Heath's Article as published on the SMSF Adviser 23 February 2017

Determining whether an amount paid to an SMSF member is a loan or access to benefits without a condition of release often depends on what the initial intention was.

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Breaching The Separation of Assets Rules

Heath's Article as published on the SMSF Adviser 04/05/16

 Under the new SISR Regulation 4.09A, where a trustee may have breached Regulation 4.09A they will have also breeched sections 31 and therefore 34 of the SISA. This can have significant tax consequences for the fund.

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Heath's article on external partnerships and the in-house asset rules was published on the SMSFAdviser 01/09/15 see the link below:

 

SMSF Adviser Article

 

Do you have an SMSF and are looking to retire, what conditions of release do you need to meet to fulfil the super laws?

Preservation Age

You must have reached preservation age which is currently 55 years of age. If you are 65 or over you can access your funds as a lump sum or income stream without any restrictions.

Retirement

You must have stopped work fully and be retired without intending to return to work.

Transition to Retirement Income Stream

If you are aged between 55 and 65 and still working you can access some of your super through a transition to retirement income stream. The amount you can access is limited.

Other Conditions of Release:

Specific rules apply to the payment of these benefits and specific advice should be obtained before accessing your funds.

Death of a Member

Upon the death of a member their super will be released to their   beneficiaries.

Incapacity

If a member has ceased gainful employment because of ill health.

Hardship

If a member can't meet reasonable and immediate family living expenses and has been receiving government income support payments for a continuous period of 26 weeks and was receiving that support at the time they applied to the trustees. The payment needs to be a single lump sum of no more than $10, 000 (only one payment in a 12 month period).

Terminal medical Conditions

If a member has a terminal medical condition and two medical professionals certify that the condition is likely to result in the member's death in the next 12 months.

Compassionate Grounds

There are specific grounds for release that the Department of Human Services must approve. If the member is experiencing financial difficulty to pay expenses and if the release is allowable under the funds governing rules the member may be able to access a lump sum on a determination of "reasonableness". 

This article is general in nature and it is recommended you obtain specific advice from a qualified SMSF specialist to assess your individual requirements.

 

 

 

Does my SMSF Require an Actuarial Certificate?

An actuarial certificate will determine what proportion of fund income is eligible to be exempted from income tax, also known as exempt current pension income (ECPI). Let's have a look at some scenarios.

Is it my intention to claim an exemption from income tax?

It may be that the earnings brought into the fund are so low that the cost of an actuarial certificate is more than the amount of tax being exempted. After determining your tax exempt percentage you can assess whether to treat all your assessable income as taxable or not.

Combined Accounts within the Fund

Do you have both accumulation and pension accounts within your SMSF? If so and your pension assets are not fully segregated from your accumulation assets you will require an actuarial certificate. It should be noted that this means for any period of time within the financial year in question.

Defined Benefit Pensions

Do you have a defined benefit pension, if so you will require a certificate.

Segregated Assets

If your assets are being treated as segregated and any of the following apply you will need an actuarial certificate:

·        If you have paid an income stream benefit other than an allocated pension, market linked pension or

         an account based pension;

·        If your SMSF is paying one of the above pensions and an additional income stream; and

·        If a benefits market value exceeds the funds supporting account balance.

For further information please visit the following ATO link:

What are the requirements for claiming the tax exemption?

This article is general in nature and it is recommended you obtain specific advice from a qualified SMSF specialist to assess your individual requirements.

 

What is Business Real Property?

 

When dealing with Self Managed Superannuation Funds (SMSF's) the term business real property is often used. One of the most frequently asked questions is what is business real property?

The term is defined in subsection 66(5) of the Superannuation Industry (Supervision) Act 1993 as follows:

"business real property" , in relation to an entity, means:

(a)    any freehold or leasehold interest of the entity in real property; or

(b)   any interest of the entity in Crown land, other than a leasehold interest, being an interest that is capable of assignment or transfer; or

(c)    if another class of interest in relation to real property is prescribed by the regulations for the purposes of this paragraph--any interest belonging to that class that is held by the entity;

where the real property is used wholly and exclusively in one or more businesses (whether carried on by the entity or not), but does not include any interest held in the capacity of beneficiary of a trust estate.

Key terms in relation to the Business Real Property Definition:

·         "Business" includes any profession, trade, employment, vocation or calling carried on for the purposes of deriving a profit. This includes primary production and professional services, but does not include occupation as an employee.

·         "Real Property" refers to land, which can generally be identified by reference to titles held over particular parcels of land. It is important to note that fixtures, including buildings, which are attached to the land form a part of the real property.

·         "Freehold interest" entitles the owner to exclusive possession of the property for an indefinite time period. It's possible for an entity to co-own real property and still hold a freehold interest, or for an entity to hold a freehold interest in a property that is strata titled.

·         "Leasehold Interest" conveys a right on the part of the entity holding the interest to exclusively possess the property for a period of time that is either pre-determined or capable of being determined.

·         "Crown land" is land vested in the Commonwealth, a State or a Territory of Australia.

The business use test - wholly and exclusively used in one or more businesses

Assuming that the SMSF holds an eligible interest in real property the underlying land must then satisfy the business use test in the definition. This requires the real property to be used wholly and exclusively in one or more businesses carried on by an entity. Of note is that this does not need to be the SMSF itself.

The character of the real property's use determines whether the business use test is satisfied. This will depend on questions of fact and degree. A holistic assessment of all facts and circumstances relating to the use of the property is made when working out whether the test is satisfied.

This assessment must be determined at the relevant point in time. For example, the test is applied when an eligible interest in real property is acquired by an SMSF from a related party. Nevertheless, the periods surrounding the acquisition also need to be considered. For instance, if there have been changes in the use of the property, these must be of a substantive and enduring nature to be considered in the business use test.
 

Additionally the business use test need only be applied to the underlying land that is the subject of the interest held by the relevant entity. For example, an owner of land may grant a lease over part of that land. In these circumstances, the lessee holds a leasehold interest in the land and therefore holds an eligible interest. If the business real property definition is being applied to the lessee, the business use test need only concern that part of the land that is subject to the lease. The mere granting of rights in relation to land such as a lease does not satisfy the business use test unless the activities, operations or actions carried on by the person who acquires these rights meet the business use test.  

 

A minor or insignificant non-business use of the property will generally still satisfy the 'wholly and exclusively' requirement.

 

For additional information and case studies in relation to business real property please see Self Managed Superannuation Funds Ruling: SMSFR 2009/1 - Self Managed Superannuation Funds: business real property for the purposes of the Superannuation Industry (Supervision) Act 1993.

 

Why is this important to an SMSF?

Under subsection 66(1) of the Superannuation Industry (Supervision) Act 1993, an SMSF trustee or investment manager cannot intentionally acquire assets from a related party.

Importantly under subsection 66(2) Business Real Property is an exception to this prohibition.

Additionally, under section 83 of Superannuation Industry (Supervision) Act 1993, in-house assets are restricted to 5% of the total assets of the SMSF. However where the asset is business real property and leased to a related party it is exempt from the in-house asset rules.

 

Loan to a Member versus Access to Benefits

Whilst working for the Self Managed Superannuation Fund (SMSF) regulator the question would often arise as to whether an amount paid to a member of an SMSF was a loan or access to benefits without meeting a condition of release. Often the hardest question would be to find out the intention at the time the money was accessed. Was there an intention to repay the money?

 

Subsection 65(1) of the Superannuation Industry (Supervision) Act 1993 (SIS Act) prohibits trustees from lending money and giving financial assistance to members or their relatives.

 

Subsection 10(1) of the SIS Act defines the term 'loan' as including:

…the provision of credit or any other form of financial accommodation, whether or not enforceable, or intended to be enforceable, by legal proceedings.           

 

As this definition is inclusive, a 'loan' can be any or all of the following:

·         a loan according to the general or legal usage of the term;

·         the provision of credit; and/or

·         any other form of financial accommodation.

 

General meaning of "loan"

 

The term 'loan' is defined in the Macquarie Dictionary 5th Edition as:

 

1.    the act of lending; a grant of the use of something temporarily: the loan of a book.

2.    something lent or furnished on condition of being returned, especially a sum of money lent at interest…

 

The definitions above point to a loan involving something being given temporarily with the intention that it will be returned. Other indicators include a loan agreement, the charging of interest and commencement of repayments from the member to the fund. Also please note that under the new penalty regime failure to comply with section 65 of the SIS Act could result in a possible charge of $10,200 per trustee. Where a loan cannot be substantiated the money paid could be deemed to be access of the member's benefits.

 

When a benefit can be accessed

 

The payment standards are prescribed in Part 6 of the Superannuation Industry (Supervision) Regulations 1994 (SIS Regulations) and the conditions of release are set out in Schedule 1 of the SIS Regulations. 


SIS Regulations subparagraph 6.17(2)(a)(i) states that a member's benefits in a fund may be paid by being cashed in accordance with Division 6.3.

SIS subregulation 6.18(1) states that a member's preserved benefits in a regulated superannuation fund may be cashed on or after the satisfaction by the member of a condition of release.

 SIS subregulation 6.01(2) defines a condition of release to mean a condition of release specified in Column 2 of Schedule 1 and, subject to regulation 6.01B, a member of a fund is taken to have satisfied a condition of release if the event specified in that condition has occurred in relation to the member.

 

The conditions of release listed in Schedule 1 include:

 

  • Retirement
  • Death
  • Terminal medical condition
  • Permanent incapacity
  • Temporary resident permanently departing Australia
  • Termination of gainful employment with a standard employer-sponsor of the regulated superannuation fund on or after 1 July 1997 (where the member's preserved benefits in the fund at the time of the termination are less than $200.
  • Severe financial hardship
  • Attaining age 65
  • Compassionate grounds
  • Termination of gainful employment with an employer who had, or any of whose associates had, at any time, contributed to the regulated superannuation fund in relation to the member.
  • Temporary incapacity
  • Attainment of preservation age. 

 

Where the member has not met any of the conditions of release shown above the member will be assessed as having accessed benefits without meeting a condition of release. Therefore the amount paid to the member will be assessed as part of their normal assessable income.

 

Please note that this regulation falls under the operating standards of the SIS Act and therefore is subject to the new penalty regime imposed by the ATO from 30 June 2014. This holds a possible charge of $3,400 per trustee so it is very important to follow the requirements set out above.

 

 

 

Value Assets at Market Values

Commencing for the financial year ending 30 June 2013 the Superannuation Industry (Supervision) Regulations 1994 state that the fund's assets must be recorded at its market value.

 

Although this poses little problem for assets such as cash, term deposits or shares the introduction of this requirement has larger implications for assets such as real estate, collectables and other real assets.

 

Market value is defined in the Superannuation Industry (Supervision) Act 1993 as:

 

'market value', in relation to an asset, means the amount that a willing buyer of the asset could reasonably be expected to pay to acquire the asset from a willing seller if the following assumptions were made:

                    (a) that the buyer and the seller dealt with each other at arm's length in relation to the sale;

                    (b) that the sale occurred after proper marketing of the asset;

         (c) that the buyer and the seller acted knowledgeably and prudentially in relation to the sale.'

 

Often real property will need to be valued by an expert such as a registered valuer or real estate agent. However in cases where this is impracticable, reasonably objective and supportable data will suffice.

 

Additionally, forcing the SMSF assets to be valued at market value rather than historical value should ensure SMSF members receive more accurate information of their fund's financial position.

 

 

 

Limited Recourse Borrowing Arrangements

Current trends show that more and more SMSF's are investing in property through the use of limited recourse borrowing arrangements. Therefore it is of ever greater importance that this process is completed in-line with ATO requirements.

For trustees thinking of undertaking a limited recourse borrowing arrangement please find a useful checklist below:

  1. Ensure your SMSF's deed allows you to borrow, grant security and allow assets to be held by a bare trust.
  2. Amend your SMSF's investment strategy to permit the acquisition of the asset (property or shares) and allow borrowing for that purpose.
  3. Who is the bare trust? Arrange for the bare trust deed to be prepared and the bare trustee company to be registered.
  4. Prepare a minute, for the bare trust, showing a resolution that the trustee will act as custodian of the asset for the SMSF trustee.
  5. Negotiate for the purchase of the asset in the name of the bare trustee.
  6. Complete loan agreements between the SMSF Trustee/s and the lender. Make sure it is clear that the loan agreement states 'limited recourse borrowing loan'.
  7. Purchase the asset using only the SMSF's money and the loan.
  8. Ensure that upon repayment of the loan the asset is transferred from the bare trust to the SMSF.

When sourcing the finance for the purchase of the asset you can lend from either private sources (including members) or traditional lenders.

 This article is general in nature and it is recommended you obtain specific advice from a qualified SMSF specialist to assess your individual requirements.

 

Although this requirement is covered in the covenants, subparagraph 52(2)(g) of the Superannuation Industry (Supervision) Act 1993 (SISA), from August 2012 this has now moved to an operating standard allowing the ATO to take firmer action with trustees who fail to follow this requirement.

The assets of a Self Managed Superannuation Fund (SMSF) must be registered with the legal owners being the trustee/s of the fund for the SMSF. An example of this would be Mr A Jones and Mrs B Jones as trustee for the Jones Superannuation Fund or Jones Pty Ltd as trustee for the Jones Superannuation Fund. This is to protect the assets of the fund in event of insolvency or bankruptcy.

It is noted that in some Australian States land and buildings, known as real property, cannot be held in the name of the SMSF. In this instance the minimum that you should do is prepare a declaration of trust stating that the property is held by the trustees on behalf of the fund.

Failure to follow this requirement can now result in the being fined up $17,000 and/or making the fund 'non-complying' which means that that the fund no longer has a right to its concessional tax treatment. When this occurs the fund will be taxed at the top marginal tax rate rather than the concessional rate of 15%.