• Update – February 2015

    This webinar discussed:

    • transition to retirement
    • dividend washing
    • non-commercial loans
    • death benefit payments
    • code of settlement.
    • an update on our compliance program
     

    See also:

    Your questions answered

    The following questions were asked during the webinars we ran in February 2015.

    The questions have been separated into the following categories:

    Transition to retirement income streams

    Does a full commutation count towards minimum pension limit of a full account-based pension?

    In a full commutation, the member’s entire super benefits are paid as a lump sum and, as a result, the income stream ends. A lump sum payment made as a result of a full commutation of a transition to retirement income stream cannot count towards either the minimum or the maximum annual amount because the income stream ceases before the payment is made.

    For more information, refer to Superannuation determination SMSFD 2014/1External Link.

    Under what circumstances can a transition to retirement income stream be commuted to a lump sum?

    Provided the rules of the SMSF and the transition to retirement income stream allow it, a transition to retirement income stream can be commuted and paid as a lump sum if the member has satisfied a condition of release where the cashing restriction for preserved benefits and restricted non-preserved benefits is 'Nil'. For example, a person can receive their super benefits as a lump sum once they have reached their preservation age and retired, or turned 65 years of age.

    The only other times that a transition to retirement income stream can be commuted is to:

    • cash an unrestricted non-preserved benefit
    • pay a superannuation contributions surcharge
    • give effect to an entitlement of a non-member spouse under a payment split
    • pay an amount to give effect to a release authority in respect for excess contributions or Division 293 tax
    • satisfy an obligation to pay an amount to the ATO under subsection 20F(1) of the Superannuation (Unclaimed Money and Lost Members) Act 1999.

    For more information refer to SMSF – transition to retirement income streams.

    Do transition to retirement income streams have to use up non-preserved balances first?

    If the member has a combination of any of preserved, restricted non-preserved or unrestricted non-preserved benefits allocated to the transition to retirement income stream, the payments from the transition to retirement income stream must be deducted from the preservation classes in the following order:

    • first, from any unrestricted non-preserved benefits
    • second, from any restricted non-preserved benefits
    • third, from any preserved benefits.

    For more information refer to SMSF – transition to retirement income streams.

    Can a member end their transition to retirement income stream without paying the minimum payment requirement for the year?

    If the member ends the income stream and the income stream payments for the year do not meet the minimum amount, then the payments that have already been made during the income year are considered to be lump sum payments rather than income stream payments.

    This may affect the amount of tax that the SMSF must pay because it will not be entitled to treat income or capital gains from the assets supporting the (previous) income stream as ECPI in the year the commutation takes place.

    Another issue that you need to consider is that the income stream payments that you have already made during the income year will be considered to be lump sum payments. If the member has not satisfied a condition of release with ‘Nil’ cashing restrictions (such as reaching their preservation age and retiring), then this may be a breach of the payment standards in the Superannuation Industry (Supervision) Regulations 1994.

    You can find more information at SMSFs: starting and stopping a pension.

    If you want advice about an SMSF’s specific circumstances, you can apply for SMSF specific advice.

    Does a transition to retirement income stream automatically convert to an account based pension on reaching the age of 65?

    When a member who has reached their preservation age and commenced a transition to retirement income stream subsequently retires or satisfies another condition of release with a 'nil' cashing restriction (such as reaching age 65), the pension does not cease. The pension continues and all benefits generally become unrestricted non-preserved benefits.

    Satisfying a condition of release with a 'nil' cashing restriction means that the pension is no longer subject to the following restrictions generally characteristic of a transition to retirement income stream:

    • the maximum annual pension payment limit no longer applies
    • some of the commutation restrictions that affect a transition to retirement income stream will cease to apply.

    You can find more information at SMSF – transition to retirement income streams.

    Non-commercial loan arrangements

    In determining whether a particular loan is arm's length – is weight given by the ATO to any of the listed considerations?

    Determining whether a particular loan would be acceptable to arm’s length lender dealing at arm’s length requires careful consideration of all the terms and conditions of the loan and also of loans that were being offered publicly at the time.

    We have listed conditions that we consider when determining if a particular loan is has been entered into on an arm’s length basis. These include:

    • the interest rate
    • the amount borrowed
    • the nature and amount of security taken for the loan
    • the term of the loan
    • the regularity and frequency of principal repayments
    • whether the loan has operated in accordance with its terms.

    None of these factors is given greater weight than any other and it is also not possible to consider any of these factors in isolation. Whether a particular loan would be acceptable to arm’s length lender depends on the whole package taken together. The overriding question trustees should consider is would these loan conditions be offered by a non-related party – for example, an Australian financial institution?

    If you’ve reviewed our guidance and are still unsure whether a particular loan arrangement is non-commercial, you can write to us to request a Private ruling.

    Death benefits

    If a member dies and a lump sum death benefit is to be paid to another trustee/member of the SMSF, can we just do a transfer by way of journal?

    The SMSF cannot pay a lump sum death benefit through a journal entry. Such an arrangement would not satisfy the requirement that a death benefit must actually be paid by transfer of ownership of the deceased member’s assets to the recipient of the death benefit.

    Please note that ATO ID 2015/2 and ATO ID 2015/3 have been withdrawn and replaced with ATO ID 2015/23 which specifically considers this question.

    If the SMSF does not have enough cash to pay a lump sum death benefit, can the SMSF pay the death benefit by transferring some shares?

    If the death benefit is paid as a lump sum, then the payment can be made in cash or through the transfer of an asset (such as shares).

    Is there any time limit for the payment of death benefit?

    A member‘s benefits in a regulated superannuation fund must be paid to the beneficiary as soon as practicable after the member dies.

    ‘As soon as practicable’ depends on the circumstances. In general, if the SMSF takes more than six months to pay a death benefit, the trustees should be prepared to demonstrate why it was not practicable to pay the death benefit sooner.

    Compliance program

    If a trustee accidentally withdraws money into their personal account and repays it as soon as possible – how is this treated?

    If a trustee transfers money from the SMSF’s bank account into their own bank account without meeting a condition of release, they have breached subsection 65(1) of the Superannuation Industry (Supervision) Act 1993.

    However, whether an auditor must report the contravention to us depends on the circumstances. Completing the Auditor/actuary contravention report (PDF, 399kB)This link will download a file (NAT 11299) and eSAT describe the tests that an auditor uses to decide whether the contravention must be reported to the ATO.

    In addition to these tests, we would accept that an auditor did not need to report the contravention to us where all of the following were true:

    • the transfer was the result of a genuine mistake, and
    • the transfer was reversed on the same day as it occurred, and
    • this was the first occasion that the trustee had made a mistake of this type.

    Regardless of whether the auditor was required to report the contravention to the ATO, we expect that the accidental transaction would be reversed as soon as the trustees realise their mistake.

    Some SMSF service and auditing providers are getting work done overseas. What is the ATO's view on this?

    Only Australian residents can be registered as approved SMSF auditors but there is no legal reason that an approved SMSF auditor cannot outsource some parts of their work to an overseas provider. However:

    • the Australian approved SMSF auditor is responsible for the quality of the audit
    • all records must be available upon request by the ATO
    • we do monitor the performance of SMSF auditors and refer auditors to ASIC for investigation where we form the view that an auditor is not suitable for registration.

    If fund's collectable assets are insured by the gallery in which they are stored, would that meet the insurance requirements for collectables?

    Collectables and personal use assets purchased by the fund must be insured in the name of the fund within seven days of the purchase.

    If the only insurance for the asset was purchased by a third party and was not in the fund’s name, this would be a contravention of sub-regulation 13.18AA (5) of the Superannuation Industry (Supervision) Regulations 1994.

    If an SMSF acquired a collectable or personal use asset prior to 1 July 2011, it must insure the collectable in the name of the fund prior to 1 July 2016 to comply with the rules.

      Last modified: 21 Jul 2016QC 49081