Changes to insurance provided by SMSFs. terminal medical condition. ATO approves courses for education directions

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1 Specialists in Self-Managed Superannuation Funds (02) Keeping you informed In this issue: ATO SMSF Updates Trusteeship Individual or Company? ATO SMSF updates Changes to insurance provided by SMSFs From 1 July 2014, trustees of an SMSF cannot provide an insured benefit in relation to a member of the fund unless the insured event is consistent with one of the following conditions of release of a member s super benefits: death terminal medical condition Q & A with Mark Caldwell permanent incapacity (causing the member to permanently cease working) temporary incapacity (causing the member to temporarily cease working). An insured event covered by a trauma insurance benefit (which covers conditions such as cancer, stroke, and heart attack) is not consistent with any of the above conditions of release. SMSFs that provided a trauma insurance benefit to a member who joined the fund before 1 July 2014, and was covered before that date, are allowed to continue to provide that benefit to the member after that date. A member cannot change the type of trauma insurance cover they had before 1 July 2014; however, they can increase or decrease the level of their existing cover from that date. Mark Caldwell - Managing Director SMSF Specialist/ Accountant/ Financial Planner Mark is our specialist superannuation advisor with SMSF specialist accreditation with Self- Managed Super Fund Professionals Association of Australia (SPAA). ATO approves courses for education directions Since 1 July 2014 the ATO has had the power to direct a recalcitrant trustee of a self-managed superannuation fund (and also directors of corporate trustees of such funds) to undertake an approved educational course. Such a direction would be given if the trustee (or director) was involved in a contravention of the rules and regulations relating to selfmanaged superannuation funds. The ATO has now approved three courses being CPA-ICAA (jointly) SPAA and SMSF Wisdom. Courses may be offered by other providers, if and when they are approved by the ATO (as to appropriateness and as to content). No fee can be charged by the provider of the course and the courses must be offered on-line. While the courses are approved by the ATO, the ATO is not liable for the content of the course and is certainly not liable for any actions or omissions taken by individuals who have completed the course.

2 Concessional NSW duty on property transfers to SMSFs increased The current duty concession on the transfer or sale of real estate held by an individual to their SMSFs has been increased from $50 to $500. This change applies from 1 July Under the concession provided by s62a, if an individual transfers or sells NSW real estate, of which they are the owner (and not held by them in trust), the transfer duty will be a fixed rate of duty (previously $50 but now $500) rather than the normal ad valorem duty. Where there was a sale and purchase and the trustee of the SMSF affected the purchase under a limited recourse borrowing arrangement the duty is $500 (there has been no change in this duty). This concession can be very significant. If the SMSF purchases NSW real estate with a market value of $500,000, the duty which would apply (but for the concession) is $17,990. With the concession, the saving in duty is $17,490. The concession only applies if the real estate is owned by an individual and the real estate is transferred to or purchased by the trustee of the individual SMSFs and is held by the trustee solely to provide retirement benefits for the individual. Further the real estate must be business real property (otherwise the trustee would not be permitted to acquire the real estate). Residency of SMSFs What happens when an SMSF member leaves Australia to go and work overseas? There may be consequences for their SMSF if that member makes or receives super contributions. For an SMSF to receive concessional tax treatment, the SMSF must satisfy the residency test requiring it to meet the definition of an Australian super fund. There are three tests that need to be satisfied for an SMSF to be an Australian super fund. The SMSF has to: be established in Australia or have any asset of the fund situated in Australia at that time ensure that central management and control is ordinarily in Australia satisfy the active member test. A key issue of concern is the active member test. An active member of an SMSF is one who makes contributions to their fund or has contributions made to their fund on their behalf. One aspect of this test requires at least 50% of all of a fund s assets to be attributable to super interests held by active members who are Australian residents for tax purposes. If an SMSF has a non-resident member who has a fund balance of more than 50% of the total balance of all active members, it will fail the active member test if the non- resident member does any of the following: rolls over funds to their SMSF makes contributions to their SMSF has contributions made to their fund on their behalf. So, if an SMSF member leaves Australia to work overseas and becomes a foreign resident, a single contribution by their employer on their behalf while they are a foreign resident may result in their fund failing the residency test resulting in it losing its complying status.

3 New SMSF penalties what it means for trustees New ATO powers mean that the ATO can now direct trustees, who contravene certain provisions of super law to undertake an education course, rectify the contravention or pay an administrative penalty. Example 1 The ABC fund had a contravention reported to the ATO in The contravention was rectified and the trustees were given information about their roles and responsibilities. Another auditor contravention report (ACR) was lodged in for a breach of the inhouse asset provisions, the contravention was not rectified and no written plan was in place to rectify. In this situation the ATO is unlikely to issue an education direction as it is unlikely to have a positive influence on future behaviour. The ATO would most likely issue a direction to rectify and the trustees would each be liable to pay the penalty of $10,200. Because of prior compliance history and no steps being taken to rectify, remission of this penalty is unlikely. Example 2 The DEF fund has an ACR lodged for the year for lending fund money to a member. There is no prior history of contraventions and when advised by the SMSF auditor that lending was prohibited, the trustees took immediate steps to recover the loan, which was paid in full, prior to ATO intervention. In this situation the ATO may decide that a direction to undertake an education course is appropriate. All trustees would be liable to a $10,200 penalty; however the ATO may remit the penalty as the contravention was rectified and there is no previous history of non-compliance. Breach Penalty units Amounts Failure to comply with Tax Office education directive 5 $850 Failure to appoint an investment manager in writing when one is appointed 5 $850 Failure to provide information on approved form in prescribed time upon establishing fund 5 $850 Failure to complete a form with requested information as part of ATO s statistical program 5 $850 Failure to prepare financial statements 10 $1700 Failure to keep trustee minutes for at least 10 years 10 $1700 Failure to keep records of change of trustees for at least 10 years 10 $1700 Failure to sign trustee declaration within 21 days of appointment and keep for at least 10 years 10 $1700 Failure to keep member reports for 10 years 10 $1700 Failure to notify the Tax Office of a change of SMSF status e.g. fund ceasing to be an SMSF 20 $3400 Like us on Facebook to keep up to date with the latest Super and Tax info, including blogs and helpful videos!

4 Trusteeship Individual or Company? Information from NowInfinity Strategically linked to the SMSF trust deed is who or what entity is going to be the trustee of the fund. By way of background, for a superannuation fund to be a SMSF all members of the fund must be trustees or directors of the corporate trustee of the fund. Therefore from a strategic perspective, getting the right trustee is crucial as the trustee holds all the power and also the responsibilities of the fund. Essentially there are two options the members themselves individually as trustees or a corporate trustee may be established and appointed as trustee. Although there is a small initial expense to create a company to act as trustee (generally no more than $700) there are significant taxation, practical and financial benefits in choosing to do so. These include: (1) Longevity for future generations (2) Concessional taxation guaranteed for a trustee company (3) Administration simplicity trustees come and go (4) Litigation protection (5) New Penalty Regime (1) Longevity for future generations It is a requirement under equity law that a trust is to last no more than 80 years. This rule, known as the rule against perpetuities was designed to prevent family assets being locked into a trust forever and not being subject to death duties or being brought into the capital gains tax net on the death of the appointor or beneficiaries of the trust. Although a SMSF is a trust, s 343 of SISA provides that the rule against perpetuities does not apply to trusts established as superannuation funds including a SMSF. Strategically this means that a SMSF lasts forever. If the fund lasts forever by virtue of the SISA it is also important for the trustee to have the capacity to last forever. The only entity that makes the grade is a company which lasts until wound up or deregistered. Current and future members may come and go as directors but the company remains constant as the trustee. (2) Concessional taxation guaranteed for a trustee company The most significant strategic change implemented under the Simpler Super revolution is the abolition of the mandatory cashing requirement at age 65. Reg 6.21(1) of the SIS Regulations 1994 (SISR) previously forced a member of a fund who was not engaged in part time gainful abolished on 11 May 2006 in the Simpler Super Budget. For many SMSF members, there is no need to ever commence a pension account in the fund but rather, the member may retain all of their superannuation benefits in an accumulation account until their death. The member will live off lump sums drawn from their accumulation account as and when needed or in some cases, where the member is wealthy outside of the fund, they may take no superannuation benefits from the fund during their life with whatever is left over at the time of the member s death passed out to their dependents or legal estate, hopefully by way of a SMSF Will. This strategy is now a crucial component of running a modern day SMSF.

5 However, s 19 of SISA provides that only SMSFs with corporate trustees can pay lump sums as well as pensions. If a SMSF has individual trustees, the sole or primary purpose of the fund must be to pay old age pensions otherwise the fund and its members will lose their concessional taxation status. Unfortunately lump sums and estate planning benefits do not fit within these tight individual trustee guidelines. A SMSF with individual trustees seeking to run a modern day SMSF with accumulation (and also pension) accounts for a retiree member as well as having extensive SMSF estate planning needs to change trusteeship to a corporate trustee or limit superannuation benefits to primarily pensions only. (3) Administration simplicity trustees come and go Members move in and out of the fund as a consequence of marriage, divorce, death, disability or bankruptcy. A requirement under the superannuation laws and by the Commissioner of Taxation is that the SMSF trustee must hold all of its assets in the names of the trustee. Where a member leaves the fund or a new member joins the fund and the trusteeship is by way of individual trustees, it is incumbent upon the trustee to notify all share and unit holder registries, land title offices and other asset registries that there has been a change in trustee. After a divorce or death this can be a sizable administrative task, and can also be costly. Strategically a corporate trustee remains constant even though the underlying director/members may change on occasion. (4) Litigation protection Trustees are potentially confronted with being sued should an event occur to an asset of the fund. For example, the trustee of a fund may own a residential property and as a result of an accident or for some other reason a tenant or visitor may sue the trustee under owner s liability. If a corporate trustee is in place, the directors are personally protected, but not so for individual trustees. As with SMSF Trust Deeds, not all companies are suitable to act as a SMSF corporate trustee. A corporate trustee of a SMSF must be built specifically for a SMSF in order to ensure that the trustee can be focused on SMSF strategy rather than the ordinary business and shareholder principles found in most proprietary limited and shelf companies. There is also a legal and financial reason to put in place a special purpose corporate trustee for a SMSF. In 2003 the government introduced legislation, the Corporations (Review Fees) Regulations 2003 that provided for a special purpose company which acted as trustee of a SMSF. The benefit of being a special purpose SMSF trustee company is that the annual ASIC fees are less than those of a proprietary company. In order to be classified as a special purpose SMSF corporate trustee, r 3 of CRFR provides that the following two conditions must be met: (i) the constitution of the company prohibits distribution of the company s income or property to its members, and (ii) the sole purpose of the company is to act as the trustee of a regulated superannuation fund.

6 Related parties & SMSFs: Using residential premises as business premises Question: I wish to use a residential premises as a business premises. I wish to acquire the premises through an SMSF and lease the premises to my company. The premises would be used only for business purposes (i.e. no residential activities). It is simply a case of preferring to use residential-type premises for my operations rather than a traditional, more commercialstyle option. Are there any restrictions on leasing these premises to a related party? The zoning of the asset is not the deciding factor; it is, as you have set out, based on the use of the asset - that the property is used wholly and exclusively in a business as per the business real property test under SIS section 66. If the asset meets the business real property test, then the SMSF can lease an existing asset to a related party and not get caught under the in-house assets test. Congratulations on the first edition of SuperNews! It was great to receive such important information in a clear, concise and timely manner. This is another great example of your excellent service. This newsletter, together with many other valuable services and initiatives definitely makes Black and White a leader in Self- Managed Superannuation Funds. A big Thank you to all the Team for managing my SMSF and other financial affairs whilst I am out of the country. Knowing that my interests are in your capable, professional hands allows me to get on with my life and business abroad. Rennie Jackson SMSF owner Are you happy with our services? We want your feedback! We are looking for your testimonies to publish on our website, Facebook and newsletters. If you would be happy to provide a testimony for the services we provide to you, please solutions@bwaccounting.net.au