPORTIONMENT OF EXPENSES
Geoff (56) and Jenny (54) members of SMSFFollowing transactions within fund for FY2012-13:
• rollovers of $460,000
• concessional contributions (CC) of $45,000• non-concessional contributions (NCC) of $170,000• fund investment income of $38,000• general expenses of $4,700
During year, Geoff started a transition to retirement income stream (TRIS)
At end of year, fund obtained actuarial tax certificate which outlined tax exemption of 56%
INDIFFERENT EXPENSE
INDIFFERENT EXPENSES
• Based on Commissioner’s draft views in TR 2013/D7 and consistent with ATOID
2012/47, the fund is entitled to following tax deduction:
$4,700 x ($713,000 – $21,280)/$713,000 = $4,560
• Where non-assessable amounts are not included, a lower level of tax
deduction would be claimed
$4,700 x ($83,000 – $21,280)/$83,000 = $3,495
(NB. $21,280 is the tax exempt amount (56%) on fund investment income of
$38,000)
ATO PRIVATE RULINGS
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Authorisation Number: 1012369819768
LRBA & NON-ARMS LENGTH INCOME
Member Member
X Y
Member
Z
Retired – under
65
Under 50
Holding Trust
SMSF
Lenders
Limited Recourse
Beneficial
interest
Related Party loan
More than 10 years
> RBA Cash Rate
3rd party tenant
Commercial rate of
rent paid to SMSF
Lender willing to reduce
interest charged to nil in
order to take pressure off
meeting minimum pensions
Question:Is there a breach of the non-arm’s length provisions (NALI) where no interest ischarged by the lender on the limited recourse loan?
Answer:No
Why:Subsection 295-550(1) of ITAA 1997 considers schemes whereby parties are notdealing with each other at arm’s length and the amount is more than theamount the entity might have been expected to derive if those parties weredealing with each other at arm’s length.
The scheme must inflate the level of ordinary or statutory income derived –subsection 295-550(1) does not consider the impact of an inflated level taxableincome derived from a lower rate of interest.
NON-ARMS LENGTH INCOME
Authorisation Number: 1012396819768
RELATED PARTY LRBA
Questions: Answer
Will a discounted amount of interest be considered a
contribution?
No
Will the annual rental derived be considered non-arm’s length
income?
No
Will any capital gain realised by the fund on the sale of the
property be considered non-arm’s length income?
No
Is a 0% interest rate deemed to be a scheme with dominant
purpose of gaining a tax benefit under Part IVA of ITAA 1936?
No
Question:Will a discounted amount of interest be considered a contribution?
Answer:No
Why:No increase in the capital of the fund (unless debt is forgiven or extinguishment of
a liability is involved) – TR 2010/1
ATO initial response in NTLG Super technical sub-group expressed view that
absence of interest does not increase capital of Fund. Interest is a common, but
not necessary feature of a loan.
DISCOUNTED INTEREST AS A CONTRIBUTION
Question:Will the annual rental income derived be considered non-arm’s length income(NALI)?
Answer:No
Why:The purchase value of the Property was determined on arm’s length dealingsbetween the Corporate Trustee and the unrelated vendor;
The dealing between the Corporate Trustee and the members involves a loan ofa certain amount for a specified number of years to the Fund by the members ata rate agreed to by the parties (or otherwise specified by the ATO); and
The Corporate Trustee intends to rent the Property to an unrelated party on arm’slength terms
NON-ARMS LENGTH INCOME
Question:Will any capital gain realised by the fund on the sale of the property be considered
non-arm’s length income?
Answer:No
Why:The rental income to be received by the Fund will be no more than the amount that
the Fund might be expected to receive if the Fund and the unrelated party dealt
with each other at arm’s length.
No indication that the terms and conditions of the loan are more favourable to the
Members as the Lender. In this context, any capital gain made will be no more than
the amount the Fund might be expected to make if the Corporate Trustee and
members were dealing with each other at arm’s length in relation to the loan.
CAPITAL GAINS & NALI
Question:Is a 0% interest rate deemed to be a scheme with dominant purpose of gaining a
tax benefit under Part IVA of ITAA 1936?
Answer:No
Why:The ‘scheme’ for the purposes of subsection 295-550(1) of the ITAA 1997 does not
indicate that the arrangement will result in any person involved is obtaining a tax
benefit, nor that the sole or dominant purpose is to obtain a tax benefit.
PART IVA
NTLG SUPER TECHNICAL SUB-GROUPSEPTEMBER 2013
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If an acquirable asset is financed by two lenders under a LRBA and one or both
lenders are granted a charge over the SAA will this breach paragraph 67A(1)(f) of
the SISA?
• ATO confirmed in June 2012 NTLG minutes that two lenders are acceptable
without breaching 67A(1)(d) and 67A(1)(e)
• Initial response ATO’s confirms 67A(1)(f) will not be contravened merely because
there are two borrowings where one or more are subjecting the acquirable asset
to a charge that satisfies paragraph 67A(1)(d)
LRBA & TWO LENDERS
Where a SMSF has a present entitlement to a distribution from a trust that is unpaid(UPE), will the UPE be an in-house asset?
• SMSFR 2009/3 sets out the Commissioner’s views about when an unpaid trustdistribution will give rise to a loan for the purposes of Part 8 of the SISA
• Paragraphs 6 – 8 of the Ruling considers the characterisation of the UPE as a‘loan’ – where amount is a loan-back or seen as provision of credit or financialassistance with the related trust, the unpaid amount will be included as an in-house asset of the SMSF
• Paragraphs 9 – 13 of the Ruling suggest that the unpaid trust distribution maygive rise to being an ‘investment’ – where the application of the asset is forincome, interest, profit or gain
• Trustee may also enter into an agreement to acquire further units (investment)
• Where trust is a related trust of the SMSF, the amount of ‘investment’ in thattrust will be an in-house asset of the SMSF (unless exclusions in sections 71 to 71Eapply)
UPE BETWEEN SMSF & UNIT TRUST
What constitutes a contribution and what is the value of that contribution when a
related party improves real property owned by the fund?
CONTRIBUTIONS & PROPERTY IMPROVEMENTS
SMSF
$500,000
$540,000Materials$12,000
Labour at no cost$13,000
How much is the
contribution?
ATO considers that the value of the contribution
would be equal to the improvement$40,000
Member/Trustee
Is it possible to pay a death benefit in two separate payments (an interim and
final benefit) if the value of the death benefit can be ascertained at the time of
the interim payment?
No, where amount can be ascertained by the time the first lump sum is paid, subparagraph 6.21(2)(a)(ii) does not permit more than one lump sum to be paid in
respect of the deceased.
Is it possible for an anti-detriment payment to be attached to only one of the
payments?
ANTI-DETRIMENT AND MULTIPLE DEATH BENEFITS
Interim payment
Final payment
Tax saving amount can be increased on either or both payments, but not calculated and applied to only one of the payments
RECENT CASES
Webinar – Changing Face of SMSFs
WOOSTER V MORRIS [2013] VSC 594
• Blended family case
• Second wife of deceased (married for 20 years) sought advice about
validity of Binding Death Benefit Nomination as dissatisfied that
benefits were left to two daughters of previous marriage
• Sought independent legal advice and was advised BDBN was not
valid and therefore died without a valid nomination in place – death
benefit at discretion of the Trustee
• Deceased’s daughters instigated proceedings in Supreme Court of
Victoria to enforce validity of BDBN
• Court referred matter to a special referee (Senior Barrister)to
investigate and report back with findings
WOOSTER V MORRIS [2013] VSC 594
• Special Referee on all points found in favour of the daughters that BDBN was in fact valid
• Judge McMillan upheld these findings – costs for the entire matter were
awarded against Mrs Morris, inclusive of her SMSF account balance (the Fund)
Lessons to learn:
• If there is any possibility of dispute between members/trustees about the
payment of a death benefit and validity of any nomination, the Trustee should
apply to the Court for a Declaration as to the matters in dispute
• The trustee must act in the best interest of present and future beneficiaries
(covenant contained within SIS Act)
• Illegal early access case
• Trustee/member of SMSF during 2010 withdrew from the fund over90% of the assets
• Individual failed to include $62,500 in the applicants personalincome tax return as assessable income
• ATO imposed a 25% administrative penalty and interest charge toshortfall
• Applicant sought review of decision by AAT, arguing amounts werea loan, not benefit withdrawals
• Commissioner disallowed as no agreement for repayment, loan wasnot genuine and withdrawal cannot be characterised as loan(section 65(1) of SISA)
• Tribunal upheld decision based on failure by taxpayer to takereasonable care
XU AND COMMISSIONER [2013] AAT 855
HOT OFF THE PRESS!
ATO has withdrawn TD 2013/D7
Ruling explained Commissioner’s initial views
about segregation of pension assets for
purposes of section 295-385 of ITAA 1997
Following submissions, it became clear to ATO
that approaches vary materially across the
industry.
New determination to deal with bank
account issues to be prepared and ATO to
consult on balance of matters in public ruling
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Aaron DunnThe SMSF Academywww.thesmsfacademy.com.au
SMSF Dunn Right,
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