SMSF News - edition 21
SMSF News - edition 21
You should be - it not only makes sense but you're legally responsible for all decisions.
In a self managed super fund, trustees will be held to be equally responsible and liable if the SMSF breaches superannuation and tax laws.
Best practice would have every trustee fully informed and involved in the running of their SMSF. By receiving this newsletter, you are demonstrating your commitment to understanding issues that affect your SMSF. If you have a trustee in your SMSF who is not as involved, it is recommended that you send them this message.
All new trustees get a letter from the ATO when they commence, and they sign a trustee declaration to indicate they understand and accept their responsibilities. While advisers can assist you, your trustee responsibility cannot be delegated.
A recent decision by the Administrative Appeals Tribunal (AAT) - Shail Superannuation Fund v Commissioner of Taxation - highlights the possible consequences when a trustee is not fully involved.
The AAT case involved a husband and wife operating an SMSF. The husband withdrew nearly all the member benefits from the fund and left the country without paying the required tax. The fund was made non-compliant for serious contraventions.
While the AAT was sympathetic to the wife's situation as an individual, they affirmed the ATO's decision, making the point that 'any appearance of unfairness to (the trustee) as an individual should not, however, obscure the nature of the fund, the role of trustees or the regulatory regime within which they function'.
It is a clear message about the responsibilities of all trustees. The ATO asks that you consider your involvement in running the SMSF, review the SMSF Trustee Declaration and make sure that this doesn't happen to you.
A beneficiary of the Interhealth Superannuation Fund started legal proceedings to be paid benefits from the fund upon retirement.
The members of the fund were commercially involved as directors of Interhealth Energies Pty Ltd and personally involved. The Interhealth Superannuation Fund was set up for the retirement of both trustees. The commercial and personal relationship did not endure. One of the members was removed as a director of the corporate trustee.
Where a self managed superannuation fund (SMSF) has a corporate trustee, it is a requirement that each member of the fund is a director of the body corporate. This is to ensure that each member is fully involved and has the opportunity to participate equally in the decision making processes of the fund (that is, that the fund is truly self managed).
Removing the member as a director of the corporate trustee meant that the fund no longer met the definition of an SMSF and the member could no longer influence the decision making processes of the fund. The corporate trustee entered into an enforceable undertaking with the Commissioner of Taxation to pay the beneficiary his full super entitlements and to collect unpaid trust distributions.
Paying the beneficiary his full super entitlements would result in the beneficiary's membership with the fund ceasing, and the fund once again meeting the definition of an SMSF.
The trustee failed to pay the beneficiary his full super entitlements and collect unpaid distributions. There were a number of other breaches also identified.
The ATO initially investigated this case after the beneficiary stopped being a director of Interhealth Energies Pty Ltd. This meant that the fund no longer met the definition of an SMSF. If the trustee of the fund is a body corporate, each member of the fund must be a director of the body corporate.
Regardless of your personal relationship with other SMSF directors, trustees or members, trustees must at all times be professional, abide by the regulatory rules and carry out their trustee obligations.
On 13 December 2011 we released the publication Self Managed Superannuation Funds: A Statistical Overview 2008-09.
This overview uses 2008-09 data to update the Statistical Summary of Self Managed Superannuation Funds. The summary was produced by the Super System Review in December 2009.
Its release forms part of the ATO's Stronger Super measure to make available additional SMSF statistical information. We expect to release a further update based on 2009-10 data in March.
Key points from the overview include:
- In the five years to 30 June 2010, the SMSF sector was the fastest growing sector of the Australian super industry.
- In recent years there has been a trend for members of new SMSFs to be from younger age groups than those of the total SMSF member population.
- SMSFs directly invested 76% of their assets, mainly in cash and term deposits and Australian listed shares.
- The data shows that SMSFs respond to government initiatives or changing economic circumstances, particularly in relation to total asset holdings and shifts in the types of asset held.
- Negative rates of returns by SMSFs for 2007-08 and 2008-09 are consistent with the rest of the superannuation industry, but the negative returns by SMSFs are estimated to have been smaller than for APRA regulated funds.
ATO Assistant Commissioner of Superannuation, Stuart Forsyth, and Assistant Commissioner of Aggressive Tax Planning, Ann Hurst, will meet with superannuation advisers in July 2012 to gain a direct understanding of issues and risks affecting the superannuation industry.
These visits form part of the ATO's approach to engage and establish an open and frank dialogue with the industry, to identify emerging issues and aggressive tax planning risks. They will also discuss current trends and patterns in the SMSF market.
'We had an overwhelmingly positive response from 58 advisers last year,' said Ann Hurst. 'It gave us insight into the hot issues facing the SMSF industry.'
Meetings will be organised in Brisbane, Adelaide, Sydney and Melbourne.
'We have conducted similar visits for two years and a different approach will be trialled this year,' Stuart said. 'We will meet with a smaller but diverse group of SMSF advisers such as auditors and administrators. This will allow us to discuss matters at length and in-depth.'
The information collected during these visits will help the ATO continue to develop and refine targeted support services for SMSF trustees and advisers.
Invitations to participate will be issued in May 2012 to a small group of superannuation advisers.
The superannuation prosecution strategy outlines factors used by the ATO when considering possible prosecution action in relation to taxation and superannuation laws where the main concern relates to a superannuation issue or risk.
Prosecution is a powerful instrument of deterrence and accountability and is the most severe of the compliance strategies available. Although prosecution action is not frequently used, it is an important part of the overall management of compliance in relation to:
- regulatory and income tax obligations of SMSFs
- taxation obligations of APRA regulated funds
- compliance with superannuation guarantee obligations
- approved auditors
- access and information gathering notices
- timeliness and accuracy of information reported to the ATO on which we manage various aspects of the superannuation and taxation system
- integrity of the system including the use of TFN
- employer quotation of TFN to superannuation funds.
When completing the regulatory information (Section J) in the SMSF 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 the audit report.
Particular attention should be given to labels G (arm's length investments) and M (separation of assets) as some trustees have incorrectly reported issues in the past.
Inaccurate responses may indicate a regulatory issue which can lead to unnecessary compliance action from the ATO.
The SMSF Member Verification System (MV system) is used by large super funds when processing rollovers to SMSFs. The system has highlighted that SMSF trustees are failing to maintain up-to-date records with both their large super funds and the ATO.
The SMSF MV System uses ATO records and any discrepancy between ATO records and large super funds will result in no match. Where large super funds cannot verify SMSF membership, they will not process rollover requests to a particular SMSF. For example, if an SMSF member submits a rollover request to their large super fund using another name, the system will provide no match and the rollover will be rejected.
SMSF trustees who have recently restructured their fund membership must inform the ATO as required under super laws. Although a rollover request may be legitimate, failure to keep ATO records up-to-date or a misalignment of member details will mean further delays in the rollover process until records are updated. To avoid delays in processing rollover requests, SMSF trustees should ensure that the fund's records are up-to-date with both the ATO and their large super fund before requesting a rollover into their SMSF.
Trustees can update their fund's details:
- online via Australian Business Register if the SMSF is registered for online services with an AUSkey or ATO digital certificate - changes will usually be processed within 24 hours
- by phoning 13 10 20 between 8am and 6pm, Monday to Friday - changes will usually be processed within 24 hours
- by submitting a Change of Details form - changes may take up to 28 days to process, so take this into account if you want to roll over any super into your SMSF.
Tax agents can update their clients SMSF details:
- online via Australian Business Register if the SMSF is registered for online services with an AUSkey or ATO digital certificate - changes will usually be processed within 24 hours
- by phoning 13 72 86 and using Fast Key Code 4 4.
The ATO ceased issuing ATO digital certificates in April 2010 due to the introduction of AUSkey, the Australian Government online security system.
While you can continue using your digital certificate to login to our online services, you must upgrade your digital certificate to an AUSkey before it expires to ensure any permissions stored in Online Access Manager are carried across to your new AUSkey.
The only real estate you can transfer into your SMSF is business real property. You cannot transfer a residential investment into your SMSF. You also cannot transfer a property that has both business and non-business uses.
Business real property is defined in the super laws as:
- any freehold or leasehold interest in real property 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 the beneficiary of a trust estate.
- the exception to this rule is an area of real property with a dwelling (for example, a house) where both the area and the dwelling are used predominantly for domestic or private purposes and the area is two hectares or larger.
Before you transfer a business real property into your SMSF, make sure you understand and comply with the super laws concerning the property transfer, both before and after the event. The real estate must be business real property both at the time and after it is transferred into the SMSF.
Moreover, you must have a legally binding lease between your SMSF and your business. If you do not have a lease in place you will be breaching the super laws. The lease must be on arm's length terms at market rent.
If the rent is below market value:
- The lease could be viewed as a way of providing financial assistance to a related party of the fund - a trustee of an SMSF is prohibited from providing financial assistance to a related party of the fund.
If the rent is above market value:
- The lease could be viewed as a way to avoid the excess contributions tax. The excess rent may be counted as a super contribution and you may exceed the excess contributions cap which could lead to severe tax consequences.
Obtain independent advice from a qualified professional if you are unsure of the market rent rate.
Thinking of renovating?
If you transfer a property into your SMSF, it is important that your business does not carry out significant improvements to the property that becomes an asset of your SMSF. This may breach the super laws as the improvements may amount to an acquisition by the SMSF from a related party.
As an SMSF trustee, any investment you make for your SMSF must be consistent with your fund's investment strategy. As with any investment you need to consider issues associated with the risk and return, maintaining diversity in your SMSF assets, liquidity of your fund and how your fund can repay any loans.
New online information is available for you when completing the Rollover benefits statement (RBS) (NAT 70944) and the Self-managed superannuation fund annual return (NAT 71226).
It includes practical examples of how to apply the proportioning rule when you receive superannuation contributions for a member and then roll over any of their superannuation interest to another fund in the same year.
To complete the RBS you must calculate the extent to which these particular contributions are treated as included in the rollover. To complete section F of the annual return you must also calculate the extent of these contributions that remain in the fund after the rollover.
Ensure you use the proportioning rule based on the method explained in Taxation Ruling TR 2010/1 example 10 and apply the principles outlined online. This will help you avoid duplicate reporting of contributions that may lead to unnecessary excess contributions tax assessments or compliance activity from the ATO.
Australia has entered into two new bilateral agreements with Austria and the Slovak Republic which commenced on 1 January 2012.
A bilateral agreement removes the issue of double super coverage, provided the employer obtains a certificate of coverage from us and you remain covered in Australia by the super guarantee laws. Australia has agreements in place with 19 other countries.
If you are an employee who has accepted an Australian employer's offer to work temporarily overseas and are a trustee of an SMSF, you must review the SMSF management arrangements before you leave Australia.
All super funds that are tax agent clients, and are not required to lodge earlier, must lodge by 15 May 2012.
New registrant (taxable and non-taxable) SMSFs need to lodge by 28 February 2012, unless required to lodge earlier.
SMSFs with total income in excess of $2 million in the latest year lodged (excluding large/medium SMSFs) must lodge by 31 March 2012 (payment is also due on this date).
Fund income tax returns not required to be lodged earlier and not eligible for the 5 June lodgment concession date must be lodged by 15 May 2012.
Payment (if required) is also due on this date.
To support to an increasingly competent auditing profession, we are continuing to update and develop our electronic superannuation audit tool (eSAT). Auditors can complete compliance audits and prepare and lodge auditor contravention reports (ACRs) online. eSATs reference material has also been improved to provide assistance for more complex circumstances.
There has been a significant increase in the use of eSAT. Downloads for version four have continued to show strong uptake of the product and ACRs lodged through eSAT for the half year to the end of December 2011 represent 37% of all ACRs for the six months, up from 27% 12 months ago.
We will continue to inform you of all the additional features in the new versions of eSAT we develop. Each release contains updated reference material, with the current version (v4) allowing compliance reviews and lodgment for 2010-11. It also enables preparation and lodgment of ACRs from earlier years.
The work of approved auditors is fundamental to the health of the SMSF market. It's a point of distinction for how we approach our SMSF regulatory task, compared for example with the self-assessed nature of income tax where the identification of risk and cases can be more complex - and it's a luxury from our perspective to have each fund independently and professionally assessed and to have identified breaches reported to us.
But equally, approved auditors play an important role on behalf of the community by providing assurances that the considerable tax concessions afforded to complying super funds are directed to the funds that are meeting the prescribed rules. So naturally we're keen to support an increasingly competent auditing profession.
See how it can be easier and more efficient for you to report contraventions. Download eSAT here.
The government has released exposure draft legislation and a draft explanatory memorandum giving effect to the government's commitment to improve the administration and management of super accounts.
Exposure Draft - Superannuation Data and Payment Standards was available for public consultation until 23 February 2012.
To view the draft legislation, visit Treasury's Stronger Super website.
From 1 July 2013, self managed superannuation funds (SMSFs) will be required by law to use the data and e-commerce standard to ensure all rollovers are made in an approved electronic form.
Large and medium employers will be required by law to adopt the standard from 1 July 2014. From 1 July 2015, small employers with less than 20 employees will be required by law to use the standard for sending contributions to funds, subject to further consultation on impacts to this group.
However, SMSFs will be required to process contributions that are sent by employers who voluntarily start using the standard from 1 July 2013.
The standard will make it easier for employers as they will only need to follow one standard for all contributions, rather than having different requirements for different funds.
Having a standard in place across the industry will improve the productivity of back office processes for the super system and enhance data integrity.
The ATO is working with industry to develop efficient and effective mechanisms to assist SMSFs adopt the standard.
Many of us use online accounts to manage our money for banking, online trading or other financial services. Online accounts make life easier and quicker most of the time; as well as saving paper, but with so much personal information online, you must take security seriously.
During its regular surveillance of the Australian financial markets, ASIC recently became aware of several intrusions into stockbroking accounts involving unauthorised access and trading.
If you notice any unauthorised trading on your broking account, contact your stockbroker immediately. This will help prevent further unauthorised activity.
Intrusions like this remind us that there are some simple things you can do to help secure your online accounts.
Tips for protecting yourself online:
- Ensure your anti-virus software is up to date.
- Never log-in via a link from an email. Always type the URL directly into your web browser.
- Never use public computers for making financial transactions or trades. If you use a computer at a library or internet cafe, your account details will be stored on the computer.
- Report any unusual activity immediately to your provider.
- Keep your smart phone or tablet device safe. Treat it like a wallet or purse and know where it is at all times.
- Be careful what information you give on social networking sites. Identity thieves trawl sites like Facebook and Twitter for personal details they can use.
- Disable pop-ups on your browser. People can use pop-ups to install programs on your computer that spy on you or record your key strokes. This is how they steal your passwords. Most internet browsers (for example, Internet Explorer, Firefox, Chrome and Safari) let you block pop-ups by selecting 'Turn on pop-up blocker' or a variation of this term under the 'Tools' or 'Settings' menu.
- Make your passwords hard to guess. Use a combination of numbers and letters and change your passwords frequently.
- Enable security settings on your mobile device. Turn off wifi, Bluetooth and GPS when not in use.
If you are attracted to hybrid securities and notes offered by household name companies and trusted brands, be aware that hybrids are very different from 'normal' corporate bonds. Make sure you understand the conditions and risks before committing your money.
Some hybrid securities ask you to take on equity-like risks but only give you bond-like returns. Some also have terms and conditions allowing the issuer to exit the deal or suspend interest payments when they choose.
Hybrid securities may not suit you if you need steady returns or capital security.
What are hybrid securities?
Hybrid securities are one way companies can borrow money from investors, while paying interest. They are offered by well-known companies and are generally traded on a secondary market such as ASX.
Hybrid securities have higher risks than most types of corporate bonds. While the conditions, timeframe, risks and interest rates of each hybrid offer differ, some have particularly complex features and risks:
Market price volatility - Like company shares, the market price of listed hybrid securities may fall below the price you originally paid, especially if the company suspends or defers interest payments, or if performance declines.
Subordinated ranking - Hybrid securities are generally unsecured, meaning repayment is not secured by a security over any asset. If the company becomes insolvent, you will generally rank behind other bondholders.
Deferral of interest payments - Some offers allow the company to suspend interest payments for a number of years. While the interest owing may be cumulative, this could leave you temporarily out of pocket.
Early termination - Some hybrid offers allow the company to terminate or buy back the investment early, but don't give you that same right.
Extremely long timeframes - Some hybrids have terms lasting decades. With a 60 year term, a 40 year-old investing today needs to live to 100 to see their investment mature. You may be able to sell the security on a secondary market such as ASX, but only if there is a demand for that security.
Questions to ask
Get these details from your financial adviser or by reading the prospectus:
- What are the risks now and in the future?
- Will the returns offered adequately compensate for the investment risks?
- How does the interest rate compare with other investments on a risk adjusted basis? Can other investments provide a similar return?
- When can the issuer exit the deal or suspend interest payments?
- What are the maturity dates?
- Will this suit your personal investment risk profile?
- Can you exit this investment if your circumstances change?
Last Modified: Wednesday, 29 February 2012