NALI ambiguity dealt with by ATO

Non-arm’s length income (NALI) determinations from the ATO must crop up now and then in SMSF trustee nightmares, particularly in regard to LRBAs.

While the NALI provisions are an accepted anti-avoidance measure designed to stop income that would otherwise attract the top marginal tax rate being directed to an SMSF, they are coming under more and more scrutiny from the regulator due to the tax revenue potentially skirting legitimate collection.

In this regard, trustees and practitioners should note that there is new legislation that seeks to draw even tighter the operating rules on NALI with a focus on the expenditure side of transactions.

Treasury Laws Amendment (2018 Superannuation Measure No. 1) Bill 2019 has now passed both houses of Parliament. This amends NALI provisions in the income tax law to specifically include non-arm’s length expenses. Note that LCR 2019/D3 and PCG 2019/D6 will aid understanding of the new rules greatly.

The EM to the legislation provides examples of where either an SMSF’s expenses are less than what would have been incurred had the parties been dealing at arm’s length, or there is no loss, outgoing or expense incurred by the SMSF where some would have been expected if the parties had been dealing at arm’s length. In these situations, the income earned by the SMSF is treated as NALI and taxed at the highest rate.

In short, the bill clarifies the operation of Subdivision 295-H to make sure that SMSFs and other complying superannuation entities cannot circumvent the NALI rules by entering into schemes involving non-arm’s length expenditure (including, as noted, where expenses are not incurred).

Note also that any capital gains from a subsequent disposal of an asset may also be treated as NALI. The former law might not have applied to net capital gains in line with the policy intent of Subdivision 295-H. For example, a fund acquires an asset at less than its market value through non-arm’s length dealings and then disposes of the asset for market value consideration.

The resulting net capital gain may arguably be the same as the gain that would have resulted had the parties been dealing with each other at arm’s length when the asset was acquired, due to the operation of the cost base market value substitution rules in section 112-20.

This meant that the former non-arm’s length income rules may have had no effect, even though the transaction diverts more wealth into the concessionally taxed superannuation entity than would have been possible had the relevant dealings been at arm’s length. The new bill aims to rectify this.

The EM provides an example of non-arm’s length expenses:

An SMSF acquired a commercial property from a third party at its market value of $1,000,000 on 1 July 2015.The SMSF derives rental income of $1,500 per week from the property ($78,000 per annum).

The SMSF financed the purchase of the property under limited recourse borrowing arrangements from a related party on terms consistent with section 67A of the SIS Act. The limited recourse borrowing arrangements were entered into on terms that include no interest, no repayments until the end of the 25 year term and borrowing of the full purchase price of the commercial real property (that is, 100% gearing).

The SMSF was in a financial position to enter into limited recourse borrowing arrangements on commercial terms with an interest rate of approximately 5.8%. The SMSF has not incurred expenses that it might have been expected to incur in an arm’s length dealing in deriving the rental income.

As such, the income that it derived from the non-arm’s length scheme is non-arm’s length income. The rental income of $78,000 (less deductions attributable to the income) therefore forms part of the SMSF’s non-arm’s length component and is taxed at the highest marginal rate.

However, there will be no deduction for interest, which under the scheme was nil. Non-arm’s length interest on borrowings to acquire an asset will result in any eventual capital gain on disposal of the rental property being treated as non-arm’s length income.

Source: Tax & Super Australia

ATO considers non-compliance notices for lapsed lodgers

The ATO may consider further action to spur on SMSF trustees to lodge their annual returns on time, including making funds non-complying where after repeated attempts to contact them they do not actively engage with the regulator around any problems preventing them from lodging.

Speaking at SMSF Adviser’s SMSF Summit 2019 in Brisbane on Tuesday, ATO assistant commissioner Dana Fleming said the regulator had written to all SMSFs who had failed to lodge a return for the first time and would take more serious steps if these funds did not engage with the ATO to rectify the situation.

“We have explained to them that by not lodging their return, their compliance status is at risk, and advising them of our early engagement and voluntary disclosure service, and to come forward if there’s a problem,” Ms Fleming said.

“If there is no response, we will consider writing to them and making them non-complying, and we are hoping that is a way for us to get them to engage.”

Ms Fleming pointed out that the non-complying status would not be permanent and would hopefully act as a more serious impetus for affected trustees to lodge their returns on time. If they subsequently engage and lodge, the notice of non-compliance would be immediately revoked.

“If we issue a notice of non-compliance, it only applies to the year in which you are made non-complying, so it would enable the person to come forward and rectify that situation before the next return is due,” she said.

Ms Fleming said “lapsed lodgers”, or those that had fallen behind after initially lodging their annual returns on time, made up over 10 per cent of the SMSF population, totaling 71,000 funds.

“They represent $44 billion of super according to their last return lodged, that we don’t know what is happening with,” she said.

She added that the reasons for lapsed lodgement commonly included the trustee encountering a “regulatory hurdle” by realising they had made a compliance breach and not being sure what to do next, or the more active member of the SMSF having passed away.

“We had one case where the trustee didn’t even know they had an SMSF, so it’s important to emphasise that all trustees are engaged with their SMSF, not just one,” Ms Fleming said.

Source: SMSF Advsier

Downsizer contributions offer more than meets the eye

Retiree clients looking to sell their property can often contribute more to their SMSF than expected through the government’s recently introduced downsizer contribution rules, due to the flexibility to split contributions between spouses and use them in conjunction with other contribution rules, according to Fitzpatricks Private Wealth.

Speaking at SMSF Adviser’s SMSF Summit 2019 event in Brisbane, the advice firm’s head of strategic advice, Colin Lewis, said it was possible for clients approaching their 65th birthday in particular to double their contribution amounts by making use of the downsizer and bring-forward contributions and potentially splitting contributions with their spouse.

“Clients must be age 65 at the time of contribution [to use downsizer], not when they sell the house, it’s when they wish to contribute the proceeds into super,” Mr Lewis said.

“So, when they sell the house they can be under 65, but if within a 90-day period they turn 65, they can make contributions, so it’s the timing that is the essence here if you are dealing with a client that is 64 and thinking of selling their home.”

Mr Lewis gave the example of Ron and Paula, who were 76 and 64, respectively, and planning to sell their $1.5 million home before Paula’s 65th birthday in December 2019. Ron had an existing account-based pension worth $1.6 million while Paula had $1 million in accumulation phase, and the couple had a joint investment portfolio worth $1.5 million outside super.

“On 16 October, they enter into a contract to sell their home for $1.5 million with settlement on 27 November,” he said.

“From the proceeds, Ron and Paula make the following contributions within 90 days: Ron makes a $300,000 downsizer contribution; prior to her 65th birthday, Paula makes a $300,000 non-concessional contribution; and after turning 65 she makes a $300,000 downsizer contribution and commences an account-based pension of $1.6 million.

“So, they’ve rearranged their affairs, they’ve now got a new house worth $1.6 million, Ron’s got an accumulation benefit worth $300,000, Paula’s got an account-based pension of $1.6 million, and their money outside super is $500,000. So, what they’ve been able to do is upsize, put more into super and make a downsizer contribution.”

Mr Lewis added that splitting contributions between a couple was another good way to make the most of the downsizer rules, given that a client’s spouse did not need to have been an owner of the property to use the proceeds for their contribution.

“The spouse doesn’t have to be on the title to contribute — with spouses, it all hinges on whether the owner of the property is eligible, and if they are, the spouse can contribute too provided they’re 65 or above,” he said.

Source: SMSF Adviser

ATO urges quick action on transfer balance caps

The ATO is urging SMSF trustees to take quick action around any excess transfer balance determinations or commutation authorities received in October to avoid any accidental non-compliance that could occur over the Christmas holiday period.

In an update posted to the ATO website on Monday, the office noted that any excess transfer balance determinations or commutation authorities issued to trustees in October would have due dates during the Christmas/New Year period, increasing the risk that trustees could accidentally fail to comply with such notices due to the holiday shutdown.

“We encourage SMSF trustees and members to respond early to this correspondence to avoid adverse consequences,” the ATO said.

“Commutation authorities need to be actioned by the due date to avoid losing access to the income tax exemption on the assets supporting the pension.

“If SMSF members don’t respond to excess transfer balance determinations by the due date, we’ll send a commutation authority to the fund specified in the determination.”

The office added that if an SMSF member had concerns about a determination issued, they or their tax agent could view the events making up their transfer balance account through the ATO’s online services.

“If any information is missing or incorrect, provide it or correct your reporting as soon as possible to allow us to revoke the determination,” the ATO said.

“If your member is concerned about information reported to us by another fund, they should discuss this with the fund.”

While the commissioner did not have discretion to grant an extension of time to respond to a commutation authority, members could contact the ATO by phone to request time extensions around excess transfer balance determinations.

Source: SMSF Adviser

Morrison dumps associations on code monitoring

The federal government will introduce a single disciplinary body for financial advice, forcing the FPA and AFA to abandon their attempts to become a code monitoring body for the industry.

On Friday, the Morrison government announced that it is accelerating the establishment of a new disciplinary system and single disciplinary body for financial advisers, as recommended by the royal commission.

The government will work towards establishing the new body in early 2021, subject to the passage of legislation that will be introduced into the Parliament next year.

A long-term sustainable solution based on commissioner Kenneth Hayne’s recommendations will replace the role of code monitoring bodies, which were due to be established by industry associations under professional standards reforms.

Following the government’s announcement, the FPA wrote to members informing them that it has withdrawn from code monitoring following concerns about member cost and compliance duplication

“Despite receiving conditional in-principle approval from ASIC, the FPA has made the decision to withdraw the application for Code Monitoring Australia (CMA),” FPA chief executive Dante De Gori said.

The FPA had been working on a joint initiative with five other professional associations to establish CMA. Following 18 months of development, a final application was lodged with ASIC on 16 August 2019 for CMA to become an approved code monitoring scheme for the FASEA Code of Ethics.

“The driving force behind CMA was our strong belief that it’s in the best interests of the profession and consumers to have one compliance scheme run by financial planners for financial planners, rather than a commercial provider,” Mr De Gori said.

“However following recent discussions, the government has now confirmed that it will progress a single disciplinary body as recommended by commissioner Hayne in the financial services royal commission in place of code monitoring.

“Given this, we do not think that it is prudent to establish CMA as a new monitoring scheme that will be superseded within a short period, resulting in a duplication of costs and compliance obligations for our members and the financial planning profession broadly.

“Though we are extremely disappointed that code monitoring will not proceed with CMA, we continue to strongly support the introduction of a comprehensive, compulsory Code of Ethics for financial planners to ensure consumer protection.”

The AFA also informed its members that it was important to avoid uncertainty and unnecessary duplication of costs.

“Financial advisers and their clients have been subjected to enormous demands and uncertainty. We need to avoid adding complexity, further duplication and cost to the regulation of financial advice,” AFA CEO Phil Kewin said.

“The AFA continues to have concerns about the current wording of the FASEA Code of Ethics as it stands, and has voiced those concerns to both FASEA and the government. We are expecting further guidance from FASEA in this regard.”

While the FPA and AFA expressed their disappointment, AIOFP executive director Peter Johnston praised the decision, saying that the association never attempted to be a code monitoring body.

“Our board thought the AIOFP should be acting in the best interests of members and their clients at all times. The royal commission debacle over Sam Henderson clearly demonstrated that associations are not equipped to become a code monitoring body. It was embarrassing,” Mr Johnston said.

Written by James Mitchell 

SMSF numbers triple in 20 years

SMSF numbers have tripled over the past two decades and assets held within them now represent a third of Australia’s total superannuation pool, according to new ATO statistics.

The data, released to mark 20 years of the ATO regulating the SMSF sector, revealed that SMSF numbers had grown from 197,000 in October 1999 to 600,000 in June 2019, while SMSF membership had more than tripled in that time from 387,000 members in 1999 to 1.125 million in 2019.

SMSF assets were now valued at $748 billion, or approximately a third of Australia’s $2.76 trillion super sector, according to the office’s statistics.

The data also looked at the ATO’s recent regulation performance, revealing that it had referred 145 auditors to ASIC over the past six years, with 51 of those having been referred in the 2019 financial year.

The office had also seen an upsurge in voluntary disclosures of breaches by super trustees, with 353 having come forward in the 2019 financial year compared to 246 in 2018 and 265 in 2017.

ATO assistant commissioner Dana Fleming said the office would continue to take its role as an SMSF regulator seriously.

“The importance of good governance in the SMSF sector cannot be underestimated. As the sole regulator of SMSFs, we are conscious of the significant responsibility of safeguarding 1.1 million Australians’ retirement savings,” Ms Fleming said.

“Our aim is to help trustees to be able to make informed decisions by understanding their responsibilities and, of course, where necessary we will take action to maintain the integrity of the SMSF sector for all other SMSF members.”

Source: SMSF Adviser

Retirement alliance endorses government review

The Alliance for a Fairer Retirement System (the Alliance) has welcomed the federal government’s Review into the Retirement Savings System and has put forward five questions the process should answer.

The first question the Alliance would like answered as part of the review is how can the retirement income system include incentives to encourage Australians to save enough for an independent retirement without introducing savings disincentives along the way.

“At present, only 30 per cent of the population over 65 is independent of government support. The remaining 70 per cent is comprised of 42 per cent on the full age pension and 28 per cent on a part age pension,” Alliance spokesperson John Maroney noted.

“As the superannuation system reaches maturity and balances at retirement increase, reliance on the age pension will reduce. Over the same time period, the number of people and the proportion of the population, in retirement will increase,” he added.

“The Alliance calls on the Review to consider the adequacy of super to support retirees into the future.”

Another question the Alliance has asked of the government in its review is what the defined objectives of superannuation and the age pension are and how can these two elements complement each other to ensure sustainability and intergenerational equity in the retirement system.

To this end the Alliance pointed out constant change to the system erodes confidence in it and can result in unintended consequences that threaten the retirement income system’s viability.

As such the group has called for any future changes to the system be made only after a full regulatory impact statement has been prepared that will consider the effects the change will have on the other components of the system and assess appropriate grandfathering provisions that will allow retirees to change their strategies over a reasonable timeframe.

Other questions the Alliance would like to addressed during the review are:

  • What is an adequate level of retirement income commensurate with their pre-retirement standard of living that older Australians should seek to attain?
  • How can retirement income policy settings ensure the maximum degree of certainty for those planning for retirement over decades?
  • Where are there gaps or issues that indicate a lack of fairness in terms of either horizontal (between people with similar circumstances) or vertical (between different generations) equity in the existing three-pillar retirement system?

The Alliance also took the opportunity to congratulate its former spokesperson Deborah Ralston on her appointment as a review panellist.

The federal government formally announced its intention to hold a review of the current retirement savings system and revealed the terms of reference to be used late last week.

The Alliance is made up of 11 industry bodies being the Association of Financial Advisers, SMSF Association, Australian Investors Association, Self-managed Independent Superannuation Funds Association, Gold Coast Retirees Inc, Association of Independent Retirees, Listed Investments Companies and Trusts Association, Australian Shareholders Association, National Seniors Australia, Stockbrokers and Financial Advisers Association, and WA Self Funded Retirees.

Written by Darin Tyson-Chan
Source: smsmagazine.com.au

ATO releases updated guidelines on SMSF changes

The ATO has released updated guidelines for trustees around how to make changes to their SMSFs within a compliant framework.

The new guidelines contain details around what to do if members or member details change within an SMSF, when an SMSF needs to be restructured or wound up, and how trustees or directors can be removed or reinstated.

The ATO stated that it needed to be notified by trustees within 28 days if there was a change in trustees, corporate trustee directors, members, fund status or the contact number and address of the key person to which fund notices could be sent. It reminded trustees that they could not use their annual SMSF return as notification.

Trustees could notify the ATO of these changes online using the corporate key for their SMSF, through a registered agent, over the phone or manually using a change of details form.

The ATO also reminded trustees that they needed to ensure their fund remained within the legal definition of an SMSF, and if the fund no longer met this definition, it would either need to be restructured or wound up within six months. 

Inaction on the part of trustees could result in the ATO issuing a notice of non-compliance or disqualifying the relevant trustee.

If a trustee became a disqualified person, the ATO stated, they must immediately resign as a trustee and inform ASIC if they were a director of a corporate trustee, or face penalties.

The other trustees in the fund had six months from the disqualified trustee’s resignation to either roll the trustee’s benefits into an APRA-regulated fund, appoint an APRA-licensed trustee or wind up the fund entirely.

Trustees who had been disqualified due to a dishonesty offence could apply to have their conviction waived, while those disqualified by order of the ATO could apply for a review of the office’s decision.

Trustees disqualified due to being insolvent could not have their conviction waived but could be reinstated once they were no longer insolvent, the ATO said.

Source: SMSF Adviser

Financial planning customers want more SMSF advice

A new ASIC report has highlighted demand for further advice on the specifics of SMSFs among the Australian population, particularly among those who have a financial planner.

The report, titled Financial advice: What consumers really think, found that 25 per cent of consumers who had recently received financial advice wanted more guidance around SMSFs.

Around 50 per cent of financial advice customers also wanted advice on retirement income planning, while around 45 per cent wanted guidance on growing their superannuation, highlighting the potential value for accountants in establishing a referral partnership with advice businesses to tap into this demand.

Within this group of consumers who had seen a financial adviser, 45 per cent chose their adviser based on their level of experience, while about 43 per cent chose them based on their ability to understand the consumer’s personal goals.

An additional 43 per cent selected their adviser as they were someone the consumer was comfortable talking to.

However, demand for SMSF advice was not limited to those who had seen a financial planner, with 15 per cent of the broader consumer population also indicating a desire for guidance around self-managed funds.

This broader group selected their adviser based primarily on their reputation (38 per cent), their experience (41 per cent) and their ability to talk to the consumer in a way they could understand (36 per cent).

Across all respondent groups, the majority indicated that the adviser would need at least five to 10 years in the industry to be trustworthy, the report said.

Source: SMSF Adviser

ATO investment strategy crackdown

ATO warns trustees with poor diversification to review strategy.

After announcing that it will be writing to SMSF trustees with a high concentration of one asset in their fund, the ATO has said it will be asking these funds to review their investment strategy and document the reasons behind their investment decisions. 

Earlier this month, the ATO announced it would be writing to 17,700 SMSF trustees who have more than 90 per cent of their assets in a single asset class and their auditors.

In an online update, the ATO said it will be contacting the 17,700 SMSF trustees and their auditors at the end of this month where its records indicate the SMSF may be holding 90 per cent or more of its funds in an asset or a single asset class.

The ATO stated that it will be asking these trustees to “review their investment strategy and clearly document the reasons behind the investment decisions”.

“We’ll also ask trustees to have their documentation ready for their SMSF’s approved auditor for their next audit to help the auditor form an opinion on the fund’s compliance with these requirements,” the ATO stated.

The ATO said it is concerned that some of these trustees haven’t given due consideration to diversifying their fund’s investments; this can put the fund’s assets at risk.

“Lack of diversification or concentration risk can expose the SMSF and its members to unnecessary risk if a significant investment fails,” it said.

Source: SMSF Adviser