SMSF Alert: November 2014

Liam Shorte and Richard Livingston highlight the past month's key SMSF developments.

Key developments

  • A reminder for those on the age pension (or eligible for it) to review their circumstances
  • NSW increases stamp duty on SMSF property transfers
  • Draft rules on excess non-concessional contributions
  • Federal Court decision on related party leasing and loans

This month’s SMSF Alert is the last for 2014. We’ll take a look at developments over the past month but first a year-end reminder.

Age pension and account-based pensions

If you’re on the age pension (or other Centrelink entitlements) and collecting a super pension you’ll be grandfathered (exempted) from the introduction of deeming for superannuation balances on 1 January (see Age pension changes: Keeping your super grandfathered). But the grandfathering only applies to the super pension you have when the clock strikes midnight on New Year’s Eve.

In a recent Fairfax articlewe reminded those on the age pension and thinking about changing or reviewing their super to act now.  After 1 January you won’t be able to start or close an SMSF, shift super funds, consolidate your pension, add a reversionary beneficiary, or make other changes, without losing your grandfathering and seeing the new deeming rules apply to your super balance.

Whilst the changes only apply to the Income Test (not the Asset Test), in the future they could impact anyone who’s currently collecting the age pension. Rising interest rates will see the Income Test become the dominant test for more and more people.

If you’re eligible for the age pension but haven’t yet applied, you have no time to lose if you want to get it started before year-end as Centrelink is getting busy. Remember you need both age pension and super pension in place before 1 January or you’ll be deemed on your super balance going forward.

Action point: If you’re on the age pension, review your super pension and make any necessary changes before year-end. If you’re eligible for the age pension but haven’t applied, do so immediately.

Increase in NSW stamp duty on super fund transfers

NSW stamp duty rules have been changed to clarify the circumstances in which members of an SMSF can transfer property to the fund and attract only a concessional flat rate of stamp duty. At the same time the Government has increased that rate from $50 to $500.

This makes it far more expensive to transfer NSW property to an SMSF than property in other states.

The law has also been amended to allow the $500 flat rate of duty to be charged where a new custodian arrangement is put in place over property owned by an SMSF trustee that has previously been subject to duty. This is designed to pick up the Office of State Revenue’s administration costs involved in transferring the property back to the SMSF trustee’s name at the end of a limited recourse borrowing arrangement.

If you want to read more about the changes you can view the explanatory notes here.

Excess non-concessional contributions

In the May budget (see SMSF Alert: May 2014) the government announced that new rules would be introduced to make the treatment of excess non-concessional contributions consistent with those that now apply to concessional contributions.

Draft rules have since been releasedand submissions from the super industry were received in late October. We expect there will be changes to the rules as drafted and we’ll run through them in more detail once the final rules are announced.

The one thing we don’t expect is a ‘get out of jail free’ card. The new rules will be less brutal than before but you should always be careful to make sure you don’t breach any of the contribution caps.

Federal Court decision: Deputy Commissioner of Taxation v Graham Family Superannuation

A recent court case highlights the importance of having a basic understanding of your trustee obligations and the rules of superannuation before setting up an SMSF, especially if you’re ‘doing it yourself’.

In this case, a husband and wife transferred their super balances to a newly established SMSF and proceeded to make a series of related party loans to purchase and maintain a caravan, cattle stud and motor vehicles. The fund also purchased a residential property (plus furniture) and leased it to the members’ son. No rent or other income was paid to the fund.

The Court was required to approve a deal agreed between the Tax Office and the couple where they were disqualified from acting as trustees, required to repay the money lent and fined a total of $40,000 (plus $10,000 towards costs).

The contraventions were only picked up years after the fact because the fund had not had timely audits, or lodged tax returns. When audited by the Tax Office the couple rectified their behaviour, expressed remorse and repaid the money to the fund from other assets.

As a result, the Court accepted that their behaviour was not of the worst kind (deliberate early access to super that is not repaid) and the penalty being set significantly below the maximum penalty of $220,000 (under the old pre-speeding ticket rules). Fortunately for the couple their fund was not made non-complying – due to their remedial action – as this would have cost them almost half their super balance.

In addition to clarifying an SMSF trustee’s responsibilities, the case also highlights the importance of acknowledging mistakes and rectifying them at the earliest opportunity. If the Grahams hadn’t shown remorse and repaid the funds from other sources the indication is that their penalty would have been far greater.

Action point: Make sure you are familiar with the things an SMSF cannot do – for instance, leasing property, or making loans, to members or their relatives or purchasing assets that are used by for private purposes. Whilst the ‘in-house assets’ rule allows some related party transactions up to 5% of the fund’s value, best practice is to keep the fund completely clear of related party assets, since a change in value of the asset or the fund can mean the asset has to be removed.

Other recent developments

You may also be interested in the following:

  1. Tax office webinars for SMSF trustees
    The Tax Office has started running webinars for SMSF trustees and superannuation professionals. The first webinar was run in October and the next will be in December. If you’re interested we suggest bookmarking the link to the ‘upcoming webinars’ pageand checking it occasionally.
  2. Future fund performance
    Members interested in comparing their performance and asset allocation may be interested in this September quarter report from the Future Fund.
  3. Interaction between enduring power of attorney and death benefit nomination
    This article from Townsend Lawyers highlights the complexity of estate issues and superannuation and the importance of getting the documentation exactly right.
  4. ASIC takes action to stop unlicensed SMSF promotion
    ASIC has commenced action in the Supreme Court of NSW seeking orders to prevent property investment promoter Park Trent Properties Group from providing unlicensed financial advice on setting up SMSFs.

Liam and Richard are founders of Eviser.

Disclaimer: This article is general in nature and does not take your personal situation into consideration. You should seek financial or legal advice specific to your situation before making any financial decision. This disclaimer is in addition to our standard Terms and Conditions.

Liam is an Authorised Representative of Genesys Wealth Advisers Limited, AFSL No 232686, ABN 20 060 778 2156.

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