It is Different

A Self-managed super fund (SMSF) is different to what are widely known industry and retail super funds. The money contributed by you and you can chosse the investments and the insurance. This article provide some basic knowledge of SMSF.

 

Types of SMSFs:

(a) Single member SMSFs, and

(b) SMSFs other than single member SMSFs.

Within each type of SMSF, the trustee of the SMSF may be a group of individuals or a body corporate.

A Single Member SMSF

A superannuation fund with only one member, where the trustee is a body corporate, is an SMSF if the member if the member is:

(a) The sole director of the body corporate

(b) One of only two directors of the body corporate and related to the second director, or

(c) One of the only two directors of the body corporate and not an employee of the second director, and

(d) No director of the body corporate can receive remuneration from the fund, or from any person for duties or services performed in relation to their position as a trustee of the fund.

A superannuation fund with only one member where the trustee is a group of individuals, will be an SMSF if the member is:

(a) One of only two trustees (of whom one is the member and one is a relative of the member)

(b) One of the only two trustees and not an employee of the other trustee

(c) No trustee of the fund can receive remuneration from the fund, or from any person for duties or services performed in relation to their position as trustee of the fund.

An SMSF, other than a single member SMSF

A superannuation fund, other than a single member SMSF, is an SMSF if:

(a) The fund has 2 to 4 members

(b) If the trustees are individuals, each individual trustee is a member

(c) If the trustee is a body corporate, each director is a member

(d) Each member is a trustee of the fund or a director of the corporate trustee

(e) No member is an employee of any other member unless they are related, and

(f) No trustee or director of a corporate trustee receives remuneration from the fund or anyone else for any duties or services as trustee or director

Requirements for individual Trustees

Generally, anyone 18 years of age and over, who is not under a legal disability (such as a mental disability) can be a trustee of an SMSF, unless they are a disqualified person.

An individual is a disqualified person if they:

(a) have ever been convicted of an offence in respect of dishonest conduct

(b) have ever been the subject of a civil penalty order under the superannuation legislation

(c) are any insolvent under administration (i.e. they are an undischarged bankrupt)

(d) have been disqualified by the Commissioner of Taxation

Aside from being unable to act as a trustee, a disqualified person cannot:

(a) have a legal personal representative act as a trustee on their behalf

(b) have a legal personal representative act as a director of a corporate trustee on their behalf, or

(c) be a member of an SMSF (unless they have successfully appealed to the ATO for an exemption)

Requirements for corporate trustee

A body corporate may be the trustee of an SMSF, unless it is considered to be a disqualified person.

A corporate trustee is deemed to be a disqualified person if:

(a) the body corporate knows, or has reasonable grounds to suspect, that a responsible officer (i.e. director, secretary, executive officer) of the body corporate is a disqualified person, or

(b) a receiver, administrator, official manager or provisional liquidator has been appointed in respect of the body corporate or

(c) action has commenced to wind-up the body corporate

Complying superannuation fund

Taxation concessions, such as tax deductions for contributions, 15% nominal tax rate on fund earnings and tax concessions on benefit payments, all depend on a superannuation fund of any type being a complying superannuation fund.

To be a complying superannuation fund, an SMSF must be:

(a) a resident regulated superannuation fund at all times during the income year

(b) must have either

i. not contravened any of the Regulations during the income year or

ii. the Compliance test may be applied

Contact us if you need further clarifications.

Resident superannuation fund

An SMSF will be an Australian superannuation fund at a particular time if:

  • the fund was established in Australia or any assets of the fund are situated in Australia
  • the central management and control of the fund is ordinarily in Australia
  • either the fund had no active members or at least 50% of either:
    • the total market value of the funds assets attributable to superannuation interests of active members or
    • the sum of the amounts that would be payable to or in respect of active members if they voluntarily cased to be members
  • is held by active members who are Australian residents.

Concessional contribution caps

Concessional contributions include:

  • employer contributions (including contributions made under a salary sacrifice arrangement)
Income year Amount of cap
2013-14 $25,000
2012-13 $25,000
2011-12 $25,000
2010-11 $25,000
2009-10 $25,000
2008-09 $50,000
2007-08 $50,000

Concessional contributions cap for people 50 years old or over up to 30 June 2012

From 1 July 2012, all individuals have a concessional contributions cap of $25,000.

An increased concessional contributions cap applied until 30 June 2012 for people who were 50 years old or over:

  • If you were 50 years old or over, your annual cap for the 2007-08 and 2008-09 financial years was $100,000.
  • If you were 50 years old or over, your annual cap for the 2009-10, 2010-11 and 2011-12 financial years was $50,000.

If you had more than one fund, all concessional contributions made to all your funds were added together and counted towards the cap. This cap was not indexed.

Non-concessional contributions cap

Non-concessional contributions include personal contributions for which you do not claim an income tax deduction.

Income year Amount of cap
2013-14 $150,000
2012-13 $150,000
2011-12 $150,000
2010-11 $150,000
2009-10 $150,000
2008-09 $150,000
2007-08 $150,000

People under 65 years old may be able to make non-concessional contributions of up to three times their non-concessional contributions cap over a three-year period. This is known as the ‘bring-forward’ option.

Contact Superfund Works for further information.

CGT cap amount

Under the CGT cap, you can during your lifetime exclude non-concessional super contributions from the non-concessional contributions cap up to the CGT cap amount. The CGT cap applies to all excluded CGT contributions, whether they were made between 10 May 2006 and 30 June 2007 or after 30 June 2007.

Income year Amount of cap
2013-14 $1,315,000
2012-13 $1,255,000
2011-12 $1,205,000
2010-11 $1,155,000
2009-10 $1.1 million
2008-09 $1.045 million
2007-08 $1 million

Are you having a small business and considering retirement planning seriously Have you just sold your business and made a capital gain on the sales Contact Superfund Works today. We may save you $$$.

Acceptable contributions to an SMSF

Age of Member Contributions and conditions
Under 65 Contributions that are made in respect to the member.
Not under 65, but is under 70 Contributions that are made in respect of the member that are:(a) Mandated employer contributions(b) If the member has been gainfully employed on at least a part-time basis during the financial year in which the contributions are made:i. Employer contributions (except mandated employer contributions) orii.Member contributions or(c) Payments from an FHSA of a kind
Not under 70, but is under 75 Contributions that are made in respect of the member that are:(a) Mandated employer contributions or(b) If the member has been gainfully employed on at least a part-time basis during the financial year in which the contributions are made contributions received on or before the day that is 28 days after the end of the month in which the member turns 75 that arei. Employer contributions (except mandated employer contributions) orii. Member contributions made by the member
Is not under 75 Contributions that are made in respect of the member that are mandated employer contributions

Do you want to utilise your concessional contribution cap effectively to achieve tax savings Contact Superfund Works today.

Contribution splitting

Very broadly, the super laws permit one spouse to transfer certain contributions made in respect of them to an SMSF into a superannuation account for their spouse.

Contribution splitting has tax advantages. Specifically, splitting to a spouse over 55 but under 60 facilitates them taking advantage of the zero tax rate on the first $165,000 should it be taken as a lump sum. Alternatively, splitting contributions with a spouse over age 60 allows them to take it tax-free.

Contribution splitting is a very technical area and requires professional knowledge to set up and implement. Please contact Superfund Works to discuss further.

Pension phase

Transition to retirement pension

Account based pension

Maximum and minimum pension payment

Lump sum payment

Preservation mode

Re-contribution strategy

Segregation of asset

Actuarial certificate

Members components

Binding death nominations

Investment strategy

Members must be resident

Fund capped contribution rules

A client who turns age 65 during the financial year is eligible to use the averaging provisions, allowing non-concessional contributions of up to $450,000. To satisfy the test, the person must have been under age 65 at anytime during the financial year and the $150,000 cap must be exceeded in the year in respect of which the triggering of the averaging provisions is being assessed.

Therefore to be eligible for the averaging provisions a client needs to be less than 65 years old at 1 July of the relevant year and not already in a bring forward period.

A super fund is prohibited from accepting a fund-capped contribution that is

  • Greater than $450,000 for a member who is 64 years old or less at 1 July in a financial year or
  • Greater than $150,000 for a member who is 65 years old, but less than 75 years old, at 1 July in a financial year

Wanting to retire soon but have not had enough in super Contact Superfund Works to find out how you may boost your retirement funds in your SMSF.

In-house asset rules

It is important to remember that in-house assets are not absolutely prohibited, but the market value of all in-house assets must not exceed 5% of the market value of all fund assets (section 82). This is tested at the end of each financial year, and practically each time the trustee of the SMSF buys an in-house asset (section 83 prohibits acquiring something which is an in-house asset if it would take the in-house asset percentage over 5%).

The basic in-house asset definition is in section 71(1). An in-house asset is:

  • An investment in or loan to a related party
  • An investment in a related trust; or
  • An asset subject to a lease arrangement with a related party

There are a number of important concepts in the in-house asset definition.

Once of the key concepts is loan, which is defined in section 10(1) as an inclusive definition a loan includes the provision of credit or any other form of financial accommodation, whether or not enforceable, or intended to be enforceable, by legal proceeding.

That is a particularly wide definition, and will include things well beyond an ordinary definition of loan there are parallels for example with the ATO’s interpretation of loan for the purposes of Division 7A of the Income Tax Assessment Act 1936.

The ATO has also considered what is a loan in SMSFRs 2009/3 and 2009/4, and these highlight the width of the meaning of the term. As examples, some joint venture arrangements can in fact involve a loan, and an unpaid entitlement from a trust which is not promptly called is a loan.

The second important concept is that of an investment in. that phrase is not defined, however, the concept invest is defined in section 10(1) as being to:

  • Apply assets in any way or
  • Make a contract for the purpose of gaining interest, income, profit or gain

Again there is very wide concept and goes well beyond the ordinary concept of buying shares or units in other entities.

This phrase is also considered by the ATO in SMSFRs 2009/3 and 2009/4, and issues highlighted include again unpaid entitlements from trusts which are not promptly called, and joint ventures between the trustee of the SMSF and a related entity.

The ATO also issued TA 2009/16 warning about joint ventures (the concepts were then incorporated into SMSFR 2009/4).

The third important concept is a lease arrangement. This is also defined in section 10 quite widely as:

Any agreement, arrangement or understanding the nature of a lease (other than lease) between the trustee of a superannuation fund and another person, under which the other person is to use, or control the use of property owned by the fund, whether or not the arrangement, arrange or understanding is enforceable, or intended to be enforceable, by legal proceedings.

The way section 71(1) operates is that if an asset is subject to a lease or lease arrangement with the related party then it is the asset itself which becomes the in-house asset. This means the value for in-house asset purposes is actually the whole value of the asset.

This is the case even if the tenant is paying market rent (if no rent is being paid there are other issues such as sole purpose).

One important exemption from the in-house asset rules is an enforceable lease arrangement of business real property (section 71(1)(g)). The concept of business real property is discussed above in section 3.

There are quite a number of other exceptions such as unit trusts, unrelated entities and ungeared entities. Contact us to discuss how your SMSF can be benefited from these structures.

Anti-avoidance rules and other possible issues

If an asset is not an in-house asset, that is not necessarily the end of potential compliance issues.

There are many other rules about what the trustee of an SMSF can and cannot do. Common ones that arise when considering investments include the trustee’s duties (section 52), the sole purpose test (section 62), financial assistance rules (section 65) and the arm’s length rules (section 109).

There are also wide anti-avoidance provisions in the in-house asset rules, including the prohibition of anti-avoidance schemes in section 71(3), the ATO’s ability to deem any asset to be an in-house asset (section 71(4)) and the prohibition on schemes to artificially reduce the in-house asset percentage of the fund (section 85). Also bear in mind when looking at these provisions that most of these will attract the automatic administrative penalty regime from 1 July 2013.

It also applies where you are looking at an investment by the trustee of a unit trust which is wholly owned by the trustee of the SMSF, even a pre 1999 trust. There are a number of cases where the Federal Court and the AAT has applied either the anti-avoidance rules or other provisions to make the SMSF non-complying because of activities of the trustee of the unit trust. These include:

  • APRA v Holloway [2000] FCA 1245, in which a loan by the trustee of a unit trust wholly owned by the trustee of an SMSF to the contributing employer was held to be an in-house asset under the anti-avoidance rules;
  • ZDDD v Commissioner of Taxation [2011] AATA 3, where an undocumented and unsecured loan noon commercial terms by the trustee of a pre- 1999 unit trust wholly owned by the trustee of an SMSF to a member was held to breach the sole purpose test and the arm’s length terms test, and providing indirect financial assistance in breach of section 65;
  • Montgomery Wools Pty Ltd as trustee for Montgomery Wools Pty Ltd Super Fund v Commissioner of Taxation [2012] AATA 61, in which the activities of the trustee of a pre- 1999 unit trust in allowing its assets to be used as security for the debts of a related family discretionary trust, and using the funds from the sale of that property to discharge the debt of the related family discretionary trust, along with an outstanding present entitlement from the unit trust to the trustee of the SMSF, resulted in the SMSF being made non-complying.

The related party rules are quite complicated and whenever you are applying them you should seek professional advices from qualified SMSF specialists Superfund Works, because they are full of surprises in their practical application.

Even when you have not technically breached the related party rules, the anti-avoidance rules can be an issue, and it is not enough to stop there as there are a number of other provisions that could apply.

Pre- 1999 unit trusts are not altogether excluded from the related party rules and you must consider the rules carefully to ensure there is not an inadvertent breach.

Finally, do not forget the benefit of using unit trusts as an alternate for structuring using SMSFs, particularly as a way to work around the stringent borrowing rules.

Taxation of contributions above caps

Concessional contributions up to the cap are taxed at 15% within the superannuation fund. These contributions are assessable income of the fund. Excess concessional contributions will be taxed an additional amount of 31.5% (total 46.5%).

The Government has proposed to allow all individuals the ability to withdraw any excess concessional contributions made from 1 July 2013 from their superannuation fund. In addition, the Government will tax excess concessional contributions at the individual’s marginal tax rate, plus an interest charge to recognise that the tax on excess contributions is collected later than the normal income tax.

Non-concessional contributions up to the cap are received tax-free by the superannuation fund. Excess non-concessional contributions are taxed at 46.5%.

Excess contribution tax assessments

The assessment of excess contributions tax for concessional and non-concessional contributions will be made by the ATO. The ATO will provide a notice to the member as soon as practicable after the assessment is made.

The ATO is able to make a part-year assessment. If a part-year assessment is made, another assessment must be made as soon as possible after the end of the financial year unless the Commissioner is satisfied that the assessment would not differ in a material way from the original assessment.

The ATO will provide the person with a release authority which can be provided to the superannuation fund to pay the additional tax. For non-concessional contributions a client must nominate a superannuation fund to pay the additional tax. For concessional contributions a client has a choice to either personally pay the additional tax or have the amount paid from a nominated superannuation fund.

Payment of excess contribution tax

Excess contributions tax is due and payable from within 21 days after the person has received an excess contribution tax assessment. The general interest charge will apply to outstanding amounts from the due date.

The ATO will provide a release of authority to a person who has a liability for an excess contribution tax. The release authority will:

  • State the amount of the excess contributions tax (concessional or non-concessional)
  • Date; and
  • Any other information the ATO determines is relevant

For excess concessional contributions, a person has the choice to pay the excess tax personally or from a nominated superannuation fund (unless the fund is a defined benefit fund). A release authority for excess concessional contributions expires after 90 days.

If an assessment has been made on excess non-concessional contributions, the member must provide the release authority to the superannuation fund within 21 days after the date of the release authority (except a defined benefit fund). A member does not have the choice to pay the amount personally it must be paid from a nominated superannuation fund.

A superannuation provider who has received a release authority for either excess concessional or non-concessional contribution tax must pay the amount within 30 days.

Discretion by ATO to disregards excess contributions

The Commissioner has the discretion to disregard excess contributions in a financial year. A person must request the Commissioner to exercise discretion within 60 days of receiving an excess contributions tax assessment. A longer period may be permitted by the Commissioner.

An application must be made on the approved form Application excess contribution tax determination.

The Commissioner may consider whether it was reasonably foreseeable that the contribution cap would be breached when the contribution was made to superannuation. Factors that would be taken into consideration are:

  • Whether the payment is made by another person (not the member) including any agreement or arrangement covering the amount and timing of the contribution (e.g. Salary sacrifice agreement)
  • The extent of control the member has over the contributions being made
  • Any other relevant matters

Factors which are not considered special circumstances include:

  • Financial hardship
  • Ignorance of the law
  • Incorrect professional advice

Retrospectivity of law or adverse effect of legislative change