SMSF Legislation
& Technical Update
Peter Burgess
SPAA Technical Director
2011 SMSF National Conference
Session overview
1.
2.
3.
4.
5.
6.
7.
Registration and definition of a SMSF
Acquisition of related party assets
Contributions
Limited recourse borrowing arrangements
In-house assets
The meaning of wholesale client and non-arms length income
Stronger super – Government response to the Cooper Review.
2011 SMSF National Conference
1. Registration and definition
of a SMSF
2011 SMSF National Conference
SMSF registration and rollovers
• November 2010 – new SMSF member verification system launched by the ATO
• APRA letter to APRA regulated super funds – “…requests for additional
documentation such as a trust deed should not be necessary.”
• December 2010 - 30,000 SMSFs re-classified as “Registered – status not
determined”
• December 2010 ATO SMSF newsletter – SMSFs should not register until assets
are held by the fund
• Stronger super – fund naming conventions, proof of identity checks, AML/CTF
Act to apply to SMSF rollovers
• Session 15A – New fund registration and SMSF rollovers – obstacles and best
practice guidelines.
2011 SMSF National Conference
Definition of a SMSF
• SMSFR 2010/2 – enduring power of attorney ruling:
•
More than one LPR can be appointed as a trustee/director in place of the
member (one-for-one substitution is not required)
•
No requirement for member to resign as director if LPR is an alternate director but LPR must only have the power to act if member is not performing those
duties
• ATO ID 2010/139 – Appointed administrator to the estate of a person
with a mental disability is permitted to be a trustee of an SMSF in
place of that person under 17A(1)(3)(i)
• Child members – if corporate trustee only a LPR (assume by court
order) can be a director of a corporate trustee in place of a minor
member (NTLG Superannuation Technical sub-group meeting – 7 September 2010).
2011 SMSF National Conference
2. Acquisition of related party assets
2011 SMSF National Conference
SMSFR 2010/1 – Application of s66(1) of the SIS Act
•
•
•
Final ruling issued on 25 February 2010
The ruling explains that a trustee of a SMSF cannot intentionally
acquire an asset from a related party of the SMSF unless an
exception applies to that asset
A range of examples provided including:
•
•
•
•
Performance of a service
Acquisition of a promissory note
Acquisition of a post-dated personal cheque
Acquisition of units in a related unit trust.
2011 SMSF National Conference
Points to note – acquiring goods and materials
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•
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Paragraphs 17, 18, 19, 114, 115 and examples 5 and 6
If goods and materials, which are not insignificant in value or
function, are provided to an SMSF as part of a service provided by a
related party, there is an acquisition of assets (being the goods or
materials)
A SMSF will breach s66 if the fund owns land and it engages a
related party on commercial terms to construct a building using
goods and materials supplied by the related party (NTLG Superannuation
Technical sub-group meeting - 8 December 2010)
•
•
In order to avoid a breach the SMSF would need to purchase the
goods and materials required to construct the premise directly from
the supplier
Session 13B – SMSFs and real property applications.
2011 SMSF National Conference
Points to note - subsection 66(2A)(a)(i)
•
•
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Paragraphs 43, 44, 163 - 171
In-house asset exception in subsection 66(2A)(a)(i) and (ii) is
limited to the acquisition of assets that are “investments in” a
related party or a related trust of the SMSF
The ATO does not consider that subsection 66(2A) could have
been intended to apply more broadly to include real property
subject to a lease or lease arrangement with a related party.
2011 SMSF National Conference
Acquiring assets on relationship breakdown
Previous law
New law (effective 1 December 2010)
A trustee of a SMSF may acquire an
asset in specie from a related party
following the marriage breakdown
of a member.
A trustee of a regulated super fund may
acquire an asset in specie from a related
party following the relationship
breakdown of a member (new s66(2B).
In-house asset transitional
exemption provisions do not apply
to the asset in the receiving fund.
In-house asset transitional exemption
provisions will apply to the asset in the
receiving fund (new S71EA).
• Session 12B – The 3Ds of superannuation – death, disability and divorce.
2011 SMSF National Conference
3. Contributions
2011 SMSF National Conference
Tax Ruling TR 2010/1: Superannuation Contributions
• Issued on 25 February 2010
• Revised meaning of the term “contribution“
“…a contribution is anything of value that increases the capital of a super
fund provided by a person whose purpose is to benefit one or more
particular members of the fund or all of the members in general.”
2011 SMSF National Conference
Superannuation contribution?
Has the capital of the
fund been increased?
Yes
Was the purpose to
benefit one or more
members or all of the
members in general?
No, if transaction is not dependant upon the identity of the other party
as a super provider or they are simply fulfilling the terms of a contract or
arrangement entered into on commercial or arm’s length basis.
Yes, if transaction is entered into because of a connection or relationship
with the super provider or cannot be explained by reference to
commercial or arm’s length dealings.
Yes
Contribution
2011 SMSF National Conference
Classification of contributions
• S292-25(2) of the ITAA97 defines a concessional contribution as a
contribution made to a fund in respect of you which is included in
the assessable income of the fund
• A contribution is included in the assessable income of the fund if it
is to provide super benefits for someone else (unless it is a spouse
or Government co-contribution).
2011 SMSF National Conference
4. Limited recourse borrowing
arrangements
2011 SMSF National Conference
Superannuation Industry (Supervision) Amendment Bill 2010
•
Received Royal Assent on 6 July 2010
•
Subsection 67(4A) repealed and replaced with new subsections 67A and 67B effective 7 July
2010
•
Amendments do not apply retrospectively to existing arrangements in place before 7 July 2010
(although 67A and 67B apply to any subsequent refinancing of these arrangements)
•
Asset acquired must be a single acquirable asset:
•
Shares – must have same market value that are together treated as a single asset
•
Real property – new rules prohibit multiple titles under the one borrowing arrangement
•
Borrowed funds can be used to maintain or repair the asset but not to improve the asset
•
Prescriptive definition of what constitutes a “replacement asset”.
2011 SMSF National Conference
ATO approach…
• Where assets are for practical purposes inseparable, or where there is
an ancillary asset of a very small value, the ATO may treat the assets
as a single asset for the purposes of s67A (NTLG Superannuation Technical subgroup meeting - 7 September 2010)
• An improvement may change the state or nature of the asset such
that it will give rise to a different asset…this would be the outcome
regardless of the source of the funds used to improve the asset (NTLG
Superannuation Technical sub-group meeting - 7 September 2010)
• Tax Ruling TR 97/23 – Deductions for repairs
• Key issues currently being discussed with Treasury as “priority technical
issues”:
•
Greater clarity around the meaning of single acquirable asset
•
The nature of the SMSF trustee’s interest in the holding trust
•
Issues regarding improvements to the asset.
2011 SMSF National Conference
ATO approach…
• ATO Interpretative Decisions:
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ATO ID 2010/162 – borrowing from a related party on terms more favourable to
the SMSF
•
ATO ID 2010/169 – refinancing
•
ATO ID 2010/170 – third party guarantees
•
ATO ID 2010/172 – joint investors
•
ATO ID 2010/184 – capitalisation of interest
•
ATO ID 2010/185 – charge not permitted over asset in holding trust.
2011 SMSF National Conference
Conference sessions
• Session 5B – Limited recourse borrowing strategies
• Session 11A – Limited recourse borrowing - what you need to do to
comply
• Session 14C – Is this the new normal for SMSF portfolios? – gearing
strategies, ETFs and instalment warrants.
2011 SMSF National Conference
5. In-house assets
2011 SMSF National Conference
Conversion of a geared trust to a 13.22C trust
• New units acquired in a pre-99 unit trust will be excluded as an in-house asset
if both of the following conditions are satisfied:
•
The unit trust now complies with SISR 13.22C
•
No event in 13.22D(1) has occurred since 28 June 2000
• A 13.22D(1) event includes new borrowing, conducting a business, acquiring
an interest in another entity
• Session 11B – Pre 99 unit trusts and non-geared unit trust strategies
• Session 13B – SMSFs and real property applications.
NTLG Superannuation Technical sub-group meeting (15 June 2010, 7 September 2010).
2011 SMSF National Conference
Example
• A SMSF purchased 100 units in a related unit trust in July 1999
• The unit trust was initially set up as a geared unit trust with a $100,000 loan
• The original loan was repaid in 2004
• The unit trust took out a new loan in 2006 which was subsequently repaid in 2010
• The SMSF now wants to purchase additional units in the unit trust
• Even though the unit trust now complies with SISR13.22C, an event listed in
13.22(D)(1) has occurred since 28 June 2000 (i.e. the new loan)
• The purchase of additional units will be classified as an in-house asset. The original
100 units remain excluded from the in-house asset test by virtue of s71A.
2011 SMSF National Conference
SISR 13.22C – related non-geared unit trust
Lender
SMSF
Existing funds
13.22C
unit trust
Borrowed funds
Property
2011 SMSF National Conference
Water rights
• Water access licence which entitles the holder to draw a specified
amount of water from a waterway for irrigation purposes
• Likely application of s71(1)(e) to exclude certain water rights from the
in-house assets of superannuation funds
• But unlikely to be an allowable related party acquisition under
s66(2A).
NTLG Superannuation Technical sub-group meeting (8 December 2010).
2011 SMSF National Conference
Government response to the Super System Review
• No evidence that in-house asset investments within the current
legislative restrictions are detrimental to SMSFs
• Likely amendment to the in-house asset rules to prohibit an in-house
asset where the asset concerned is a collectable or personal use
asset
• Exposure Draft (Tax Laws Amendment (2011 Measures No.2) Bill 2011)
released - “Collectables” and “Personal use assets” as defined in ITAA
1997
• Session 19C – Art, collectables and personal use assets – discussion
and practical implications.
2011 SMSF National Conference
6. Meaning of wholesale client
and non-arms length income
2011 SMSF National Conference
Meaning of a wholesale client
•
A financial service provided to the trustee of a SMSF will always be provided to the trustee as a
“retail client” unless the fund has net assets of at least $10 million – ASIC QFS 150
•
Trustees of a SMSF cannot be “sophisticated investors” within the meaning of the Corporations
Act – ASIC QFS 150
•
Confusion regarding whether “in relation to a superannuation product” in S761G applies to
financial services and products made available to the trustee of a super fund
•
Restricts access to wholesale investment markets and reduces the range of investments
available to SMSFs
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January 2011 – options paper released as part of the FOFA reforms
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Need to ensure consistency across the Corporations Act
•
Session 6C – The wholesale/retail client distinction – opportunities and risks for Accountants and
Planners.
2011 SMSF National Conference
Non-arms length income
•
Allen’s Asphalt Staff Super fund v FCT – SMSF received a $2.5m capital gain distribution
via an interposed trust which was assessed by the ATO as special income (non-arms
length arrangement – no consideration provided by the SMSF)
•
Henfam Super Fund v Commissioner of Taxation – acquired at less than market value but
dividends paid on an arm’s length basis.
2011 SMSF National Conference
7. Stronger super
2011 SMSF National Conference
Government’s response to the Cooper Review
Current law
Likely new law
ATO’s enforcement
powers.
Only used in the most severe cases of
non-compliance.
Administrative penalties on a sliding
scale payable personally by the
trustees.
Mandatory trustee
education.
No requirement.
Yes, if contravene SIS. Session 15A.
Asset acquisitions and
disposals.
On or off market.
On market but Government to
consult.
Assets valued at net
market value.
Not mandatory.
Mandatory.
ATO/ASIC standard trust
deed.
Not available.
Anything permitted by the SIS Act or
ITAA to be permitted by SMSF trust
deeds.
Consideration of life and
TPD insurance.
No operating standard.
SIS operating standard.
2011 SMSF National Conference
Disclaimer
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.
2011 SMSF National Conference