CHANGING FACE OF SMSFs

Transcription

1 CHANGING FACE OF SMSFs March 2014 Helping professionals grow their SMSF business

2 General Advice Warning This presentation provides general advice only. No direct or implicit recommendations are given in this presentation. This means that the general advice provided has not been prepared taking into account any individual s financial circumstances (i.e. investment objectives, financial situation and particular investment needs). The SMSF Academy Pty Ltd believes that the information in this presentation is correct at the time of compilation but does not warrant the accuracy of that information. Save for statutory liability which cannot be excluded, The SMSF Academy disclaims all responsibility for any loss or 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 by any fault or negligence on the part of presenter or otherwise. The SMSF Academy, 2014 Changing Face of SMSFs March

3 Key rates & thresholds Concessional contribution cap After a freeze on indexation of the concessional contribution cap for the and financial years, the ATO has recently published the key rates and thresholds showing indexation of the concessional contribution cap. This cap is indexed in line with Average Weekly Ordinary Times Earnings (AWOTE), in increments of $5,000 (rounded down). Income year Amount of general cap $30, $25, $25, $25, $25, $25, $50, $50,000 The temporary concessional contribution cap for will be extended to those individuals 49 and over at 30 June For the financial year, this temporary cap was only available to individuals 59 and over (at 30 June 2013). The temporary higher cap is not indexed and will cease when the general concession contribution cap is indexed to $35,000. Non-concessional contributions The non-concessional contribution (NCC) cap is calculated as six times the general concessional contribution cap. As a result, the NCC cap will increase to $180,000 from 1 July Furthermore, this will result in the bring-forward rule amount increasing to $540,000. It is important to note that an individual who has triggered the bring-forward rule in previous financial years will be unable to access this indexed amount. Full details of all updated key rates and thresholds for the year can be found on the ATO website, Changing Face of SMSFs March

4 Legislative Instrument Self-Managed Super Funds (Limited Recourse Borrowing Arrangements In-house Asset Exclusion) Determination 2013 The Commissioner s views expressed on key concepts with limited recourse borrowing arrangements within SMSFR 2012/1 provided certainty around issues including single acquirable asset, repairs, maintaining and improving an asset, along with when an asset becomes a different asset. However, a level of uncertainty remained with a number of issues regarding the application of the in-house asset exemption provided by subsection 71(8) of the Superannuation Industry (Supervision) Act 1993 (SIS Act) to an investment in a related trust held by a self-managed superannuation fund (SMSF) as a required part of a limited recourse borrowing arrangement (LRBA). The in-house asset exemption does not exclude an SMSF's investment in a related trust from being an in-house asset of the SMSF at the following points in time: at the beginning of an LRBA where a borrowing referred to in paragraph 71(8)(b) of the SIS Act has not yet begun or the related trust does not yet hold the acquirable asset where the asset continues to be held in the related trust after the borrowing referred to in paragraph 71(8)(b) of the SIS Act has been repaid. To provide certainty for SMSF trustees in such circumstances, ATO has drafted a legislative instrument under paragraph 71(1)(f) of the SIS Act. The legislative instrument is intended to exclude an investment in a related trust held by an SMSF as a required part of an LRBA from being an in-house asset of the SMSF in the periods mentioned above. Invitations for submission were requested through to 31 January 2014, with the ATO likely to finalise the instrument in May Background to ATO View Under an LRBA, an SMSF s trustees may borrow money to acquire an asset provided that the lender only has recourse in the event of default to the asset acquired using the borrowed money. While the borrowing remains outstanding, the asset is to be held on trust so that the trustee of the SMSF acquires a beneficial interest in that asset. The trust that holds the legal title to the asset under an LRBA is generally known as a holding trust. In many cases, the holding trust will be a related trust of the SMSF as defined in subsection 10(1). An investment in a related trust of the SMSF is an in-house asset of the SMSF as defined in subsection 71(1), unless a relevant exception applies. The in-house asset rules contained in Part 8 impose a limit on the value of in-house assets that an SMSF can hold. This limit as set out in section 82 is currently 5% of the total market value of the fund s assets. Changing Face of SMSFs March

5 Section 83 prohibits an SMSF trustee from acquiring an in-house asset if the value of the fund s in-house assets already exceeds the 5% limit or if the acquisition would cause the fund to exceed the 5% limit. Section 84 provides for civil and criminal penalties for contravention of these rules. Subsection 71(8) provides an exception to the definition of in-house asset that is particularly relevant to an SMSF s investment in the holding trust as part of an LRBA. That subsection provides that if, at a time: an asset (the investment asset) of a superannuation fund is an investment in a related trust of the fund; and the related trust is one described in paragraph 67A(1)(b) in connection with a borrowing, by the trustee of the fund, that is covered by subsection 67A(1); and the only property of the related trust is the acquirable asset mentioned in paragraph 67A(1)(b), the investment asset is an in-house asset of the fund at the time only if the acquirable asset would be an in-house asset of the fund if it were an asset of the fund at the time. According to the ATO, the opening words of subsection 71(8), If at a time. refer to a specific point in time at which the requirements of paragraphs 71(8)(a),(b) and (c) must be satisfied in order for the exception provided by that subsection to apply in respect of that particular time. Therefore, pursuant to paragraph 71(8)(b), a borrowing covered by the relevant provision must be in place at a particular time for subsection 71(8) to apply in respect of that time. However, there may be a period where a contract for the acquisition of the acquirable asset has been entered into and a substantial deposit paid under that contract, but a borrowing (to fund payment of the balance of the acquisition cost of the acquirable asset) will not be in place until near or on settlement of that contract. Similarly, there may be a period when the acquirable asset continues to be held in the holding trust after the borrowing covered by the relevant provision has been repaid. In such cases, the exclusion provided by subsection 71(8) does not apply to the SMSF s investment in the related holding trust during such a period when there is no borrowing that is covered by subsection 67A(1) (or, as relevant, former subsection 67(4A)). Additionally, paragraph 71(8)(c) requires that, at the particular time being tested, the only property of the related trust is the asset mentioned in paragraph 67A(1)(b) (or, as relevant, former subsection 67(4A)). Even if a borrowing covered by the relevant provision has begun (such as where the borrowing funds the payment of a deposit under the contract for the acquisition of the acquirable asset), there may be a delay in the related trust holding the asset referred to in paragraph 71(8)(c) (such as where a strata-titled unit is being acquired off the plan ). Changing Face of SMSFs March

6 In such cases, the exclusion provided by subsection 71(8) does not apply to the SMSF s investment in the related trust during such a period when the related trust does not yet hold the acquirable asset. To provide certainty for SMSF trustees in the circumstances described, this instrument is made by the Regulator pursuant to paragraph 71(1)(f) and will potentially apply to exclude an SMSF s investment in such a related holding trust from being an in-house asset of the fund in those circumstances during affected periods. Clause 3.1 in-house asset exemption at the commencement of an LRBA Clause 3.1 provides that an asset (the investment asset) of an SMSF (the fund) that is an investment in a related trust of the fund is not an in-house asset of the fund at a time (the test time) where: the application of subsection 71(8) would result in the investment asset not being an in-house asset of the fund at the test time but for the fact that: o if a borrowing referred to in paragraph 71(8)(b) has not yet begun such a borrowing has not yet begun: and o the related trust does not yet hold the asset referred to in paragraph 71(8)(c); and it is reasonable to conclude at the test time that: o if a borrowing referred to in paragraph 71(8)(b) has not yet begun such a borrowing will occur; and o the related trust will hold the asset referred to in paragraph 71(8)(c); and o the application of subsection 71(8) would result in the investment asset not being an in-house asset of the fund from the time the related trust begins to hold the asset referred to in paragraph 71(8)(c). This clause is intended to apply in circumstance where the fund holds the investment prior to the commencement of a borrowing referred to in paragraph 71(8)(b). This includes where the fund may have more than one borrowing under the one LRBA (e.g. borrowing for deposit and borrowing at settlement). In addition, this clause is intended to apply at a time when the related trust does not yet hold the asset even though one or more borrowings may have begun. Once the related trust begins to hold the asset, the investment asset will be excluded from being an in-house asset of the fund from that time onwards through the operation of subsection 71(8), provided the requirements of that subsection are met (from that time onwards). It is important to note that clause 3.1 is not intended to provide indefinite relief from the inhouse asset rules. SMSF trustees should take all reasonable steps to ensure there are no unreasonable delays to the commencement of the borrowing or the acquisition of the asset by the trustee of the holding trust. Changing Face of SMSFs March

7 Clause 3.2 in-house asset exemption after a borrowing is repaid In practice, transfer of the asset from the holding trust to the SMSF trustee is unlikely to happen at the same time as the borrowing under the LRBA is repaid. As such, there may be a period when the asset continues to be held in the holding trust after the borrowing referred to in paragraph 71(8)(b) has been repaid. The exclusion provided by subsection 71(8) does not apply to the SMSF s investment in the related holding trust during such a period when there is no borrowing that is covered by subsection 67A(1) (or, as relevant, former subsection 67(4A)). Clause 3.2 operates in those circumstances. Specifically, clause 3.2 provides that an asset (the investment asset) of an SMSF (the fund) that is an investment in a related trust of the fund is not an in-house asset of the fund at a time (the test time) where: the application of subsection 71(8) resulted in the investment asset not being an inhouse asset of the fund at all times from when the related trust began to hold the asset referred to in paragraph 71(8)(c) until a borrowing referred to in paragraph 71(8)(b) was repaid: and the application of subsection 71(8) would result in the investment asset not being an in-house asset of the fund at the test time but for the fact that that borrowing referred to in paragraph 71(8)(b) has been repaid. In circumstances where there are multiple borrowings covered by subsection 67A(1) (or, as relevant former subsection 67(4A)) under one LRBA, the investment asset will be excluded, through the operation of subsection 71(8), from being an in-house asset of the fund until the last of such borrowings under the LRBA is repaid, provided the requirements of subsection 71(8) are continually met until that time. Clause 3.2 is intended to apply once the last of such borrowings under the LRBA is repaid. To satisfy clause 3.2(a), the SMSF s trustees must be able to demonstrate that the application of subsection 71(8) resulted in the investment asset not being an in-house asset of the fund at all times from the time the related trust began to hold the asset referred to in paragraph 71(8)(c) until a borrowing referred to in paragraph 71(8)(b) was repaid. Given the requirements of subsection 71(8), this means, for example, that at all times during that period: the only property of the related trust is the asset referred to in paragraph 71(8)(c); and that asset would not be an in-house asset of the fund if directly held by the SMSF. To satisfy clause 3.2(b), the SMSF s trustees must be able to demonstrate that the application of subsection 71(8) would result in the investment asset not being an in-house asset of the fund at the test time but for the fact that the borrowing referred to in clause Changing Face of SMSFs March

8 3.2(a) has been repaid. Given the requirements of subsection 71(8), this means, for example, that at the test time: the only property of the related trust is the asset referred to in paragraph 71(8)(c); and that asset would not be an in-house asset of the fund if directly held by the SMSF. References: ATO Website, More information: Listen to the SMSF Podcast Show Episode 11 with Aaron Dunn discussing this legislative instrument with Nathan Burgess, Director of Risk & Regulatory, SMSF Segment at the Australian Taxation Office. Changing Face of SMSFs March

9 Tax and Superannuation Laws Amendment (2014 Measures No.1) Bill 2014 Administrative directions and penalties for contraventions relating to SMSFs Schedule 2 of the Bill is to introduce administrative directions and penalties for contraventions relating to SMSFs including: Rectification directions; Education directions; and Administrative penalties These measures once having received Royal Assent 1, will become law from 1 July It was recognised through the Super System Review (Cooper Review) that the Regulator had a limited number of tools available to them to deter and address instances of noncompliance with SMSF trustees. These included: Making a SMSF non-complying for taxation purposes; Applying to a court for civil penalties to be imposed. A person may also face criminal penalties for more serious breaches of the law. Accepting an enforceable undertaking in relation to a contravention; and disqualifying a trustee of a SMSF It was recognised that applying many of these penalties were costly and time-consuming, with a potential outcome in certain circumstances that the consequence would be disproportionate to the compliance breach. However, it was not appropriate to allow for trustees to contravene the law and expect no consequences because of the disproportionate remedies currently available. As a result, these new measures provide a more graduated approach for the Commissioner, granting powers to give directions and impose administrative penalties for contraventions of the SIS Act. 1 Bill passed both Houses on 6 March 2014, awaiting Royal Assent Changing Face of SMSFs March

10 Rectification direction A rectification direction will require a person to undertake specified action to rectify the contravention within a specified time frame and provide the Regulator with evidence of the person s compliance with the direction. The Regulator may give a rectification direction if he reasonably believes that a person who is a trustee, or a director of a body corporate that is a trustee of an SMSF, has contravened the SIS Act (other than Part 3B which relates to superannuation data and payment standards) or the SIS Regulations in relation to the fund. As the provisions of the SIS Act and SIS Regulations must be adhered to by all trustees, a rectification direction can be be given to: an individual trustee of an SMSF that has contravened the SIS Act or SIS Regulations; a body corporate that is the trustee of an SMSF that has contravened the SIS Act or SIS Regulations; or a director of a body corporate trustee of an SMSF who has contravened the SIS Act or SIS Regulations. The Regulator may give a person a rectification direction requiring the person to take a specified action to rectify the contravention and to provide the Regulator with evidence of the person s compliance with the direction. Contraventions over a number of years Whilst some contraventions will only occur in the year of income a particular transaction took place, there will be instances where a contravention may carry over longer for a number of income years. The following provide examples of multiple year contraventions: Example 1 Section 67 of the SIS Act prohibits an SMSF trustee from borrowing money or maintaining an existing borrowing of money except in limited circumstances. Trustees may contravene this provision in: o the year of income that the borrowing is undertaken (this will result in a contravention of paragraph 67(1)(a)); and o each year of income the borrowing is maintained (this will result in contraventions of paragraph 67(1)(b)). In these circumstances, it may be appropriate for the Regulator to give a rectification direction to the trustee of the SMSF specifying that the trustee must ensure that the borrowing is paid off over a specified period of time. Such action will ensure that the Changing Face of SMSFs March

11 trustee does not continue to maintain a borrowing in contravention of paragraph 67(1)(b). Example 2 Where the market value of a fund s in house assets exceeds five per cent at the end of an income year, subsection 82(1) requires the trustees of a fund to prepare a written plan before the end of the following income year that sets out: o o the amount by which the market value ratio of the fund s in house assets exceeds 5 per cent; and the steps that the trustees will take to ensure that in house assets are disposed of and that the value of those assets disposed of will return the fund to a market value ratio of five per cent or less. If the Regulator determines that the trustees have not carried out the steps of the plan they prepared within the relevant time period, the Regulator may issue a direction to dispose of assets in accordance with the plan prepared by the trustees. In deciding whether to give a person a rectification direction, the Regulator should have regard to: any financial detriment that might reasonably be expected to be suffered by the fund as a result of the person s compliance with the direction; the nature and seriousness of the person s contravention; and any other relevant circumstances. These factors do not limit the matters that the Regulator may have regard to in determining whether to issue a rectification direction. In considering all the facts, the Commissioner may determine that a rectification direction is not the appropriate action. The Regulator may utilise other actions available to him, such as issuing a notice of non-compliance under section 40 of the SIS Act where it is deemed more appropriate. Specify period of time A rectification direction must specify the period within which the person must comply with the direction, which must be reasonable in the circumstances. In determining the period of time to specify in the direction, the Regulator should have regard to factors including, but not limited to: the type of action specified in the direction; and the circumstances of the person to whom the direction is issued Changing Face of SMSFs March

12 Enforceable Undertakings The Regulator must not give a rectification direction in relation to a particular contravention if the Regulator has accepted an enforceable undertaking given by a person in relation to the contravention, the contravention is covered by that undertaking and the undertaking has neither been withdrawn nor varied in a way that means the contravention is no longer covered by it. Timeframe to comply A person to whom a rectification direction is given must comply with the direction before the end of the period specified in the direction. If the person fails to comply with the direction within that period, the person commits an offence of strict liability and is liable for a maximum of 10 penalty units. Strict liability is defined in section 6.1 of the Criminal Code Act The strict liability relates to the lack of action by a person to whom the direction was issued, and who is personally liable for the offence. This is designed to discourage careless non-compliance. Additionally, the penalty is less than 60 penalty units and does not include imprisonment. The Regulator is not prevented from giving a rectification direction in relation to a contravention even if an administrative penalty also applies in relation to a particular contravention under the administrative penalty regime. Additionally, the Regulator is not prevented from imposing or applying for other sanctions for a contravention, such as giving an education direction or issuing a notice of non-compliance, if the rectification direction is not complied with. Education direction An education direction will require a person to undertake a specified course of education within a specified time frame and provide the Regulator with evidence of completion of the course. Trustees and directors of corporate trustees will also be required to sign or re-sign the SMSF trustee declaration form to confirm that they understand their obligations and duties as a trustee (or director of a corporate trustee) of an SMSF. The Regulator will look to issue an education direction where the person s lack of knowledge or understanding of their obligations has contributed to a contravention of the SIS Act or the SIS Regulations. It is intended that an approved course of education will provide trustees and directors with appropriate knowledge relating to the contravention that has occurred. It will also provide an opportunity for trustees and directors to improve and refresh their overall knowledge of relevant superannuation laws and should reduce the likelihood of trustees and directors committing contraventions in the future. Changing Face of SMSFs March

13 An education direction must specify the period within which the person must comply with the direction, which must be a period that is reasonable in the circumstances. A person to whom an education direction is given must comply with the direction before the end of the specified period. If the person fails to comply with the direction within that period, the person commits an offence of strict liability and is liable for a maximum of 10 penalty units. The Regulator is not prevented from giving an education direction in relation to a contravention even if an administrative penalty is also imposed for that contravention under the administrative penalty regime. Additionally, the Regulator is not prevented from imposing or applying for other sanctions for a contravention, such as giving a rectification direction or issuing a notice of non-compliance, if a contravention of the same kind occurs in the future. Cost of course education Trustees and directors may incur costs in complying with the education direction such as travel costs, costs incurred in notifying the Regulator that the education direction has been complied with and expenses related to using the internet if the course is undertaken online. However, the approved course must be a course for which no fees are charged. In addition, none of the costs that may be associated with undertaking the course may be paid or reimbursed from the assets of the fund in relation to which the education direction was given. Right to review The Regulator may, at any time, vary or revoke a rectification direction or an education direction by written notice given to the person to whom the direction was given. A person may request for the Regulator to vary the rectification direction or an education direction. This may include for example, the person requesting a variation to the period specified in the notice if the person requires more time to undertake a course of education or take action to rectify a contravention. Where the time period has passed, a person cannot seek to vary the direction. The request must set out the reasons for making the request, aimed to assist the Regulator in making a decision. The Regulator must decide whether to: vary the direction in accordance with the request; or vary the direction otherwise than in accordance with the request; or refuse to vary the direction. Changing Face of SMSFs March

14 Where the Regulator does not make a decision before the end of 28 days on which the request was made, it is taken that the request has been refused. Where a decision is made within 28 days, the Regulator will provide a written response for the decision. Example - Request to vary a direction Liz and Aaron are members and individual trustees of Pink SMSF. The Commissioner issues Liz and Aaron with an education direction on 1 January 2014 that specifies the direction must be complied with by 30 June Liz and Aaron request on 5 May 2014 for the period specified in the direction to be extended to 31 December The Commissioner notifies Liz and Aaron on 31 May 2014 that the request to extend the period for compliance to 31 December 2014 has been refused and that the education direction must be complied with by 27 July Taxation objections A person may object against a decision of the Regulator in the manner set out in Part IVC of the Taxation Administration Act 1953 (TAA 1953) [Schedule 2, item 22, section 165]. An objection may be lodged where the member is dissatisfied with a decision of the Regulator: to give a rectification direction or education direction; to refuse to vary a direction; or to vary a direction otherwise than in accordance with a request. The manner and timeframe within which an objection must be made is provided for in Part IVC of the TAA 1953 Administrative penalties A person will be liable to an administrative penalty if certain provisions of the SIS Act are contravened in relation to an SMSF. The amount of the penalty is an amount specified in the law (Division 3 of the Superannuation Industry (Supervision) Act 1993). An administrative penalty is not imposed for all contraventions of the SIS Act, only those included in a table in the Act. Below is a list of the administrative penalties in relation to selfmanaged super funds to take effect from 1 July 2014: Changing Face of SMSFs March

15 Provision of SIS Act SIS Act Details Administrative penalty Subsection 34(1) Prescribed operating standards must be complied with by each trustee 20 penalty units Section 35B Accounts and Statements 10 penalty units Subsection 65(1) Lending to members prohibited 60 penalty units Subsection 67(1) Borrowing 60 penalty units Subsection 84(1) In-house asset rules 60 penalty units Subsection 103(1) Duty to keep minutes & records individual trustees Subsection 103(2) Duty to keep minutes & records corporate trustee 10 penalty units 10 penalty units Subsection 103(2A) Retain election under 71E 10 penalty units Subsection 104(1) Duty to keep records of change of trustees 10 penalty units Subsection 104A(2) Sign and retain trustee declaration 10 penalty units Subsection 105(1) Duty to keep reports 10 penalty units Subsection 106(1) Duty to notify the Regulator of significant adverse events Subsection 106A(1) Duty to notify Commissioner of Taxation of change in fund status Subsection 124(1) Written appointment of investment managers 60 penalty units 20 penalty units 5 penalty units Subsection 160(4) Education direction 5 penalty units Subsection 254(1) Information to be given to Regulator 5 penalty units Subsection 347A(5) Obligation for trustee to participate in Regulator s statistics program Administrative penalties may be imposed on: 5 penalty units a trustee of an SMSF (including an individual trustee or a corporate trustee); or a director of a body corporate that is a trustee of an SMSF Changing Face of SMSFs March

16 Administrative penalty and civil penalty The Regulator may commence proceedings against a person for contravention of a civil penalty provision (Part 21 of the SIS Act). If an administrative penalty has been imposed for the contravention, then (whether or not the proceedings are withdrawn), the person is not liable to pay the administrative penalty. If an amount of the administrative penalty has been paid, then it is to be refunded or applied by the Regulator in total or partial discharge of another tax related liability. [Schedule 2, item 22, section 167] For the avoidance of doubt, section 8ZE of the TAA 1953 deals with the situation of a person against whom a criminal prosecution is instituted Penalty must not be reimbursed from the fund An administrative penalty amount must not be paid or reimbursed from the assets of the fund in relation to which the administrative penalty was imposed. Such penalties imposed are payable personally by the person who has committed the breach and therefore must not be paid or reimbursed from assets of the SMSF. Directors of a Corporate Trustee If a trustee that is a body corporate becomes liable to an administrative penalty, then the directors of that body corporate are jointly and severally liable to pay the amount of the penalty. Example - Corporate trustee that contravenes a provision Stuart and Alison are members and the directors of a body corporate that is the trustee of Green SMSF. Stuart and Alison fail to ensure that accounts and statements for Green SMSF are prepared for the income year. As a result, the corporate trustee has contravened section 35B. An administrative penalty of 10 penalty units is imposed on the body corporate that is the trustee of the Green SMSF. Stuart and Alison as directors of the body corporate become jointly and severally liable to an administrative penalty of 10 penalty units imposed on the body corporate. Certain provisions in the table apply directly to directors of body corporates that are trustees of SMSFs, for example, section 104A (about trustee declarations). A trustee or director who contravenes these provisions will be liable to an administrative penalty Example - Director of corporate trustee that contravenes a provision Marita and Peter become directors of a body corporate that is trustee of Blue SMSF. Peter fails to sign a trustee declaration and contravenes subsection 104A(2). Changing Face of SMSFs March

17 An administrative penalty of 10 penalty units is imposed on Peter, as a director of the corporate trustee. Peter is liable to an administrative penalty of 10 penalty units. Individual Trustees Each individual trustee is personally liable for an administrative penalty where the fund has contravened one or more of the provisions. Example - Individual trustees who contravene a provision Jill and Merryn are members and individual trustees of Yellow SMSF. Jill and Merryn fail to ensure that accounts and statements for Yellow SMSF are prepared for the income year. As a result, each individual trustee has contravened section 35B. An administrative penalty of 10 penalty units is imposed on each individual trustee of Yellow SMSF in their personal capacity. Jill and Merryn are each liable to an administrative penalty of 10 penalty units. Where one individual has failed to comply with the relevant provisions, an administrative penalty will apply only to that individual: Important Example - Individual trustees that contravene a provision Cameron and Rohan are individual trustees of Red SMSF. Cameron fails to sign a trustee declaration and contravenes subsection 104A(2). An administrative penalty of 10 penalty units is imposed on Cameron in his personal capacity. Cameron is liable to an administrative penalty of 10 penalty units. These new penalty powers granted to the Regulator have further highlighted the importance of individual trustees vs. corporate trustee. You may wish to consider reading Aaron s blogpost, Will the new SMSF trustee penalty regime expose professionals? References: t?bid=r5168 Changing Face of SMSFs March

18 Superstream & SMSFs The SuperStream reform measures are aimed at improving the efficiency of the superannuation system. These measures were a recommendation of the Super System Review (Cooper Review). Under SuperStream, employers must make super contributions on behalf of their employees by submitting data and payments electronically in accordance with the SuperStream standard. All superannuation funds, including SMSFs, must receive contributions electronically in accordance with this standard. Details of the SuperStream standard are set out in the Data and Payment Standard Legislative Instrument and its associated schedules - From 1 July 2014: employers with 20 or more employees will start using the SuperStream standard to send contribution data and payments electronically all super funds (including SMSFs) must receive any employer contributions sent to their fund in accordance with the SuperStream standard. From 1 July 2015, employers with 19 or fewer employees will also be required to send contributions data and payment electronically. However, some may choose to adopt this standard sooner. The Australian Taxation Office has indicated that it will focus on supporting SMSFs during the introduction of SuperStream with up to 100,000 individuals impacted by these new measures. Letters were sent from the ATO to SMSF fund members on 28 February 2014 outlining their obligations to comply with the new SuperStream measures for future employer contributions. Related-party employers Regulation 7.07F of the Superannuation Industry (Supervision) Regulation 1994 ( SIS Regs ) provides an exemption to comply with the data and payment standard where the selfmanaged super fund and the employer is a related party of the fund. Contributions sent to an SMSF from a related-party employer are exempt from SuperStream and can be made using existing processes. Example Ken has a family plumbing business, which only employees he and his wife, Helen. Super contributions are made from his business into their SMSF each quarter. As the employer and SMSF are related, the business does not have to comply with the new data and Changing Face of SMSFs March

19 payment standard. Ken can continue to simply transfer funds from the business into his SMSF bank account. However, if Ken had two apprentice plumbers, he would be required to comply with the new Superstream requires as a small employer from 1 July 2015 for his additional employees. Meeting your obligations There are a range of options required for fund members to meet their SuperStream obligations. Each option involves providing their employer with: the SMSF's Australian Business Number (ABN) the SMSF's bank account for receipt of contribution payments (BSB and account number) an electronic service address for receipt of a contribution data message. Where a fund member works for an employer with 20 or more employees, the member will need to update their details with their employer by 31 May Alternatively, they should check with their employer to confirm which date best aligns with the company s implementation plan for SuperStream. It is important for trustees to ensure the SMSF bank account is able to receive electronic contribution payments and the fund can receive a contribution message with information about these payments in the SuperStream format. List of SMSF messaging providers The ATO has published a list of registered SuperStream messaging solution providers who may be able to able to assist trustees meet their obligations under the SuperStream standard. These obligations include the requirement to have an electronic service address for receipt of data messages associated with employer contributions. The list of SMSF message providers can be found here, A range of Frequently Asked Questions (FAQs) has also been developed by the ATO to support the implementation of SuperStream for SMSFs, Changing Face of SMSFs March

20 ATO Interpretative Decisions ATO ID 2014/6 Death benefits dependant adult child on youth allowance Issue Is a taxpayer in receipt of Youth Allowance at the time of the death of a parent, a death benefits dependant of the parent for the purpose of section of the Income Tax Assessment Act 1997 (ITAA 1997)? Decision Yes. On the facts given, the taxpayer is a death benefits dependant of the parent for the purpose of section of the ITAA Facts The taxpayer receives a death benefit from the parent's superannuation fund after the parent's death. The taxpayer is over 18 years old at the time, was living at home with the parent until the parent's death and receiving Youth Allowance payments from Centrelink. Reasons for Decision The term 'death benefits dependant' is defined in subsection (1) of the ITAA Paragraph (1)(d) states that a death benefits dependant, of a person who has died, is any other person who was a dependant of the deceased person just before he or she died. Dictionary definitions of 'dependant' make reference to substantial financial support. That dependency involves substantial financial support or maintenance is supported by passages in the Explanatory Memorandum to the Income Tax Assessment Amendment Bill (No.3) 1984 and Explanatory Memorandum for Taxation Laws Amendment Bill (No. 5) The determination of financial support is a question of fact. The Youth Allowance payments the taxpayer received were calculated at a lower 'at home' rate as opposed to the higher 'independent' rate. This indicates that the taxpayer was substantially financially dependent. A comparison of the level of financial support provided by the taxpayer's parent with that provided by the Youth Allowance payments also indicates that the taxpayer was financially dependent. Date of decision: 12 February 2014 Changing Face of SMSFs March

21 Comments: Whilst the ATO decision demonstrates the tax dependency of the above arrangement, it would be strongly argued that the adult child would have satisfied the interdependency relationship definition in section of the ITAA What is interesting in the reasoning provided by the Commissioner within this decision is its broader application to other financial dependency arrangements (i.e. establishing dependency in a grand-parent/grand-child relationship). Whilst each case of financial dependency is a question of fact, the Commissioner has only ever provided limited guidance on the topic, predominantly through private rulings. Changing Face of SMSFs March

22 ATO ID 2014/7: Keeping money and other assets separate from those of other parties Issue Has a contravention of section 34 of the Superannuation Industry (Supervision) Act 1993 (SISA) occurred where a Self-Managed Superannuation Fund (SMSF) shares a bank account with related unit trusts? Decision Yes, an SMSF must open and maintain its own bank account, as it is required to keep its assets and money separate from that of other entities. Facts The trustees of the SMSF are members of a family. The fund has a standard employer-sponsor and all the trustees work for the standard employer-sponsor in various capacities. There are several unit trusts owned and operated by the SMSF and/or the trustees. The trustees have stated that, for administrative simplicity and cost savings, unit trusts jointly owned by the SMSF and trustees as well as unit trusts owned solely by the SMSF all operate using the one bank account. The account is held in the name of the SMSF. Reasons for Decision Subsection 31(1) of the SISA provides for the regulations to prescribe standards applicable to the operation of regulated superannuation funds (which includes a complying SMSF) and to trustees of those funds. Subsection 34(1) of the SISA requires each trustee of a superannuation entity to ensure that the operating standards are complied with at all times. A failure to do this is considered to be an offence under subsection 34(2) of SISA. Regulation 4.09A of the Superannuation Industry (Supervision) Regulations 1994 (SISR) states that for the purposes of subsection 31(1) of the SISA, a trustee of an SMSF must keep the money and other assets of the fund separate from any money and assets respectively: (a) that are held by the trustee personally, or (b) that are money or assets of a standard employer- sponsor, or an associate of a standard employer-sponsor, of the fund. The unit trusts are associates of the standard employer-sponsor of the fund in accordance with section 12 of the SISA. Keeping all of the unit trusts' money in the SMSF's bank account, including those trusts jointly owned by the SMSF, is not in line with the Changing Face of SMSFs March

23 requirements of regulation 4.09A of the SISR and therefore constitutes a contravention under subsection 34(1) of the SISA. Note: While this ATO ID looks specifically at bank accounts, the principles of regulation 4.09A of the SISR apply to all types of assets, including shares, units in a trust and other property. Date of decision: 11 February &Life= Comments: It is uncommon to see SMSFs with employer-sponsor arrangements in place today, meaning the exact facts of ATO ID 2014/7 are not likely to occur today. SIS Reg 4.09A(2) states: A trustee of a regulated superannuation fund that is a self-managed superannuation fund must keep the money and other assets of the fund separate from any money and assets, respectively: (a) that are held by the trustee personally; or (b) that are money or assets, as the case may be, of a standard employer-sponsor, or an associate of a standard employer-sponsor, of the fund. With a large majority of SMSFs without a standard employer sponsor, this effectively renders SISR 4.09A(2)(b) irrelevant for any potential breach. When considering subparagraph (a), this will only raise concerns where the fund has individual trustees, which require fund assets to be held separately from a trustee s personal assets. Where a special purpose corporate trustee is in place (acting as fund trustee), the fund is unable to mix fund assets within its personal assets as the Trustee does not hold any. The regulation does not consider the activities of the directors, therefore meaning it is almost impossible to contravene. Changing Face of SMSFs March

24 Ioppolo & Hesford v. Conti [2013] WASC 389 The recent case of IOPPOLO & HESFORD v CONTI [2013] WASC 389 confirmed, in addition to other important issues, that the payment of superannuation death benefits is not a matter that can be determined by the deceased superannuant s Will. Master Craig Sanderson of Western Australia's Supreme Court had to make two distinct rulings in relation to this case: Is it compulsory for the surviving Member/Trustee of a SMSF to appoint a deceased Member's Legal Personal Representative (Executor) a Trustee of the Fund for the purposes of the payment of a death benefit?; and Is the surviving Member/Trustee of a SMSF compelled to pay the deceased Member's death benefit as specified in the deceased Members Will? Background Augusto and Francesca Conti established a Self-Managed Superannuation Fund ("the SMSF") in Augusto and Francesca were both Members and Individual Trustees of the SMSF. Subsequent to Francesca's death Augusto established a Corporate Trustee of the SMSF of which he was the sole director and now as the only surviving Member of the SMSF. Francesca died in She had made her Will in In her Will she directed that her superannuation death benefit be divided equally between her children. In 2002 and 2006 Francesca made two Binding Death Benefit Nominations ("BDBNs") leaving all her death benefits to her husband. These nominations, in accordance with the SMSF's Trust Deed, lapsed after 3 years. Consequently Francesca died without a BDBN in effect. Ultimately, Augusto paid all Francesca's death benefits to himself in accordance with the provisions of the SMSF's Trust Deed. Francesca's Executors on behalf of the beneficiaries of her Will took exception to the manner that Augusto had paid the death benefits. They instigated proceedings in the Supreme Court of Western Australia against Augusto and the Fund s Corporate Trustee. The Plaintiffs contended that they should have been appointed as additional Trustees to the Fund for the purpose of the payment of Francesca's death benefits. They also applied that the Court direct that Francesca's superannuation death benefits be paid in accordance with the directions contained in her Will. Master Sanderson found in favour of Augusto in both of the issues argued by the Plaintiffs. In his findings, it was concluded that: Augusto has acted in accordance with the provisions of the operative Trust Deed of the SMSF; both establishing the Corporate Trustee post Francesca's death and Changing Face of SMSFs March

25 paying all her death benefits to himself as Francesca's dependent. The unfettered discretion of the Trustee, in the absence of a BDBN to make the latter determination was emphasised by Master Sanderson; and The provisions of Section 17 of the SIS Act did not give the Legal Personal Representatives (the Executor/Defendants) the automatic right to be appointed as Trustees of the SMSF for the purpose of the payment of Francesca's death benefits. What does this mean in practice? Similar to the findings in the previous cases of Katz v Grossman 2 and Donavan v Donovan 3, the critical issue of a valid BDBN is always required to be dealt with by the Fund s operative Trust Deed. So, what could have been done in Conti s case? It would have saved considerable trouble and substantial expense if Francesca, at the time of her death had a valid BDBN. If the benefits were intended to be paid to the Plaintiffs, then the terms of the BDBN should have directed Francesca s superannuation death benefits to her Estate. If this occurred, regardless of whom the trustees of directors of the Corporate Trustee were, Francesca's daughters would have benefited as she may have intended. What should you do to prevent this issue? Ensure that the Fund s Trust Deed enables a Member to nominate who will be their replacement Trustee of the Fund when they die; and Make sure that the member has a valid and up-to-date Death Benefit Nomination. Reference: IOPPOLO & HESFORD -v- CONTI [2013] WASC 389 Other items of interest: ATO announces Division 293 tax notices of assessment to be issued from early February, ATO SMSF statistics December 2013 released, ATO/Research-and-statistics/In-detail/Super-statistics/SMSF/Self-managed-superfund-statistical-report---December-2013/ ATO SMSF News edition 29, 2 Katz v Grossman [2005] NSWSC Donovan v Donovan [2009] QSC 26 Changing Face of SMSFs March