Self Managed Superannuation Funds (SMSF) - Non-compliance with SMSF Rules
Date: March 08, 2011
Authors: LAC Lawyers
Non-compliance with SMSF Rules – ATO Approaches
In recent times, the ATO have expressed a keenness to ensure the SMSF industry is compliant with all the laws that govern it. A non-compliant SMSF can be penalized by the ATO by way of a loss of entitlement to concessional rates of tax or disqualification of a trustee.
Although all these sanctions are not taken lightly by the ATO however this should provide little comfort as the Commissioner of Taxation has indicated clearly that he will not be lenient in the enforcement of the same.
Areas that are to be observed closely by the ATO include where a SMSF borrows funds from or lends funds to members or relatives of members. The Commissioner of Taxation has stated that it has around 300 audits planned in the coming months which are aimed at the protection of assets for the benefit of members. Voluntary disclosure may be the best course of action where there is apparent contravention of these laws.
SMSF In-house Asset Rules
Similarly, there appears to be a shift by the Commissioner of Taxation towards the imposition of more serious sanctions, such as re-characterising a SMSF as non-complying where the in-house asset rules are not adhered to.
Historically, it has be permitted for a SMSF to hold up to a maximum of 5% of its assets as an in house asset such as shares in related companies or loans to related parties. Where the in-house asset rule threshold is exceeded there is a problem, as is usually seen in the form of loans to members, their businesses, loans to minors and relatives of members, non-commercial loans, shares or units in trust that are owned by members.
The Commissioner of Taxation has in recent relevant cases, looked at the significance and length of the breaches (often multiple), the level of carelessness and/or recklessness on the part of the trustee of the SMSF in breaching the in-house asset rules.
Excessive SMSF contributions
There are limits that apply to the amount of contribution that can be made to an SMSF in any given financial year. The legislation makes clear that a penalty rate of up to 93% tax may be applied to amounts that exceed the relevant contribution limits and the Commissioner of Taxation is not afforded much discretion to reduce the penalties for such breaches of the contribution limits.
The ATO looks closely at the terms of the trust deed that regulates the SMSF for terms that may be set up to avoid application of a penal tax, known as an Excess Contributions Tax (ECT) on any contribution that exceeds the relevant contribution cap.
At LAC Lawyers, we can help you to structure your SMSF appropriately, draft a trust deed for you which sets out the rules of the SMSF, provide you with guidance as to the operation of your SMSF and explain your obligations and responsibilities as trustee of the SMSF. We can also assist you to mitigate any of your SMSF's non-complying conduct. It is important to note that beneficiaries are not owners of the fund even though it has been set up for their benefit. There are specific rules which govern assets in the fund e.g. the buying and storing of art. We recommed you seek advice on your obligations so you are not caught out if the ATO come knocking.
This article is intended only to provide a summary of the subject matter covered. It does not purport to be comprehensive or to render legal advice. No reader should act on the basis of any matter contained in this article without first obtaining specific professional advice.
Tax Law - Superannuation - Trust Deeds - Excess Contributions Tax
Date: February 21, 2012
Author(s): Frank Egan B.A., LL.B., A.C.L.A., F.T.I.A. (Notary)
Excess contributions tax has become a hot potato over the last few years. As a result the ATO introduced TA2010/2 striking down clauses in self –managed superannuation fund trust deeds designed to circumvent the imposition of excess contributions tax.
Self Managed Superannuation Funds (SMSF) - Borrowing a New Amount to Repair an SMSF Instalment Warrant Asset
Date: December 02, 2011
Author(s): Jonathan Lim B.A., LL.B. (Hons)
An issue raised before the ATO very recently is whether a self-managed superannuation fund (SMSF) is permitted to borrow a new amount to repair an instalment warrant asset it already holds. As we have discussed in previous articles, an SMSF is generally prohibited from borrowing money. However, an exception is available for limited recourse borrowing arrangements (better known as instalment warrants) in which the SMSF borrows money to pay for an asset that is held in a property trust and only transferred to the SMSF when the amount is paid off.
Self Managed Superannuation Funds (SMSF) - Can an SMSF Carry on a Business? Part 1 of 2
Date: December 02, 2011
Author(s): Jonathan Lim B.A., LL.B. (Hons)
An old question relating to self-managed superannuation funds (SMSFs) is whether they are permitted to carry on a business. This is the first in our two part article on the ATO’s attitude to such activities, which is ambiguous and contains many pitfalls for the unwary.
Self Managed Superannuation Funds (SMSF) - Can an SMSF Carry on a Business? Part 2 of 2
Date: December 02, 2011
Author(s): Jonathan Lim B.A., LL.B. (Hons)
In Part 1 of this article, we looked at the ATO’s general disapproval of the carrying on of businesses by self-managed superannuation funds (SMSFs). This part of the article will look at the ATO’s apparent change in attitude to this issue. However we will analyse the real effect of the ATO’s new publication and warn about how little has really changed.
Self Managed Superannuation Funds (SMSF) - In-specie Payments by an SMSF
Date: December 02, 2011
Author(s): Jonathan Lim B.A., LL.B. (Hons)
It has always been accepted that a self-managed superannuation fund (SMSF) can make lump sum payments in specie. What is not so clear is what happens when a lump sum is paid as a commutation of part of a superannuation income stream. This issue, which has sometimes arisen in the past, has been brought recently before the ATO.
Self Managed Superannuation Funds (SMSF) - Insurance and SMSFs
Date: December 02, 2011
Author(s): Jonathan Lim B.A., LL.B. (Hons)
In our article entitled SMSFs and personal injury liability we discussed the idea of a self-managed superannuation fund (SMSF) obtaining public liability insurance to protect itself against personal injury claims. In this article, we will discuss forms of insurance that the SMSF can obtain over its members. This can include life insurance, disability insurance and trauma insurance. The effect of such insurance upon the SMSF has been the subject of recent debate.
Self Managed Superannuation Funds (SMSF) - Partial Lease by an SMSF of an In-house Asset
Date: December 02, 2011
Author(s): Jonathan Lim B.A., LL.B. (Hons)
It is well-known that an exception to the restriction on in-house assets held by a self-managed superannuation fund (SMSF) is the real property exception, under which the property is leased to a member or related entity for business purposes. One issue that has arisen recently is what happens when the in-house asset is only partially leased.
Self Managed Superannuation Funds (SMSF) - SMSFs and ESS interests
Date: December 02, 2011
Author(s): Jonathan Lim B.A., LL.B. (Hons)
An employee share scheme (ESS) is a scheme under which an employer provides shares or options (ESS interests) to employees at a discount. Unfortunately, the ATO has noted many instances of employees nominating their self-managed superannuation fund (SMSF) as the acquirer of ESS interests under an ESS. While employees may generally nominate another party as the acquirer of ESS interests, nominating the SMSF gives rise to serious issues, as we shall see.
Self Managed Superannuation Funds (SMSF) - SMSFs and Personal Injury Liability
Date: December 02, 2011
Author(s): Jonathan Lim B.A., LL.B. (Hons)
It may seem obvious, but self-managed superannuation funds (SMSFs) can be liable in their own right to personal injury litigation. Liability for personal injury caused by faults in property will normally fall under the tort of negligence. Under tort law, property owners have a common law duty of care to all individuals on their premises. If the required standard of care is not met, and injury occurs to the tortfeasor in a reasonably foreseeable manner, then the property owner is liable for negligence.
Self Managed Superannuation Funds (SMSF) - SMSFs and Rectifying In-house Asset Breaches
Date: December 02, 2011
Author(s): Jonathan Lim B.A., LL.B. (Hons)
A non-complying self-managed superannuation fund (SMSF) is open to all sorts of penalties. However, there is often some leeway for breaches, provided action is taken quickly. This article deals with the rectification of a breach of the in-house asset rule.
Self Managed Superannuation Funds (SMSF) - SMSFs and Tax Exemptions on Pension Assets
Date: December 02, 2011
Author(s): Jonathan Lim B.A., LL.B. (Hons)
Once a self-managed superannuation fund begins to pay income stream benefits (ie a pension) to any of its members, it can begin to claim a tax exemption on income earned on assets it holds that are being used to produce the pension. This article deals with the nature of this exemption and the misunderstandings that sometimes arise.
Self Managed Superannuation Funds (SMSF) - Stepchildren and SMSF Death Benefits
Date: December 02, 2011
Author(s): Jonathan Lim B.A., LL.B. (Hons)
The rules applicable to self-managed superannuation funds have restrictions on who can receive cashed out member benefits. One rule is that member benefits may be cashed in favour of a member’s dependants, if the member dies. One issue that has been raised recently is whether the ATO would accept a stepchild as the dependant of its step parent if its natural parent dies first or the pair divorce. This is apparently an issue that has already come up quite often in Australia.
Self Managed Superannuation Funds (SMSF) - Excess Contributions Tax – Release Authority
Date: November 28, 2011
Author(s): Jonathan Lim B.A., LL.B. (Hons)
If an individual makes contributions to his or her self-managed superannuation fund (SMSF) and these contributions exceed the caps relevant to that type of contribution, then the individual may be liable to excess contributions tax (ECT).
Self Managed Superannuation Funds (SMSF) - Income Streams – When They Start
Date: November 28, 2011
Author(s): Jonathan Lim B.A., LL.B. (Hons)
When a member of a self-managed superannuation fund (SMSF) satisfies a condition of release, he or she may be eligible for an income stream benefit from the SMSF. When a member is receiving an income stream of this sort, it can be highly relevant for tax purposes (both for the member and the SMSF) to determine exactly when the income stream commences and ceases. The ATO has just released draft guidelines on how to determine these times (Draft Taxation Ruling TR 2011/D3).
Self Managed Superannuation Funds (SMSF) - Losses on Disposal of Shares
Date: November 28, 2011
Author(s): Jonathan Lim B.A., LL.B. (Hons)
A self-managed superannuation fund (SMSF) is generally discouraged from engaging in business. Although the ATO and Parliament have failed to make any binding statements on this point, it is fairly clear that they expect this point to be followed. A related issue that has clearly been vexing the Government and the ATO in recent times has been that of the treatment of SMSF share sale losses.
Self Managed Superannuation Funds (SMSF) - New Guidance for SMSF Instalment Warrants
Date: November 28, 2011
Author(s): Jonathan Lim B.A., LL.B. (Hons)
New draft ATO guidance is now available for the use of instalment warrants by self-managed superannuation funds. The instalment warrant system (officially “limited recourse borrowing arrangements”) permits SMSFs to borrow money, under restricted circumstances, to acquire an asset. However, many SMSFs attempting, or claiming to attempt, to use the instalment warrant system honestly, have been in breach of the rules, hence the new guidelines (Draft SMSF Ruling SMSFR 2011/D1, released September 2011).
Self Managed Superannuation Funds (SMSF) - Recording SMSF Contributions
Date: November 28, 2011
Author(s): Jonathan Lim B.A., LL.B. (Hons)
The Commissioner of Taxation has taken advantage of two recent cases before the Administrative Appeals Tribunal (AAT) to emphasise the importance of proper record-keeping by self-managed superannuation funds (SMSFs). He also emphasized the duty tax agents have to ensure that client SMSFs are not financially disadvantaged.
Self Managed Superannuation Funds (SMSF) - SMSF Auditors
Date: November 28, 2011
Author(s): Jonathan Lim B.A., LL.B. (Hons)
Every self-managed superannuation fund (SMSF) is required to arrange an annual audit of its accounts, statements and compliance. Audits must be carried out by an “approved auditor”. The SMSF trustee appoints an approved auditor every year and must provide the auditor with all documents needed for the audit. All audits must be in writing and highlight any important issues that may arise.
Self Managed Superannuation Funds (SMSF) - SMSFs and Non Arm's Length Income
Date: November 28, 2011
Author(s): Jonathan Lim B.A., LL.B. (Hons)
A self-managed superannuation fund (SMSF) is concessionally taxed at a very low rate. There is naturally a temptation in some quarters to exploit this fact by using an SMSF to help split income. However, the ATO has recently warned that the widespread abuse of an SMSF in this manner, whether the members believe it to be legal or not, is not in accordance with the law.
Self Managed Superannuation Funds (SMSF) - Winding Up an SMSF
Date: November 28, 2011
Author(s): Jonathan Lim B.A., LL.B. (Hons)
There comes a time in many instances when a self-managed superannuation fund (SMSF) must be wound up. Yet the Commissioner has recently warned that winding up procedures are frequently not being followed by SMSF trustees. In essence, the task of the SMSF trustee when winding up the SMSF is: to deal with all of the SMSF’s assets so that none remain; and to complete all administrative obligations.
Self Managed Superannuation Funds (SMSF) - Early Release Schemes
Date: November 25, 2011
Author(s): Jonathan Lim B.A., LL.B. (Hons)
For several years now, the Commissioner of Taxation has been making public his disapproval of schemes that illegally promise the early release of self-managed superannuation fund (SMSF) benefits. These types of scheme apparently have not disappeared, for the Commissioner has once more targeted them in his 2011-12 compliance program for SMSFs. Indeed, this year it would be wise for all SMSF trustees to familiarise themselves with the nature of this common and potentially disastrous form of illegal scheme.
Testamentary Trusts - Excepted Assessible Income or Excepted Trust Income
Date: January 12, 2011
Author(s): Michael Pickering B.A., LL.B. (Hons.), LL.M., M. A.
Another exception to the general rule introduced by Division 6AA is whether the income is "excepted assessable income" or "excepted trust income." In other words, not all income is affected by the new rules in division 6AA. Excepted accessible income or excepted trust income will be assessed at ordinary marginal tax rates.
Testamentary Trusts - Taxation of Testamentary Trusts
Date: January 12, 2011
Author(s): Michael Pickering B.A., LL.B. (Hons.), LL.M., M. A.
Trustees will need to pay particular attention to section 102AG(2)(a)(i) of ITTA 1936. This section controls income distributed to minors from testamentary trusts. Trustees should insure that the will incorporating the testamentary trust is properly drafted so that the testamentary trust has the characteristics of the discretionary trust structure.
Testamentary Trusts - What Happens When A Beneficiary Is A Minor
Date: January 12, 2011
Author(s): Michael Pickering B.A., LL.B. (Hons.), LL.M., M. A.
Testamentary trusts are an effective vehicle for splitting business income. Problems arise, however if there are beneficiaries who are minors (i.e. under 18 years old).
Back to Basics - Self Managed Superannuation Funds - Documentation
Date: January 11, 2011
Author(s): Tony Anamourlis B.A., LL.B., MTaxLaw, GradDipLegPrac, SJD Candidate (La Trobe); ATIA
In essence, what the law states: if the correct “borrowing structure” is in place, a super fund will be exempted from borrowing restrictions. Which means super funds can borrow to buy an investment property, as long as the structure suggested in Sec 67 (4A) of SIS Act is in place.
Back to Basics - Self Managed Superannuation Funds - Legal Issues
Date: January 11, 2011
Author(s): Tony Anamourlis B.A., LL.B., MTaxLaw, GradDipLegPrac, SJD Candidate (La Trobe); ATIA
The Trust deed of the existing SMSF should be reviewed to ensure that the borrowing and investment by way of an instalment warrant is permitted under the governing rules.
Back to Basics - Self Managed Superannuation Funds - Loans
Date: January 11, 2011
Author(s): Tony Anamourlis B.A., LL.B., MTaxLaw, GradDipLegPrac, SJD Candidate (La Trobe); ATIA
Borrowing in an SMSF can be from two sources; internal lender or external lender.... read on to find out about SMSFs
Can my self managed superannuation fund (SMSF) buy property?
Date: September 01, 2010
Author(s): LAC Lawyers
In the past, Australian law with respect to Superannuation did not permit a SMSF to borrow money, or to mortgage the fund’s existing property BUT...
Estate Planning - Self Managed Super Funds
Date: July 12, 2010
Author(s): LAC Lawyers
Retirement is not at the forefront of most working people’s lives but it should be. As Australia’ population is aging superannuation, and saving for retirement is becoming increasingly important.