Changing Face of SMSFsWebinar:

THE CHANGING FACE OF SMSFsDecember 2013

© The SMSF Academy 2013

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HOUSEKEEPING

This presentation provides general advice only. No direct or implicit recommendations aregiven in this presentation. This means that the general advice provided has not beenprepared taking into account any individual’s financial circumstances (i.e. investmentobjectives, financial situation and particular investment needs).

The SMSF Academy Pty Ltd believes that the information in this presentation is correct at thetime of compilation but does not warrant the accuracy of that information. Save for statutoryliability which cannot be excluded, The SMSF Academy disclaims all responsibility for any lossor damage which any person may suffer from reliance on this information or any opinion,

conclusion or recommendation in this presentation whether the loss or damage is caused byany fault or negligence on the part of presenter or otherwise.

© The SMSF Academy, 2013

GENERAL ADVICE WARNING

GOVERNMENT MEASURES

Webinar – Changing Face of SMSFs

• Federal Budget measure announced on 5 April 2013 to make changes

to deeming provisions to align income streams with other financial

assets for Centrelink/DVA entitlements

• Social Services and Other Legislation Bill (2013) currently before the

Senate will extend the deeming provisions to any asset-tested income

stream that is an account-based pension or equivalent annuity

product

• Measure to treat people with similar financial assets consistently under

the income support system

• Amendments to take effect from 1 January 2015

CENTRELINK DEEMING OF PENSIONS

• Account-Based Pensions held by income support recipients

immediately before 1 January 2015 will continue to be assessed under

the current rules

• Can choose to change product to be assessed under new rules

• To qualify:

1. The person was receiving income support payment immediately prior to 1

January 2015;

2. The person was receiving asset-tested income stream (i.e. account-

based pension) immediately prior to 1 January 2015;

3. The person has been continuously receiving an income support payment

since 1 January 2015; and

4. That income stream has continued to be provided to that person since 1

January 2015

GRANDFATHERING PROVISIONS

• Where the income ceases to be payable

and subsequently recommenced, individual

will be subject to new deeming rules from

the day of the cessation of the pension

• A pension may cease in several ways that

could impact an income support payment,

including:

− Failure to comply with the pension rules (e.g.

not meeting the minimum pension payment)

− Full commutation of the income stream

− Death of a member

IF PENSION CEASES…

Active role required in

managing pension payment obligations

• Where an individual is already in receipt of an account-based pension,

these amendments will not apply to a reversionary beneficiary where:

− the primary beneficiary died during a time while the amendments were

being made having satisfied the grandfathering provisions;

− the qualifying income stream (grandfathered) reverts to the reversionary

beneficiary on the primary beneficiary’s death;

− at the time of that reversion, the reversionary beneficiary is receiving an

income support payment;

− the reversionary beneficiary has been continuously receiving an income

support payment since the time of that reversion; and

− that income stream has been provided to the reversionary beneficiary

since the time of that reversion.

REVERSIONARY INCOME STREAMS

CENTRELINK DEEMING OF PENSIONS

Source: IOOF, July 2013

Coalition Government announced on 6 November 2013 that they will not be proceeding with the measure to tax earnings on superannuation assets supporting retirement income streams

Media Release

“The complexity and compliance costs associated with this initiative are extreme and

essentially undeliverable. This is a demonstration of the Government's commitment to

provide certainty for superannuation fund members by making no adverse unexpected

changes to superannuation during our first term. The Government acknowledges that not

proceeding with these and other measures will negatively impact on the underlying cash

balance by $2.4 billion over the current forward estimates period.”

Assistant Treasurer, Senator Arthur Sinodinos

TAX ON SUPER PENSION EARNINGS

ATO RULINGS & DETERMINATIONS

Webinar – Changing Face of SMSFs

• Release of TD 2013/22 considers timing of allocation of concessional

contributions after the end of financial year in which contributions

were made

• Follows application of ATOID 2012/16 and use of unallocated

contributions holding account (contribution reserving)

• Benefit of a public ruling, providing greater certainty in adopting

strategy for clients

• Updated guidance reflects changes in Superannuation Data &

Payment Standards, plus operation of Division 291 of the ITAA 1997

CONTRIBUTION RESERVING

• Ruling confirms that amounts paid in June can be ‘held over’

and remain unallocated at 30 June – amount to be allocated

to member by 28 July

− APRA Regulated Funds in complying with Data & Payment Standards must

now allocate to a member within 3 business days after receiving the

contribution

• Contribution is not counted twice for contribution cap purposes, rather it will count once on the effective date of the

allocation

CONTRIBUTION RESERVING

Concessional contributions are assessable in year made – allocation to be grossed-

up for member contribution reporting purposes in following income year

• Release of draft ruling, TR 2013/D7

• Considers apportionment for purposes of section 8-1 of the ITAA 1997 in respect to a loss or outgoing incurred by a super fund in gaining or producing assessable income and partly in gaining or producing non-assessable income

• Distinct & severable expenses, indifferent expenses

• Similar views expressed previously within ATOID 2012/47

APPORTIONMENT OF EXPENSES

Geoff (56) and Jenny (54) members of SMSFFollowing transactions within fund for FY2012-13:

• rollovers of $460,000

• concessional contributions (CC) of $45,000• non-concessional contributions (NCC) of $170,000• fund investment income of $38,000• general expenses of $4,700

During year, Geoff started a transition to retirement income stream (TRIS)

At end of year, fund obtained actuarial tax certificate which outlined tax exemption of 56%

INDIFFERENT EXPENSE

INDIFFERENT EXPENSES

• Based on Commissioner’s draft views in TR 2013/D7 and consistent with ATOID

2012/47, the fund is entitled to following tax deduction:

$4,700 x ($713,000 – $21,280)/$713,000 = $4,560

• Where non-assessable amounts are not included, a lower level of tax

deduction would be claimed

$4,700 x ($83,000 – $21,280)/$83,000 = $3,495

(NB. $21,280 is the tax exempt amount (56%) on fund investment income of

$38,000)

ATO PRIVATE RULINGS

Webinar – Changing Face of SMSFs

Authorisation Number: 1012369819768

LRBA & NON-ARMS LENGTH INCOME

Member Member

X Y

Member

Z

Retired – under

65

Under 50

Holding Trust

SMSF

Lenders

Limited Recourse

Beneficial

interest

Related Party loan

More than 10 years

> RBA Cash Rate

3rd party tenant

Commercial rate of

rent paid to SMSF

Lender willing to reduce

interest charged to nil in

order to take pressure off

meeting minimum pensions

Question:Is there a breach of the non-arm’s length provisions (NALI) where no interest ischarged by the lender on the limited recourse loan?

Answer:No

Why:Subsection 295-550(1) of ITAA 1997 considers schemes whereby parties are notdealing with each other at arm’s length and the amount is more than theamount the entity might have been expected to derive if those parties weredealing with each other at arm’s length.

The scheme must inflate the level of ordinary or statutory income derived –subsection 295-550(1) does not consider the impact of an inflated level taxableincome derived from a lower rate of interest.

NON-ARMS LENGTH INCOME

Authorisation Number: 1012396819768

RELATED PARTY LRBA

Questions: Answer

Will a discounted amount of interest be considered a

contribution?

No

Will the annual rental derived be considered non-arm’s length

income?

No

Will any capital gain realised by the fund on the sale of the

property be considered non-arm’s length income?

No

Is a 0% interest rate deemed to be a scheme with dominant

purpose of gaining a tax benefit under Part IVA of ITAA 1936?

No

Question:Will a discounted amount of interest be considered a contribution?

Answer:No

Why:No increase in the capital of the fund (unless debt is forgiven or extinguishment of

a liability is involved) – TR 2010/1

ATO initial response in NTLG Super technical sub-group expressed view that

absence of interest does not increase capital of Fund. Interest is a common, but

not necessary feature of a loan.

DISCOUNTED INTEREST AS A CONTRIBUTION

Question:Will the annual rental income derived be considered non-arm’s length income(NALI)?

Answer:No

Why:The purchase value of the Property was determined on arm’s length dealingsbetween the Corporate Trustee and the unrelated vendor;

The dealing between the Corporate Trustee and the members involves a loan ofa certain amount for a specified number of years to the Fund by the members ata rate agreed to by the parties (or otherwise specified by the ATO); and

The Corporate Trustee intends to rent the Property to an unrelated party on arm’slength terms

NON-ARMS LENGTH INCOME

Question:Will any capital gain realised by the fund on the sale of the property be considered

non-arm’s length income?

Answer:No

Why:The rental income to be received by the Fund will be no more than the amount that

the Fund might be expected to receive if the Fund and the unrelated party dealt

with each other at arm’s length.

No indication that the terms and conditions of the loan are more favourable to the

Members as the Lender. In this context, any capital gain made will be no more than

the amount the Fund might be expected to make if the Corporate Trustee and

members were dealing with each other at arm’s length in relation to the loan.

CAPITAL GAINS & NALI

Question:Is a 0% interest rate deemed to be a scheme with dominant purpose of gaining a

tax benefit under Part IVA of ITAA 1936?

Answer:No

Why:The ‘scheme’ for the purposes of subsection 295-550(1) of the ITAA 1997 does not

indicate that the arrangement will result in any person involved is obtaining a tax

benefit, nor that the sole or dominant purpose is to obtain a tax benefit.

PART IVA

NTLG SUPER TECHNICAL SUB-GROUPSEPTEMBER 2013

Webinar – Changing Face of SMSFs

If an acquirable asset is financed by two lenders under a LRBA and one or both

lenders are granted a charge over the SAA will this breach paragraph 67A(1)(f) of

the SISA?

• ATO confirmed in June 2012 NTLG minutes that two lenders are acceptable

without breaching 67A(1)(d) and 67A(1)(e)

• Initial response ATO’s confirms 67A(1)(f) will not be contravened merely because

there are two borrowings where one or more are subjecting the acquirable asset

to a charge that satisfies paragraph 67A(1)(d)

LRBA & TWO LENDERS

Where a SMSF has a present entitlement to a distribution from a trust that is unpaid(UPE), will the UPE be an in-house asset?

• SMSFR 2009/3 sets out the Commissioner’s views about when an unpaid trustdistribution will give rise to a loan for the purposes of Part 8 of the SISA

• Paragraphs 6 – 8 of the Ruling considers the characterisation of the UPE as a‘loan’ – where amount is a loan-back or seen as provision of credit or financialassistance with the related trust, the unpaid amount will be included as an in-house asset of the SMSF

• Paragraphs 9 – 13 of the Ruling suggest that the unpaid trust distribution maygive rise to being an ‘investment’ – where the application of the asset is forincome, interest, profit or gain

• Trustee may also enter into an agreement to acquire further units (investment)

• Where trust is a related trust of the SMSF, the amount of ‘investment’ in thattrust will be an in-house asset of the SMSF (unless exclusions in sections 71 to 71Eapply)

UPE BETWEEN SMSF & UNIT TRUST

What constitutes a contribution and what is the value of that contribution when a

related party improves real property owned by the fund?

CONTRIBUTIONS & PROPERTY IMPROVEMENTS

SMSF

$500,000

$540,000Materials$12,000

Labour at no cost$13,000

How much is the

contribution?

ATO considers that the value of the contribution

would be equal to the improvement$40,000

Member/Trustee

Is it possible to pay a death benefit in two separate payments (an interim and

final benefit) if the value of the death benefit can be ascertained at the time of

the interim payment?

No, where amount can be ascertained by the time the first lump sum is paid, subparagraph 6.21(2)(a)(ii) does not permit more than one lump sum to be paid in

respect of the deceased.

Is it possible for an anti-detriment payment to be attached to only one of the

payments?

ANTI-DETRIMENT AND MULTIPLE DEATH BENEFITS

Interim payment

Final payment

Tax saving amount can be increased on either or both payments, but not calculated and applied to only one of the payments

RECENT CASES

Webinar – Changing Face of SMSFs

WOOSTER V MORRIS [2013] VSC 594

• Blended family case

• Second wife of deceased (married for 20 years) sought advice about

validity of Binding Death Benefit Nomination as dissatisfied that

benefits were left to two daughters of previous marriage

• Sought independent legal advice and was advised BDBN was not

valid and therefore died without a valid nomination in place – death

benefit at discretion of the Trustee

• Deceased’s daughters instigated proceedings in Supreme Court of

Victoria to enforce validity of BDBN

• Court referred matter to a special referee (Senior Barrister)to

investigate and report back with findings

WOOSTER V MORRIS [2013] VSC 594

• Special Referee on all points found in favour of the daughters that BDBN was in fact valid

• Judge McMillan upheld these findings – costs for the entire matter were

awarded against Mrs Morris, inclusive of her SMSF account balance (the Fund)

Lessons to learn:

• If there is any possibility of dispute between members/trustees about the

payment of a death benefit and validity of any nomination, the Trustee should

apply to the Court for a Declaration as to the matters in dispute

• The trustee must act in the best interest of present and future beneficiaries

(covenant contained within SIS Act)

• Illegal early access case

• Trustee/member of SMSF during 2010 withdrew from the fund over90% of the assets

• Individual failed to include $62,500 in the applicants personalincome tax return as assessable income

• ATO imposed a 25% administrative penalty and interest charge toshortfall

• Applicant sought review of decision by AAT, arguing amounts werea loan, not benefit withdrawals

• Commissioner disallowed as no agreement for repayment, loan wasnot genuine and withdrawal cannot be characterised as loan(section 65(1) of SISA)

• Tribunal upheld decision based on failure by taxpayer to takereasonable care

XU AND COMMISSIONER [2013] AAT 855

HOT OFF THE PRESS!

ATO has withdrawn TD 2013/D7

Ruling explained Commissioner’s initial views

about segregation of pension assets for

purposes of section 295-385 of ITAA 1997

Following submissions, it became clear to ATO

that approaches vary materially across the

industry.

New determination to deal with bank

account issues to be prepared and ATO to

consult on balance of matters in public ruling

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Aaron DunnThe SMSF Academywww.thesmsfacademy.com.au

SMSF Dunn Right,

http://thedunnthing.com

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