Self managed super funds and gambling

Transcription

1 Slide 1 Self managed super funds and gambling Are there hands in the cookie jar? Slide 2 Disclaimer Susan Orchard August 2017 all rights reserved This presentation is intended for instruction. It is general information only, and is not specific financial advice and no person should rely on the contents without first obtaining advice from a qualified professional person acting in that role or reference to source materials such as application forms and instructions. Nevertheless, all care has been taken in preparing this information to the time of its distribution at the training event. Financial and Consumer Rights Council, Connect Health and Community, Susan Orchard, related entities, officers and employees do not accept any contractual, tortuous or other form of liability for this content or for any consequence arising from its use or for omissions or errors, including responsibility to any person by reason of negligence.

2 Slide 3 Agenda SMSF structures How are these sold Risks Illegal early release Legal early release Investments Finding superannuation accounts Slide 4 Question Do you ask all clients about super? What do you do if they say they have an SMSF? What if they disclose they had money in super but have spent it?

3 Slide 5 What is an SMSF An SMSF is a small super fund owned and operated by the member A self managed superannuation fund is a small fund operated by the members. In this section we will look at the structures for their operations.

4 Slide 6 Trustee structure Basic definition Less than 5 members All members are trustees/all trustees are members Member is not an employee of another member No trustee is paid for services provided to the fund The basic definition is that there are less than 5 members and that all members are trustees and all trustees are members. There are some exceptions to this for a single member fund; minors or those with a legal impediment. The member cannot be an employee of another member. An exception to this rule exists where the employee is a direct relative of the other member. I.e. Father employs daughter in business they can be in a fund together A trustee cannot be paid for services to the fund. This does not apply when the member is in the business of providing the service and has the skills and training to do so i.e. a plumber can receive payment for plumbing repairs on a property owned by the fund.

5 Slide 7 Trustee structure Which of these structures are permitted Trustees Members Which of these structures meets the definition of an SMSF?

6 Slide 8 Trustee structure Legal personal representatives Parent of guardian of a person under 18 Person under legal disability Executor of deceased estate Enduring power of attorney Another person may act as a members representative. This occurs when the person: Is under age of 18 Is under a legal disability Is deceased Has appointed a power of attorney

7 Slide 9 Disqualified persons Members are disqualified when Convicted of an offence involving dishonestly Have been subject to a civil penalty order under SIS Are an undischarged bankrupt Disqualified by the regulator A member is disqualified from acting as a trustee when they have been: Convicted of an offence of dishonesty generally a serious office is considered where a jail term in excess of 2 years is applied Subject to a civil penalty order i.e. a fine imposed by ASIC Undischarged bankrupt if you become bankrupt you must resign this will have an impact if the fund owns the property used by the clients business. Disqualified by ATO or ASIC. This is a response to legislative breaches.

8 Slide 10 Disqualified persons If you become disqualified Inform ATO Cease acting as a trustee Rollover benefits Becoming a trustee again Apply for waiver of disqualified status Once insolvency period ends Revocation of disqualified status by courts If the trustee becomes a bankrupt the fund will need to be closed. This will generally mean the assets will be sold and monies rolled over to a large superannuation fund. Once the period of bankruptcy has ended the member may commence an SMSF again.

9 Slide 11 How are these sold Client expresses a desire to access money Client wants to run a small business from a property owned by the SMSF There are a number of key drivers for people wanting an SMSF these are generally: Control over investments Buying a property for the business to use. Clients may also be targeted by unscrupulous advisors who sell the ability to access money. These providers will generally charge a fee based on a percentage of the money accessed. These fees can be as high as 40%

10 Slide 12 Risks Client is in control of bank and withdraws money illegally Client uses money for purchasing an investment for use by the client House - illegal Business property ok unless rent not paid The risks to a gambling client is that they are in control of the funds assets. Where the purpose of the fund was to solve a short term financial issue they will take the money. Although the intention may be to take a small amount the temptation is to take all the money often wins out. Where the client is using the money to buy an asset for personal or business use there is a risk they will not use it in accordance with the law. Eg 1 In the case of residential property this can not be used for accommodation by a family member. Note the definition of related party used in the legislation is broad and can include family members of business associates. Eg 2 In the case of business property the rent may not be being paid or may be under market value. This causes the arrangement to be in breach.

11 Slide 13 Illegal early release Questions to ask How long ago did this happen? Can it be repaid with interest? Has the ATO contacted the client? When a client has taken an illegal early release the financial counsellor should establish some facts to enable them to inform the client on possible outcomes. For example How long ago did this happen? If this was a current event it may be possible to treat this as a loan, albeit, a non-compliant transaction with a view to having the money returned with interest and a legal early release application made. If this took place some time ago then this is not an option. The client should consult their accountant on this. Can the loan be repaid with interest? If there is capacity to repay the loan with interest then there may be an option to self report to the ATO and negotiate rectification arrangements. The client should consult their accountant on this. Has the ATO contacted the client? The ATO runs programs to identify schemes which target clients in financial difficulty and offer them an illegal early release option. The can then go to each fund which was created and request information. This then can lead to the application of tax penalties and trustee fines. (Review sample documents)

12 Slide 14 Illegal early release Taxation consequences Member taxed personally Top marginal tax rate applied 45% + 2% medicare Penalty of up to 75% assessed as fraudulent Trustee consequences Trustee penalty up to $340,000 5 years jail Should the money have been removed from the fund and unable to be repaid then an illegal early release event has occurred. The member will be taxed personally and the top marginal tax rate applied. Where the member does not disclose the payment of the money in their tax return and the ATO identifies the payment and amends the assessment then a penalty of up to 75% of tax payable can be applied. With strong representation from an FC the client may have some tax an penalties remitted when they can show that the client was misled by a scheme promoter. On top of the tax penalties the trustee can also be subject to penalties of up to $340,000 although most penalties applied to date have been between $10, 000 and $40,000. A further penalty can include jail time. These are generally not imposed where a scheme promoter has been involved. It is important to note that the fund should be wound up i.e. closed and any remaining monies returned to the APRA regulated sector as the trustee is likely to find themselves listed as a disqualifed person. Where the trustees occupation will be adversely impacted by disqualification self disqualification is the best option.

13 Slide 15 Illegal early release Illegal early release treated as a loan No tax penalty Trustee penalties up to $12600 Where the member is able to repay the money with interest and have this classified as a loan then a breach of the superannuation laws has occurred however there are different penalties. The loan must be accompanied by appropriate legal documentation and the interest rate applied must be an arms length unsecured rate. Without these features the ATO may treat the loan as an illegal early release and apply the tax penalty. The penalties are up to 60 penalty units or $ To minimise the risk of penalties being applied the trustee can voluntarily disclose the breach and that it has been rectified. Where the trustee winds up the fund and moves the assets to an APRA regulated fund the likelihood of a penalty is reduced.

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15 Slide 17 Legal early release Cashing events Retirement Severe financial hardship Compassionate grounds Terminal medical condition Disability Death Preservation Unrestricted non preserved Restricted non preserved Preserved Everyone s superannuation is required to be maintained in the superannuation system until age 65. There are some exceptions to the rule when a cashing event occurs after preservation age. A cashing event is: Retirement Severe financial hardship Compassionate grounds Terminal medical condition Death Disability (permanent or temporary) Preservation age is the age until reached superannuation must remain in the superannuation fund. This is increasing to age 60 on a sliding scale. For a person born between 1 July June 1961 this is 56; for a person born in the period 1 July June 1961 this is 57, reaching 60 for those born on or 1 July Once a person reaches age 65 this becomes an unrestricted non preserved benefit. Unrestricted non preserved Can be taken at any time Restricted non preserved Becomes unrestricted upon change of employment Reaching 65 Preserved All contributions and income

16 Ceases to be preserved at age 65 Earlier condition of release

17 Slide 18 Legal early release Severe financial hardship Under preservation age and 39 weeks be in receipt of a Commonwealth income support payment, continuously, for the last 26 weeks; and satisfy the trustee that you are unable to meet reasonable and immediate family living expenses. release between $1,000 and $10,000 Eligible income support excludes family benefits austudy, abstudy, youth allowance Where a member is able to show that they are experiencing severe financial hardship when they have been in receipt of commonwealth income support for a period exceeding 26 continuous weeks and are unable to meet ordinary living expenses. This will need to be supported by documentary evidence such as Centrelink advice and mortgage default notices. The member should provide a budget or cash flow statement showing the income shortfall. Eligible commonwealth income support excludes family payments and austudy / abstudy, youth allowance.

18 Slide 19 Legal early release Severe financial hardship Over preservation age and 39 weeks have received a Commonwealth income support payment for a cumulative period of 39 weeks after reaching preservation age; and not be gainfully employed on a full-time or part-time basis on the date of your application to the trustee. Able to release full benefit Eligible income support excludes Trap for clients over preservation age to be able to access the total superannuation benefit you must show the receipt of income support for 39 weeks.

19 Slide 20 Legal early release Compassionate grounds Medical treatment Medical transport Mortgage assistance Modifications to family home /transport severe disability Funeral assistance Palliative Care A fund member can make an application to have monies released for compassionate purposes. This application is made via the department of human services and a release authority will be provided which will be given to the superannuation to enable monies to be released. The monies released will be limited to that required to stop the bank foreclosing on the mortgage or to meet the cost of the medical or funeral need. The benefit cannot be claimed if the bill has already been paid.

20 Slide 21 Investing in property No restriction on superannuation fund investments Rules around usage Residential cannot be used by a related party Business usage must be on an arms length basis Generally a superannuation fund can invest in any asset. This makes an SMSF an attractive option for those wishing to invest in property, with a little encouragement from real estate agents clients can invest without clearly understanding the rules. When a fund owns residential property this cannot be used by a related party. This includes siblings and their spouses; children and children of siblings and parents and spouses. This also includes business partners and their related parties. When things get tough there is a risk the client will take up residence rent free in the property owned by their superannuation fund. This makes the property an in house asset. There are many breaches that can arise which can see multiple penalties apply. The catch with this is that fixing the problem is not as simple as paying rent or moving out the property must be sold. When a fund owns a business property any use by a related party including a members business must be on an arms length basis. This means there must be a lease agreement and rent paid on commercial terms. Where these do not exist or the terms of the agreement are not followed then a breach has occurred. Where the clients reports they have a large debt to the superannuation fund from their small business the financial counsellor should make enquiries as to how this arose and whether this can be repaid prior to the year end. The rectification is generally for the repayment of outstanding rent or for the business to be given notice to vacate as would occur in an arms length arrangement. If breaches have occurred the financial counsellor should refer the client to their accountant or auditor. They can assist with managing the self reporting of the compliance breaches and appropriate rectifications.

21 Slide 22 Legal transactions Gambling behaviour Apparent in trading activity Option moving money to another fund As financial counsellors we may see clients who have had savings or investments and have lost this due to gambling like behaviours. The client may not see this as gambling and as with economic violence the financial counsellor may need to expressly draw this to the clients attention. The types of trading activity which may highlight gambling type behaviours are: Investing in speculative investments such as options trading or contracts for difference Frequent share or currency trades in higher risk investments. These may be profitmaking and hide the behaviour behind gains during periods of market growth but can result in losses or excessive costs exceeding market averages. For example a client invested in options over shares. He was speculating that the share would both increase and decrease in value. His view was that this would reduced losses through hedging. However the effect of the trades was to incur costs as any gains offset losses. The two transactions cancelled each other out. The financial counsellor can add value by providing an analytical view of the trading activity and highlighting where the transactions are speculative.

22 Slide 23 Advice Warning Remember prohibited financial advice includes: A recommendation to change superannuation fund A recommendation to stop or start a benefit A recommendation to change investments Advice warning: The financial counsellor can provide factual information about these topics but not make recommendations. As this is not protected by the limited ASIC licencing exemption granted to financial counsellors. Any written advice should contain a statement advising the client of this and referring them for financial advice.

23 Slide 24 Finding a clients super Client may not realise they have an SMSF Use MyGov to find superannuation accounts Use the manual form There are 2 ways to find a clients superannuation accounts whether you are looking for insurance for a benefit claim or suspect there may be an SMSF. The first is via MyGov. Note that if the client has a tax agent linking the ATO to the clients MyGov account to perform this search will prevent the tax agent seeing some information. They may need to unlink them to keep the services working. The second is to use the manual form. This can be found at:

24 Slide 25 Questions