SMSF Alert: January 2014

Liam Shorte and Richard Livingston highlight the past two months’ key SMSF developments.

Key Points

  • Draft legislation to ensure SMSFs using limited recourse borrowing strategy do not fall foul of ‘5% in-house assets’ rule
  • Draft tax office determination on dividend washing
  • Tribunal decision on when a company is a related party could affect SMSFs
  • Credit Suisse publishes report on the ‘selfie’ (SMSF) effect

Summer is normally a quiet period for SMSF related news, but there have been some interesting legislative and media announcements.

Draft legislation to protect properties purchased through borrowing arrangements

SMSFs are prohibited from owning more than 5% ‘in-house assets’ (broadly, investments in related entities including trusts). However, the bare trusts set up to hold property for limited recourse borrowing arrangements (LRBAs) are excluded from the rules.

But under current legislation this exemption may not be adequate, since most property purchases involve the entry of a contract and payment of deposit prior to the borrowing being put in place. For this initial period, there is a risk the exemption wouldn’t apply and the ‘in-house assets test’ would be breached – a disaster for the SMSF. Similarly, the exemption may not apply after a loan is repaid.

The new draft legislation (ex-dividend until a later date than ‘normal’ shares.

This means an investor can sell shares on the normal market once they’ve gone ex-dividend and immediately buy shares on the Special Market to replace them. As the Special Market shares are still trading cum-dividend, the investor effectively picks up the dividend and franking credit twice, but only ever risks their capital on one lot of shares.

It’s our understanding the strategy has been promoted by stockbrokers and, because it’s so simple, some investors are likely to have adopted it without proper tax advice. If you’re an ordinary investor in shares, you shouldn’t have anything to worry about. But if you’ve been trading through the ASX Special Market (and you’re not an options trader) you should speak to an accountant or lawyer as soon as possible.

SMSF Trustees need to consider who is a related party

A recent Administrative Appeals Tribunal case (Gutteridge and Commissioner of Taxation [2013] AATA 947) provides some valuable insights into when a person may be deemed to 'control' an entity, even where the person is not a director or shareholder of the entity.

While the case was concerned with 'control' in the context of the small business capital gains tax concessions, the principles could be applied to the various SMSF prohibitions on dealing with related parties.

In this case a daughter was the ‘figurehead’ of the trust (she was the sole director and shareholder of the trustee company) but it was clear that her father, who had no official position, was pulling the strings in the background, including attending meetings, liaising and bargaining with third parties.

The test of ‘control’ provides that where an entity is ‘accustomed to acting in accordance with another’s wishes’, that other person will be regarded as controlling the entity. As a result the entity is regarded as a ‘related party’ of that person.

In this case the Tribunal decided that the trust was accustomed to acting in accordance with the wishes of the father, making the trust a ‘related party’ for the purpose of the Tax Act.

This case shows that ‘control’ is not straightforward and extends well beyond who’s listed on the share register or named as a director. SMSFs entering into structures or deals with companies in which they or family members are involved (or who’ve done so in the past) should seek advice on the application of the principles of this case.

Credit Suisse report on impact of SMSFs in Aussie market

shorting these stocks, since small investors are less likely to abandon them over risks such as housing bubble concerns than other investors.

Something for all investors to think about is that the ‘dividend phenomena’ could reverse itself (causing a plummeting share price) if any of these companies were to cut their dividend payouts. This might be the case even if the dividend cut was a sensible long-term strategy.

Action point: Investors in ‘yield stocks’ (especially financials and Telstra) need to be aware of the risk that their share prices are likely to be more heavily exposed to changes in dividend policy than share prices of companies without many SMSFs on the share register.

Other recent developments

  1. ATO SMSF Statistical Report Sept 2013 - The ATO has released its latest SMSF Statistical Report. A highlight of the report is the significant increase in benefits being taken as pensions (rather than lump sums) since 2008 (up from 64% to 72%).

    Given that a significant portion of those taking lump sums will have recontributed the money to super (known as a ‘recontribution strategy’), the level of true lump sum withdrawals is likely to be overstated. This suggests that the fear that many retirees will take a super lump sum, spend it and then move on to the aged pension may be overblown.

    Another highlight was that total SMSF assets moved above $500bn.
     
  2. Division 293 Tax Assessments - The ATO has advised that it will start issuing notices in early February 2014 to collect the extra 15% tax on concessional contributions made or received by higher income earners (those earning more than $300,000) in 2012/13. You have 21 days from receiving the notice to make the payment either through your fund or directly.

    Action Point: Do not ignore the notice. Get advice from your planner or tax agent immediately you receive one of these notices to avoid penalties.

Note: Liam Shorte is an SMSF Specialist Advisor™ with Verante Financial Planning and author of The SMSF Coach.

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