The year in review: SMSFs in 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 

Back-to-back wins for taxpayers with excess contributions tax cases

Deciding to take on the Commissioner with Excess Contribution Tax (ECT) assessments was becoming a daunting task, with a perfect record that started to look a little like Black Caviar’s!!  Well, the last couple of cases has seen the taxpayer land knockout blows against the Commissioner at the Administrative Appeals Tribunal (AAT).

After tasting defeat for the first time on in Bornstein’s case regarding the exercising of discretion due to “special circumstances”, a similar outcome has occurred in the AAT case of Longcake vs. Commissioner of Taxation.

In this case, the taxpayer incurred an ECT liability of $6,788 for the 2009-10 financial year based upon reported concessional contributions of $71,551.  The taxpayer argued (successfully) that $25,367 of these contributions related to the 2008-09 financial year.

Many of the cases to date that have been found in favour of the Commissioner state that special circumstances do not exist “simply because of the taxpayer’s misfortune, but rather the uniqueness of events which give rise to the misfortune” (see Tran and Commissioner of Taxation [2012] AATA 123).

In this case, the additional ‘special circumstances’ included:

  • Longcake had sought to arrange his affairs to not breach the concessional contributions (CC) cap;
  • the contributions to AMP were not to continue beyond 30 June 2009 as he had made a deliberate decision to cease that fund;
  • no further prospective salary sacrifice arrangement was made with his employer to contribute to the AMP fund for the 2009-10 financial year
  • he relied on the terms of the agreement with his employer for contributions to be made in a timely manner
  • there was irregularity in super contribution payments by his employer

The Tribunal found that these circumstances that were present set apart this case from more usual or ordinary cases.

It was interesting to note the acknowledgement by the Tribunal of the general ‘confusion’ of the timing differences between employer obligations for SGC purposes and when super funds report the contributions as being received.  The court stated that:

“… there may well be genuine confusion in the minds of employers, in particular those operating a small business, about exactly when concessional contributions arising from salary sacrifice are to be made to the employee’s superannuation funds”.  Although, this in itself though, does not constitute special circumstances.

Like Bornstein’s case, this win does open up some scope for taxpayers to consider challenging ECT assessments (s.292-245 of ITAA 1997) on the grounds of special circumstances.  It is important however to work through the particulars of case such as these to see the characteristics that set this case apart for the taxpayer victory.

With the spike in ECT assessments again expected for the 2012-13 financial year, the timing of contributions remains as critical as ever!

(C) The SMSF Academy 2012
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