Dunno? Dealing with contributions made in error [VIDEO]


I regularly get asked questions from readers through my blog on issues and strategies relating to self managed super funds, so I thought why not bring these questions to ‘life’ by starting a new regular weekly blog, “Dunno: ask a question”.

Each week I will hand-pick a reader question and respond with a video, audio (blogcast) or written response.  Look out for these each and every Thursday.  If you “dunno” an answer, don’t be afraid to ask Aaron the question!

Reader Question:

Can a deposit into a SMSF made in error be withdrawn in the next financial year without a tax penalty if both members of a fund were over sixty-five when the deposit was made and the fund was in accumulation mode? How would such a deposit be described by the auditor of the fund?

Tell us what you think about the “Dunno?” blog posts

Disclaimer

What lies ahead for SMSFs in 2013?


2013

A Happy New Year to all my readers…

With the SMSF industry growing strongly, 2013 is likely to provide one of the most challenging and competitive (yet rewarding) periods for SMSF professionals. The year ahead will require practitioners to ‘step-up to the plate’ and be ready for many of the reforms that will reshape the advice and compliance landscape – many that I see as ‘game-changing’ – not only for SMSFs, but for superannuation and financial services in general.

This year will see the culmination of Government reforms, with the introduction of many of the changes related to Future of Financial Advice (FoFA) and Stronger Super. These will have a wide-ranging impact on financial advisers, accountants and auditors, who will all be required to demonstrate increased competency as service providers within the SMSF industry.

So what else will we see in 2013?

There will be no shortage of news and changes when it comes to superannuation… here are just a few that I expect will make some noise this year:

  • With the Mid-Year Economic & Fiscal Outlook (MYEFO) announcing that the Government will amend legislation to extend the tax exemption after death when paying pensions, it is likely that we will see the finalisation of draft ruling, TR 2011/D3. This final ruling is expected to provide much-needed clarity to a range of issues related to when a pension commences and ceases.
  • Outcomes from the Inspector General of Taxation’s (IGT) review of excess contributions – the ATO’s approach to excess contributions has come under significant attack from individuals and practitioners, which has led the IGT to launch a review. This review is designed to address concerns around:
    • ECT administration, such as the timeliness, clarity and comprehensiveness of ATO advice (including where discretion is to be applied),
    • the quality of communication; and
    • the adverse impacts of the ATO’s administration on taxpayers and tax practitioners.
  • There has been a lot of recent discussion and activity around limited recourse borrowing arrangements (LRBAs), with both the ATO and ASIC having issued warnings about the correct structuring of arrangements and promoters schemes with property investing in super.  This year we are likely to see some action on bringing sections 67A & 67B into the financial consumer protection framework by making any LRBA acquisition a financial product. It is not a unanimously agreed decision within industry, but unless some action is taken, the next likely step might be to remove the ability to borrow using limited recourse arrangements altogether.

Election “super” promises or dealing with a changing landscape?

With the Labor Government having recently withdrawn from their commitment to delivering a budget surplus, this year’s Federal Budget could see the delivery of a few superannuation ‘sweeteners’ – in particular, an increase to the concessional contribution cap for those over 50. Subject to being re-elected, the Labor Government still appears committed to their concessional contribution cap extension for those 50 and over with super account balances of less than $500,000. But will there be something more to grab votes?

The opposing view to vote-grabbing was highlighted last year in a speech titled “Future Challenges: Australia’s Super System” given by Dr Martin Parkinson, Secretary to the Treasury, at ASFA’s conference (28 November 2012). Dr Parkinson shared some valuable insights about the challenges that face Australia’s superannuation system. He mentioned that the future direction of the retirement income system must be characterised by Australian’s having adequate income in their retirement, through a system that has integrity and is sustainable over the long-term.

But what does this mean for the year ahead?

The issue of adequacy will evolve in 2013, with the commencement of increases to compulsory superannuation from 9% to 12% by 2020. From 1 July 2013, a further 0.25% in compulsory superannuation (SGC) will be required to be paid on behalf of employees. With changes to compulsory super levels expected to provide up to 90% replacement income for an individual who is currently 30 years old, much of the attention now needs to focus on the management of various retirement phases and risks such as longevity. This issue has been at the forefront of discussions with the Government’s Superannuation Roundtable and will continue throughout 2013 and beyond.

Sustainability appears to be one of the Government’s greatest challenges, due to global uncertainty and an ageing population. A key question is whether the current framework for our superannuation system will be sustainable into the future. Continued budgetary pressures may put a further ‘squeeze’ on superannuation policy, rather than affording to offer some incentives in an election year. Dr Parkinson noted in his speech that “…scrutiny will be even more important to the extent that existing concessions are seen to favour some at the expense of the majority”.  Do you remember some of those recommendations in the Tax Review by Dr Ken Henry?  I don’t think we’ll see any courageous decisions in retirement policy an election year!

The growth of SMSFs certainly wasn’t lost on Dr Parkinson and will continue to be closely scrutinised by Treasury as an emerging issue of integrity for the superannuation system. It is clear that Government wish to see greater transparency on the implications of operating an SMSF, along with increased accountability requirements for SMSF trustees. The ‘stepped’ administrative penalty system to be introduced as part of the Stronger Super reforms from 1 July 2013 will certainly offer a greater level of accountability to fund trustees, as it provides the ATO with additional powers including potential mandatory training subject to the severity of the breach.

What does it all mean for SMSF professionals?

An exciting opportunity lies ahead for those who are prepared to embrace change and look to further develop their SMSF business model to attract new and existing trustees. More than ever, you will need to think about effective ways to deliver your services, content and education as many self-directed trustees continue to build knowledge through the web and social media.

I look forward to exploring these issues with you in the year ahead…

Regards,

Aaron

PS. We will also see the one millionth member of a self-managed super fund in 2013. I suspect this will happen in either the September or December quarter this year. An amazing milestone that shows the sector is flourishing!

The year in review: SMSFs in 2012


2012

It’s been a fascinating year… an Olympic year, with golden memories from London, a diamond jubilee, a Korean named Psy had a billion visits on YouTube in just five months, and the world still lingers on the precipice of further economic turmoil.  It is this global uncertainty that has arguably continued to have the biggest impact on superannuation and self-managed super funds as decreasing consumer confidence in financial markets and reducing interest rates have many trustees wondering where they should be investing their retirement savings.

So what were the things that impacted SMSFs in 2012?

There’s been a few…

The Future of Financial Advice (FoFA) and Stronger Super reforms made a big splash in 2012; however a range of these matters were delayed for further industry consultation.  Only now, at the tail end of the year, are we seeing regulatory statements being issued by ASIC around the best interests duty and scaled advice, along with the long-awaited draft regulations regarding the replacement for the accountant’s exemption.

For SMSF auditors, the licensing regime is about to formally commence, with registrations opening from 31 January 2013,  requiring approved auditors to be registered to conduct audits from 1 July 2013.  For those who have conducted 20 or more audits, a streamlined pathway to registration is available; for those auditing less than 20 funds, a competency exam awaits.

The year also saw the Government announce a deferral in the banning of off-market share transfers on listed shares until 1 July 2013.  New regulations around consideration of a contract of insurance for members; regularly reviewing the fund investment strategy; and valuing all fund assets to market value took effect from 1 July 2012.

For most of the year, the industry awaited a response from the Commissioner to his draft ruling, TR 2011/D3, as to when a pension commences and ceases.  With the industry not sitting comfortably with the Commissioner’s views, in particular with the cessation of a pension at death, intense lobbying finally saw an announcement in the Mid Year Economic & Fiscal Outlook (MYEFO) that the Government will amend the legislation to continue a fund’s tax exemption until after the payment of a death benefit to a beneficiary or beneficiaries.  Added to the MYEFO announcements were changes to the timing of the SMSF Supervisory Levy with an increase to $259 over the next couple of years.

The focus on delivering a surplus in the Federal Budget (May 2012), saw the re-introduction of a “surcharge” for high-income earners (those with income >$300k), along with a deferral until 1 July 2014 of an increased concessional contribution cap for over 50′s with less than $500,000 in superannuation savings.  This deferral effectively meant that every individual regardless of age is subject to a $25,000 concessional contribution limit for the current financial year.  As part of the Government’s intent to re-balance the fairness and equity of tax concessions with super contributions, a new Low-Income Super Contribution (LISC) was also introduced to effectively ensure that no contributions tax is paid by individuals earning less than $37,000 p.a.

The ATO released its final ruling on the application of key concepts using limited recourse borrowing arrangements, SMSFR 2012/1.  Widely applauded for taking a practical approach to issues such as the single acquirable asset definition and repairs, and maintaining and improving an asset, the year has seen a growing interest in borrowing within SMSFs.  This growth however has been a concern to both the ATO and ASIC who have  issued warnings about the correct structuring and use of property within SMSFs and reassurances that surveillance activity is occurring to ensure consumers are not getting caught by opportunistic ‘property spruikers’.

Statistics on excess contributions for the 2009-10 financial year were published in 2012, which showed a 316% increase in people caught with excess concessional contributions, predominantly as a result of the halving of the cap by the Labor Government in that financial year.  This has led to many cases through the Administrative Appeals Tribunal (AAT) throughout 2012, with the taxpayer having some victories in amounts being disregarded or reallocated (re: Bornstein and Longcake decisions).  2012 for the first time, saw refunds and personal assessments for super fund members who breached their concessional contribution cap by less than $10,000.

Some interpretative decisions impacting SMSFs were also significant…  the timing of contribution allocations to members flagged a large amount of interest in ‘reserving’ strategies with contributions through ATOID 2012/16, however discussion followed shortly via the NTLG that alerted practitioners to some key issues with fund-capped amounts and some practical issues in effectively implementing the strategy.  The Commissioner also appears to have put the “acid” on the use of reserves with his views expressed with allocations from self-insurance reserves and through the commutation of defined benefit pensions.

Statistically, SMSFs continued to grow, with the latest numbers now showing more than 490,000 in existence and more than $458 billion in total assets.  A growing number of individuals under the age of 45 are becoming attracted to SMSFs as they wish to take a greater level of control and interest in building their retirement savings.

So, that was 2012… a lot of activity, with a lot more to come in 2013.  A common complaint amongst practitioners has been that they are feeling “FoFA’ed” out, however the year ahead poses just as many, if not more challenges to SMSF professionals.  In my view, it is these challenges that some people and businesses will see as opportunities that will drive success in the year ahead.

* Next post “2013 – the road ahead for SMSFs” to follow 

GUEST POST: Understand the state jurisdictions when establishing LRBAs


the-law

The ATO’s recent release of Taxpayer Alert – TA 2012/7, provide trustees and professionals with a timely reminder about acquisition of property using a Limited Recourse Borrowing Arrangement (LRBA) and also through related unit trusts.

Some of the examples of concern raised by the Commissioner in TA 2012/7 surrounding LRBAs suggest individuals are either:

  • oblivious to the appropriate legislative provisions; or
  • not seeking the appropriate advice prior to entering into the property acquisition.

Of most interest from the features that concern the Commissioner, was the following statement:

“The trustee of the holding trust is not in existence and the holding trust is not established at the time the contract to acquire the asset is signed” [Arrangement 1, item (c)]

Whilst this may be a true statement for some state jurisdictions, this is not necessarily the case across all States and Territories of Australia.  For example, Victoria’s conveyancing and stamp duty laws do not prohibit nor penalise parties when they incorporate and establish a Trust in contemplation of being the nominated party for a property transaction that is already on foot.  It is commonplace in Victoria for parties to be nominated to complete a property acquisition to which they were not the original party. Usually, the initial Contract of Sale provides a nomination provision. If this is not the case, there is a statutory provision that enables a nomination of the purchaser of a property in Victoria within 14 days of the date of settlement.  Any nomination is subject to the nominated party completing the transaction. If this not be the case the original purchaser is still liable to settle.

Additionally there is no stamp duty penalty if there is a nomination of a substituted purchaser that does not equate to a second sale.

The fact that the Custodial Trustee and the Bare Trust has not been established prior to the execution of the Contract for the property that is eventually acquired by the SMSF as law would be irrelevant in Victoria.

With a LRBA via nomination adhering to all of the provisions of section 67A & 67B of the SIS Act, it is difficult to determine what offends SIS or the ATO in respect of such arrangements?

The prohibition described by the ATO where the Custodial Trustee and the Bare/Holding Trust has not been established prior to the execution of the contract may in fact offend some State stamp duty provisions that would lead to double Stamp Duty.

The “lore” described by the ATO where the Custodial Trustee and the Bare Trust has not been established prior to the execution of the Contract may not be found offensive in Victoria.  I would submit that the Victorian courts would question the ATO’s motives by making such a statement.

Only time will tell, but invariably frightened parties will shy away from when a good real estate investment opportunity presents itself to a SMSF.

Written by Ian Glenister, Solicitor

Legal Officer & Co-founder, The SMSF Academy

Prevailing market conditions can pose problems in acquiring shares using LRBAs


investors

Whilst most of the attention with limited recourse borrowing arrangements (LRBAs) has centred around property transactions, there has been a need to clarify a range of issues on other acquirable assets, in particular assets allowable as a collection of identical assets under the definition of a single acquirable asset (SAA).

It’s not uncommon when placing an order of shares that there may be insufficient volume at a particular price to acquire shares or units.  This is particularly common where the shares are to be acquired at the prevailing market price.  This results in the single order being ‘filled’ over multiple share prices or even different dates.   This however poses a problem for those undertaking any share acquisitions using a limited recourse borrowing arrangement, because of the strict interpretation of a collection of assets” within the single acquirable asset as defined within s67A(3) of the SIS Act.

The question was asked of the ATO recently (via National Tax Liaison Group (NTLG) Superannuation Technical sub-group, September 2012) as to whether a single order of shares filled over multiple prices or dates will still meet the definition of a single acquirable asset.

To understand the issue, let’s consider the following example:

ABC Super Fund enters in a LRBA to acquire #42,500 shares in NewCo Limited at the prevailing market price. This single order is undertaken by the trustees through their CommSec account.  Due to the share volumes available at the time of the order and movement in the prevailing market price, the purchase of the shares were completed in three tranches:

  • 01/10/2012 – #30,000 @ $4.70
  • 01/10/2012 – #10,000 @ $4.72
  • 02/10/2012 – #2,500 @ $4.67

Have we got a problem?

It is important to note that the policy intent around the changes introduced on 7 July 2010 were to prevent borrowing arrangements over multiple assets in which may permit the lender to choose which assets are sold in the event of default.   Whilst a strict interpretation of s67A would mean this transaction would fail as a single acquirable asset, the ATO has stated that in circumstances such as these, they are prepared to ignore short delays in fulfilling a single on-market order to purchase shares or a single on-market order at the prevailing market price which might result in some shares being acquired at different prices.

For the trustees of the ABC Super Fund, the ATO would allow these this single order to be filled over multiple transactions, given the short timeframe to fulfil the order (based on the prevailing market conditions).

Whilst providing a logical outcome for fund trustees, the Regulator has also made it abundantly clear that it will not allow trustees to embark on a course of action to accumulate or sell down shares as an acquisition of a ‘single acquirable asset’.

Do you see much activity with LRBAs to acquire assets other the property?

(C) The SMSF Academy 2012
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