SMSF Fundamentals Essential yet so easily forgotten. Sean Dunne, Managing Director, Dominium Capital

Transcription

1 SMSF Fundamentals Essential yet so easily forgotten Sean Dunne, Managing Director, Dominium Capital

2 Pop Quiz: Who is responsible for determining a member s eligibility to contribute? What is the future liability to pay benefits deduction? What constitutes non-arm s length income? Can you, should you, change from individual trustees to corporate trustee? Can a SMSF remain complying if the trustee(s) is/are overseas?

3 Agenda Contributions Deductions Non-arm s length income Residency Trustee essential paperwork Individual vs Corporate trustee Trust deed clauses Who can be in a SMSF?

4 Contributions Accepting contributions In-specie contributions

5 Accepting Contributions Trustees are responsible for determining a member s eligibility to contribute, and meeting both: SIS requirements and the trust deed Types of contributions: mandated employer non-mandated personal, co-contributions, spouse Contribution standards: age employment, contribution caps

6 Accepting Contributions Contribution standards reminder for trustees: Member s Age Mandated Employer Contributions Voluntary Employer Contributions Personal Member Contributions Other Member Contributions Under to under 70 - with work test - with work test - with work test 70 to under 75 - with work test - with work test 75 and over

7 Accepting Contributions Fund-capped contributions limit SMSFs cannot accept single contributions that exceed a member's fund-capped contribution limit. If the member is: 65 years or over but under 75 on 1 July of the financial year, the fund-capped contribution limit is the non-concessional contributions cap for that financial year. 64 years or under on 1 July of the financial year, the fund-capped contribution limit is three times the non-concessional contributions cap for that financial year.

8 Accepting Contributions Fund-capped contributions limit Does not include: personal contributions where the member intends to claim an income tax deduction. contributions from a structured settlement or personal injury payment. super co-contributions.

9 Accepting Contributions Common problem: You need to properly document contributions and rollovers including the amount, type and breakdown of components and allocate them to the fund members accounts within 28 days of the end of the month in which you received them. (ATO Website,

10 In-specie Contributions is a contribution in the form of an asset other than money. Can be: Concessional or non-concessional; or a combination of both Typically shares, but can be real estate/property. Property becoming more common? Property - independent valuations are important

11 In-specie Contributions - Administration Check the trust deed; Check the investment strategy; Think about tax; Calculate the stamp duty.

12 Capital gains tax cap amount Contributions made from certain amounts arising from the disposal of qualifying small business assets are exempt from a member s non-concessional contribution cap, up to a lifetime limit of $1,355,000 (2014/15). Contributions allowed under the cap include: up to $500,000 of capital gains that are disregarded under the small business capital gains tax (CGT) retirement exemption, and; the capital proceeds from the disposal of assets that qualify for the small business CGT 15-year exemption.

13 Capital gains tax cap amount A final word on CGT concessions: Sometimes overlooked by trustees, as they scramble to get assets into super as soon as they can. What if they could hold the asset for a few more years and be completely exempted from paying CGT? A cost-benefit analysis needs to be completed!

14 Deductions Insurance policies section ITAA 1997 Section ITAA 1997 deductions for future liability to pay benefits

15 Insurance policies section ITAA 1997 Premium deductibility: Term life: 100% of premium Whole of life: 30% Endowment: 10% Income protection: 100% Don t forget that deductibility of premiums for new insurance policies, from 1 July 2014, can only be claimed for policies meeting the SIS definitions for a condition of release pertaining to death, terminal illness, permanent incapacity and temporary incapacity.

16 Section ITAA 1997 deductions for future liability to pay benefits If a trustee elects to use the provision under s , the deduction is calculated using the following formula: Benefit Amount X (Future Service Days / Total Service Days) As a rule of thumb, for members under the age of 65, the younger the deceased, the more beneficial. Naturally, if the deduction exceeds the amount of assessable income of the fund, the loss can be carried forward for future years. If this election is made, the fund may not be able to deduct future premiums for other members.

17 Section ITAA 1997 deductions for future liability to pay benefits WORKED EXAMPLE Key Facts: Richard Dymock is married to Elsie. They have two children, Harry (12 years old) and Georgia (10 years old). The have a SMSF The Dymock Family Superannuation Fund. Richard and Elsie have a mortgage and Richard is the primary breadwinner. In accounting for their mortgage, income needs and future education needs, Richard has $1.5M life insurance coverage, which his Adviser has recommended the Dymock Family Superannuation own. Richard is aged 43 and has a superannuation member balance of $300,000

18 Section ITAA 1997 deductions for future liability to pay benefits WORKED EXAMPLE Key Data: Premium for Richard s policy: $2,490 per annum Richard was born on 1 July 1969 His eligible service date is: 1 July 1992 His 65 th birthday will occur on: 1 July 2034 Richard died on 1 July As such, his Future Service Period is: 7,305 days and his Total Service Period is 15,341 days.

19 Section ITAA 1997 deductions for future liability to pay benefits WORKED EXAMPLE Do the sums: Benefit Amount X (Future Service Days / Total Service Days) = [Member Balance + Insurance Proceeds] X (Future Service Days / Total Service Days) = [$300,000+ $1,500,000] X (7305 / 15341) = $1,800,000 X (7305 / 15341) = $857,114 This is the deduction that the fund can claim this year (versus the premium amount of $2,490).

20 Section ITAA 1997 deductions for future liability to pay benefits Be aware of this potential deduction! It tends to be: Under-appreciated Not understood This may be due to a general lack of awareness. Can apply to disability payments, but generally needs to be carefully assessed, against future deductibility.

21 Non-arm s Length Income Key Points: Non-arm s length income Is income derived from non-arm s length transactions: such as private company dividends, discretionary trust distributions Taxed at 47%: no use of imputation credits (directly against non-arm s length income) Assessable non-arm s length income = non-arm s length income minus deductions relating exclusively to non-arm s length income

22 Non-arm s Length Income In simple terms: There is basically a presumption that income from private companies and fixed unit trusts (not widely held ie: related) is non-arm s length income. The onus is on the trustees to demonstrate that the income is, in fact, arm s length. Put simply, the SMSF should have bought/acquired the shares/units in these entities at market rates (commercial terms), and the income received from holding these share/units must the same, as that of any other class of shareholder/unitholder. Demonstrated history of returns is helpful.

23 Non-arm s Length Income Finally: Income from discretionary trusts will be non-arm s length income. ATO website: In addition, income from investments that have non-commercial conditions for example limited recourse borrowing arrangements with zero interest loans may also be considered non-arm's length income. (SOURCE: See also: ATO ID 2014/40 Income Tax: non-arm's length income - related party noncommercial limited recourse borrowing arrangement to acquire real property

24 Another Pop Quiz: Are you ready???

25 Another Pop (80s) Quiz: Question 1: How did Goose die in the 1986 classic film Top Gun?

26 Another Pop (80s) Quiz: Question 2: The Style Council s classic 1984 single Shout To The Top reached which position on Australia s Top- 10 chart in that same year?

27 Another Pop (80s) Quiz: Question 3: John Rambo returned from the Vietnam War only to be ostracized and left disaffected, wandering across the US

28 Another Pop (80s) Quiz: Question 3: What was Rambo s call sign in the classic 1982 film First Blood, starring Sly Stallone?

29 Another Pop (80s) Quiz: Question 4: Who is this?

30 Another Pop (80s) Quiz:

31 Another Pop (80s) Quiz: Question 5: The attempted assassination of United States President, Ronald Reagan, occurred on March 30, 1981 what is the name of his would-be assassin?

32 Residency Status Residency status: What is an Australian superannuation fund? For an SMSF to be a complying superannuation fund it must also meet the definition of an Australian superannuation fund in section of the Income Tax Assessment Act 1997 (ITAA97).

33 Residency Status A fund will be an Australian superannuation fund if: the fund was established in Australia, or any asset of the fund is situated in Australia at establishment, and; the central management and control of the fund is ordinarily in Australia, and; where the fund has active members, at least 50% of the assets of the fund (or amounts payable from the fund) relate to active members who are Australian residents.

34 Residency Status A common question: Can the members/trustees reside outside of Australia? The legislation states: To avoid doubt, the central management and control of a superannuation fund is ordinarily in Australia at a time even if that central management and control is temporarily outside Australia for a period of not more than 2 years. (subsection (4) ITAA 1997)

35 Residency Status WORKED EXAMPLE Jen & Barry have a SMSF with their 2 children, Peter & Simon. Jen s entitlement = $400,000 Barry s entitlement = $400,000 Peter s entitlement = $100,000 Simon s entitlement = $100,000 (SOURCE: Kaplan Education - used with express permission )

36 Residency Status WORKED EXAMPLE Jen & Barry have sold up and moved offshore for a lucrative employment contract in Hong Kong. Simon and Peter remain in Australia and have SG employer contributions going into the fund. QUESTION: Can Jen and Barry make personal contributions into the SMSF whilst they are nonresidents? (SOURCE: Kaplan Education - used with express permission )

37 Residency Status WORKED EXAMPLE ISSUES: Jen and Barry are non-residents; they are also active members, as they are making contributions. Also - what is their intent? The proportion of the fund assets held by resident active members is insufficient, as a proportion of the fund s assets attributable to ALL active (including non-resident) members. $200,000/$1,000,000 = 20% Therefore, because the total value of the fund s assets, attributable to RESIDENT ACTIVE members, is less than 50%, the fund ceases to be an Australian superannuation fund. (SOURCE: Kaplan Education - used with express permission )

38 Trustee Essential Paperwork Probably the most obvious piece is the: Trustee Declaration (ATO) Trustees declare that they understand: Sole Purpose Trustee Duties Accepting Contributions and Paying Benefits Investment Restrictions Administrative Requirements

39 Trustee Essential Paperwork Administration and Compliance: Trustees are required to lodge an annual combined income tax and regulatory return with ATO (includes member contributions statement) An approved auditor must complete both: Financial audit Compliance audit

40 Trustee Essential Paperwork Administration and Compliance: Compliance includes ensuring regulatory deadlines/timeframes are also met.

41 Trustee Essential Paperwork Examples: Appoint an approved SMSF auditor each year, no later than 45 days before the due date for lodgement of the fund s annual return and provide documents to the auditor as requested Lodge the fund s annual return, completed in its entirety, by the due date Notify the ATO within 28 days of any changes to the: membership of the fund, or trustees or directors of the corporate trustee; name of the fund; contact person and their contact details; postal address, registered address or address for service of notices for the fund.

42 Trustee Essential Paperwork Record Keeping: Keep and retain for at least 10 years: minutes of all trustee meetings at which matters affecting the fund were considered (this includes investment decisions and decisions to appoint members and trustees) records of all changes of trustees, including directors of the corporate trustee each trustee s consent to be appointed as a trustee of the fund or a director of the corporate trustee all trustee declarations copies of all reports given to members

43 Trustee Essential Paperwork Record Keeping: Keep and retain for at least 5 years: an annual statement of the financial position of the fund an annual operating statement copies of all annual returns lodged accounts and statements that accurately record and explain the transactions and financial position of the fund

44 Trustee Essential Paperwork Trustee Minutes: minutes of all trustee meetings at which matters affecting the fund were considered (this includes investment decisions and decisions to appoint members and trustees)

45 Trustee Essential Paperwork Trustee Minutes: ATO guidance: You should take minutes of all investment decisions, including: why a particular investment was chosen whether all trustees agreed with the decision. (ATO Website,

46 Trustee Essential Paperwork Trustee Minutes: ATO guidance: If, as one of the fund s trustees, you invest the SMSF s money in an investment that fails, the other trustees could take action against you for failing to be diligent in your duties. However, if your investment decision was recorded in meeting minutes that were signed by the other trustees, you will have a record to show the other trustees agreed with your actions. (ATO Website,

47 Trustee Essential Paperwork Valuation of Assets: Independent valuation may be prudent where: in-specie amounts are about to be paid out or contributed to the fund, assets are sold to a related party, or assets are to form part of the assets to support a pension Auditors may require a revaluation.

48 Trustee Essential Paperwork Valuation of Assets: Depending on the situation, a market valuation may be undertaken by one of the following: A registered valuer; A member of a recognised professional valuation body; A Director, for balance sheet purposes; A person without formal valuation qualifications whose assessment is based on reasonably objective and supportable data. (ATO Website,

49 Individual vs Corporate Trustees Can you change? Which is better?

50 Individual vs Corporate Trustees Can you change? Simple answer: yes - you can. There are, however, some general steps Trustees should observe.

51 Individual vs Corporate Trustees Can you change? You need to think about the following: Check the Trust Deed this really must be your first port of call! Create a company the Corporate Trustee Notify The Australian Taxation Office Bank Accounts/Broker Accounts/Fund Managers Property (Real Estate) Any other legal documents/contracts/leases

52 Individual vs Corporate Trustees Which is better? My view: corporate trustee is the way to go. Clearer segregation of SMSF assets; Administration efficiencies (principally due to a change in membership); Simpler trustee succession - a corporate trustee will continue in the event of a member's death.

53 Trust Deed Clauses what to watch for The Trust Deed: Establishes the rules of the fund Can have more onerous requirements than SIS requirements Can be amended but must follow procedures set in original deed Changes resulting in reductions in entitlements require approval by members or regulators Outlines how member accounts will be calculated Contains SIS Deemed Covenants these cannot be disregarded/excluded

54 Trust Deed Clauses what to watch for Section 52 - SIS Act The Deemed Covenants In essence, this means that trustees must: act honestly in all matters affecting the entity, exercise a degree of care, skill and diligence as an ordinary prudent person, act in the best interests of the beneficiaries, keep fund assets separate, not to do anything that would impede the proper performance and function of powers, formulate and give effect to an investment strategy, manage reserves responsibly, allow the beneficiaries access to certain information, do other such acts as prescribed in the SIS Act covenants. (Superannuation Industry (Supervision) Act 1993, accessed at Comlaw,

55 Trust Deed Clauses what to watch for Section 52 - SIS Act The Deemed Covenants Potential traps for trustees anecdotal : act honestly in all matters affecting the entity, exercise a degree of care, skill and diligence as an ordinary prudent person, act in the best interests of the beneficiaries, keep fund assets separate, not to do anything that would impede the proper performance and function of powers, formulate and give effect to an investment strategy, manage reserves responsibly, allow the beneficiaries access to certain information, do other such acts as prescribed in the SIS Act covenants. (Superannuation Industry (Supervision) Act 1993, accessed at Comlaw,

56 Who can be in a SMSF? Basically, anyone can be a member of a SMSF, so long as they are not employed by another member of the fund (with the exception of relatives ). A disqualified person can NOT be a member.

57 Who can be in a SMSF? A disqualified person can NOT be a member. Under section 120 of the SISA an individual is a disqualified person by operation of law where they have been/are: convicted of an offence involving dishonesty subject to a civil penalty order an undischarged bankrupt, or disqualified by the Commissioner under section 126A of the SISA.

58 Who can be in a SMSF? The Commissioner may disqualify an individual under section 126A of the SISA where the: person has contravened the SISA or the Financial Sector (Collection of Data) Act 2001, corporate trustee has contravened the SISA or the FS Act and the individual was a responsible officer at the time of the contravention, or individual is otherwise not a 'fit and proper' person (subsection 126A(3) of the SISA).

59 Who can be in a SMSF? SUPERANNUATION INDUSTRY (SUPERVISION) ACT SECT 120 Bodies corporate are disqualified if: (a) the body corporate knows, or has reasonable grounds to suspect, that a person who is, or is acting as, a responsible officer of the body corporate is: (i) for a person who is a disqualified person only because he or she was disqualified under section126h - disqualified from being or acting as a responsible officer of the body corporate; or (ii) otherwise - a disqualified person; or

60 Who can be in a SMSF? SUPERANNUATION INDUSTRY (SUPERVISION) ACT SECT 120 Bodies corporate are disqualified if: (b) a receiver, or a receiver and manager, has been appointed in respect of property beneficially owned by the body; or (c) an administrator has been appointed in respect of the body; or (d) a provisional liquidator has been appointed in respect of the body; or (e) the body has begun to be wound up. (SOURCE: Australasian Legal Information Institute Database, accessed at

61 Pop Quiz Answers: Question 1: Sadly, Goose dies after his head hit the canopy of his F-15 tomcat, when he and Maverick are forced to eject. They were forced to eject when their aircraft went into a spin after flying through Iceman s jetwash.

62 Pop Quiz Answers: Question 2: The Style Council s classic 1984 single Shout To The Top reached Number 8 on Australia s Top-10 chart.

63 Pop Quiz Answers: Question 3: John Rambo s call sign in the classic 1982 film First Blood, was Raven.

64 Pop Quiz Answers: Question 4: Prince (aka: Love Symbol, aka The Artists Formerly Known as Prince)

65 Pop Quiz Answers: Question 5: Ronald Reagan s would-be assassin was: John Hinckley, Jr.

66 Disclaimer Sean Dunne, Dominium Capital Group 2015 This presentation is for general information only. Every effort has been made to ensure that it is accurate, however it is not intended to be a complete description of the matters described. The presentation has been prepared without taking into account any personal objectives, financial situation or needs. It does not contain and is not to be taken as containing any securities advice or securities recommendation. Furthermore, it is not intended that it be relied on by recipients for the purpose of making investment decisions and is not a replacement of the requirement for individual research or professional tax advice. This presentation was accompanied by an oral presentation, and is not a complete record of the discussion held. No part of this presentation should be used elsewhere without prior consent from the author.