Presentation on theme: "SMSF Legislation & Technical Update"— Presentation transcript:
1SMSF Legislation & Technical Update Peter Burgess SPAA Technical Director
2Session overview Registration and definition of a SMSF Acquisition of related party assetsContributionsLimited recourse borrowing arrangementsIn-house assetsThe meaning of wholesale client and non-arms length incomeStronger super – Government response to the Cooper Review.
4SMSF registration and rollovers November 2010 – new SMSF member verification system launched by the ATOAPRA letter to APRA regulated super funds – “…requests for additional documentation such as a trust deed should not be necessary.”December ,000 SMSFs re-classified as “Registered – status not determined”December 2010 ATO SMSF newsletter – SMSFs should not register until assets are held by the fundStronger super – fund naming conventions, proof of identity checks, AML/CTF Act to apply to SMSF rolloversSession 15A – New fund registration and SMSF rollovers – obstacles and best practice guidelines.
5Definition of a SMSF SMSFR 2010/2 – enduring power of attorney ruling: More than one LPR can be appointed as a trustee/director in place of the member (one-for-one substitution is not required)No requirement for member to resign as director if LPR is an alternate director - but LPR must only have the power to act if member is not performing those dutiesATO ID 2010/139 – Appointed administrator to the estate of a person with a mental disability is permitted to be a trustee of an SMSF in place of that person under 17A(1)(3)(i)Child members – if corporate trustee only a LPR (assume by court order) can be a director of a corporate trustee in place of a minor member (NTLG Superannuation Technical sub-group meeting – 7 September 2010).
7SMSFR 2010/1 – Application of s66(1) of the SIS Act Final ruling issued on 25 February 2010The ruling explains that a trustee of a SMSF cannot intentionally acquire an asset from a related party of the SMSF unless an exception applies to that assetA range of examples provided including:Performance of a serviceAcquisition of a promissory noteAcquisition of a post-dated personal chequeAcquisition of units in a related unit trust.
8Points to note – acquiring goods and materials Paragraphs 17, 18, 19, 114, 115 and examples 5 and 6If goods and materials, which are not insignificant in value or function, are provided to an SMSF as part of a service provided by a related party, there is an acquisition of assets (being the goods or materials)A SMSF will breach s66 if the fund owns land and it engages a related party on commercial terms to construct a building using goods and materials supplied by the related party (NTLG Superannuation Technical sub-group meeting - 8 December 2010)In order to avoid a breach the SMSF would need to purchase the goods and materials required to construct the premise directly from the supplierSession 13B – SMSFs and real property applications.
9Points to note - subsection 66(2A)(a)(i) Paragraphs 43, 44,In-house asset exception in subsection 66(2A)(a)(i) and (ii) is limited to the acquisition of assets that are “investments in” a related party or a related trust of the SMSFThe ATO does not consider that subsection 66(2A) could have been intended to apply more broadly to include real property subject to a lease or lease arrangement with a related party.
10Acquiring assets on relationship breakdown Previous lawNew law (effective 1 December 2010)A trustee of a SMSF may acquire an asset in specie from a related party following the marriage breakdown of a member.A trustee of a regulated super fund may acquire an asset in specie from a related party following the relationship breakdown of a member (new s66(2B).In-house asset transitional exemption provisions do not apply to the asset in the receiving fund.In-house asset transitional exemption provisions will apply to the asset in the receiving fund (new S71EA).Session 12B – The 3Ds of superannuation – death, disability and divorce.
12Tax Ruling TR 2010/1: Superannuation Contributions Issued on 25 February 2010Revised meaning of the term “contribution““…a contribution is anything of value that increases the capital of a super fund provided by a person whose purpose is to benefit one or more particular members of the fund or all of the members in general.”
13Superannuation contribution? Has the capital of thefund been increased?YesWas the purpose tobenefit one or moremembers or all of themembers in general?No, if transaction is not dependant upon the identity of the other partyas a super provider or they are simply fulfilling the terms of a contract orarrangement entered into on commercial or arm’s length basis.Yes, if transaction is entered into because of a connection or relationshipwith the super provider or cannot be explained by reference tocommercial or arm’s length dealings.YesContribution
14Classification of contributions S292-25(2) of the ITAA97 defines a concessional contribution as a contribution made to a fund in respect of you which is included in the assessable income of the fundA contribution is included in the assessable income of the fund if it is to provide super benefits for someone else (unless it is a spouse or Government co-contribution).
16Superannuation Industry (Supervision) Amendment Bill 2010 Received Royal Assent on 6 July 2010Subsection 67(4A) repealed and replaced with new subsections 67A and 67B effective 7 July 2010Amendments do not apply retrospectively to existing arrangements in place before 7 July (although 67A and 67B apply to any subsequent refinancing of these arrangements)Asset acquired must be a single acquirable asset:Shares – must have same market value that are together treated as a single assetReal property – new rules prohibit multiple titles under the one borrowing arrangementBorrowed funds can be used to maintain or repair the asset but not to improve the assetPrescriptive definition of what constitutes a “replacement asset”.
17ATO approach…Where assets are for practical purposes inseparable, or where there is an ancillary asset of a very small value, the ATO may treat the assets as a single asset for the purposes of s67A (NTLG Superannuation Technical sub- group meeting - 7 September 2010)An improvement may change the state or nature of the asset such that it will give rise to a different asset…this would be the outcome regardless of the source of the funds used to improve the asset (NTLG Superannuation Technical sub-group meeting - 7 September 2010)Tax Ruling TR 97/23 – Deductions for repairsKey issues currently being discussed with Treasury as “priority technical issues”:Greater clarity around the meaning of single acquirable assetThe nature of the SMSF trustee’s interest in the holding trustIssues regarding improvements to the asset.
18ATO approach… ATO Interpretative Decisions: ATO ID 2010/162 – borrowing from a related party on terms more favourable to the SMSFATO ID 2010/169 – refinancingATO ID 2010/170 – third party guaranteesATO ID 2010/172 – joint investorsATO ID 2010/184 – capitalisation of interestATO ID 2010/185 – charge not permitted over asset in holding trust.
19Conference sessions Session 5B – Limited recourse borrowing strategies Session 11A – Limited recourse borrowing - what you need to do to complySession 14C – Is this the new normal for SMSF portfolios? – gearing strategies, ETFs and instalment warrants.
21Conversion of a geared trust to a 13.22C trust New units acquired in a pre-99 unit trust will be excluded as an in-house asset if both of the following conditions are satisfied:The unit trust now complies with SISR 13.22CNo event in 13.22D(1) has occurred since 28 June 2000A 13.22D(1) event includes new borrowing, conducting a business, acquiring an interest in another entitySession 11B – Pre 99 unit trusts and non-geared unit trust strategiesSession 13B – SMSFs and real property applications.NTLG Superannuation Technical sub-group meeting (15 June 2010, 7 September 2010).
22ExampleA SMSF purchased 100 units in a related unit trust in July 1999The unit trust was initially set up as a geared unit trust with a $100,000 loanThe original loan was repaid in 2004The unit trust took out a new loan in 2006 which was subsequently repaid in 2010The SMSF now wants to purchase additional units in the unit trustEven though the unit trust now complies with SISR13.22C, an event listed in (D)(1) has occurred since 28 June 2000 (i.e. the new loan)The purchase of additional units will be classified as an in-house asset. The original 100 units remain excluded from the in-house asset test by virtue of s71A.
23SISR 13.22C – related non-geared unit trust SMSFLenderExisting funds13.22Cunit trustBorrowed fundsProperty
24Water rightsWater access licence which entitles the holder to draw a specified amount of water from a waterway for irrigation purposesLikely application of s71(1)(e) to exclude certain water rights from the in-house assets of superannuation fundsBut unlikely to be an allowable related party acquisition under s66(2A).NTLG Superannuation Technical sub-group meeting (8 December 2010).
25Government response to the Super System Review No evidence that in-house asset investments within the current legislative restrictions are detrimental to SMSFsLikely amendment to the in-house asset rules to prohibit an in-house asset where the asset concerned is a collectable or personal use assetExposure Draft (Tax Laws Amendment (2011 Measures No.2) Bill 2011) released - “Collectables” and “Personal use assets” as defined in ITAA 1997Session 19C – Art, collectables and personal use assets – discussion and practical implications.
266. Meaning of wholesale client and non-arms length income
27Meaning of a wholesale client A financial service provided to the trustee of a SMSF will always be provided to the trustee as a “retail client” unless the fund has net assets of at least $10 million – ASIC QFS 150Trustees of a SMSF cannot be “sophisticated investors” within the meaning of the Corporations Act – ASIC QFS 150Confusion regarding whether “in relation to a superannuation product” in S761G applies to financial services and products made available to the trustee of a super fundRestricts access to wholesale investment markets and reduces the range of investments available to SMSFsJanuary 2011 – options paper released as part of the FOFA reformsNeed to ensure consistency across the Corporations ActSession 6C – The wholesale/retail client distinction – opportunities and risks for Accountants and Planners.
28Non-arms length income Allen’s Asphalt Staff Super fund v FCT – SMSF received a $2.5m capital gain distribution via an interposed trust which was assessed by the ATO as special income (non-arms length arrangement – no consideration provided by the SMSF)Henfam Super Fund v Commissioner of Taxation – acquired at less than market value but dividends paid on an arm’s length basis.
30Government’s response to the Cooper Review Current lawLikely new lawATO’s enforcement powers.Only used in the most severe cases of non-compliance.Administrative penalties on a sliding scale payable personally by the trustees.Mandatory trustee education.No requirement.Yes, if contravene SIS. Session 15A.Asset acquisitions and disposals.On or off market.On market but Government to consult.Assets valued at net market value.Not mandatory.Mandatory.ATO/ASIC standard trust deed.Not available.Anything permitted by the SIS Act or ITAA to be permitted by SMSF trust deeds.Consideration of life and TPD insurance.No operating standard.SIS operating standard.
31DisclaimerThis presentation is for general information only. Every effort has been made to ensure that it is accurate, however it is not intended to be a complete description of the matters described. The presentation has been prepared without taking into account any personal objectives, financial situation or needs. It does not contain and is not to be taken as containing any securities advice or securities recommendation. Furthermore, it is not intended that it be relied on by recipients for the purpose of making investment decisions and is not a replacement of the requirement for individual research or professional tax advice. This presentation was accompanied by an oral presentation, and is not a complete record of the discussion held. No part of this presentation should be used elsewhere without prior consent from the author.31