SMSF News - edition 20
SMSF News - edition 20
The government has announced that pension drawdown relief will continue to be available for the 2012-13 year, extending the drawdown relief available during the 2011-12 financial year.
The minimum payment amounts for account-based, allocated and market-linked (term allocated) pensions will continue to be reduced by 25% for 2012-13. It is believed that about 125,000 self-funded retirees will benefit from this extension.
Minimum payment amounts were halved for account-based pensions in 2008-09, 2009-10 and 2010-11. In 2011-12 they were reduced by 25%.
While the government indicated that the minimum payment amounts would return to normal in 2012-13, equity markets continue to be volatile and extending drawdown relief for a further year will assist retirees to recoup capital losses as equity markets recover over time.
The ATO, working in consultation with industry, has developed a web-based document that provides answers to 22 questions about the new regulations governing SMSF investments in collectables and personal use assets.
From 1 July 2011, new standards applied to SMSFs that make new investments in collectables and personal use assets. These standards have been prescribed in the Superannuation Industry Supervision (SIS) Act regulations and apply to all new investments in collectables and personal use assets from 1 July 2011. For investments held in these types of assets before 1 July 2011, trustees have until 1 July 2016 to comply.
The 'Collectables and personal use assets - questions and answers' address a variety of topics, including what the new rules are, the transitional arrangements and a number of scenario based questions relevant to each of the rules.
An SMSF can borrow money to acquire an asset providing the arrangement satisfies certain conditions.
An SMSF trustee who borrows on behalf of an SMSF to invest in property must ensure that they fully understand and comply with the SMSF borrowing requirements.
Trustees should always consider seeking independent professional advice separate from the individual or organiser promoting the investment before entering into a borrowing arrangement.
When completing the regulatory information (section J) in the annual return, read each question carefully before answering 'yes' or 'no'. In most situations, your responses to these questions should align with those provided by the approved auditor in their audit report.
Pay attention to labels G (arm's-length investments) and M (separation of assets), as some trustees have incorrectly reported issues in the past.
Misreported responses could lead to unnecessary compliance activity from the ATO.
The ATO has three major focus areas for our SMSF compliance program:
- non or late lodgments
- compliance breaches without an auditor contravention report
- unrectified auditor contravention reports (ACR).
We also see SMSF trustees making the same breaches we have previously addressed with them.
SMSFs must lodge a return with the ATO every year after being audited. At 30 June 2011, lodgment performance for 2009 SMSF annual return stands at 93.5%. The 2010 lodgment rate at 5 July is 79.39%.
SMSF trustees who continue not to lodge returns may receive assessments with penalties based on the information available to us. Funds may also be made non-complying. Trustees who do not meet their fund's lodgment obligations may be prosecuted.
Our current compliance activities around lodgment focus on:
- related-party investments including lending to members
- breaches of the 5% in-house asset limit
- exempt current pension income (ECPI) and non-arm's length income
- ACRs lodged for SMSFs that are under 15 months old (new funds must report all identified contraventions).
Contraventions related to lending and in-house assets continue to be significant. Contraventions reported have not really changed in the past 12 months. There has been a continued upward trend of borrowing contraventions which account for close to 8% of all contraventions reported and 6.4% of rectified contraventions.
It is in your best interest to appoint an auditor who will detect and report breaches. If breaches are not reported to us, you may face serious consequences.
During 2010-11, the ATO conducted about 5,200 regulatory and income tax cases and just over 2,700 illegal early release cases against individuals.
The SMSF annual return lodgment dates are fast approaching for most funds. Trustees should start preparing their funds' financial operating statements for the last reporting year. Appoint an independent approved auditor to review these statements and confirm your fund's compliance with the super law.
It is important to report personal contributions accurately, otherwise your member may be incorrectly assessed and will have to pay excess contributions tax.
All member contributions are 'personal contributions', even if they notify you of their intention to claim a deduction for their contribution. The Notice of intent to claim a tax deduction for super contributions from your member does not change how you report the contribution to us in the SMSF annual return - even though the income tax consequences have changed for the fund and for the member.
You must report all personal contributions at the 'Personal contributions' label in the SMSF annual return. Whether these contributions are treated as concessional or non-concessional contributions is determined by what your member is allowed as a personal super deduction in their income tax return.
Ordinary income and statutory income that a complying SMSF earns from assets held for super income stream benefits is exempt from income tax. This is referred to as exempt current pension income (ECPI).
ECPI continues to be a major deduction for funds and is a major area of concern for us.
The ECPI can be claimed by all complying super funds (including SMSFs) currently paying super income stream benefits. However, an SMSF paying such a benefit is not automatically entitled to the exemption - it must meet certain other conditions.
Total ECPI represented 83% of total deductions for SMSFs in 2010, and the ATO remains concerned that some SMSF trustees do not always apply it correctly.
Common errors are:
- including contributions
- incorrectly apportioning expenses
- not meeting payment standards
- failing to obtain an actuarial certificate or where obtained, failing to apply the correct percentage to calculate the proportion of exempt income.
Tips for calculating ECPI
Make sure the method you use to calculate ECPI meets the relevant requirements:
- when using the segregated asset method, you must set aside certain assets so that the income from these can be identified as having the sole purpose of paying a super income stream benefit
- under the proportional (unsegregated) method, an actuarial certificate must be obtained before lodging the annual return. If you do not do this, your ECPI claim may be disallowed
- your SMSFs assets must be revalued to their current market value before the pension starts
- if the minimum pension standard hasn't been met in a year of income, the pension doesn't meet the definition of a super income stream and ECPI provisions do not apply.
Fixed interest - worth a closer look
With fixed interest investments, you lend money to a government or related entity, or to a public company. In return, they pay you interest. Examples of fixed interest investments include government and corporate bonds.
Despite their compelling historical record, Australians tend to pay relatively little attention to bonds and fixed interest investments. Yet these can play an important role in a diversified portfolio, particularly when there's uncertainty in financial markets.
Over the 25 years to the end of September 2011, fixed interest bonds provided a better average return than cash (such as bank deposits), listed property investments and Australian and international equities. While property and share markets experienced dramatic rises and falls, high-quality bonds and other fixed interest investments yielded an average return of 9.7% per year, exceeding Australian shares' 9.2% average.
You can invest in fixed interest through a managed fund, an index fund or corporate bonds. A range of other investments pay a fixed rate of interest, but do not always have the 'investment grade' rating of good quality bonds and fixed interest. These riskier investments include some unlisted debentures, unsecured notes, unlisted mortgage funds and mezzanine investments. It is very important to understand the distinctions, and to know what you're investing in.
Australian bond performance is based on the UBS Warburg Australia Composite Bond Accumulation Index (since September 1989) and Commonwealth Bank All Series Greater than 10 years Bond Accumulation Index (before September 1989). Australian shares performance is based on the S&P / ASX All Ordinaries Accumulation Index. Figures do not take account of fees, costs, taxes or currency movements.
As happened in a recent case, we take firm action against SMSF trustees who do not comply with the super laws. We can make a fund non-complying, disqualify SMSF trustees and apply to the court to impose penalties.
In the case of Olesen v Parker  FCA 1096, the Federal Court imposed penalties totalling $50,000 on husband and wife trustees, plus $5,000 in legal costs, due to serious contraventions of the super laws. The penalties were imposed in addition to previous action taken by the ATO, which included disqualifying the trustees and making their SMSF non-complying (which removed their income tax concessions) resulting in a $139,570 income tax liability.
The SMSF made a number of loans to related entities which resulted in serious breaches of the in-house asset rules, the arm's length investment rules and the sole purpose test.
In determining the seriousness of the contravention and amount of penalty, the court took note of a number of factors, including the nature and extent of the contraventions, the trustees' knowledge of their obligations under the super laws and the amount of loss or damage caused.
The court found the contraventions were deliberate and repetitive, having taken place over more than three years. The market value ratio of the fund's in-house assets significantly exceeded 5% in each relevant year. The trustees were also generally aware of their obligations under the super laws, having been permitted to rectify previous breaches by way of an enforceable undertaking.
The court also found that the contraventions put a significant amount of the fund assets at risk. By the end of the contravening period, the bank account balance of the fund was reduced almost to nil. The ATO had previously audited the fund, and the contraventions at that time were rectified by an enforceable undertaking by the trustees. Given the dominant role played by one trustee in relation to the contraventions, the penalty of $50,000 was apportioned in the amounts of $35,000 and $15,000. The court found that such penalties strike an appropriate balance between deterrence (specific and general) and penalty for the contravening conduct, without being oppressive.
This decision makes it clear that there can be severe consequences for SMSF trustees who do not comply with the super laws.
Earlier this year the National Institute of Accountants (NIA) changed their name to the Institute of Public Accountants (IPA). A number of SMSF publications still refer to the NIA and these will be updated over time.
Where systems require NIA details to be provided (for example, SMSF annual returns and reports to the ATO from approved auditors), users can continue to use the NIA code for the IPA until these have been updated.
Thank you for your patience on this matter.
Last Modified: Monday, 19 December 2011