The following information has been prepared for trustees of self-managed super funds (SMSF) and approved auditors.
We encourage you to seek professional advice before making a decision about any of the options outlined.
What if my SMSF exceeds the in-house asset limits?
If the market value of your assets (for example, listed shares) reduces to a greater extent than the in-house assets (for example, an asset leased to a related party) this may cause the market value ratio of in-house assets to exceed the permitted maximum of 5%.
If you have exceeded the in-house asset limits as at the end of a financial year, you need to prepare a written plan to reduce the market ratio of in-house assets to or below 5%. The plan must be prepared before the end of the following financial year. For example, if you exceed the 5% threshold at 30 June 2009, a plan must be prepared and implemented on or before 30 June 2010.
What if my SMSF breaches the super laws?
If your SMSF breaches the super laws, we will consider all the relevant circumstances before considering whether to issue a notice of non-compliance.
If the breach results from events outside your control, and you’ve taken any steps that could reasonably be taken to fix the breach, then your fund's complying status would not be affected unless there were other breaches or conduct that led to a different outcome.
Example 1
Due to the falling value of other fund assets, the in-house asset 5% test was not met as at 30 June 2009 and the trustees put in place a plan to reduce the market value ratio below 5% by 30 June 2010 by selling an in-house asset.
However, due to economic conditions the trustees were unable to sell the asset (for example, specialised equipment which is subject to a lease between the fund and a related party) by the required time, despite taking all reasonable steps.
In this instance, the fund will not be made non-complying solely because of this breach. However, the trustees would still be expected to continue to take all reasonable steps to rectify the breach.
Example 2
Due to the falling value of other fund assets, the in-house asset 5% test was not met as at 30 June 2009 and the trustees put in place a plan to reduce the market value ratio below 5% by 30 June 2010 by selling an in-house asset.
However, due to a recovery in the value of other fund assets resulting from a changed investment strategy and changing economic conditions, the market value ratio of in-house assets falls below 5% without disposing of any in-house assets.
If the trustees subsequently did not dispose of the asset as planned, they would still be considered to have rectified the issue, as the in-house asset level would be below 5%.
What if I wish to reduce the minimum annual pension payment requirement for my SMSF?
The super regulations require that you must pay a minimum amount each year to a member from that member’s pension account.
The super regulations were amended to halve the minimum payment amounts for account-based pensions for the 2008–09 and 2009-10 financial years.
For more information about this, refer to Reduction in the minimum annual payment amount.
The economic downturn may impact on your capacity to meet the minimum annual pension payment obligations, especially if asset values have dropped significantly since 1 July of a financial year. The minimum pension amount may have a greater than anticipated impact on your retirement savings.
Example 3
A 60-year-old self-funded retiree with an account-based pension is required during a year to draw a minimum annual pension payment of 4% of their account balance as at 1 July of that year (or as at the commencement date of the pension if it commenced during that year). Under the amended regulations, this percentage is reduced to 2% for the 2008-09 and 2009-10 financial years.
If the retiree drew pension payments equal to 2% of their 1 July 2008 account balance, no further pension payment is needed to satisfy the minimum annual pension for the 2008–09 financial year.
However, if pension payments drawn by the retiree only equated to, for example, 1% of the retiree’s account balance as at 1 July 2008, additional payments of 1% would be required to satisfy the minimum annual pension for the 2008–09 financial year.
If a pension was stopped during the 2008–09 financial year and a new pension was started, the minimum payment amount is not reduced by amounts previously paid on the commuted pension.
Example 4
A member was 60 years old and had a $500,000 account balance on 1 July 2008. On 31 December 2008, the value of the assets of the SMSF had reduced to $250,000, and the existing pension was stopped. On 1 January 2009, a new pension based on the new value of the assets, was started.
The minimum pension payment for the original pension is required to be met. It is calculated for the 184-day period between 1 July and 31 December 2008 as follows:
$500,000 x 4% x 184/365 = $10,082 (rounded to $10,080).
The minimum annual pension payment of the original pension was calculated using 4%.
Taking into account the reduction in the minimum pension payment for the 2008–09 financial year, the minimum pension payment for the new pension is calculated for the 181-day period between 1 January and 30 June 2009 as follows:
$250,000 x 2% x 181/365 = $2,479 (rounded to $2,480).
This $2,480 does not take into account the $10,080 paid to meet the minimum pension payment of the previous pension.
What if my SMSF cannot meet the minimum annual pension payment requirements?
If your fund fails to meet its minimum pension payment due to factors beyond your control, like not being able to liquidate assets due to current economic conditions despite taking all reasonable steps, it’s generally unlikely that an offence against the operating standards in the super laws will occur.
An offence against the operating standards will only occur where the contravention is intentional or reckless.
However, if your fund does not pay the minimum pension benefits, the payment is not considered to be a pension and therefore is not a superannuation income stream.
This means there is no entitlement to the exempt current pension income deduction.
What if my SMSF has frozen assets?
The downturn in the economy may impact on SMSFs receiving income or capital, or otherwise dealing with assets that your fund needs to pay pensions.
The duration of such constraints will vary depending on the mix of investments, nature of the constraint and cash position of the fund.
If the SMSF has significant assets that have been frozen, you can consider taking advantage of the reduction in the minimum annual pension payment requirements for the 2008–09 and 2009-10 financial years.
What if my SMSF has to pay superannuation death benefits?
The economic downturn may have a negative impact on your ability to pay a superannuation death benefit. In particular, frozen assets may affect the ability of a fund to pay a superannuation death benefit when required.
A super benefit arising from a commutation of a superannuation income stream will be a superannuation death benefit if it is paid before the latter of:
- six months after the death
- three months after the granting of probate or letters of administration on that deceased person's will or estate
- six months after finalising legal action over entitlement to the benefit
- six months after identifying and contacting potential benefit recipients, if the benefit payment was delayed because of the identification process.
If a commuted superannuation benefit is paid outside of these periods, the benefit will be a superannuation member benefit. Classifying the benefit as a superannuation member benefit rather than a superannuation death benefit may affect the tax treatment. You should contact us to find out what the tax consequences may be.
The Tax Office has a discretion to determine a payment made outside these periods to be a superannuation death benefit, but this discretion does not extend to the inability to pay due to frozen assets.
Trustees may consider making the payment of a superannuation death benefit as an income stream. However, from 1 July 2007 a superannuation income stream death benefit can only be received by a dependant and may be taxed, depending on the age of the dependant when the benefit is received and the age of the deceased at the time of death.
What if I need to value the assets of my SMSF?
Although most SMSFs are not required to comply with Australian Accounting Standard AAS 25, which requires superannuation funds to value their assets at their net market value as at the reporting date, we prefer that all SMSFs use market-value reporting for their financial statements.
If you are considering revaluing the fund’s assets, our guide Market valuation for tax purposes provides guidance as to who can determine the market value of an asset and valuation methods.
As a trustee of an SMSF, you may need to consider the value of your fund’s assets when determining the account balance for calculating minimum annual pension payments.
If I am a trustee of an SMSF, what impacts of the economic downturn do I need to report?
The super laws may require you to tell us of any events that are likely to have a significant adverse effect on the financial position of the fund – for example, where you cannot make payments to beneficiaries when obliged to do so.
However, this will only apply to you as a trustee where you are required to provide annual reports to members, such as when it is specified in the trust deed of the SMSF.
If I am an auditor of an SMSF, what impacts of the economic downturn do I need to report?
If the financial position of the fund may be or may be about to become unsatisfactory, approved auditors need to report to us and to the trustee of the fund.
Auditors can report any information obtained in the course of an audit that they believe may help us in our regulatory role. For example, situations where funds assets are frozen could be reported. Auditors could also report to us, via an auditor contravention report, a situation where they have determined that trustees had an obligation to report a significant adverse event – even though this is not a reportable contravention.
Auditors need to report excess contributions accepted by SMSFs that do not meet the required conditions.
Last Modified: Wednesday, 1 July 2009
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