SMSF Alert: July 2015

The Tax Office wants to stop shareholders of private firms using self-managed super funds to transfer tax-free earnings to members in the accumulation phase. Also, be aware that auditors report to the ATO on DIY funds' affairs even if the trustees stop using them and employ another auditor.

Key Points

  • Tax Office targets transferrals of private shareholdings

  • Your auditor's duty to the ATO

  • Repayments schedule for non-concessional excess contributions

 

Dividend stripping on ATO check list

Trustees of DIY funds who attempt to transfer shares in a related private company to an SMSF should be aware the Tax Office is looking out for this activity, which it calls dividend stripping.

In its taxpayer alert TA 2015/1 the ATO stated it takes a dim view when profits and franking credits are transferred to an SMSF by trustees who are owners of the shareholding. In that case, it says the original owners have escaped tax owed at their marginal personal rates.

DIY funds in pension mode pay no tax, and in accumulation phase they pay 15% tax.

Shareholders who are paid fully franked dividends must pay tax on distributions, but only the difference between their marginal personal rate and the corporate tax rate, as company tax has already been paid.

The Tax Office is concerned fund members associated with the original shareholders will benefit from franking credit refunds. It is on the lookout in particular where members are approaching retirement.

“This arrangement has features of dividend stripping which could lead to the ATO cancelling any tax benefit for the transferring shareholder and/or denying the SMSF the franking credit tax offset,” the ATO alert says.

If in doubt, seek professional advice. Harsh penalties apply.

Excess non-concessional contributions release approaches

It’s easier than it sounds to contribute too much to your retirement savings fund. Many SMSFs find themselves in the position where they have exceeded the non-concessional contributions cap, the maximum for contributions made with money which has already been taxed.

In a survey released in May, Roy Morgan Research found 42.6% of DIY super funds make contributions beyond the compulsory level.

Excess non-concessional contributions made after July 1, 2013, can be withdrawn by SMSF trustees along with 85% of earnings from those contributions.

All of those earnings must then be included as assessable income, to be taxed at the marginal rate in the year the contributions were made. Because tax will have already been paid within the SMSF by then, the trustee will receive a 15% tax offset to make up the difference between paying tax on 100% of the earnings when tax within super has been paid.

Starting around July, the ATO will contact funds that exceeded the cap in 2013-14 to ask members how they wish to handle the issue.

If they choose to release funds, the SMSF will be sent a release authority so the funds can be withdrawn. Members who choose not to release funds will be taxed on these contributions at their marginal rate.

A dropped auditor must still report to the ATO

Self-managed super funds which receive a tick from their auditor are issued an unqualified independent auditor’s report, but where an auditor gets the feeling a fund’s financial reports look a bit suspicious or that it is not complying with the super laws he or she will qualify the report.

Auditors are also legally required to report certain issues to the ATO, in an auditor contravention report.

DIY fund trustees who think they can hide any trickery from the ATO by sacking an auditor and finding another one should know there is no escape.

“While it is your right to appoint the SMSF auditor of your choice, you should be aware that an auditor’s obligation to report to us exists whether they complete the audit engagement or not,” the Tax Office says.

The rules of managing a DIY fund are complex and any auditor who highlights legitimate concerns which were unknown to trustees will prove its worth. Avoiding trouble can save you more money than it costs.

“It is better to work with your auditor when an issue is identified rather than try to cover it up or ignore it,” the ATO says.

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