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

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

Ask anyone in the street for a comment about superannuation and you are likely to get the same response “They keep changing the rules.”  This survey emphasized this, pinpointing consumer and industry concern at policy changes as well as the negative impacts of changes to contribution caps.

The survey made it clear that the Government’s tinkering had done nothing to generate certainty among those approaching retirement age or those advising them. According to the survey, “The perceived frequency of reform generates distrust and unease in planning superannuation strategies over a life cycle. Consumers are confused and disenchanted; the superannuation system seems complex enough without having to constantly monitor and understand changes to regulations.”

It also says “There are deep-seated fears that the age pension will be abolished and that there will be no safety net for those who have inadequate superannuation at the point of retirement. These concerns are compounded by changes such as the implementation of concessional caps which impact on longer term superannuation funding strategies.

“Across the consumer group there is worry and guilt about superannuation, and a strong sense of disempowerment.”

As financial planners all know, it is only later in a person’s working life that they have sufficient funds to dedicate to retirement needs.  Then the government pulls the rug out from under their feet. “This change to the system is seen to be self-defeating and to have sent the wrong message to people who require encouragement to maximise their superannuation contributions when they have sufficient disposable income to do so,” the report said.

“A lot of people actively strategise to maximise their superannuation contributions towards the end of their working life and these legislative changes have invalidated this strategy. It has resulted in some people diversifying investments away from superannuation into areas where caps do not apply, and losing the tax advantages of contributing directly into superannuation.”

If the government wants to cut down the Social security bill then it must put in place rules that will encourage the individual to accumulate funds for his or her retirement.

It is a fact that most working people don’t have enough superannuation to retire. It takes a lifetime to accumulate sufficient funds which is something that the well superannuated politicians and the fat cats of the public service who accumulate a very generous retirement benefit via a very hefty contribution from the public purse, tend to forget. They have little empathy for the rest of Australia when it comes to superannuation. They forget that compulsory superannuation is a relatively recent innovation and even at the current 9% level which has only existed for 8 years, the retirement benefit will be less than what most people need.

It is to be hoped that the government will realize its mistake early enough to rectify it. Not to do so will only increase the cost to tax payers of the future and leave many retirees much poorer in their golden years.

POSTED: 09-Nov-2010

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

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

For the last couple of years the government has allowed the minimum drawndown amounts to be reduced by 50%. This was done because of an acknowledgement by the government that many self-funded retirees had suffered significant capital losses during the financial crisis, from which they had not yet recovered. The drawdown relief therefore would assist those people by reducing the need for retirees to sell assets at a loss in order to meet the minimum payment requirement.

The government has just announced that this relief will be extended another year. That means that retirees will be afforded a 50 per cent reduction in the minimum drawdown amounts for account-based, allocated and market-linked pensions for the 2010-11financial year. That means that for example, a person under age 65 need only draw 2% of their account balance during this financial year.

This relief measure has been generally welcomed. The Small Independent Superannuation Funds Association (SISFA) has called for the relief to be extended permanently though the government is unlikely to accede to this request.  

POSTED: 01-Jul-2010

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

The ruling outlines that a contribution can be anything of value which increases the value of a superannuation fund provided by a person whose aim is to benefit one or more members of the fund.

As well as the obvious, it can be:

·         Shares or property transferred into the fund at nil or below market value consideration,

·         The paying of an expense on behalf of the fund, or

·         Forgiving of a loan made to the fund or repaying a debt of the fund.

The ruling also looks at the timing of contributions and when in fact a contribution is determined to have been made.  For most this may appear to be a rather academic question. However this is important in determining in which year a deduction might be claimed, and ensuring the maximum contribution limits are not breached.

Basically, the ATO has determined that the contribution is actually made when the fund value is increased or ownership of an asset is obtained or the fund in some way benefits from the receipt of an amount. For example, if money was paid into an account say by electronic transfer or cheque, it is the date the payment was received (unless the cheque subsequently dishonoured). In the case of the transfer of shares or property, it is when legal title passes to the fund (not when the transfer may be registered).

POSTED: 11-Jun-2010

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

So it was interesting to read of the results of a survey by CoreData of a Mystery-Shopping exercise conducted across the financial planning industry.  Reportedly the survey disclosed that the services provided by advisers from the Industry Funds Financial Planning (IFFP) group are not as good as independent financial advisers (IFAs) and bank-aligned planners. 

It reported that whilst IFFP advisers showed a good understanding of the basics, they had a limited ability to meet customers’ planning needs. Apparently, they found it difficult to build relationships with clients and cater for individual situations that deviated from the norm.  We wonder if this was because of their narrow focus on Industry Superannuation funds rather than the broader view that financial advisers need too take. 

 CoreData said “The IFFP model appears to be restricted and limited both in terms of the solutions its advisers can offer and also around the notion of an ongoing service proposition”.

The research was based on 480 shadow shopping events conducted by more than 200 people who were aged between 45-60 years and between two to 20 years from their expected retirement date and who held more than $150,000 in investable assets or superannuation.

The Industry Fund Network believes they are on a winner providing salaried advisers to service their huge membership base.  What they miss however is the incentive for advisers to perform. Whilst independent financial advisers are willing to put the work into keeping their knowledge up to date and building their businesses, the salaried adviser has no incentive to go the extra yard and as a result they develop a ‘take it or leave it’ attitude which appeared to come through in the survey results.  This is reinforced by the data that shows IFAs also outperform the bank aligned salaried advisers.

At the end of the day, how can taking away incentive and restricting the breadth of advice be good for consumers?

POSTED: 21-Jan-2010