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How to keep within the DIY super lines - Hewison Private Wealth

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Media Coverage
Company: Hewison Private Wealth
Date: 23 April 2014
Publication: Smart Investor
Page: Online
Readership: 44,000 UA
How to keep within the DIY super lines
Brendan Swift - 23 April 2014
Superannuation Lure of designer funds masks mundane reality.
Bewilderingly complex paperwork and eye-watering fines are just two of the depressing realities
facing those eager to dump their mass market super fund for a fancy DIY vehicle designed to meet
every investment need.
While it's true you need to keep your eyes peeled for a growing array of "helpful" advisers keen to
part you from your funds, it's the mundane aspects of running a self-managed super fund that are
more likely to trip you up.
From July 1, the Australian Taxation Office will have new powers to bolster the sector's standards
and prevent the savings vehicles from being rorted.
"It's a bit of a wake-up call for people," says Hewison Private Wealth director and private client
adviser, Chris Morcom. "I expect they've probably already got people in their sights."
Among those to be closely scrutinised are the 53,900 members of the 27,800 new SMSFs established
last year. They will be in line for a new series of punitive measures, compulsory education courses
and fines worth up to $10,200 per trustee.
Novices trustees face a steep learning curve and must abide by the labyrinthine and regularly
changing legislation contained in the Superannuation Industry (Supervision) Act.
Prosperity Advisers director, business services and taxation, Stephen Cribb says new trustees must
be mindful of filing their returns on time.
"For new funds that's really the point of scrutiny" Cribb says. "If the fund can demonstrate that it's
going to play by the rules in the first year – and that includes lodging its tax returns pretty early (by
October 31) – normally that then gets a green light from the ATO."
Earlier this year, ATO assistant commissioner Matthew Bambrick said lodgment rates were
improving but still a concern. Trustees with outstanding lodgments for more than two years have
been removed from the government's Super Fund Lookup site which lists the compliance status of
Media Coverage
Company: Hewison Private Wealth
Date: 23 April 2014
Publication: Smart Investor
Page: Online
Readership: 44,000 UA
"APRA funds look at that when they do a rollover into an SMSF and some employers look at it before
they make contributions," he says. "By doing that we've given people an incentive to update their
lodgments and we've had quite a few people respond to that and update their lodgments."
Bambrick says other common contraventions reported by auditors include inappropriate loans and
borrowings, improper dealings with related parties (and in-house assets that should not be in a
fund), as well as incorrect use of limited recourse borrowing arrangements to buy property.
Nonetheless, only about 2 per cent of SMSFs are reported by auditors to the ATO for contraventions
each year.
For the first time, the ATO can take a more flexible approach for such contraventions. In the past it
could only resort to heavy-handed actions such as disqualifying a trustee, applying an enforceable
undertaking or making a SMSF non-complying (where it loses its concessional tax status).
It remains to be seen how the ATO will apply its new sanctions, but Morcom says trustees would be
well placed to restructure their SMSFs because penalties are applied individually to trustees and
cannot be claimed against the assets of the fund.
"There is now an incentive for people to put in place corporate trustees in their self-managed super
funds – something we've been actively doing for a number of years," he says.
It means penalties applied to a single corporate trustee are limited to $10,200 compared to a
maximum $40,800 that can be applied to four individual SMSF directors.
There is a limit to the degree government will allow super investors to enjoy the benefits of
concessional tax. Make an excess contribution and the tax bill can be hefty.
"That is clearly still an area that people are getting wrong and sometimes inadvertently," Morcom
He points to the seemingly positive move to raise the non-concessional contributions cap (personal
contributions which do not receive an income tax deduction) to $180,000 in 2014-15 from $150,000
currently. Some investors have already used the "bring-forward" rule, which allows them to make
three years' worth of contributions (up to $450,000 under the current caps) in a single financial year.
But the new cap (which would allow $540,000 to be brought forward) won't apply until those
investors have served the initial three-year period – even if it extends into 2014-15 and beyond.
While the risk of making excess contributions can be an issue during a fund's accumulation phase,
the opposite can occur during draw-down for members receiving a part-pension.
"Where people can inadvertently find themselves trapped is if they haven't got the right paperwork
– the actuary's certificate – or they haven't taken the appropriate steps to ensure that the
investment assets are segregated," Prosperity's Cribb says. "You can trap the fund into paying the
15 per cent tax rate when it should have really been paying the 0 per cent tax rate."
Earnings on assets in the accumulation phase are taxed at 15 per cent but earnings on pension fund
assets are exempt from tax. However, an actuarial certificate is needed to apportion the assets used
for accumulation or draw-down to clearly maintain that status.
Media Coverage
Company: Hewison Private Wealth
Date: 23 April 2014
Publication: Smart Investor
Page: Online
Readership: 44,000 UA
If trustees pay out even slightly less than the minimum annual pension (4 per cent of the pension
account balance for those aged under 65), the ATO regards those earnings as being from a noncomplying pension and tax on earnings rises to 15 per cent.
"The trap that people can fall into is to think it's just the same as last year's and it's not," Cribb says.
SMSF trustees are often more active investors than those in large APRA funds but with greater
involvement can come deals which benefit fund members more than their retirement savings. The
sole purpose test requires a fund be maintained solely for the purpose of providing retirement
Prosperity's Cribb says the ATO also has related-party transactions on its radar. It is illegal to buy a
residential property for an SMSF and rent the home to a family member. Other transactions with
related parties are allowed but only under strict conditions and are another area where
contraventions commonly occur. SMSF trustees hoping to take advantage of related-party deals by
transferring assets into their fund at less than market value can be penalised.
It can occur when a trustee fails to transfer their business property into their SMSF on an armslength basis (paying less than market value). Future rental income and capital gains will now be
classed as "special income" and concessional tax rates are forfeited.
"Even though there's not a strict requirement to have a formal valuation you'd be crazy not to do
that, to have both the transfer value of the property checked out [and] the rental charges supported
by valuations," Cribb says.
Investments or loans) n a related party or trust of the SMSF, and super fund assets leased to a
related party, are defined as in-house assets and generally restricted to no more than 5 per cent of
the fund's total assets (although some business property investment is allowed to breach that level).
Property investment has been a hot area over the past year and the corporate regulator has cracked
down on some of the aggressive advertising encouraging trustees to use their SMSFs to buy
property. Using borrowed money to buy an asset such as property is strictly regulated under the
LRBA rules, which limit a lender's recourse to the single asset purchased.
The rules about what type of renovations and improvements a trustee can do to a property are
complex and trustees should obtain financial advice before proceeding. It is an area that is
constantly under review. A private binding ruling issued by the ATO in April suggests it may be about
to clamp down on loans that are made well below market value. The ATO ruled that a recent LRBA
arrangement charging no interest or maximum loan term to acquire ASX shares was not done on an
arms-length basis. As such, income from the investment would be charged at 45 per cent even if the
assets were in pension mode when earnings are tax free (for more see pg 26).
While zero-interest rate loans do not breach the rules, the tax outcome defeats the strategy, and it
would be a brave trustee who entered into a similar interest-free or low-rate loan without obtaining
their own private ruling.
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