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End-of-financial-year essentials for SMSF trustees

As the end of the financial year approaches, it is a good time for trustees to do an annual check-up on their Self-Managed Super Fund.

Here are five key issues to be aware of in the 2020-21 tax year.

Contributions

Non-concessional (after-tax) contributions are limited to $100,000 (or a maximum of $300,000 if you satisfy the non-concessional contributions bring-forward rule) and concessional (before-tax) contributions are limited to $25,000. These limits will be indexed on July 1 and increase to $110,000 for non-concessional contributions ($330,000 under bring-forward rule) and $27,500 for concessional contributions.

The non-concessional contributions bring-forward thresholds do not increase if you have already triggered a bring-forward period that has not ended by June 30.

To make sure you do not accidentally trigger the bring-forward arrangement, you need to consider all your non-concessional contributions made to all your superannuation funds. Unreleased excess concessional contributions also count towards the non-concessional contributions cap.

Before June 30, it is important to review contribution strategies to ensure you have contributed what you intended to, and ensure you are below the contribution caps.

In the 2020-21 financial year you may also be eligible, subject to your Total Super Balance (TSB), to make larger concessional contributions – if you have any unused concessional contribution cap space from the 2018-19 or later financial years.

Where you have made personal contributions and intend to claim a tax deduction in 2020-21, it is important that you check all employer contributions and salary sacrificed amounts to super to make sure you do not breach the annual concessional contributions cap.

Investment strategy

It is important to understand that an SMSF’s investment objectives and strategy are not set in stone.

Trustees should regularly review the investments of the fund, investment risk, likely returns, liquidity, insurance and cash flow requirements as well as the diversification of investments.

Before any investment decision is made, you should examine the impact it would likely have on the overall portfolio, to ensure you are investing in line with your investment strategy.

Minimum pension payments

To help manage the economic impact of the coronavirus pandemic, for the 2019-20, 2020-21 and 2021-22 tax years, the federal government has reduced the minimum drawdown requirements by half for account-based pensions and market-linked pensions. There is still time to consider and, if required, amend your pension payments for 2020-21.

Where you have continued to receive regular pension payments, it is likely you may have received more than the required minimum amount. Unless you meet contribution eligibility rules, these funds cannot be returned.

Where you have restructured your pension withdrawal amounts, it is important to ensure that you do not underpay the minimum pension payment required. Where this requirement is not met, a SMSF may be subject to 15 per cent tax on pension investments, instead of them being tax free.

Valuing assets

SMSF trustees are required to value the fund’s assets at market value on June 30 each year when preparing the fund’s financial accounts.

Ensuring that member benefits are shown at market value is important when calculating each member’s TSB. This number is used to determine what, if any, non-concessional contributions can be made without exceeding your non-concessional contributions cap, and when determining your eligibility to make catch-up concessional contributions and receive government co-contributions.

If you are starting a pension, it is important to value your pension balance correctly to ensure you do not begin a pension with a balance exceeding the Transfer Balance Cap. For the 2020-21 income year, this cap is $1.6 million and will increase to $1.7 million on July 1, in line with indexation.

Lodgement obligations

All SMSF trustees are expected to work with their tax agent or accountant to ensure that they meet all their lodgement requirements on time.

While the current economic conditions due to COVID-19 may make keeping up to date with your trustee obligations a challenge, access to the ATO’s early engagement and voluntary disclosure service is available to assist you to get your affairs in order.

Missing your annual return lodgement due date could result in the status of your SMSF changing on the ATO’s Super Fund Lookup, which could restrict your SMSF from receiving super guarantee payments, as well as some rollovers.

Written by John Maroney, CEO, SMSF Association

SMSFs and 50/50 unit trusts

There is an increasing number of SMSFs that invest in 50/50 unit trusts. That is, an SMSF has a 50 per cent interest in a unit trust, with another unitholder holding the remaining 50 per cent interest, which invariably is an unrelated SMSF.

Our experience over the years has uncovered weaknesses in how many of these have been implemented, operated or documented.

We examine below some key risks that should be considered and strategies for successfully navigating this trust structure.

Is the trust a related trust?

Where there are two unrelated SMSFs each holding 50 per cent of the units in a unit trust, this “arrangement” has generally been considered not to give rise to a related trust for in-house asset purposes under s 70E(2)(a) of the Superannuation Industry (Supervision) Act 1993 (Cth) (SISA).

However, there are several other tests that can easily give rise to a related trust relationship and related follow on consequences as discussed below.

The primary consequence of the related trust relationship is that once this relationship arises, the in-house asset rules limit each fund’s investment to no more than 5 per cent of the market value of each fund.

ATO materials regarding 50/50 unit trusts

The ATO in March 2013 confirmed in its ATO National Tax Liaison Group – Superannuation Sub Committee Minutes of 5 March 2013 (ATO NTLG Minutes) that an SMSF holding a 50 per cent interest does not, by itself, amount to control of a unit trust. These non-binding ATO comments have been relied on by many without realising that the ATO did not rule out the other tests in s 70E(2) such as s 70E(2)(b) and (c).

Section 70E(2) provides three limbs to test whether a unit trust is a related trust.

(2) For the purposes of sections 70B, 70C and 70D, an entity controls a trust if: 

  • a group in relation to the entity has a fixed entitlement to more than 50 per cent of the capital or income of the trust; or 
  • the trustee of the trust, or a majority of the trustees of the trust, is accustomed or under an obligation (whether formal or informal), or might reasonably be expected, to act in accordance with the directions, instructions or wishes of a group in relation to the entity (whether those directions, instructions or wishes are, or might reasonably be expected to be, communicated directly or through interposed companies, partnerships or trusts); or 
  • a group in relation to the entity is able to remove or appoint the trustee, or a majority of the trustees, of the trust.

More than 50 per cent of units

The test in s 70E(2)(a) relies on whether a group (e.g. the member and the member’s related parties) has a fixed entitlement to more than 50 per cent of the capital or income of the trust.

This requires more than a 50 per cent holding of units. Therefore, a 50 per cent or lesser holding does not give rise to a related trust relationship under s 70E(2)(a). This test is generally relatively easy to establish from the unit trust documentation and related records if all units are of the same class of units.

In reviewing a trust deed, however, you need to carefully review the provisions of each deed in detail and should not make any assumptions on what, for instance, you might expect to find in the document. As noted by the High Court in CPT Custodian Pty Ltd v Commissioner of State Revenue (2005) 224 CLR 98 at [15]:

In taking those steps, a priori assumptions as to the nature of unit trusts under the general law and principles of equity would not assist and would be apt to mislead. All depends, as Tamberlin and Hely JJ put it in Kent v SS “Maria Luisa” (No 2), upon the terms of the particular trust. The term “unit trust” is the subject of much exegesis by commentators.

However, “unit trust”, like “discretionary trust”, in the absence of an applicable statutory definition, does not have a constant, fixed normative meaning which can dictate the application to particular facts of the definition in s 3(a) of the act.

If there are different classes of units, for instance, a detailed analysis would need to be undertaken to see which unitholder may exert more influence or control.

Sufficient influence

The second test in s 70E(2)(b) that can result in a related trust relationship is what is broadly known as the “sufficient influence” test. The ATO comments on the 50/50 unit trust question in the 2013 NTLG Minutes were qualified s 70E(2)(b) stating that:

… the trustee of the trust … might reasonably be expected, to act in accordance with the directions, instructions or wishes of a group in relation to the entity …

Until recently, there has been little guidance on the sufficient influence test in s 70E(2)(b). SMSF trustees involved in 50/50 unit trusts have generally tried to minimise any “related trust” risk. Some instances that may indicate some influence might include:

  • The unit trust deed provides one unitholder a discretion, power or advantage over the other unitholder.
  • The constitution of the corporate trustee to the unit trust provides one director/shareholder with power or advantage over the other director/shareholder, e.g. the chair of a directors or shareholders meeting has a casting vote.
  • One unitholder and/or a related entity, for example:
    • is actively involved in managing and controlling the unit trust’s affairs and the other is relatively passive; or
    • provides loans to the unit trust and has influence via the loan agreements or mortgage or security arrangements in relation to the unit trust.

Recent developments in case law and ATO materials now, however, provide better guidance on what is meant by sufficient influence.

The BHP Billiton Limited v FCT [2020] HCA 5 decision considered “sufficient influence” for the purposes of identifying “associates” of a company under s 318 of the Income Tax Assessment Act 1936 (Cth) (ITAA 1936). The High Court held that BHP Billiton Limited sufficiently influenced BHP Billiton Plc (and vice versa). Further, BHP Marketing AG (the group’s Swiss marketing entity owned 58 per cent by BHP Billiton Limited and 42 per cent by BHP Billiton Plc) was sufficiently influenced by BHP Billiton Plc and BHP Billiton Limited.

Similar wording is used in s 318(6)(b) of the ITAA 1936 to that in s 70E(2)(b) that relevantly provides:

(6) For the purposes of this section:

  • … 
  • a company is sufficiently influenced by an entity or entities if the company, or its directors, are accustomed or under an obligation (whether formal or informal), or might reasonably be expected, to act in accordance with the directions, instructions or wishes of the entity or entities (whether those directions, instructions or wishes are, or might reasonably be expected to be, communicated directly or through interposed companies, partnerships or trusts); …

The BHP decision held that for a company to be “sufficiently influenced” by another entity under s 318(6)(b), it was not necessary to show “effective control” or a causal link between the entity’s “directions, instructions or wishes” and the company’s actions (as BHP had contended).

The court held that the test could be satisfied if the facts provided a basis upon which to conclude a “requisite degree of contribution” between such directions and actions. The BHP facts broadly involved, among other things, a dual-listed UK-Australian company arrangement where directors had to generally vote in a consistent manner.

While the BHP decision related to a different legislative test in relation to a company and its associates for tax purposes to the test in s 70E(2)(b) of the SISA that relates to a unit trust, the decision is relevant as it provides meaning to the similar legislative text/test. As you will glean from the above legislative extracts, both tests (i.e. s 318 of the ITAA 1936 and s 70E(2)(b) of SISA) largely include similar wording including “directions, instructions or wishes … communicated directly or through interposed companies, partnerships or trusts .

There have also been other recent developments where a company has been taken to be controlled by a person who was not formally appointed as a director. Therefore, the fact that a person is not formally appointed does not preclude that person being in a position of control or sufficient influence.

The power to hire or fire the trustee

For completeness, the third test in s 70E(2)(b) is reliant on who can remove or appoint the trustee, or a majority of the trustees, of the trust. As with the more than 50 per cent of units test in s 70E(2)(a), this test is generally relatively easy to determine by a review of the unit trust’s documentation and related records.

As noted above in relation to the High Court’s comments in the CPT Custodian decision, there is no constant, fixed normative meaning of what a unit trust is, as it depends on the terms in the deed being considered.

In this regard, there are various drafting methods used in relation to who has the power to remove or appoint the trustee, or, in the case of individual trustees, a majority of the trustees, of the trust. Several popular methods that we encounter include:

  • A certain majority of unitholders, e.g. 75 per cent can vote to remove or appoint a trustee.
  • An appointor/guardian/founder or similar person or entity is given the power to remove or appoint a trustee.
  • The current trustee may be given the power to resign, remove or appoint a trustee.

The multi-pronged related trust test

As you will see from the above outline, there are a number of important considerations to review to determine whether a related trust relationship exists in s 70E(2) of the SISA.

There are also a number of less well-known provisions that might prove a trap for young players.

Does the ATO discretion to deem an asset to be an in-house asset?

In short, yes. For example, the ATO has a broad discretionary power to deem an asset (that is not an in-house under the usual tests) to be one under s 71(4) of the SISA.

The ATO relied on this deeming power in Aussiegolfa Pty Ltd as trustee of the Benson Family Superannuation Fund and Commissioner of Taxation [2017] AATA 3013. While the ATO lost in the Administrative Appeals Tribunal, the ATO does have a broad discretion to deem an asset to be an in-house asset.

The ATO actually won a separate case in the Full Federal Court, namely Aussiegolfa v Commissioner of Taxation [2018] FCAFC 122, that resulted in the units in the unit trust in question being held to be an in-house asset. The Full Federal Court decision effectively removed the ability of the Administrative Appeals Tribunal to deem the asset to be an in-house asset, as the Full Federal Court had already determined the asset’s status.

Understanding the risks

Thus, as you will appreciate from the above outline, a 50/50 unit trust faces a number of possible risks. If there is any doubt, timely expert legal advice should be obtained especially as a contravention of the in-house asset provisions can result in serious adverse consequences. For example, a contravention can potentially result in, among other things:

  • significant administrative penalties;
  • an SMSF being rendered non-complying with a significant tax liability; or
  • being imposed and potentially the SMSF directors/trustees being rendered disqualified from ever being SMSF trustees/directors again.

By Daniel Butler ([email protected]), director, DBA Lawyers
Source: SMSF Adviser

 

How to ensure SMSF beneficiaries get their share when a member dies

Ensuring that SMSF funds go where the deceased member wants them to go should seemingly be a straightforward process, but unfortunately, this isn’t always the case.

The deceased’s intentions can be thwarted by conniving beneficiaries attempting to acquire a greater share than that intended. This can also result in the intended beneficiary receiving nothing at all.

So, what can go wrong? There are a number of leading cases which demonstrate how SMSF beneficiaries can be prevented from receiving their fair share. Here are a few of them.

Katz v Grossman

The celebrated case of Katz and Grossman is one of the first to make a big impact when it comes to SMSF beneficiaries. In this case, there was an argument between Daniel Katz and his sister Linda Grossman over who were the trustees and members of their deceased parents’ superannuation fund.

Their father and mother were trustees and members of the SMSF. After their mother died, their father appointed Linda as the other trustee of the fund. Then the father died and just after his death Linda appointed her husband Peter as the trustee of the fund. 

Linda and her husband refused to follow her late father’s non-binding death benefit nomination, which had provided that his membership entitlement be given equally to Linda and her brother Daniel.

Daniel argued that Linda was not validly appointed as a trustee. If the court agreed with him, then all subsequent decisions of the trustee of the super fund would have been declared void.

But the court rejected Daniel’s arguments on the basis that the father did have the power to appoint Linda as a trustee and that Linda had the power to appoint her husband Peter as a trustee. The judgment doesn’t mention the payment of death benefits, but it is assumed that Linda and her husband subsequently resolved to have the super fund pay Linda the whole of her father’s membership entitlement. As a result, Daniel did not receive half the superannuation as was intended by the deceased.

This case demonstrates the need for a binding death benefit nomination and the importance of selecting trustees who will honour the member’s wishes upon their death.  

EM Squared Pty Ltd v Hassan

The EM Squared Pty Ltd v Hassan case demonstrates the importance of a well-written SMSF deed. Without the deed being watertight, there may be loopholes which can be exploited to prevent all SMSF beneficiaries from receiving their share. 

In this case, Morris Hassan and his second wife Margaret established an SMSF during their marriage. In 2005, Morris signed a document entitled “Confidential Memorandum” which stated that upon his death, he wished for his portion of the SMSF to be split equally between his wife Margaret and the children of his former marriage, Jeremy and Jane. A year later, Morris died. His benefits in the SMSF were valued at more than $3 million.

Margaret, the sole surviving trustee, established a company, EM Squared Pty Ltd. Margaret was the sole director and shareholder of the company. EM Squared Pty Ltd was appointed as the trustee of the SMSF. 

Margaret sought legal advice which found that the Confidential Memorandum may not be binding, and she may be within her rights to distribute the entirety of Morris’ benefit to herself rather than dividing it equally between herself, Jeremy and Jane. 

The reason for this was that the SMSF deed had strict requirements for documenting how the entitlements would pass to beneficiaries which the Confidential Memorandum may not have met. In addition, the Confidential Memorandum did not take the appropriate form, and further, it could not be proved that the Confidential Memorandum had been served on the trustees of the SMSF during Morris’ life. 

Margaret applied to the Supreme Court. While the outcome of the case is unknown, the court did find that it was an “entirely appropriate case in which to seek advice and directions”. What appears to be the exploitation of a loophole was considered legitimate and appropriate by the court. 

This case demonstrates the importance of a well-written SMSF deed that excludes unnecessary limitations on a binding death benefit nomination. It is inappropriate for a deed to require that the binding death benefit nomination must be in a particular form or that it must be provided to the trustee during the member’s life in order for it to be binding. 

McIntosh v McIntosh 

The McIntosh v McIntosh case provides an interesting lesson on when superannuation is considered part of someone’s estate and the fiduciary duties of a deceased’s legal personal representative. 

When James McIntosh died in 2013 without a surviving spouse, children or a valid will, the rules of intestacy required that James’ estate be distributed equally between his parents Elizabeth and John — who were long divorced and on bad terms. James’ estate was valued at about $80,000. He also had $454,000 in various super funds. 

Elizabeth was appointed as the administrator of James’ estate. This required her to collect her son’s assets and distribute his estate equally between herself and John. 

Elizabeth applied to James’ super funds to have the entitlements paid to her personally, rather than to the estate. She was named as the nominated beneficiary (via non-binding nominations) for each super fund and they released the money to her. 

John’s lawyers wrote to Elizabeth arguing that the super entitlements should be paid into the estate and then divided equally. Elizabeth’s lawyers responded that superannuation did not form part of the estate. 

The courts found that there was a conflict and that Elizabeth was not meeting the fiduciary duties of an administrator; she had a duty to act in the best interest of the estate and instead she was prioritising her own interests. Elizabeth was required to hand over the super benefits to the estate. 

This case demonstrates the importance of a binding death benefit nomination. Had this existed for Elizabeth, then she would have been recognised as the sole beneficiary. It also demonstrates the importance of having a will. Had Elizabeth been named as the executor in James’ will, the court may have decided differently. 

While this case doesn’t directly involve an SMSF, it is pertinent for SMSF advisers as it demonstrates the importance of binding death benefit nominations, the fiduciary duties of legal personnel and the importance of having a will. 

Wooster v Morris 

The Wooster v Morris case not only demonstrates the importance of a binding death benefit nomination, but also illustrates how they can be vulnerable to exploitation.

In this case, Maxwell Morris and his second wife Patricia were co-trustees of their SMSF. Maxwell had made a binding death benefit nomination that required his entitlement be divided between his two daughters from a previous marriage, Susan and Kerry.

Maxwell’s SMSF entitlement upon his death was approximately $930,000 and Patricia’s entitlement at that time was approximately $450,000. 

When Maxwell died, Patricia appointed her son Nathan as co-trustee of the SMSF. She subsequently established a company, Upper Swan Nominees Pty Ltd, of which she was the sole director and shareholder, and the company was appointed as the corporate trustee. 

On legal advice that Maxwell’s binding death benefit may not be binding as it had not been formally delivered to the trustees during Maxwell’s life (a requirement under the SMSF deed), Patricia did not honour the binding death benefit nomination and instead paid Maxwell’s entire entitlement to herself.

Susan and Kerry took the matter to court. The court found that the binding death benefit nomination was indeed binding. Furthermore, the court ordered that Patricia be personally liable for the legal costs of Susan and Kerry to the extent that the corporate trustee was unable to pay them from its own funds.  In this regard, the corporate trustee was prevented from seeking access to the assets of the SMSF fund to pay for the costs of Susan and Kerry.  

While the court found in favour of Susan and Kerry, they were still tied up in court for many years to obtain what was owed to them. The case also demonstrates that given an executor does not automatically become a trustee of an SMSF, executors don’t have control over SMSF assets. Instead, had Maxwell nominated Susan or Kerry to replace him as trustee of the SMSF, Patricia would have been unable to take the steps she did. 

Ioppolo & Hesford v Conti

The Ioppolo & Hesford v Conti case highlights that superannuation is not considered an asset of an estate — it is dealt with separately. Executors do not have control over SMSF entitlements unless they are appointed as trustees. 

In this case, Francesca and Augusto Conti were the only trustees and members of an SMSF.  

Francesca died in 2010. Francesca’s will stated that she wanted to leave her superannuation benefit of approximately $649,000 to her children and not her husband Augusto; however, at the time, she did not have a valid death benefit nomination in place.

Upon Francesca’s death, Augusto appointed as trustee of the SMSF a corporate trustee of which he was the sole director and shareholder. As a result, the corporate trustee had the discretion to pay Francesca’s entire SMSF entitlement to Augusto, which it did. 

Francesca’s children took legal action as executors of her estate, arguing that they were entitled to be appointed as co-trustees of the SMSF which would have given them control over how the SMSF entitlement was paid. 

The court found that executors are not automatically required to be appointed as co-trustees and that the corporate trustee was therefore entitled to ignore the directions set out in the will. As such, the court did not overturn the trustee’s decision to pay the SMSF entitlement to Augusto. 

This case reveals how important it is to correctly document how an SMSF benefit is to be paid on a member’s death. In this case, had a binding death benefit nomination been created, the outcome may have been very different. It also highlights that executors do not have any control over the distribution of SMSF assets. 

How can we ensure SMSF beneficiaries receive their share?

To ensure that super beneficiaries get their share when a member dies, it’s important to plan for how control of the SMSF will be transferred. It’s important to anticipate any issues and tailor a suitable response. Members should consider whether they can trust that the remaining trustee will respect their wishes when they die. If not, then a new trustee may need to be appointed. 

The SMSF deed should be watertight and a binding death benefit nomination should be created. Having a trustee with an appropriately worded enduring power of attorney can usually ensure that superannuation funds go where the deceased member wanted them to go.

Written by Leigh Adams, Owen Hodge Lawyers
Source: SMSF Adviser 

SMSF asset compliance considerations

Investing in certain asset classes or implementing particular structures to do so can result in additional compliance issues for SMSFs. Mark Ellem, head of education at Accurium, identifies areas where trustees will need to pay extra attention. 

When an SMSF considers acquiring an asset or making a new investment, there are several compliance rules and issues that need to be considered at the time of acquisition. For example:

  • whether the asset can be acquired from a related party,
  • does it fit within the fund’s investment strategy,
  • will the investment be regarded as an in-house asset,
  • does the acquisition meet the sole purchase test, and
  • is the acquisition or investment permitted under the trust deed.

In addition to these considerations at the time of acquisition, the ongoing and potential future compliance and audit requirements should also be factored in when the trustees are weighing up whether a particular investment is one the SMSF should be making. SMSFs can have additional layers of compliance when compared to using other non-super structures when acquiring and holding an asset. These ongoing compliance requirements, potential costs and hurdles should be understood by SMSF trustees prior to purchase.

Let’s consider what these issues are for various types of commonly held SMSF assets.

Real estate

One of the most popular asset types held by an SMSF is real estate, which presents several ongoing compliance issues that SMSF trustees need to be aware of. A few of these are discussed below.

• Year-end market value – The market value of real estate held by an SMSF must be considered by the trustee(s) each and every 30 June. SMSF trustees need to be aware of the potential ongoing costs associated with determining and substantiating market value for real estate. Potential costs include the expense of obtaining an independent valuation or other forms of market-value evidence and additional administration and audit costs for an SMSF owning real estate. The ATO has recently released guidance on the evidence trustees need to provide their auditor to substantiate the market value used in the fund’s financial statements (search QC 64053 on the ATO’s website).

• Leasing real estate to a related party – Where the property is leased to a related party, trustees must ensure it continues to meet the definition of business real property (BRP). There should be an examination of the lease agreement to ensure the terms are being adhered to, including any review of the market of rents and that the rental agreement has not expired. In addition to the initial costs to draft and execute a lease, there would be ongoing costs to extend, renew and vary it. This may include the cost of obtaining an independent assessment of market rental value. Variation to a lease may also be caused by unexpected market conditions, for example, the COVID-19 rent relief measures.

• Residential property – Where the property is residential, the SMSF auditor may require evidence it has not been used by a fund member, relative or related party. This could be brought into question where the property is situated in a popular holiday destination and is rented out as holiday rental accommodation. An SMSF auditor may require the trustee(s) to provide evidence the property has not been used by a related party and that this is provided at each annual audit.

• Charges over the property – The SMSF auditor may wish to conduct a search each audit year to ensure the property has not been used to secure any borrowings, unless permitted. This may incur additional costs for the SMSF.

• Investment strategy – It is not uncommon for an SMSF holding real estate to have no other assets, apart from its bank account. The ATO and SMSF auditors have a focus on funds with single-asset investment strategies to ensure compliance with the requirements under the Superannuation Industry (Supervision) (SIS) Act 1993. SMSF trustees need to be prepared to dedicate time to ensure the investment strategy will stand up to audit scrutiny.

• LRBAs – Real estate held via a limited recourse borrowing arrangement (LRBA) is subject to certain SIS requirements. For example, the property cannot be developed. SMSF trustees need to be mindful of the limitations and restrictions of property purchased using an LRBA.

Units in a non-related unit trust

A common scenario is where two or more unrelated SMSFs hold units in a unit trust and that unit trust acquires an asset, typically real estate. In these cases, each SMSF must not hold more than 50 per cent of the issued units in the unit trust. This, together with other requirements, ensures the SMSF’s investment is not treated as an in-house asset.

• Ongoing assessment of relationships – In addition to an initial assessment to ensure a unit trust is not a related trust of each of the SMSF unitholders, there will be a requirement for an ongoing annual assessment to ensure this remains the case. This would include determining whether there has been any change in circumstances that makes members from different SMSFs related parties. For example, a member from each fund jointly acquiring a rental property together or children of members from each SMSF getting married to each other may mean they become related parties. The trustee should not be surprised if their auditor reviews the structure each and every year.

SMSFs can have additional layers of compliance when compared to using other non-super structures when acquiring and holding an asset.

• Exit plan – It is important when this type of structure is entered into that the SMSF trustees are aware of the potential issues when one of the SMSF unitholders wants to dispose of their units in the unit trust. The assessment of whether the investment is caught by the in-house asset rules is examined from the perspective of each SMSF unitholder. A unit trust may be a related trust to one of the SMSF unitholders, but not another SMSF unitholder. For example, a unit trust is set up with three unrelated SMSF unitholders, SMSF A, SMSF B and SMSF C, each holding one-third of the issued units. SMSF C unitholder wants out and SMSF A offers to buy the units at market value. From a practical perspective, this achieves the desired outcome. However, there is now a significant compliance issue for SMSF A as it now holds two-thirds of the units in the unit trust. As SMSF A now holds more than 50 per cent of the issued units, the unit trust is a related trust of SMSF A and caught by the in-house asset rules. From SMSF B’s perspective, it still holds units that represent less than 50 per cent of the issued units and so the unit trust is not a related trust of SMSF B. Assuming SMSF A’s unitholding value represents more than 5 per cent of the total value of its assets, it will be required to dispose of the excess in-house asset amount by the following 30 June. This may cause issues, particularly where the asset held by the unit trust is the business premises of the business operated by members from one or more of the SMSFs. SMSF trustees in this type of non-related unit trust structure need to have an exit plan prior to executing the acquisition to deal with unitholders wanting to dispose of their interest, either voluntarily or involuntarily, such as when a member passes away.

• Market value – As with real estate, SMSF trustees who hold units in a unit trust, or any other unlisted entity, will be required to determine and substantiate the market value each and every 30 June.

Division 13.3A unit trusts

Another common scenario is where an SMSF acquires an asset via an interposed unit trust that complies with SIS regulation 13.22C in Division 13.3A, commonly referred to as a non-geared unit trust. This type of structure can be used where the SMSF is the sole unitholder or where the fund and a related party are the unitholders. While the unit trust is prima facie a related trust of the SMSF, the SIS provisions exempt the units from being treated as an in-house asset, provided it complies with the requirements of SIS regulation 13.22C.

One of the most popular asset types held by an SMSF is real estate, which presents several ongoing compliance issues that SMSF trustees need to be aware of.

• Checklist of prohibited events – SMSF trustees need to be aware of the consequences where certain events occur after the structure has been established. These events are commonly referred to as 13.22D events and will cause the unit trust to be forever tainted as an in-house asset. A 13.22D event can occur simply through the SMSF buying listed shares with surplus cash. Rectification can be a challenge, as well as costly. The fund auditor will need to assess, during each annual audit, that there have been no 13.22D events.

Overseas assets

Two issues that arise where SMSFs acquire assets overseas, particularly direct assets such as real estate, are ownership and market value. Often local laws prohibit the asset being held by the SMSF and an interposed entity is required to hold the asset as a custodian or nominee, resulting in additional costs. Without relevant documentation, substantiating asset ownership can be a challenge.

Market value is also a challenge and may require engaging a local valuer to provide a market-value report. Again, this may be more expensive than arranging a valuation of a property situated in Australia.

• Language used – Where documents are not in English, translation costs may be incurred so that the accountant and auditor can understand them.

• Foreign currency translation – Where a transaction in relation to the overseas asset is in a foreign currency, there may be additional accounting and compliance costs associated with converting the amounts into Australian dollars and dealing with the related income tax consequences. Further, the SMSF may have an obligation to lodge local foreign jurisdiction returns and pay taxes. Generally, the administration and compliance costs associated with an SMSF owning an overseas asset, such as real estate, will be higher than where the asset is situated in Australia.

Collectables and personal-use assets

The rules for an SMSF owning these types of assets are very prescriptive and are generally seen as a back-door prohibition on SMSFs holding such assets. Commonly, when SMSF trustees are made aware of the ongoing compliance requirements of these types of assets, they decide to acquire the asset outside of their fund.

Forewarned is forearmed

Advice at the time an SMSF acquires an asset, or makes an investment, is important to ensure the superannuation rules are followed, but such advice should not end there. Where SMSF trustees have the knowledge and understanding of the ongoing compliance requirements for different types of asset classes, preparation of the annual financial statements and performance of the annual independent audit can run a lot smoother. It also prompts forward planning to deal with potential future events. In fact, it may even lead to the SMSF trustees deciding not to acquire the asset or make the investment. Educating trustees on these and other asset-type issues can reduce the risk of compliance matters or simply lessen the level of annual audit angst for trustees, their accountants and even the auditor.

Source: smsmagazine.com.au

Can an SMSF claim this as a deduction?

SMSF auditors have been witness to some outlandish expense claims and get frequently asked: “Can an SMSF claim this as a deduction?”

One of the most extraordinary claims was for the cost of a 20,000-litre water tank purchased for a property owned by the fund. Unfortunately, it was a small two-bedroom townhouse that couldn’t accommodate a 1,000-litre tank, let alone a 20,000-litre one.

And while it was purely coincidental that the trustee’s residential address was in a rural area, the expense was quickly identified as a mistake and promptly removed from the fund.

The current COVID-19 crisis has only highlighted more uncertainty, with a recent private binding ruling (PBR) providing additional insight into allowable deductions for SMSF expenses claimed by trustees.

The ATO has said that while PBRs cannot be relied upon by taxpayers, this particular ruling applies to the 2021 financial year where the fund attempted to claim a deduction for the costs of a course and subscription for share trading.

Nature of expenses

The general nature of a deductible expense extends to whether it relates to assessable income or not. Where an expense relates to the gaining of non-accessible income (such as exempt current pension income [ECPI]) or when it’s capital in nature means that it is non-deductible. 

It is also essential to make sure that the expense is in line with the assets and investments outlined in the fund’s investment strategy and also allowed under the trust deed and SIS.

Paragraph 4 of TR 93/17 states that subject to any apportionment of expenditure, the following expenses are deductible:

  1. Actuarial costs
  2. Accountancy fees
  3. Audit fees
  4. Costs of complying with SIS (unless the cost is a capital expense)
  5. Trustee fees and premiums for an indemnity insurance policy
  6. Costs in connection with the calculation and payment of benefits to members
  7. Investment and adviser fees and costs
  8. Subscriptions for memberships paid by a fund to industry bodies
  9. Other administrative costs incurred in managing the fund

General deductions

There is even more confusion about general deductions, which get classified in this way when a specific deduction provision is absent.  

These types of deductions are subject to exclusions that include:

  1. Whether it is incurred in gaining or producing assessable income
  2. Whether it is necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income

According to the ATO website, expenses that fall under this category (unless a specific deduction provision applies) include:

  • Management and administration fees
  • Audit fees
  • Subscriptions and attending seminars
  • Ongoing investment-related expenses

Several other exclusions also apply in understanding whether a general deduction is allowable. An SMSF cannot deduct a loss or outgoing to the extent that it is a loss or outgoing of capital (or of a capital nature) or private or domestic nature. 

Some income tax laws also prevent the fund from deducting an expense as well as where the fund produces non-assessable income, such as ECPI. 

Additionally, a fund cannot claim more than one deduction for the same expenditure and can only claim under the most appropriate tax provision for the expense. 

Investment-related expenses

A very well-debated question within the SMSF industry is whether investment-related expenses are deductible or not. 

The answer is that it’s the exact nature of these expenses which is critical in determining deductibility. 

The focus of the PBR was whether an SMSF could claim a deduction for the reimbursement of the costs of a course and subscriptions for share trading purposes under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997).

The answer from the ATO was a resounding no.

One of the reasons is that subsection 295-85(2) of the ITAA 1997 operates to modify the operation of ordinary income and general deduction provisions so that the CGT rules are the primary code for calculating gains or losses realised by a complying SMSF on the disposal of CGT assets. 

The exception to this treatment includes CGT assets that are debentures, bonds, bills of exchanges, certificates of entitlement, promissory notes, deposits with a bank or other financial institution, or a loan. 

While there is also an exception for trading stock, shares and derivatives of shares are not trading stock because they are covered assets under section 275-105 of the ITAA 1997.

Courses and subscriptions not deductible

Any gains made by an SMSF trading in shares will be assessable under the CGT provisions, and any expenditure regarding courses or subscriptions is capital in nature. 

The costs incurred for the course and the subscriptions relate to specific activities that will only generate capital gains and not ordinary income and are therefore not deductible. 

Additionally, they have not been incurred in the administration, operation or management of the SMSF and are not of the type as referenced in paragraph 4 of TR 93/17.

In particular, the PBR noted that the subscriptions were not for memberships to the Association of Superannuation Fund of Australia Limited and other such industry bodies. 

Based on the information provided, the expenses were not incidental, relevant or sufficiently linked to any of the fund’s trading activities.  

Seminar-type expenses may also not be deductible if the expenditure does not have a sufficient connection with assessable income and is an investment of capital made to prepare for the future commencement of an investment business as found in Petrovic and FCT (2005) 59 ATR 1052, [2005] AATA 416. 

In this case, the taxpayer was denied a deduction in respect of property seminars after it was found that the expenditure was not incidental to his pre-existing rental income. 

Conclusion

Apart from depreciating assets, SMSFs should be claiming fund expenses in the year the trustee incurs them. From a compliance point of view, it is also best practice to have all invoices in the name of the SMSF and to pay them directly from the fund’s bank account.

Where the fund incurs expenses specifically relating to assets that generate capital gains or losses, a deduction cannot be claimed under section 51AAA of the ITAA 1936.

To this extent, the latest PBR makes it clear that trustees are unable to claim a deduction for the costs of courses and subscriptions that relate to share trading activities which are capital in nature. 

Which means that the answer is no, an SMSF can’t claim this as a deduction.

Shelley Banton, head of education, ASF Audits
Source: SMSF Adviser

Investment segregation in an SMSF explained

When advisers hear the word ‘segregation’ in an SMSF context, they typically think of segregation for tax purposes. Broadly, this type of segregation involves calculating a fund’s exempt current pension income exemption for a financial year under the segregated method, with any capital gains (or losses) in respect of ‘segregated current pension assets’ being disregarded.

Segregated current pension assets are fund assets excluding ‘disregarded small fund assets’ that are invested, held in reserve or otherwise dealt with solely to enable a fund to discharge all or part of its liabilities in respect of retirement phase pensions. Most commonly, segregated current pension assets arise where 100% of a fund’s assets are supporting retirement phase pension liabilities under the ATO’s view of deemed segregation.

This article examines a different kind of segregation; namely, segregation for accounting or investment purposes. In broad terms, investment segregation involves fund assets being designated to particular members or superannuation interests, eg, for the purposes of allocating investment returns and capital appreciation. Investment segregation can essentially be thought of as a form of member investment choice that is implemented within an SMSF. Naturally, all SMSFs provide a certain degree of member investment choice by virtue of being ‘self managed’. However, this article draws a distinction between genuine member investment choice and the typical investment approach for SMSFs where there is a general pool of fund assets that do not ‘belong to’ any particular member.

Investment segregation potentially offers unique planning opportunities due to the flexibility it provides in relation to apportioning growth between different member accounts. For example, with an appropriate allocation of assets, investment segregation can be used to ensure that Member A’s account balance grows faster than Member B’s account balance, or it can be used to ensure that Member’s A retirement phase account grows faster than Member A’s accumulation account. Accordingly, this flexibility can be used to provide more tax effective outcomes, including in respect of the $1.6 million transfer balance cap (‘TBC’).

We now examine the relevant rules for implementing investment segregation in an SMSF. The discussion will focus on allocation of investment returns rather than an apportionment of costs.

The fair and reasonable standard

Regulation 5.03 of Superannuation Industry (Supervision) Regulations 1994 (Cth) (‘SISR’) provides that trustees must determine how investment returns are to be credited or debited to a member’s benefits in a way that is fair and reasonable as between all the members of the fund and the various kinds of benefits of each member of the fund. There is an equivalent rule in relation to charging of costs (see reg 5.02 of the SISR).

This begs the question: what does ‘fair and reasonable’ require? In the context of the usual pooled investment approach, SMSF trustees generally distribute investment returns in accordance with the existing proportions of member benefits in the fund, subject to the terms of the SMSF deed. Naturally, the ‘fair and reasonable’ standard would require adjustments to be made where there are other variables at play, such as new members being admitted or members ceasing membership during a financial year.

The ‘fair and reasonable’ standard allows for departures from the pooled approach where there is a segregation of member investments in place. For example, under such a strategy, Member A could pick certain assets for investment purposes and it would be entirely consistent with the fair and reasonable standard if the investment returns on those particular assets were credited to Member A’s account.

What does the ATO say?

The ATO acknowledge on their website that investment segregation is allowable (‘Super changes – frequently asked questions’ https://www.ato.gov.au/Individuals/Super/In-detail/Super-changes—FAQs/ (QC 51875)):

Where my SMSF cannot use the segregated method to claim ECPI (exempt current pension income), can I still segregate assets for investment returns?

The change which limits an SMSF from using the segregated method only relates to the ability for that SMSF segregate for the purposes of claiming ECPI. So in these cases, even though the SMSF may be required to use the proportionate method to calculating its ECPI, the trustee can still decide which assets will support pension accounts. In essence, the returns on the segregated assets would continue to be allocated to the respective pension account(s) and the allocation of any tax would be done proportionately.

The above commentary from the ATO makes it clear that the rules in s 295‑387 of the Income Tax Assessment Act 1997 (Cth) that preclude certain SMSFs from using the segregated method for claiming exempt income does not preclude such funds from using investment segregation.

Other relevant considerations

The governing rules of the SMSF should allow for investment segregation and the investment strategy of the fund should be appropriately drafted to reflect the principles of member investment choice.

A fund’s investment strategy documentation is also important for a host of other reasons. For instance, in SMSFR 2008/1 [13], the ATO state that if the activities and investments of an SMSF are undertaken in accordance with the fund’s investment strategy, this is a factor that weighs in favour of the conclusion that the SMSF is being maintained in accordance with the sole purpose test. Additionally, under s 55(5) of the Superannuation Industry (Supervision) Act 1993 (Cth) (‘SISA’), SMSF trustees can be afforded a defence against damages when acting in accordance with the fund’s investment strategy and other applicable SISA covenants, including having regard to investment choice (see s 52B(4) of the SISA).

How can this be used?

As explained below, investment segregation may assist in managing a member’s TBC.

The TBC is a cap on the value of assets which can be transferred into tax-free retirement phase. As the TBC is measured through a static system of debits and credits, growth above that cap (ie, $1.6 million limit as indexed) is not tested and does not trigger an excess transfer balance.

Segregation of investment returns provides an opportunity to pinpoint allocation of growth on an asset-by-asset basis, assuming that asset returns and growth can be accurately predicted. For example, if a well-performing parcel of shares is linked to a member’s pension account, that pension can benefit from the growth in the shares (eg, due to large dividends being paid and the share price increasing) without impacting the member’s transfer balance. Take the following example:

Example

Mr and Mrs Renner are members of the Renner Family SMSF. On 1 July 2018, Mrs Renner turned 65 and commenced a pension. Due to the fund adopting investment segregation, it is agreed that the asset supporting the pension is real estate in the fund valued at $1.6 million. Assume that minimum the annual pension payment is made each year in respect of the pension.

Due to decent rental returns and capital appreciation on the real estate, Mrs Renner’s pension account balance increases to $1.85 million by 30 June 2021 which provides a better outcome for her TBC than if she had merely received a proportion of overall fund growth.

Naturally, appropriate records should be retained in relation investment segregation — ie, based on an appropriate and regularly reviewed investment strategy that provides a proper basis for investment segregation.

Moreover, it should be borne in mind that if investment segregation is maintained solely for tax purposes, the ATO may seek to apply the general anti-avoidance provisions in pt IVA of the Income Tax Assessment Act 1936 (Cth), ie, if the sole or dominant purpose of the segregation is to obtain a tax benefit.

Conclusion

If implemented appropriately and authorised under the SMSF’s governing rules, investment segregation can offer unique planning opportunities for SMSF trustees and advisers due to the flexibility it provides in relation to apportioning growth between different member accounts.

Expert advice should be obtained before implementing investment segregation.

*           *           *

This article is for general information only and should not be relied upon without first seeking advice from an appropriately qualified professional. The above does not constitute financial product advice. Financial product advice can only be obtained from a licenced financial adviser under the Corporations Act 2000 (Cth).

Source: DBA Lawyers

Important eligibility condition flagged for early release of super

SMSF clients that have been unemployed for a number of years may be eligible for early release of super, but it is vital they are able to show that they are facing financial difficulty, says a technical expert.

SMSF Association deputy chief executive Peter Burgess explained that in order for clients to apply to access their super early, they need to meet at least one of the eligibility conditions.

“In addition to a client meeting at least one of these conditions, they also need to show that they’ve been adversely impacted by the pandemic,” Mr Burgess said at the SMSF Association Technical Day last week.

With some of the conditions, it’s quite obvious that the client has been financially impacted, he said.

“[For example], if they’ve been made redundant as a result of the pandemic or their hours have been reduced, then it’s pretty obvious that they’ve been impacted and that they qualify,” he explained.

Other conditions, however, are not as obvious, he noted.

“Where the client is unemployed and perhaps has been unemployed for a number of a years, it may not be so obvious that they have been financially impacted by the pandemic,” he said.

“In fact, we’ve had a number of advisers ask us questions about unemployed clients. The common scenario is where the client has been a stay-at-home parent and they’ve been unemployed for many years.”

They can qualify to access their super early under this measure, Mr Burgess said, as long as they can show that they have been financially impacted by the pandemic.

“It’s been put to us that it’s not difficult to show that someone has been impacted. The fact that they’re paying more for their toilet paper could be an indication that they have been financially impacted, but that’s clearly not the intent of these provisions,” he stated.

“So, in addition to meeting one of these conditions, they also need to show that they’re facing difficulty making ends meet and those difficulties have been caused by the coronavirus.”

Source: SMSF Adviser

Lesser known change, and an unfortunate delay, leave their mark

There were several important bills passed during the June 2020 parliamentary sitting, none more so than the bill that provides a much needed 12 months extension for financial advisers to pass the FASEA exam.

One bill, the Treasury Laws Amendment (registries modernisation and other measures) Bill 2019, which passed both houses of parliament on 12 June 2020 without much attention, contains a new initiative which will impact SMSFs with a corporate trustee.

This new initiative will require all directors, including the directors of a corporate trustee that acts as the trustee of an SMSF, to obtain a Director Identification Number (DIN). It applies to a person who is a director of a registered body which, for the purposes of this law, includes a company, registered foreign company or registered Australian body which is registered under the Corporations Act. 

 

The new DIN regime is being introduced to deter and detect phoenix activity which occurs when the controllers of a company deliberately avoid paying liabilities by shutting down an indebted company and transferring the assets to another company. According to the Explanatory Memorandum that accompanied the bill, it is estimated that phoenixing costs the Australian economy somewhere between $2.9 billion and $5.1 billion annually.  

A person will keep their unique DIN permanently even if they cease to be a director and it’s not intended that a person’s DIN will ever be re-issued to someone else or that one person will ever be issued with more than one. As such, the DIN will provide traceability of a director’s relationships across companies, enabling better tracking of directors of failed companies and will prevent the use of fictitious identifies. 

It will also help regulators and external administrators to investigate a director’s involvement in repeated unlawful activity including illegal phoenix activity. Although the law has in the past required directors’ details to be lodged with ASIC, it has not required the regulator to verify the identity of directors.  

Under the new regime the Minister will appoint an existing Commonwealth body to be the registrar. The registrar will be responsible for the administration of the regime including the processing of DIN applications. After receiving an application, the registrar must provide the director with a DIN if the registrar is satisfied that the director’s identity has been established. This is the case unless a DIN has already been issued to the director as the integrity of the regime requires each director to hold no more than one DIN.  

To allow sufficient time for the development of systems, processes and new technology, the DIN regime will not commence until 12 June 2022, unless an earlier date is set. All existing directors, including acting alternate directors, at this time will be given a period of time to apply for a DIN. 

A person who is appointed a director within the first 12 months of the new regime’s operation will be given 28 days to apply for a DIN. After this transitional period ends, the standard rule applies, that is, a director must apply for a DIN prior to being appointed as a director. This transitional period is designed to provide time for new directors to become familiar with the new requirement and for any information or awareness campaigns in relation to it to take effect.

From 12 June 2022 (or an earlier date if one is set), SMSF establishment processes will need to be updated to ensure a person who is to be appointed as a director of the corporate trustee of the fund has a DIN. If the person does not already have a DIN, during the transitional period, an application for a DIN will need to be made within 28 days of their appointment as a director. After this transitional period ends, the application for a DIN must be made prior to their appointment as a director. The same rules will apply to a person who, from 12 June 2022 (or an earlier date if one is set), is appointed as a director or alternative director of a company that was in existence at 12 June 2022.

While the need to obtain a DIN introduces an additional step for SMSFs established with a corporate trustee, it should be remembered that a corporate trustee has many advantages over an individual trustee structure and should remain the preferred option for clients. The introduction of the new DIN regime will enhance the integrity of the SMSF sector by ensuring the identity of a person who is or will be the director of a company that acts as the corporate trustee of an SMSF, has been verified by a Commonwealth body. It should also help to ensure that those who act in the capacity of a director of a corporate trustee of an SMSF are not disqualified from doing so.  

What has not changed  

While the regulations to allow individuals aged 65 and 66 to make voluntary superannuation contributions without satisfying a work test have been passed, unfortunately amendments to the Income Tax Assessment Act 1997 to allow these individuals to bring forward their non-concessional contributions, did not pass the June sitting of Parliament. 

This change is slated to start from 1 July 2020 but will now not be passed until after this date. While we can’t assume this amendment will be passed by the Parliament, we don’t consider this amendment to be politically controversial and therefore expect it will receive a smooth passage through the Parliament when it sits again later in the year. Once passed we expect this amendment will apply from 1 July 2020, as originally intended.

The delayed passage of the legislation does create some difficulties particularly for clients turning 65 in the 2019/20 financial year. If the law is amended as intended, clients turning 65 in the 2019/20 financial year who have the capacity to contribute $300,000, and are looking to maximise the amount they can contribute in the remaining few years before their retirement, may be better off not triggering the bring-forward period until the next financial year. 

Staying across the measures which have now been enacted, those that have not and measures from other bills which impact on SMSFs, is never an easy task. In the current environment, where legislation has been rapidly changing, it has never been more important for advisers to stay up to date with the latest developments and strategies. 

Source: SMSF Adviser & SMSF Association

Property and my SMSF

Directly held property makes up approximately 19% of all SMSF assets, indicating that many SMSF trustees consider it’s an important and significant part of a diversified portfolio.  There are numerous strategies and ways for property to form part of an SMSF’s investments and each must be carefully considered.

Investment strategy first!

Before any investment decision, it is imperative and a legal requirement that you as an SMSF trustee must consider your investment strategy. Your strategy should detail such things as how much exposure you would like to the property market, the form of exposure and how appropriate it is for your current circumstances. A well-diversified portfolio is essential to provide income for retirement and spread investment risk so that any single asset class, such as property, does not dominate your SMSF risk and returns.

Direct investment

A common form of property exposure is direct investment into a property. This can be in the form of either a residential property or commercial property. When purchasing a property with an SMSF’s cash there are some important considerations that must be worked through including:

  • Your asset allocation and diversification.
  • Potential rental income and property expenses.
  • How close you are to retirement and the need for liquid assets to pay pensions.
  • Unless the property is a business real property (BRP) you or your related parties cannot use the property:
    • If the property is BRP you may be able to work from the premises which is owned by your SMSF.
    • You may also be able to utilise the small business CGT concessions and contribution limits.

Limited Recourse Borrowing Arrangements (LRBA)

SMSFs may also invest in property through an LRBA. These are complex borrowing structures which allows SMSF trustees to take out a loan from a third party lender. The SMSF trustee then uses these funds to purchase a property to be held on trust. The lender only has recourse to the property held in the trust – this is why the loan is “limited recourse”.

An LRBA should only be utilised when it is the right structure for your SMSF on the basis of SMSF Specialist advice. Some very important considerations in addition to the ones above include:

  • Can your SMSF maintain the loan repayments over a long period of time considering asset returns, interest rates, liquidity, and contributions caps?
  • Evaluating set-up costs and structures.
  • Is your property valuation accurate?
  • You cannot use borrowed money to improve the asset or change the nature of the property at any time.
  • Do you meet the strict bank lending requirements?
    • Typically, lenders require the SMSF to have a minimum of net assets of $200,000 or more and for the loan to have a loan to value ratio below 70%.

Indirect investment

Another way to gain exposure to property for SMSFs is through indirect investment. This can include listed invested vehicles such as, listed investment companies and exchange traded. Managed investment trusts are also a common investment for SMSFs to gain exposure to property. Investing indirectly may suit your SMSF needs more than a purchase of a property because it is relatively simple and most likely will not require a large amount of capital. It also allows your SMSFs to get exposure to large value properties such as office blocks, shopping centres and industrial properties that would otherwise be out of reach. Investing in these products should be accompanied by SMSF Specialist advice.

Source: SMSF Association 

Have you considered what you will do if an unexpected event occurs?

Your SMSF is a long-term plan.  Much can happen during this time including illness, incapacity or death of a member.

It is best practice to have contingency plans in place to deal with unexpected events. For example, if a fund member dies, leaving you as the sole member are you happy to continue with the SMSF? 

Outlined are some issues to consider planning for as trustees.  Leaving the planning to when, and if an event happens may be too late.   

Death – Think about where you want your superannuation to go on your death. Given the introduction of the $1.6 million transfer balance cap which means larger sums of money may need to leave the superannuation system sooner, planning has never been more important. You may need to think carefully about who receives your superannuation on death to maximise its benefit for your beneficiaries.

The rules of your SMSF, as set out in your trust deed and related documents, determine how the trustee structure is to be reconstructed on the death of a member as well as how death benefits are to be handled by you and your fund.

A lot of careful consideration needs to be given to understanding the member’s wishes to ensure that your fund’s trust deed and broader governing rules are drafted appropriately to achieve these requirements.

Legal tools to help direct your superannuation can include making a binding death benefit nomination to nominate who will receive your superannuation on your death or providing for your pension to continue (or revert) to a permitted beneficiary (such as your spouse) following your death.

You may also consider appointing a corporate trustee.  If the membership of an SMSF with individual trustees changes, the names on the funds’ ownership documents must also change. This can be costly and time-consuming. 

A corporate trustee will continue to control an SMSF and its assets after the death or incapacity of a member. This is a significant succession-planning issue for an SMSF as well as for the estate-planning of its members.

Diminished capacity – Consider the consequences if you become unable to act as trustee (e.g., due to mental incapacity). You can appoint an enduring power of attorney to act in your place as trustee, if required.  This is someone who can be trusted to handle your financial affairs and can be appointed as trustee of the SMSF. 

Member leaves – How would your SMSF be affected if one or more of the fund members decided to exit the fund? For example, an SMSF heavily weighted in real estate may have to sell the asset, or introduce a new fund member to allow the exiting member to transfer out of the fund.

Separating couple – Family law contains a number of options for superannuation to be split between a couple who separate or divorce. Your superannuation is treated separately to your other property, so specialist advice may be needed.

Reviewing your insurance – SMSF trustees should regularly review insurance as part of preparing your investment strategy. This includes considering whether or not insurance cover should be held for each SMSF member.  Your insurance cover may be essential if an unexpected event occurs.

In some circumstances, you may already be holding insurance through membership of a large super fund. This policy may exist due to an employment arrangement and may be more cost-effective than an equivalent valued policy that you could hold within an SMSF. However, not all insurance policies are the same, so seeking advice will help you to understand your needs.

Administration of your SMSF – If an unexpected event happens you may need to consider winding up the fund if managing the fund will be too time-consuming, onerous or costly for the remaining members.

As annual SMSF running costs generally remain fixed, your superannuation balance may fall to a level where it is not cost-effective to remain in an SMSF – at this point, it may be appropriate to transfer out of the fund (e.g., to a retail or industry fund).

Source: SMSF Association