SMSF lifestyle asset breaches under the microscope

The ATO has indicated it will be taking a closer look at lifestyle assets such as marine vessels, fine art and high-value motor vehicles in the new year, identifying possible breaches of the sole purpose test by SMSFs around these assets as an area of focus.

In a statement released on Wednesday, the regulator said it would be investigating SMSFs suspected of acquiring lifestyle assets “purely for the personal enjoyment of the fund’s trustee or beneficiaries”, as part of a wider exercise to match taxpayer data and high-value asset ownership.

The ATO said it would request policy information from 30 insurance companies to ascertain the value of assets owned by around 350,000 taxpayers between the 2016 and 2020 financial years, as part of its efforts to ensure taxpayers were fulfilling their tax and super reporting obligations.

The insurers would be required to provide the ATO with detailed policy information where the value of the asset was equal to or above $100,000 for marine vessels, $65,000 for motor vehicles, $100,000 for fine art, $150,000 for aircraft and $65,000 for thoroughbred horses.

ATO deputy commissioner Deborah Jenkins said knowing who owned such assets helped the agency get a more complete picture about the financial situation of taxpayers compared to what they had reported on their returns.

“If a taxpayer is reporting a taxable income of $70,000 to us but we know they own a $3 million yacht, then this is likely to raise some red flags,” Ms Jenkins said.

“Regardless of your level of wealth, we all need to pay the correct amount of tax, and this data will allow us to ensure those people who can afford these kinds of items are doing the right thing along with everyone else.”

Ms Jenkins clarified that the data would not be used to initiate compliance activity against taxpayers, but to aid the ATO in its investigations against individuals that had already been selected for compliance activities.

“The data is made available to our compliance teams to support their risk profiling of the selected taxpayers,” she said.

“Existence of an insurance policy may or may not prompt the compliance officer to pursue a particular line of inquiry.”

The regulator said it encouraged taxpayers who suspected they had failed to properly comply with their tax or super obligations to speak to their tax agent or make a voluntary disclosure to the ATO.

“Taxpayers who make a voluntary disclosure can generally expect a reduction in the administrative penalties and interest charges that would normally apply,” the ATO said.

Source: SMSF Adviser

Death benefit types affect minimum payments for pensions

When an SMSF member passes away midway through a financial year, the minimum pension payments for that year may not need to be met for the deceased person’s pension, depending on how they have nominated it to be paid out to their beneficiaries, according to Accurium.

Speaking in a recent webinar, Accurium general manager Doug McBirnie said that following the passing of an SMSF member, it was still possible to claim exempt current pension income on the deceased member’s pension for the financial year in which they had passed away despite the fact that the minimum payments may not have been met before they died.

“If it’s non-reversionary, there is no requirement to make a pension payment in that year — the ATO is happy that the ECPI can continue until the death benefits are paid out, as long as they are paid out as soon as practicable,” Mr McBirnie said.

“If the pension is reversionary, the spouse will take the pension, and in that case, if they have withdrawn the minimum pension during the year they can still claim ECPI.”

Accurium technical services manager Melanie Dunn said it was important to note that if the deceased member had opted for their pension to be reversionary on death, the minimum payments still needed to be met for the financial year in which they had passed away.

“The ability to not pay the pension payment is only where the pension is not automatically reversionary,” she said.

“Where it is reversionary, you must pay a minimum payment in the year, and if the client has not made the minimum payment, the income stream would not have met the minimum standards.”

However, Ms Dunn said the death of the member would not affect the amount that needed to be paid out of the pension during the year of the member’s passing.

“It’s based on the same minimum pension payment calculated back at 1 July — it doesn’t need to be pro-rated or anything like that, it’s the same minimum payment calculated on the income stream at the beginning of the year,” she said.

Source: SMSF Adviser

ATO flags Christmas shutdown for SMSF functions

The ATO has advised SMSF professionals that its systems will be unavailable during the period between Christmas and New Year due to planned upgrades.

In a communication on its website, the regulator said that from midday Australian eastern daylight time on 24 December, its systems would progressively become unavailable as it prepared for “major systems upgrades”.

“You should consider what reporting or activities you can lodge with us before the outage period starts,” the ATO said.

“We expect services to be restored from 6.00am AEDT on 2 January 2020.”

Between these dates, it would not be possible to notify the ATO of any changes of SMSF details or check the registration details of an SMSF, the regulator said.

“The electronic superannuation audit tool used to lodge an auditor/actuary contravention report will also be unavailable during this period,” the ATO said.

The announcement follows previous reporting by SMSF Adviser sister title Accountants Daily that noted the ATO was set to undertake its Activity Statement Financial Processing project during the annual Christmas/New Year closure period.

The major system upgrade would see more than 17 million activity statements and franking deficit tax accounts move into the accounting system currently used for income tax.

As such, the ATO advised that all Standard Business Reporting, including the practitioner lodgement service, and ATO online services, including Online Services for Agents, would be unavailable from 24 December to 2 January.

Commenting on the shutdown, ATO assistant commissioner Colin Walker said it would be a good opportunity for practitioners to take a well-deserved break.

Source: SMSF Adviser

Christmas Trading Hours

Merry Christmas from the team at Practical Systems Super

We wish you and your family a joyous and safe Christmas. 
Thank you for your wonderful support throughout the year, we look forward to working with you in 2020!

We will be closed from 5:30 pm, Monday 23rd December and reopen at 8:30 am on Thursday 2nd January.

If you have any questions regarding our services, please contact our office via email [email protected] or call the office on 1800 951 855.

Australians not prepared for ‘largest’ transfer in history

Despite being the largest transfer of intergenerational wealth, the vast majority of Australians are not prepared, according to new figures.

Perpetual has revealed that 76 per cent of Australians do not have a current will, while 53 per cent of parents have not discussed their will and legacy with their children.

Perpetual Private’s Andrew Baker, general manager of private clients, believes the majority of parents wish their children would use their inheritance wisely and build for the future, but research shows the opposite is happening.

He conceded, however, that the rising costs of living, slow wage growth and a volatile property market is painting a different picture of wealth today than it was 30 years ago.

“It is estimated that 70 per cent of families will lose their wealth by the second generation and 90 per cent will lose it by the third,” said Mr Baker.

To offset risks of families losing their wealth, Mr Baker advocates for discussions around wills and inheritance be broken down so all parties can be prepared and have a plan in place.

“As humans, we tend to shy away from discussing money amongst our families and friends.”

“However, as we approach the largest intergenerational wealth transfer in history with more than half of Australians expecting to inherit, why have only just over a third discussed their wishes with their children?” Mr Baker said.

The wealth manager believes normalising discussions around money and the future can preserve wealth across generations.

Source: SMSF Adviser

Tax Institute calls for delay to enforcement of NALE rules

The Tax Institute has called for enforcement of changes to non-arm’s length expense (NALE) rules to be delayed until 1 July 2020, suggesting the ATO’s interpretation of the laws should be referred to its General Anti-Avoidance Rules (GAAR) panel as the powers handed to the regulator are too broad.

In a submission to the ATO this week in response to its Draft Law Companion Ruling 2019/D3, which outlines the ATO’s interpretation of the NALE laws, The Tax Institute suggested compliance guidelines released with the ruling, which indicated resources would not be allocated to policing the general expense provisions until the 2021 financial year, should be extended to all SMSFs caught by the changes.

“The PCG should apply across the board to any taxpayers where the ATO seeks to apply the new NALI/NALE provisions for any of the FY2019 and FY2020 periods,” the institute said.

“The Tax Institute rejects the ATO’s position that the PCG be limited so as to apply only in the instance where a general expense taints all the fund’s income.

“We recommend that given the delay in introducing the NALE reforms, the ruling in relation to the NALE measures only take effect from 1 July 2020.”

The institute warned that the ATO’s ruling had “serious ramifications” for many SMSF trustees because of the degree to which “substantial adverse tax implications” could result from small matters, such as an accountant assisting with their own fund’s tax returns, and as such should be reviewed to the GAAR panel before it was applied to any taxpayer.

Tax Institute Superannuation Committee member and DBA Lawyers director Dan Butler said the ruling as it currently stood gave the ATO “very broad power” and could result in affected clients being caught up in costly long-term legal battles to fight excessive assessments from the ATO.

“In some circumstances, it takes years of information gathering and correspondence with the ATO to work through these matters, and it inflicts great costs on the taxpayer to prove that the NALI assessment is excessive,” Mr Butler told SMSF Adviser.

“We don’t like that the legislation has provided the ATO a lot of discretion. There is not much protection for a taxpayer, and to get the system right, there should at least be independent representation given to the ATO’s GAAR panel which then decides whether to pursue a NALI assessment, because of the costs and the consequences that follow.”

Clarification needed around who will be caught

The Tax Institute also suggested in its submission that the ATO provide more specific clarification around which trustees would be caught by the rules, by applying a “de minimis” principle and providing guidance around which activities constituted trustee and non-trustee services.

Mr Butler said the industry would benefit from guidelines about what constituted a “material” expense, which could also reduce the administrative workload required from the ATO to police the laws.

“Why are we talking about expenses at $100? The administrative side of it is too great,” he said.

“We need a guideline from the ATO to say we won’t go looking for bits and pieces, it’s material items. Let’s say an administration service may be $2,000 a year — I would consider that immaterial, so perhaps it should be above $20,000. You need a benchmark where people can say we’re above the limbo bar.”

Equally, while the ruling mentioned the distinction between services performed in a trustee capacity or an individual capacity as a key factor in whether an expense would be considered non-arm’s length, Mr Butler said there needed to be clearer guidance as to what these services were.

“In the ATO’s 2013 NTLG super committee minutes, the example they gave of when something becomes a non-trustee service was a builder, because it’s someone who’s got specific skills and they are adding a lot of material value to the fund,” he said.

“The ATO may say as an adviser you have investment skills, but because the adviser is a trustee and under trust law they have to do the best for the fund, it’s hard to start splitting hairs about what is their role as a trustee and what is their role as a planner.”

Catch-up contributions can release assets from defined benefit pensions

New catch-up contribution rules can be used to assist clients with large amounts of assets locked in to defined benefit pensions, according to Colonial First State (CFS).

Addressing SMSF Adviser’s recent SMSF Summit 2019 in Perth, CFS executive manager Craig Day said the new rules, which allowed fund members to access unused concessional contribution balances up to five years ago, could be used to reduce sometimes large reserves of assets stuck in defined benefit pensions for older clients.

“If the client’s got no other concessional contributions, you can allocate up to the cap, which is currently $25,000, but the interesting thing about the concessional catch-up rules is you get [access to] those rules regardless,” Mr Day said.

“If a client hasn’t worked for 20 years, what level of salary sacrifice and SG contributions has he got? Zero. So, all these clients are accumulating unused concessional cap amounts of $25,000 a year and a client’s concessional cap may be up to $100,000.”

Mr Day said CFS was receiving an increasing number of calls from advisers who were concerned about what to do with clients that were advancing in age and had large amounts of assets locked up in defined benefit pensions.

“If your clients did commence one of these fixed term defined benefit pensions, they could only be one of two types: a lifetime, and the people are dying; or a life expectancy, and you’re getting to the end of the term,” he said.

“The ATO has told us that if the person dies or the term comes to an end, the assets backing that pension don’t belong to that member, they simply fall into a reserve. If you want to get that back to the members, you’ve got to allocate it out of the reserve back to members’ accounts, and if it goes above 5 per cent, you have an amount counting towards the concessional cap.”

Mr Day said for some defined benefit pension types, part of the pension could be commuted into a term allocated pension without counting as a contribution.

“There’s a strategy that simply involves rolling over to commence a complying term allocated pension, and if you do that, the allocation will not count towards the concessional cap, but there are some catches here,” he said.

“If you’ve got one of the non-complying defined benefit pensions or a complying life expectancy, the commutation value is limited — it might give you $100,000, but the amount of assets you’ve got sitting on reserve is $200,000, so you can only allocate $100,000 that doesn’t count towards the caps.

“With the lifetime pensions, there is no commutation and that can make a massive difference.”

Source: SMSF Adviser

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