The recent floods have highlighted potential problems with properties held within a Self Managed Superannuation Fund (SMSF). 

For those who might have a property upon which they have borrowed to put into their SMSF, and which may have been flooded, there could be some issues.

The regulations in the case of geared property investments do not allow the trustees to alter the property in any way that is deemed an improvement. This does not include repairs. This could be a problem where the refurbishment involves capital outlays, almost a certainty after a flood. So how can the property be adequately repaired?

Then there is the question of paying for the repairs. No problem if the SMSF has enough money to fund repairs but with costs possibly running into hundreds of thousands, there could be a problem.  For example, if the trustees were to pay for the repairs personally, then those costs paid will be deemed to be a contribution to the fund and counted under the contributions cap.

What happens if the members have already contributed the maximum? What about where the caps are inadvertently exceeded? The penalty for exceeding contributions caps is severe with the ATO rarely exercising its power to ignore the breach so this could involve extra tax for those who already have suffered mightily.

It would seem likely that if this turns out to be a significant problem, then the government will come under pressure to change some of the rules surrounding the capital improvement ban.  The contribution caps are a bigger issue. Everybody knows they are too low anyway, but getting the government to admit they were wrong and do something about it could be a big ask.  The government could however instruct the ATO that extra tax be waived.

POSTED: 19-Jan-2011

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SMSF TAX RETURNS

The ATO continues to indicate that it is toughening its stand with Self Managed Superannuation Funds (SMSF).

The ultimate power that the Tax office has is to make SMSF non compliant.  This is a drastic step normally reserved for only the most serious of offenses and has the impact of making the fund assets subject to penalty tax, thereby approximately halving the value of the superannuation fund.

The ATO recently confirmed it has this power under the Superannuation Supervision Act. “We can in fact make the fund non-complying because it is a contravention not to keep accounts, not to get the fund audited, and not to lodge the return with the regulator,” ATO assistant commissioner superannuation Stuart Forsyth said.

The SMSF return is now lodged as one reporting package that includes financial statements, the audit report for the fund, and the tax return.

Forsyth says that making a fund non compliant is not something they would want to do and it would seem this action would only take place after repeated warnings were ignored by the trustees.

SMSF AUDIT ACTIVITY

The ATO has announced that its compliance program for the next 12 months for SMSFs will focus on related party transactions.

ATO assistant commissioner superannuation Stuart Forsyth said “I have a view that most people will not have a contravention in their fund unless they have a related party transaction.” He added “It’s hard to see how you can have a significant contravention in a fund other than perhaps some of the more technical things unless you have a related party transaction.”

Related party transactions are transactions such as withdrawing money from the fund when you’re not supposed to, and lending money to yourself or a related business.

The ATO plans to perform 300 audits and 1000 reviews throughout the coming year.

It also plans another 1200 mail-outs and a follow-up program from the previous year’s tailored advice programs.

POSTED: 09-Nov-2010

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The Australian Taxation Office (ATO) has advised that it will be increasing its scrutiny of re-reporting in relation to superannuation contributions over the next 12 months.

They are concerned that this activity has arisen from situations where individuals have re-reported their contributions almost immediately after being notified of a breach of the contributions caps, which limit the maximum that can be contributed to a superannuation fund in any one year.

According to ATO deputy commissioner of taxation Neil Olesen, there has been a problem with a large number of cases where a breach of the contributions caps has been identified which have come about from misreporting.

“As a result, we’ve had a significant re-reporting of contributions, with about 10 per cent of member contributions that are associated with an excess contributions tax liability being re-reported to us,” Olesen said.

“While most of that re-reporting is to correct errors, we do have a concern what’s being reported may not in fact be correct given that it occurs, often immediately, after we’ve notified a member they may have an excess contributions tax liability and it ultimately has an effect of eliminating that liability,” he said.

POSTED: 04-Oct-2010

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There are now some 400,000 SMSF funds out there currently.  The ATO hasn’t got a hope of auditing them all.  Their solution is to target those with particular peculiarities (eg loans) and those who audit the funds.

The article below indicated how this is paying off for the Tax Office in identifying fund trustees not obeying the rules.

ATO reveals SMSF compliance numbers

By Mike Taylor, Money Management

The Australian Taxation Office (ATO) has revealed the degree to which its compliance activity has strengthened as the number of self-managed superannuation funds (SMSFs) has multiplied.

In an address to a SMSF Conference in Sydney this week, Deputy Commissioner of Taxation Neil Olesen said that whereas in 2005-06 the ATO had made 12 funds non-complying, this figure had risen to 185 in the last financial year.

As well, he said that before 2007-08 the ATO had not referred any approved auditors to their professional bodies for disciplinary action, but last financial year it referred 30 auditors and 11 had been disqualified.

Where SMSF trustees were concerned, Olesen said that in 2005-06 the ATO had disqualified 27 trustees, and last financial year this figure had risen to 94.

However, he said the figures were not indicative of worsening compliance, but rather a maturing of administration.

“The figures need to be seen in the context of a system that has grown from 190,000 funds in 1999 to nearly 430,000 funds today,” Olesen said.

POSTED: 24-Sep-2010

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The government recently amended the Superannuation Industry (Supervision) Act to clarify the borrowing rules for Self Managed Superannuation Funds.  The changes provide that you can acquire more than one asset at a time under the one arrangement but only if they are ‘identical to each other’ and have the ‘same market value as each other’.

This means for example that you can acquire a parcel of shares in one company under a single arrangement but cannot in the same way acquire two or more properties. This also means you would not be able to have one arrangement over two or more titles. Borrowing for construction purposes continues to be prohibited.

POSTED: 11-Jun-2010

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Most people who manage their own superannuation funds are aware that through the use of an ‘installment warrant’ arrangement, it is possible to borrow money within a Self Managed Superannuation Fund (SMSF). The process involves setting up an Installment Trust (A Bare Trust) with a Custodian trustee. Properly structured it means that the fund is compliant and whe the debt is repaid the asset transfers to ownership by the SMSF without any Capital Gains Tax (CGT) implications.

Lawyer Brett Davies from Perth reports that there are some problems arising from documentation prepared by the banks who are promoting their Installment Warrant loans.

Brett says:

To create an effective CGT position, the trustee of the SMSF must be absolutely and presently entitled to the asset from the start of the bare trust. The custodian has really no discretionary powers and simply follows the directions of the beneficial owner. This is the very nature of a bare trust. Anything different and it is not a bare trust and fails. The beneficial owner is the superannuation fund. On this basis, no CGT event arises when the loan is repaid or when the property is transferred to the superannuation fund.

The trust needs to be a Bare Trust as this avoids CGT. It seems that in many cases the banks are putting in their own trustee (and charging a fee for the privilege) who has broad powers to deal with the trust asset (the incumbent property). This has the potential to create a CGT liability when the asset is transferred to the superannuation fund.

There is a clear lesson here. Don’t let the bank provide the documentation. Get independent advice and use a trustee that you control (it’s cheaper also) whose is obliged to transfer the property to the superannuation fund on repayment of the debt.

POSTED: 04-Mar-2010

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There are over 400,000 Self Managed Superannuation Funds (SMSF) in Australia and the number is growing by tens of thousands a year.

Over the last few years, since the ATO assumed responsibility for SMSF’s it has been on a learning curve ascertaining how they are run, where the money is invested and how they are managed. It has been setting up surveillance measures to gather information so as to better manage this huge number of funds and ensure compliance.  After all it is simply not possible for them to individually audit each fund even every few years let alone annually.

Their surveillance has identified an increasing number of breaches of compliance rules.  Many of these, probably the vast majority of them, are through ignorance rather than any deliberate flouting of the rules.

The biggest number of breaches, totalling 19.1% for the 2008 year, related to loans to members or their relations, followed by breaches of the in house assets test at 15.6% and assets not being held in the name of the trustee at 13.6%.  The ATO has been endeavouring to educate trustees on their responsibilities to reduce the risk of non compliance, but are struggling against the rapidly increasing number of funds.

In an effort to stem the rising tide, the ATO has stepped up its campaign by concentrating on the activities of auditors. Every fund must be audited each year. The auditor’s responsibilities are to ensure that the fund is maintained in accordance with all laws and regulations, that the assets of the fund exist and are separate from the members own assets, amongst other things.

Where a breach is identified, the Auditor now must report the breach to the ATO.

The ATO obviously believed it is easier to manage a much smaller number of auditors than try to check every fund.  After all, if the auditor fails to do the job properly they will lose their auditing capability.  So if you have a SMSF, be prepared to undergo a more thorough audit than previously and to pay more for the privilege.

POSTED: 07-Sep-2009

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Recently a self managed superannuation fund was made non-complying when it was found to be in breach of the rules. The ATO rarely uses this power that it has and the fact that it has this time (and had its decision ratified by the Administrative Appeals Tribunal) is a warning to all SMSF’s to ensure that they have their house in order.

This is the most serious action that the ATO can take against a fund as it means that the fund loses its concessional tax treatment and the assets of the fund (less non-concessional contributions) are taxed at the top marginal rate.

If that happens, you lose up to almost half of your money in one go!

In this case it was a serious breach where the fund breached the in-house assets rule. Under the in-house rule, a SMSF must not invest, lend or lease to related parties (including members) of the fund more than 5% of its assets. This fund did just that, and did not repay the loan until 4 years later which was 2 years after the fund auditors alerted the trustees to the breach.  The ATO does not take action like this lightly and it indicates a hardening of attitude toward trustees who flout the rules.

POSTED: 07-Sep-2009

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Self Managed Superannuation Funds (SMSF) have become very popular in recent years and it has become the fastest growing sector of the superannuation marketplace. It’s a popular notion isn’t it – running your own superannuation fund. But it is not all beer and skittles.

Increasing numbers of SMSF trustees are running foul of the regulator, the Australian Taxation Office (ATO), for not complying with the regulations. Just because it is your money does not mean that you can do what you like. There are rules.

These rules cover the types of investments you have in the fund, how the investments are managed and reporting obligations. For example, generally, you cannot buy an investment that you will use for your own benefit (a property or artwork) nor can you take a loan from the fund or lend money to someone close to you even though they may pay interest.

SMSF can be a great opportunity for someone to build their wealth in a tax effective manner, but they can also be a burden for those who do not understand their obligations and responsibilities.

The ATO has some very useful publications on their website http://www.ato.gov.au/smsf/pathway.asp?pc=001/135/003&mfp=001/135&mnu=41614#001_135_003 that will assist you if you are thinking that this might be an option for you.

POSTED: 21-Nov-2008

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