Self Managed Superannuation Funds (SMSF) - SMSFs and Tax Exemptions on Pension Assets
Date: December 02, 2011
Authors: 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.
Exempt current pension income
When an SMSF is paying a pension, any income it derives from underlying assets to support that pension is classified as exempt current pension income (ECPI) and there is an income tax exemption for the SMSF in respect of the ECPI up to the value of the underlying current pension assets.
The method of calculating the ECPI can differ according to whether the SMSF chooses the segregated or unsegregated method of calculation, the former requiring the particular asset(s) of the SMSF to be devoted solely to paying the pension in question.
If the unsegregated method is chosen, then an actuarial certificate is required every year to apportion the part of the asset(s) being used for non-pension purposes.
Value of the assets
The ECPI exemption applies to the extent that the ECPI does not exceed the value of the relevant current pension asset(s). This means that the SMSF is expected to re-value the relevant asset(s) to their current market value before the exemption is claimed.
Treatment of CGT
Because of the nature of the ECPI exemption, all capital gains and capital losses arising from the disposal of the current pension asset(s) is ignored.
Expenses
Because of the nature of the ECPI exemption, SMSF expenses relating to the deriving of ECPI may not be claimed as a deduction. Thus, any management or administrative expenses of deriving ECPI are not recorded.
Example: ECPI exemption
A and B are husband and wife and the only members and trustees of their SMSF. The SMSF holds various real property investments, including a rental property located in Kogarah NSW. The value of the property is $300,000. The rent from the property amounts to $100,000 a year.
B reaches retirement age and becomes eligible to a pension from the SMSF. The SMSF decides to pay B a pension of $100,000 a year, constituting the whole rental income from the Kogarah property. The Kogarah property is now used by the SMSF solely as a source of income to pay B’s pension.
In this case, the Kogarah property is a segregated current pension asset. The rental income to the SMSF from the Kogarah property constitutes ECPI.
The SMSF ought to obtain a current market valuation of the property. If this is $300,000, then the SMSF may claim income tax exemption on the rental income, until such time as the total income exceeds $300,000. In this case, this is likely to happen within three years.
If the SMSF disposed of part of the Kogarah property, it would ignore any capital gains or losses on the disposal, since the property is a segregated current pension asset. However, the SMSF would be denied any deduction for expenses associated with deriving the rental income.
Conclusion
If you have concerns about the ECPI exemption and how it applies to an SMSF, call LAC Lawyers and we can provide advice and assistance.
Tax Law - Annual compliance arrangements(Part 1)
Date: February 22, 2012
Author(s): Jonathan Lim B.A., LL.B. (Hons)
The ATO has always recognised the importance of large business entities to the general well-being of the Commonwealth. If nothing else, large business entities contribute no less than 60% of annual income tax revenue to the Commonwealth. Annual compliance arrangements (ACAs) are just one way amongst many for the ATO to engage with large businesses and ensure throughgoing compliance as far as possible.
Tax Law - Annual compliance arrangements(Part 2)
Date: February 22, 2012
Author(s): Jonathan Lim B.A., LL.B. (Hons)
Part 1 of this article set out the basics of what an annual compliance arrangement (ACA) is, and how to enter one. This part of the article will talk about what the arrangement involves during each year.
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.
Tax Law - Compliance Programme 2011 - 2012 Fiscal Year (Part 3)
Date: February 20, 2012
Author(s): Frank Egan B.A., LL.B., A.C.L.A., F.T.I.A. (Notary)
The collection and recovery of tax debts has proved challenging for the ATO in the last financial year. Declining economic conditions coupled with natural disasters have made tax and superannuation compliance hard for everyone. That said, some taxpayers have resorted to cheating the taxation system but as the year progressed, the ATO was able to address some of these problems.
Tax Law - Compliance Programme 2011-2012 Fiscal Year(Part 1)
Date: February 20, 2012
Author(s): Frank Egan B.A., LL.B., A.C.L.A., F.T.I.A. (Notary)
The collection and recovery of tax debts has proved challenging for the ATO in the last financial year. Declining economic conditions coupled with natural disasters have made tax and superannuation compliance hard for everyone. That said, some taxpayers have resorted to cheating the taxation system but as the year progressed, the ATO was able to address some of these problems.
Tax Law - Compliance Programme 2011-2012 Fiscal Year(Part 2)
Date: February 20, 2012
Author(s): Frank Egan B.A., LL.B., A.C.L.A., F.T.I.A. (Notary)
The collection and recovery of tax debts has proved challenging for the ATO in the last financial year. Declining economic conditions coupled with natural disasters have made tax and superannuation compliance hard for everyone. That said, some taxpayers have resorted to cheating the taxation system but as the year progressed, the ATO was able to address some of these problems.
Tax Law - Compliance Programme 2011-2012 Fiscal Year(Part 4)
Date: February 20, 2012
Author(s): Frank Egan B.A., LL.B., A.C.L.A., F.T.I.A. (Notary)
The collection and recovery of tax debts has proved challenging for the ATO in the last financial year. Declining economic conditions coupled with natural disasters have made tax and superannuation compliance hard for everyone. That said, some taxpayers have resorted to cheating the taxation system but as the year progressed, the ATO was able to address some of these problems.
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) - 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.
Employment Law - Redundancy - Unfair Dismissal - Should Employers Offer a Lower Paid Position to Employees?
Date: November 29, 2011
Author(s): Patrick Mulligan B.A., LL.B.
The purpose of this article is to review Margolina v Jenny Craig Weight Loss Centres Pty Ltd [2011]FWA 5215. This case addressed issues of whether it would have been reasonable to redeploy the employee into a lower paying position when she was made redundant. She argued that it was not a genuine redundancy as the employer never offered her alternative employment in a lower paid position.
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.
Self Managed Superannuation Funds (SMSF) - Non-compliance with SMSF Rules
Date: March 08, 2011
Author(s): LAC Lawyers
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.
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.