smsf legislation & technical update

2011 SMSF National Conference

SMSF Legislation & Technical Update

Peter BurgessSPAA Technical Director


Session overview1. Registration and definition of a SMSF2. Acquisition of related party assets3. Contributions4. Limited recourse borrowing arrangements 5. In-house assets6. The meaning of wholesale client and non-arms length income7. Stronger super – Government response to the Cooper Review.


1. Registration and definition of a SMSF


SMSF registration and rollovers • November 2010 – new SMSF member verification system launched by the ATO• APRA letter to APRA regulated super funds – “…requests for additional

documentation such as a trust deed should not be necessary.” • December 2010 - 30,000 SMSFs re-classified as “Registered – status not

determined” • December 2010 ATO SMSF newsletter – SMSFs should not register until assets

are held by the fund• Stronger super – fund naming conventions, proof of identity checks, AML/CTF

Act to apply to SMSF rollovers • Session 15A – New fund registration and SMSF rollovers – obstacles and best

practice guidelines.


Definition of a SMSF • SMSFR 2010/2 – enduring power of attorney ruling:

• More than one LPR can be appointed as a trustee/director in place of the member (one-for-one substitution is not required)

• No requirement for member to resign as director if LPR is an alternate director - but LPR must only have the power to act if member is not performing those duties

• ATO ID 2010/139 – Appointed administrator to the estate of a person with a mental disability is permitted to be a trustee of an SMSF in place of that person under 17A(1)(3)(i)

• Child members – if corporate trustee only a LPR (assume by court order) can be a director of a corporate trustee in place of a minor member (NTLG Superannuation Technical sub-group meeting – 7 September 2010).


2. Acquisition of related party assets


SMSFR 2010/1 – Application of s66(1) of the SIS Act • Final ruling issued on 25 February 2010• The ruling explains that a trustee of a SMSF cannot

intentionally acquire an asset from a related party of the SMSF unless an exception applies to that asset

• A range of examples provided including:• Performance of a service• Acquisition of a promissory note• Acquisition of a post-dated personal cheque• Acquisition of units in a related unit trust.


Points to note – acquiring goods and materials • Paragraphs 17, 18, 19, 114, 115 and examples 5 and 6• If goods and materials, which are not insignificant in value or

function, are provided to an SMSF as part of a service provided by a related party, there is an acquisition of assets (being the goods or materials)

• A SMSF will breach s66 if the fund owns land and it engages a related party on commercial terms to construct a building using goods and materials supplied by the related party (NTLG Superannuation Technical sub-group meeting - 8 December 2010)

• In order to avoid a breach the SMSF would need to purchase the goods and materials required to construct the premise directly from the supplier

• Session 13B – SMSFs and real property applications.


Points to note - subsection 66(2A)(a)(i) • Paragraphs 43, 44, 163 - 171• In-house asset exception in subsection 66(2A)(a)(i) and (ii) is

limited to the acquisition of assets that are “investments in” a related party or a related trust of the SMSF

• The ATO does not consider that subsection 66(2A) could have been intended to apply more broadly to include real property subject to a lease or lease arrangement with a related party.


Acquiring assets on relationship breakdown Previous law New law (effective 1 December 2010)

A trustee of a SMSF may acquire an asset in specie from a related party following the marriage breakdown of a member.

A trustee of a regulated super fund may acquire an asset in specie from a related party following the relationship breakdown of a member (new s66(2B).

In-house asset transitional exemption provisions do not apply to the asset in the receiving fund.

In-house asset transitional exemption provisions will apply to the asset in the receiving fund (new S71EA).

• Session 12B – The 3Ds of superannuation – death, disability and divorce.


3. Contributions


Tax Ruling TR 2010/1: Superannuation Contributions • Issued on 25 February 2010• Revised meaning of the term “contribution“

“…a contribution is anything of value that increases the capital of a super fund provided by a person whose purpose is to benefit one or more particular members of the fund or all of the members in general.”


Superannuation contribution?Has the capital of thefund been increased?

Was the purpose to benefit one or moremembers or all of the members in general?

Contribution

Yes

Yes

No, if transaction is not dependant upon the identity of the other party as a super provider or they are simply fulfilling the terms of a contract orarrangement entered into on commercial or arm’s length basis.

Yes, if transaction is entered into because of a connection or relationship with the super provider or cannot be explained by reference to commercial or arm’s length dealings.


Classification of contributions • S292-25(2) of the ITAA97 defines a concessional contribution as

a contribution made to a fund in respect of you which is included in the assessable income of the fund

• A contribution is included in the assessable income of the fund if it is to provide super benefits for someone else (unless it is a spouse or Government co-contribution).


4. Limited recourse borrowing arrangements


Superannuation Industry (Supervision) Amendment Bill 2010 • Received Royal Assent on 6 July 2010• Subsection 67(4A) repealed and replaced with new subsections 67A and 67B effective 7

July 2010• Amendments do not apply retrospectively to existing arrangements in place before 7 July

2010 (although 67A and 67B apply to any subsequent refinancing of these arrangements)• Asset acquired must be a single acquirable asset:

• Shares – must have same market value that are together treated as a single asset • Real property – new rules prohibit multiple titles under the one borrowing arrangement

• Borrowed funds can be used to maintain or repair the asset but not to improve the asset• Prescriptive definition of what constitutes a “replacement asset”.


ATO approach… • Where assets are for practical purposes inseparable, or where

there is an ancillary asset of a very small value, the ATO may treat the assets as a single asset for the purposes of s67A (NTLG Superannuation Technical sub-group meeting - 7 September 2010)

• An improvement may change the state or nature of the asset such that it will give rise to a different asset…this would be the outcome regardless of the source of the funds used to improve the asset (NTLG Superannuation Technical sub-group meeting - 7 September 2010)

• Tax Ruling TR 97/23 – Deductions for repairs • Key issues currently being discussed with Treasury as “priority

technical issues”:• Greater clarity around the meaning of single acquirable asset• The nature of the SMSF trustee’s interest in the holding trust• Issues regarding improvements to the asset.


ATO approach… • ATO Interpretative Decisions:

• ATO ID 2010/162 – borrowing from a related party on terms more favourable to the SMSF

• ATO ID 2010/169 – refinancing• ATO ID 2010/170 – third party guarantees• ATO ID 2010/172 – joint investors• ATO ID 2010/184 – capitalisation of interest• ATO ID 2010/185 – charge not permitted over asset in holding trust.


Conference sessions

• Session 5B – Limited recourse borrowing strategies• Session 11A – Limited recourse borrowing - what you need to

do to comply• Session 14C – Is this the new normal for SMSF portfolios? –

gearing strategies, ETFs and instalment warrants.


5. In-house assets


Conversion of a geared trust to a 13.22C trust • New units acquired in a pre-99 unit trust will be excluded as an in-house

asset if both of the following conditions are satisfied:• The unit trust now complies with SISR 13.22C• No event in 13.22D(1) has occurred since 28 June 2000

• A 13.22D(1) event includes new borrowing, conducting a business, acquiring an interest in another entity

• Session 11B – Pre 99 unit trusts and non-geared unit trust strategies• Session 13B – SMSFs and real property applications.

NTLG Superannuation Technical sub-group meeting (15 June 2010, 7 September 2010).


Example • A SMSF purchased 100 units in a related unit trust in July 1999• The unit trust was initially set up as a geared unit trust with a $100,000 loan • The original loan was repaid in 2004• The unit trust took out a new loan in 2006 which was subsequently repaid in 2010• The SMSF now wants to purchase additional units in the unit trust• Even though the unit trust now complies with SISR13.22C, an event listed in

13.22(D)(1) has occurred since 28 June 2000 (i.e. the new loan) • The purchase of additional units will be classified as an in-house asset. The

original 100 units remain excluded from the in-house asset test by virtue of s71A.


SISR 13.22C – related non-geared unit trust

Lender SMSF

13.22C unit trust

Borrowed funds

Existing funds

Property


Water rights • Water access licence which entitles the holder to draw a specified

amount of water from a waterway for irrigation purposes• Likely application of s71(1)(e) to exclude certain water rights from

the in-house assets of superannuation funds• But unlikely to be an allowable related party acquisition under

s66(2A).

NTLG Superannuation Technical sub-group meeting (8 December 2010).


Government response to the Super System Review • No evidence that in-house asset investments within the current

legislative restrictions are detrimental to SMSFs• Likely amendment to the in-house asset rules to prohibit an in-

house asset where the asset concerned is a collectable or personal use asset

• Exposure Draft (Tax Laws Amendment (2011 Measures No.2) Bill 2011) released - “Collectables” and “Personal use assets” as defined in ITAA 1997

• Session 19C – Art, collectables and personal use assets – discussion and practical implications.


6. Meaning of wholesale client and non-arms length income


Meaning of a wholesale client • A financial service provided to the trustee of a SMSF will always be provided to the trustee

as a “retail client” unless the fund has net assets of at least $10 million – ASIC QFS 150• Trustees of a SMSF cannot be “sophisticated investors” within the meaning of the

Corporations Act – ASIC QFS 150• Confusion regarding whether “in relation to a superannuation product” in S761G applies to

financial services and products made available to the trustee of a super fund • Restricts access to wholesale investment markets and reduces the range of investments

available to SMSFs• January 2011 – options paper released as part of the FOFA reforms• Need to ensure consistency across the Corporations Act• Session 6C – The wholesale/retail client distinction – opportunities and risks for

Accountants and Planners.


Non-arms length income • Allen’s Asphalt Staff Super fund v FCT – SMSF received a $2.5m capital gain

distribution via an interposed trust which was assessed by the ATO as special income (non-arms length arrangement – no consideration provided by the SMSF)

• Henfam Super Fund v Commissioner of Taxation – acquired at less than market value but dividends paid on an arm’s length basis.


7. Stronger super


Government’s response to the Cooper ReviewCurrent law Likely new law

ATO’s enforcement powers.

Only used in the most severe cases of non-compliance.

Administrative penalties on a sliding scale payable personally by the trustees.

Mandatory trustee education.

No requirement. Yes, if contravene SIS. Session 15A.

Asset acquisitions and disposals.

On or off market. On market but Government to consult.

Assets valued at net market value.

Not mandatory. Mandatory.

ATO/ASIC standard trust deed.

Not available. Anything permitted by the SIS Act or ITAA to be permitted by SMSF trust deeds.

Consideration of life and TPD insurance.

No operating standard. SIS operating standard.


DisclaimerThis presentation is for general information only. Every effort has been made to ensure that it is accurate, however it is not intended to be a complete description of the matters described. The presentation has been prepared without taking into account any personal objectives, financial situation or needs. It does not contain and is not to be taken as containing any securities advice or securities recommendation. Furthermore, it is not intended that it be relied on by recipients for the purpose of making investment decisions and is not a replacement of the requirement for individual research or professional tax advice. This presentation was accompanied by an oral presentation, and is not a complete record of the discussion held. No part of this presentation should be used elsewhere without prior consent from the author.

smsf legislation & technical update

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