SMSF News 0614

HIGHLIGHTS UP TO JUNE 2014:

• SMSF annual return for newly registered funds due soon … read more
• Do more with SuperSeeker … read more
• Certain SMSF Super Reform measures previously announced will not proceed … read more
• Be prepared for new penalty powers … read more
• Super contributions cap … read more
• Timing of allocation and excess concessional contributions … read more
• Minimum pension payment requirement … read more
• The work test and making contributions … read more
• SMSFs must have assets before registering for an ABN … read more
• News for SMSF Auditors … read more
• Thinking about starting an SMSF? … read more
• Limited recourse borrowing arrangements … read more
• How to report limited recourse borrowing arrangements on SMSF annual return … read more
• SMSF supervisory levy reform – phase 2 … read more
• New ATO powers receive royal assent … read more
• Reporting member information correctly after a rollover … read more
• Lodge on time or risk removal from Super Fund Lookup … read more
• Simple tips to help trustees claim exempt current pension income (ECPI) …read more
• SMSF compliance program changes – auditor contravention reports … read more

SMSF annual return for newly registered funds due soon

Newly registered SMSFs that are clients of tax agents must lodge their Self-managed superannuation fund annual return (NAT 71226) by 28 February 2014.

SMSFs that self-prepare their returns were required to lodge by 31 October 2013.

Newly registered funds that did not set aside assets for the benefit of their members and did not commence operating in their first financial year of registration may request a return not necessary (RNN) concession for their first financial year only.

The fund must confirm in writing:

• it did not hold assets and did not receive contributions or rollovers in the first financial year
• the date the fund first held assets and commenced operating
• that it will lodge future returns.

SMSF’s granted an RNN concession as a new registrant in 2011-12 and are now legally established must also lodge by 28 February 2014. If these funds have not yet set aside assets for the benefit of members their registration is required to be cancelled.

In all other circumstances, SMSF’s must lodge a return for each year of operation, including the year the fund is wound up. Failure to do so may result in compliance action. Annual returns without assets will not be accepted unless it is a final return.

To request an RNN concession or cancellation of registration where the fund has not legally established:

• tax agents should use the Tax Agent Portal
• trustees should write to us at GPO Box 9990 in the capital city of your state or territory.

Do more with SuperSeeker

There are billions of dollars in lost super dollars and some of it could be yours.

The popular tool SuperSeeker has been improved so you can now do more with your super online. You can:

• check all your super accounts
• find lost or ATO-held super
• transfer your super to your preferred super fund (if this is a fund-to-fund transfer it will generally be actioned within three working days).

To access these services, the first thing you need to do is register online with the ATO. This is an important security measure, given the personal information we display.

You can keep track of your super at SuperSeeker.

Certain SMSF Super Reform measures previously announced will not proceed

On 6 November 2013 the Assistant Treasurer, Senator the Hon Arthur Sinodinos AO, announced the Tax on Superannuation Pensions measure would not proceed.

In addition on 14 December 2013 Senator Sinodinos announced the outcome of consultations over unlegislated tax and superannuation measures.

Among those not to proceed were the following SMSF Super reform measures:

• Self-managed superannuation funds — acquisitions and disposals of certain assets between related parties (previously announced as not proceeding) – No 45
• Superannuation — verification of self-managed superannuation funds members and bank accounts [Cooper review] – No 49
• Stronger Super — self-managed super funds — rollovers to SMSFs – No 68
• Stronger Super — unlawful payments from regulated superannuation funds — income tax rates amendment – No.71.

Be prepared for new penalty powers

On 14 December 2013 the government announced that it will proceed with law changes that give the ATO greater powers in dealing with SMSF trustees who breach super law.

It is proposed that these new powers will apply to contraventions occurring from 1 July 2014 and cover:

• administrative penalties
• education directions
  
• rectification directions.

They will also apply to contraventions that were made prior to 1 July 2014 and continue after that date.

For example, if your fund has lent money to a member or relative and the loan still exists on or after 1 July 2014 you will be liable for a penalty. The loan should immediately be repaid to the fund with appropriate commercial interest.

Under the proposed measures, penalties will vary according to the type of breach. In the example above, each individual trustee will be personally liable for a penalty of $10,200.

For an SMSF with a corporate trustee each director will be jointly and severally liable for a penalty of $10,200.

The penalty cannot be paid using the resources of the SMSF and doing so would be considered a serious breach likely subject to more significant penalties from the ATO.

Under the proposed administrative penalties the ATO must impose the penalty when we become aware of a relevant breach from 1 July 2014. To avoid these penalties make sure your SMSF is fully compliant with the super laws so that you don’t become liable for a penalty or other sanctions.

If trustees are making progress in resolving contravention(s) by 1 July 2014 the ATO would consider these circumstances in any request to remit any imposed administrative penalties.

Super contributions cap

Caps apply to contributions made by, or for the benefit of, fund members and any contributions made over the caps are subject to extra tax. The caps and how much extra tax a member may need to pay on amounts over the cap depends on whether the contributions are concessional (before-tax) or non-concessional (after-tax).

A person’s concessional contributions cap depends on their age as set out in the following table:

Income year	Cap for those turning age 60 or over in 2013-14	Cap for those turning age 50 or over in 2014-15	Cap for everyone else
2014–15	$35,000	$35,000	$30,000
2013–14	$35,000	$25,000	$25,000

Concessional contributions made to a super fund in a financial year include:

• most employer contributions such as compulsory super guarantee
• amounts members salary sacrifice to their super
• amounts for which an income tax deduction is allowed
• certain other amounts included in the assessable income of the super fund.

More about concessional contributions can be read here.

From 1 July 2013, if a member exceeds their concessional cap, the amount over the cap will be included in their assessable income and taxed at their marginal tax rate plus any applicable excess concessional contributions (ECC) charge. The ECC charge is applied to any extra tax payable as a result of excess concessional contributions being included in a member’s assessable income. The ECC charge is intended to negate any tax advantage a member may obtain by exceeding the excess concessional contributions cap, such as the benefit of having the tax collected later than normal income tax. The ATO will apply a 15% tax offset to account for the contributions tax that has already been paid by the super fund. This will be issued to the member on an income tax Notice of Assessment or income tax Notice of Amended Assessment.

There are no changes to the non-concessional cap rules. The non-concessional contributions cap for 2013-14 remains at $150,000. Members aged 64 or under on 1 July can bring forward future entitlements to the next two years of their non-concessional contributions cap, but conditions apply.

Timing of allocation and excess concessional contributions

Where your super fund’s trust deed or governing rules permit it, a contribution may be paid into a ‘contributions reserve’ or ‘suspense account’ before being allocated to a member. The ATO’s view of these arrangements for both SMSFs and other funds has recently been formalised in Taxation Determination TD 2013/22. In limited circumstances concessional contributions made in one financial year do not count towards a member’s concessional contributions cap until the next financial year when they are allocated to the member.

If you decide to use your SMSF in this sort of arrangement make sure that
you:

• Implement it in a manner consistent with TD 2013/22 and keep accurate records that document receipt and allocation of contributions.
• Report member contributions information in the usual way in Section F of the SMSF annual return, following the instructions. This means you must report contributions in the financial year in which they were made to the fund (not in the year they were later allocated to the member).
• Follow the contribution standards applying to SMSFs. You must allocate contributions to a member generally within 28 days of them being made to the fund.
• Comply with the requirements for deductibility of any personal contributions involved in the arrangement.

Reporting contributions when they are made and not when they are allocated will mean that, in the exceptional circumstances in which TD 2013/22 applies, affected SMSF members will be assessed incorrectly in relation to the excess contributions caps. The ATO’s administrative assumption is that contributions are always made and allocated in the same year so affected SMSF members will need to draw the circumstances to the ATO’s attention when this assumption does not apply.

When TD 2013/22 applies, they will need to object to any incorrect assessment of excess contributions tax (for 2012-13 and earlier years) or income tax assessment that includes excess concessional contributions in their assessable income (for 201314 and later financial years). Objections will need to include details of the arrangement that was entered into including evidence of when and how the relevant contributions were allocated to the member and in relation to any deduction claimed.

More information is available on our website concerning:

• Reportingand regulatory obligations SMSF trustees
• how to lodge an objection for an assessment made in relation to excess concessional contributions where TD 2013/22 applies.

Minimum pension payment requirement

The finalisation of TR 2013/5: Income tax: when a superannuation income stream commences and ceases generated much discussion in the media and industry on the ATO’s view that a pension ceases when a fund does not pay the required annual minimum pension amount.

The ATO subsequently considered circumstances that warrant the Commissioner to grant an exception that would allow a super income stream to continue, so the fund can claim Exempt current pension income (ECPI), even though the annual
minimum pension payment requirements have not been met. We published a Q&A on our website some months ago to highlight the conditions that need to be satisfied to allow a fund to continue to claim ECPI. There is a Q&A specifically for trustees of SMSFs and a separate Q&A on our website for APRA regulated funds.

Generally, if a catch up payment is made as soon as practicable, the fund may be able to continue to treat the pension as continuing, when:

• the pension underpayment is less than one twelfth of the minimum pension payment required, or
• the failure to pay the minimum pension payment was because of matters outside the control of the trustee.

To date the Commissioner has received a number of requests from SMSF trustees to grant this exception to allow the pension to continue, despite the trustee having failed to pay the required minimum pension amount in the relevant year. Some of the common circumstances when this exception has been granted are:

• the trustees of the fund had a serious ongoing medical condition that was supported by documented medical certificates
• genuine bank errors when the error was on the part of the bank and not the trustee (supported by evidence from the bank).

We would like to remind SMSF trustees that the following circumstances will generally NOT result in the Commissioner granting this exception:

• a medical condition was not serious and was short term, no supporting medical documentation is provided
• the circumstance that prevented the payment being made such as a medical condition was experienced by one/some but not all trustees – all trustees are equally responsible for the running of the fund and the Commissioner expects that if at least one trustee is not affected by the circumstance in consideration this trustee is able to carry out the necessary administration of the fund
• a bank error occurred due to a mistake on the part of the trustee and not the bank.

We are currently updating our web material to provide further guidance on when the exception applies. For example, the new material will confirm that the exception can also apply to an allocated pension.

The work test and making contributions

If you are 65 years old or over, but under 75, you will need to satisfy the ‘work test’ in each financial year a contribution is made to your super account. To satisfy the work test, you must be gainfully employed for at least 40
hours during a consecutive 30-day period each financial year in which the contributions are made.

The ‘work test’ requirement must be satisfied for the year when the contributions are made rather than when contributions are allocated to your super account.

Due to the wide variety of ways that contributions can be made, including in-specie property transfers, there is no single rule that covers all circumstances.

Generally speaking however, a contribution is made when the funds are received by your super account or super provider.

For more information about when contributions are made see ruling TR 2010/1.

SMSFs must have assets before registering for an ABN

Applications for an ABN for your SMSF can only be made once the fund is established. Whilst you need to register your fund with the ATO to obtain an ABN and elect for it to be regulated, the fund must have assets set aside for members (eg property, money). Additional to the fund asset requirement, the fund must also have:

• trustees
• signed trustees’ declarations
• a trust deed
• identifiable beneficiaries.

When you satisfy the requirements of an SMSF and have registered your SMSF, there are certain responsibilities and obligations you must fulfil as a trustee or a director of a corporate trustee of an SMSF. These include:

• acting in the best interests of all fund members when you make decisions
• managing the fund separately from your own affairs
• ensuring the money in the fund is only accessed when the law allows it
• complying with Australian superannuation legislation
• ensuring your SMSF is independently audited every year
• lodging an SMSF annual return every financial year
• paying the supervisory levy every year the fund is in existence.

News for SMSF Auditors

SMSF Audits

All Audits from 1 July 2013 must be completed by auditors registered with ASIC. Auditors must use their SMSF Auditor Number (SAN) on all:

• audit reports
• contravention reports lodged with the ATO.

Auditor Contravention Reports in the approved form

Some auditors are lodging Auditor Contravention Reports (ACRs) in a plain paper format. This is not an approved method of lodgment. To maintain our processing integrity and standards it is important that ACRs are submitted in the approved form.

When we don’t receive ACRs in the approved form, we may reject the report and require the auditor to relodge using the approved form available via:

• eSAT (electronic superannuation audit tool)
• the ACR on the business portal
• using the approved paper form available from the ATO – call our Publication Distribution Service on 1300 720 092 or use our online ordering service
• eSAT lodgment is our preferred lodgment channel for auditors to use because it provides easy completion and lodgment and automatic saving of the form. eSAT is available from the ATO website at ato.gov.au/eSAT.

eSAT updating issue

Some users have reported difficulties with the eSAT update process. If you have any difficulties updating the product, you can download the full version and reinstall. This should not affect your data; however it is prudent to backup data on a regular basis.

Thinking about starting an SMSF?

The ATO has created two new animated videos to assist those who are thinking about starting an SMSF.

Whilst an SMSF can be a great way to have more control over your superannuation, you need to be aware that it requires a lot of time and effort. There are legislative obligations that you will be responsible for and that you must meet year after year.

It is also important to know, that despite what you often hear, an SMSF is not something you can do all yourself. There are a number of other people who will be involved and who you may need help from to
successfully run your SMSF.

Have a look at the videos below to see what is really involved with running an SMSF <Click Here>

Limited recourse borrowing arrangements

The Self-Managed Superannuation Funds (Limited Recourse Borrowing Arrangements – In-house Asset Exclusion) Determination 2014 Legislative instrument was registered on 10 April 2014.

The instrument addresses concerns raised by industry about the application of the in-house asset exemption provided by subsection 71(8) of the Superannuation Industry (Supervision) Act 1993 (SISA) to an investment in a related trust held by an SMSF as a required part of a limited recourse borrowing arrangement (LRBA).

Prior to this legislative instrument the in-house asset exemption did not apply to exclude an SMSF’s investment in the related trust from being an in-house asset of the SMSF at particular times, including:

• at the beginning of an LRBA where a borrowing referred to in paragraph 71(8)(b) has not yet begun, such a borrowing has not yet begun and the related trust does not yet hold the acquirable asset; and
• where the asset continues to be held in the related trust after the borrowing referred to in paragraph 71(8)(b) has been repaid.

To provide certainty for SMSF trustees, a legislative instrument has been registered. It provides an exception to the definition of an ‘in-house asset’ in the circumstances described above.

The instrument is taken to have commenced on 24 September 2007. This aligns with the date of effect of the introduction of provisions in the SISA that allow trustees of regulated super funds to enter into LRBAs. This ensures SMSFs that entered into LRBAs prior to the making of this instrument are not disadvantaged as compared with SMSFs that enter into LRBAs after the making of this instrument.

How to report limited recourse borrowing arrangements on SMSF annual return

In SMSF News – edition 26 the ATO described how you will report limited recourse borrowing arrangements at additional labels on the 2013 SMSF annual return.

They have noticed some misreporting at these labels, so we have prepared this guidance for Section H: Assets and liabilities:

• Show at J1 to J6 the value of all assets held in trusts as security for loans under limited recourse borrowing arrangements.
• Show at J the sum of all values shown at J1 to J6.
• Show at V Borrowings item 16 the value of outstanding borrowings under SMSF’s limited recourse borrowing arrangements.
• Do not report again values included in J1 to J6 at any other asset label in Section H.
• An instalment warrant is a limited recourse borrowing arrangement (show it at the appropriate label J1 to J6).
• Do not include derivatives at J1 to J6. Show them at O Other assets.

For example, if a residential real property worth $200,000 is held in a trust as security for a loan of $100,000 under a limited recourse borrowing arrangement, the SMSF would report $200,000 at J1 Australian residential real property. The value of the loan ($100,000) is included at V Borrowings item 16.

SMSF supervisory levy reform – phase 2

Effective 1 July 2013, changes were introduced which phased in the move to payment of the supervisory levy for self-managed super funds (SMSFs) being paid for the financial year in which the annual return is due.

For SMSFs registered prior to 2013–14 year, when they lodge their 2013–14 SMSF annual return (SAR) they will be required to pay the second instalment of the 2013–14 levy ($129). This is in addition to the fullamount of the 2014–15 levy which is $259. The first instalment of the 2013–14 levy was paid on lodgment of the 2013 SAR. Funds newly registered in the 2013–14 year will be required to pay the full amounts of the 2013–14 and 2014–15 levies ($259 +$259) which is a total of $518.

New ATO powers receive royal assent

Laws which give the ATO new and more flexible powers to deal with SMSF trustees who breach super law received royal assent on 18 March 2014. The message for SMSF trustees is clear – rectify contraventions as soon as possible or have plans in place to do so by 1 July.

The new laws apply to contraventions that occur from 1 July 2014 and cover:

• administrative penalties
• education directions
• rectification directions.

Trustees will be personally liable for penalties of up to $10,200 per breach (if it is an administrative penalty provision) and may be directed by the ATO to rectify the contravention and undertake an SMSF education course.

While the start date is 1 July 2014, contraventions, such as loans to members or relatives, still existing on that date will come under the new penalty regime. For more information see SMSF News no. 29 – Be prepared for new penalty powers.

From 18 March 2014, a person must not promote a scheme that has resulted, or is likely to result, in a payment being illegally made froma regulated superannuation fund. Penalties up to $340,000 and imprisonment not exceeding five years may apply to scheme promoters.

Reporting member information correctly after a rollover

The rollover benefits statement and SMSF annual return have changed to simplify your reporting requirements after a rollover. The super fund that receives a contribution during a financial year is always the super fund with the obligation to report the contribution to the ATO, even if it has been rolled out or paid to a member before the end of that year.

As an SMSF trustee, ensure that in sections F and G of the 2014 SMSF annual return you report:

• all members and former members who held a superannuation interest in the fund during the year, including any members who have rolled out during the year
• all contributions received for those members and former members before a rollover or other benefit payment occurred.

The changes made to sections F and G of the 2014 SMSF annual return and instructions to allow this to happen include:

• Label P has been renamed ‘Inward rollovers and transfers’.
• Label Q is now ‘Outward rollovers and transfers’.
• You no longer report rolled in contributions at contribution labels A to M.

Lodge on time or risk removal from Super Fund Lookup

Self-managed superannuation funds (SMSFs) with two or more years’ worth of overdue returns will have their details removed from Super Fund Lookup until they bring their lodgments up to date. This year, they are focusing on newly registered SMSFs, encouraging on-time lodgment of their first return. For SMSFs who fall into this category and who are not operating in their first year, we may issue a ‘return not necessary’ (RNN) indicator. The RNN will be for that year only and the SMSF will not be eligible for an RNN in their subsequent year of income.  If the SMSF has not started to operate in their second year, the trustees will be encouraged to cancel the registration.

Additionally they are analysing details of SMSFs who have never lodged. Where they have evidence that the fund is operating they will remove the fund details from Super Fund Lookup and refer them for compliance action for non-lodgment. Where there is no evidence of the fund operating they intend to cancel their registration. If your SMSF falls into any of these categories please bring your lodgment up to date or wind-up your fund.

Simple tips to help trustees claim exempt current pension income (ECPI)

With 30 June approaching, it is a good time to remind trustees paying pensions of some simple tips to ensure they correctly claim their entitlement to ECPI for the year.

Timing of pension payments

Payments must be ‘cashed’ (that is ‘paid’) by 30 June. The best way to meet this requirement is to ensure pension payments are not left till  the last minute. To assist trustees, we have recently published ‘Timing of a pension payment’.

Missing the minimum pension payment

Where a fund fails to meet the minimum pension payment requirements for an account-based pension (including a transition to retirement or allocated pension) in an income year the fund may not be entitled to treat income or capital gains as ECPI for the year.

You can find this updated material on our website

• SMSFs: Starting and stopping a pension
• SMSFs: Minimum pension payment requirements – frequently asked questions

Segregation of pension assets

The issue of segregation is an important one in relation to ECPI calculations by the fund. There has been much discussion around the Commissioner’s view on when an asset of a complying super fund will satisfy the definition of a ‘segregated’ asset, in particular around the treatment of bank accounts.

A new Taxation Determination dealing specifically with bank accounts has been issued. You can read more about it here.

In the meantime, we continue to work on the residual issues identified during the consultation process for the now withdrawn TD 2013/D7 which initially set out the Commissioner’s preliminary view that an asset could not be partially segregated.

Apportionment of expenses  

The tax rules relating to deductibility of expenses under s 8-1 of the income tax act are also very important where a fund is claiming ECPI. Late last year the ATO released draft tax ruling TR 2013/D7 which focuses on the apportionment of expenses incurred by a super fund where a fund derives both assessable and non-assessable income.

The finalisation of this ruling is occurring concurrently with the ATO working towards clarifying residual issues currently dealt with inTR 93/17. It’s expected this will result in consultation on a separate ruling, dealing with expenses incurred by a super fund in complying with super laws in the near future. TR 93/17 will be withdrawn when the rulings are finalised.

SMSF compliance program changes – auditor contravention reports

The ATO has developed a new approach to treat auditor contravention reports (ACRs) based upon the overall risk posed by the SMSF. Using new risk models, we will analyse multiple indicators of non-compliance including regulatory and income tax matters, drawing information from the SMSF annual return, ACRs and other data including trustee and members’ records. They will use these risk models to determine the appropriate action to take on each SMSF.

This new approach will mean we will treat all ACRs received with an audit, phone call or letter, shortly after lodgment. This provides more certainty to trustees, tax agents and SMSF auditors. It also recognises increased SMSF auditor professionalism stemming from the new registration regime, therefore warranting less intrusive action in many cases.

High-risk SMSFs

These SMSFs will be selected for comprehensive audits that will scrutinise all regulatory and income tax risks displayed by the fund, with a particular focus on repeat offenders. This program will also involve an increasing number of field visits to engage high-risk SMSFs and their tax agents. SMSF administrative penalties will apply when we confirm the breach is eligible for this penalty.

Medium-risk SMSFs

They will take less intrusive action on SMSFs assessed as medium risk. As trustees are responsible for their fund’s behaviour, they will engage directly with trustees to discuss the reported contravention, remind trustees of their obligations and encourage compliance in future. This action will usually occur within 6-8 weeks of the ACR lodgment. In the majority of cases, if the trustee can assure us that they understand their obligations, the issues reported in the ACR will be closed and no penalties applied. Through this treatment, we aim to intervene before more serious comprehensive audits are required.

Lower-risk SMSFs

The ATO will issue tailored correspondence to SMSFs we assess as lower risk, reminding trustees of their obligations and encouraging compliance in future. The issue reported in the ACR will be closed with the issuing of this letter which will usually occur within 6–8 weeks of lodgment of the ACR. The ATO will be running webinars during June to describe our new compliance approach to SMSFs including the use of our new powers from 1 July 2014.