- Draft stricter rules for transactions between SMSFs and related parties
- Recent case highlights the potential cost of mistakes
- ATO takes a concessional approach to minor breaches of minimum pension rule
- Draft regulations to allow continuation of pension tax exemption after death of a member
It is with great pleasure that we introduce Ruth Stringer, one of Australia’s top superannuation and financial services lawyers. Ruth has agreed to be the first member on our panel of experts and will be keeping an eye on key developments in the SMSF space and contributing to superannuation articles. Detailed information on Ruth’s background can be ASX and transfers of other assets to be accompanied by a formal valuation. These changes respond to concerns of potential abuse highlighted in the Cooper Review into superannuation.
For SMSF members it will mean that, from 1 July 2013, you can no longer simply do a share transfer and send in the off market transfer forms later. It might also mean additional costs due to brokerage, the potential to have to cross bid/offer spreads and the need to engage a qualified valuer on non-share transactions.
Action point: If you are considering transferring assets to your SMSF it may pay to act before 1 July 2013.
Tribunal decision: Verschuer vs Commissioner of Taxation (‘The Dymocks case’)
On 14 January 2013, the Administrative Appeals Tribunal (AAT) handed down its decision in Verschuer and Commission of Taxation. This case dealt with a situation where a taxpayer’s employer (Dymocks) had made a contribution on her behalf in June 2008 but it had not been allocated to the taxpayer’s account until July 2008 (the amount remaining in a clearing account for the interim period).
As a result the amount counted towards her 2009 concessional and non-concessional contributions caps (not 2008). The taxpayer, apparently unaware of the consequences of the delay in allocating the payment, made a $90,000 concessional contribution and $450,000 non-concessional contribution (utilising the three-year bring forward rule) to her SMSF in 2009.
The ATO charged the taxpayer roughly $70,000 in excess contributions tax – an effective tax rate of 78% on her taxable contributions – and declined to exercise its discretion to re-allocate the initial contribution to the 2008 year on the basis of ‘special circumstances’. Despite the technical nature of the mistake and its penal consequences, the AAT agreed with the ATO – no special circumstances existed, even though the taxpayer wasn't in control of the timing of the initial employer contribution. It took the view that the taxpayer could have investigated this before making the later contributions.
For SMSF trustees, this case serves as a reminder that the penalties for mistakes can be brutal, particularly when it comes to contributions, and that the ATO will vigorously pursue taxpayers for excess contributions tax, including through the tribunal and courts.
In A warning to SMSF property investors we warned that poor execution of borrowing arrangements is likely to be punished harshly. This case emphasises the need to make sure all your i’s are dotted and t’s are crossed.
ATO concession on minimum pension standards
Somewhat contrary to the comments above, on 23 January 2013 the ATO announced (in the publication Self-managed superannuation funds – starting and stopping a superannuation income stream (pension)) that it would take a concessional approach to minor underpayments of super pensions.
The consequences of failing to pay the minimum amount of pension (depending on members age, currently 3% to 10.5% of the account balance) in a year are severe. The pension is regarded as being terminated at the start of the relevant year, with the loss of the tax exemption on the associated income and the pension needing to be re-established going forward.
The ATO’s announcement means that, so long as all other requirements are met, minor, honest mistakes and errors outside the control of the trustee will be forgiven so long as they are small (less than one twelfth of the required minimum) and quickly corrected (within 28 days). Mistakes outside these parameters require a specific application to the ATO (which may decline to exercise its discretion to disregard the error).
Whilst the announcement seems surprisingly generous, the concession is limited. It is only likely to assist those who, for instance, have had an automatic debit fail to go through on the nominated date and corrected it shortly afterwards. Failure to be aware of the minimum pension requirements and more significant mistakes are unlikely to be forgiven.
Action point: Check your pension payments prior to the end of June each year (it's better not to have to rely on the ATO concession) but also do an extra check in July to make sure payments occurred as planned. If you find an underpayment correct it immediately.
Draft regulations on continuation of pension tax exemption after death of a member
Draft regulations were released on 29 January 2013 to allow the pension earnings tax exemption to continue following the death of a member. The new rules allow time for the deceased member's benefits to be paid out (but subject to a requirement for the death benefit to be paid as soon as practicable). These changes were announced previously by the Government and will apply to the 2012-13 and later income years.
Other recent developments
Members may also have an interest in the following:
SMSFs: A statistical overview 2010-11. The ATO released the publication Self-managed super funds: A statistical overview 2010-11, together with associated tables (19 December 2012).
Key messages for trustees. The ATO also released a factsheet Self-managed super funds – key messages for trustees (19 December 2012).
- Superannuation Fund Performance Data. For members interested in comparing their SMSF to external super funds, APRA released the latest version of the Superannuation Fund-level Rates of Return and Profiles and Financial Performance (9 January 2012).