Summary: Industry Super Australia’s “Refocus” report makes a number of assertions about tax concessions for SMSFs that are inaccurate. These include false claims about business real property that is sold to a SMSF, tax paid on in-specie share transfers, and how non-concessional contributions are taxed. These claims have been reported largely without question, so it is worth looking at the arguments in detail to separate fact from fiction.
Key take out: The report puts forward the belief that the $180,000 a year non-concessional contribution cap is too high. This point can be made without implying SMSF holders can dodge tax in ways they simply can’t.
Key beneficiaries: General investors. Category: Shares.
All super lobby groups have a duty to protect their stakeholders. But Industry Super Australia’s latest attack on SMSFs is plain ignorant at best and deliberately misleading at worst.
ISA’s report, called “Refocus”, is a supplementary submission for the federal government’s tax review.
Most of the assertions about SMSFs are simply mud slinging, in the hope that some mud will stick to the SMSF industry. It certainly got significant media airplay.
ISA’s report lists the usual arguments about the tax concessions received by higher-income earners, and those with higher super fund balances, through the report.
But it’s section 5 – “Excess superannuation saving and tax minimisation strategies” where the gun-toting rampage really starts aiming at SMSFs.
The following excerpts were, largely unquestioningly, quoted verbatim by several media outlets.
1. Business Real Property sold to SMSF
ISA’s report stated:
“The business real property exemption (say the contribution of a car showroom) can set up a situation where a family company pays rent to their own SMSF. The company can claim a deduction equal to 30 per cent of the rent, but as income of the fund the rent will only be taxed at 15 per cent at most. If members of the SMSF are in the retirement phase the tax rate could be less, and could be 0 per cent if all members are retired.”
The statement is more or less true (with at least one glaring factual inaccuracy – they can claim a tax deduction equal to 100 per pent of the rent, not 30 per cent). But the inference is that if the strategy is used by a SMSF, it’s creating a massive tax dodge.
It is suggesting that if some completely unrelated SMSF, from a family on the other side of the country, owned the business real property, different tax rules would apply.
It is suggesting that more tax would be paid or collected if someone other than the family’s super fund was receiving rent from the same family’s business. Utter rubbish.
There is no innate tax dodge in a SMSF owning the property out of which a family business operates.
If what ISA is suggesting is that the ability to transfer the asset into super is a tax dodge…well, that’s also misleading. The act of transferring the property into the super fund creates a CGT event for whoever owned it. (Some states might waive the stamp duty on the transfer.)
If the allegation is that the contribution of the asset is a tax dodge…also inaccurate. The contribution needs to be made under the non-concessional contribution caps. If it’s higher than could be fit in, a related party loan could be made, but that could also be done to purchase any other asset the super fund wanted to invest in.
(If owned by the individuals, or the business, the asset could be sold, the money transferred into super and some other, similar, asset could be purchased.)
Market rents still need to be paid/charged, or you risk trouble with the ATO.
Of course, there are risks to the SMSF. For example, if the business begins to have cashflow issues, the SMSF trustees might be lenient on rent payments. If they did so, they could again face problems with the auditor or the ATO.
ISA’s report tried to suggest the ATO is missing out on millions because of this. It is not.
2. In-specie transfers
ISA has tried to make a similar argument in regards to “in specie” transfers of shares from individuals into their SMSFs.
“The transfer of assets from a related party can allow the returns or capital gain from that asset to become tax free if the members of the fund are over 60 and retire. But there is also a tax benefit in the accumulation phase. Capital gains are fully assessable for a company but only two thirds assessable for a superannuation fund in the accumulation phase.
If the shares transferred into a fund generate franked dividends, they will generate a direct payment of imputation credits from the ATO for members in the retirement phase. This is because the imputation credits are designed to remove dual taxation which is not possible when the member with dividends cannot be taxed on any income received.”
For similar reasons to above, this is also deliberately misleading
For a start, at the time of transfer of the asset from the individual to the SMSF, the asset has a CGT event and capital gains tax would need to be paid.
(The only way that this can become unfair is if the SMSF and the individual can manipulate the price at which the shares are transferred into the super fund. But that is a separate issue that they did not raise.)
Apart from price manipulation on transfer, there is no tax difference between (a) transferring the asset in specie into super and (b) selling the asset/s, transferring the cash into super, and then repurchasing the asset/s.
Franked dividends would still get full imputation credits for members in pension phase. Capital gains still receive a discount of one third.
The only real advantage to in-specie contributions is in not having to pay share brokerage – to sell it outside the fund and then to repurchase it back inside the fund.
3. No tax paid outside super for non-concessional contributions
The argument here is no better.
“The cap for non-concessional… contributions is $180,000 in 2015-16 but three years contributions (up to $540,000) can be made in the one year... This means that an SMSF with 4 members can make a non-concessional contribution of $2.16 million in a single year. The rationale for this is that the wealth being used has previously been taxed – but it may well be difficult to establish when if ever. Anecdotally, people borrowed to make use of the $1m transitional non-concessional contribution limit. Borrowings would not have been taxed as income. Bequests would not be taxed as income. Proceeds from cash in hand businesses may not be taxed as income. Proceeds from pre-1985 asset sales would not be taxed as income.”
Four people making $540,000 worth of NCCs equals $2.16m, which sounds like a terribly big number.
But it is still four individuals contributing $540,000 each. They have four individual accounts that have just had $540,000 added to them. (They could do the same in an industry fund.)
The money has been taxed, to the extent that it is supposed to be taxed, elsewhere (with the exception of the example of cash businesses, but that’s a problem for the ATO in general and applies equally to contributions to industry funds).
Yes, people borrowed $1 million to put into super prior to 30 June 2007. But those borrowings weren’t taxed because they weren’t earnings. The borrowings eventually had to be repaid, which taxable income does not. Further, interest on the borrowings was not claimable as a tax deduction, because the borrowings were not for an investment in an assessable income-producing
(To be honest, and I said this at the time in early 2007, it simply didn’t make a lot of sense for people to borrow the $1m to put into super. At the time, interest rates were around 7-8 per cent, the interest wouldn’t have been a tax deduction and, which I didn’t predict, the timing would have stunk, investing a million dollars just before the peak of stock markets in late 2007. They would quickly have turned their $1m into about $600,000 if invested in equities.)
Bequests and proceeds from the sale of pre-CGT (1985) assets are received, legally, tax-free. They have had tax paid on them to the extent that the government demands tax to be paid on them.
With the exception of cash-based businesses, the rest has been (a) taxed to the extent that it was taxable, (b) was never taxable, or (c) did not receive a tax deduction. But all had paid the appropriate tax, as determined by the ATO.
But the inference is that the wealthy could do all this and didn’t pay any tax? Bollocks.
It’s easy to beat up on SMSFs. They are, generally, wealthier and have more in superannuation. They have often made sacrifices to do so, or have sought good advice, or have educated themselves.
And yes, it usually has something to do with higher incomes.
What ISA is really complaining about in its report is that it thinks the $180,000 a year non-concessional contributions limit is way too high.
Fine. Attack that. Without using inaccurate and stupid assertions about SMSF tax “dodges” that simply aren’t.
The information contained in this column should be treated as general advice only. It has not taken anyone’s specific circumstances into account. If you are considering a strategy such as those mentioned here, you are strongly advised to consult your adviser/s, as some of the strategies used in these columns are extremely complex and require high-level technical compliance.
Bruce Brammall is managing director of Bruce Brammall Financial. E: bruce@