14 Aug 2015

Super Snippets: August 2015

The Eviser Team highlight the key developments affecting self-managed super fund trustees over the past month.

Snapshot

  • Contributions reserving strategy made simpler with new ATO form
  • ATO determinations on allocations from reserves being treated as concessional contributions
  • AMP freezes investment property lending
  • Tribunal decisions on transfer from overseas retirement account and whether a service provider is entitled to compulsory super

In the past month the ATO has published a range of material, AMP has pulled back from SMSF lending and there were two decisions of interest to SMSF trustees. Let’s take a look.

ATO form for ‘contributions reserving strategy’

The contributions reserving strategy started with the ATO’s decision in TD 2013/22 and involves a member of a super fund making a concessional contributionThe 'normal' contributions made to your super account. Concessional contributions include compulsory contributions made on your behalf by your employer, voluntary contributions made out of your salary package and cash contributions by self-employed people (who are entitled to a tax deduction for it). Concessional contributions are either made from 'pre-tax' income or are tax deductible. See the ATO website for more information. in the current financial year but only having it count against the following year’s annual cap. This is achieved by having the fund hold the contribution in reserve when made (in June) and allocating it to the member’s account in July of the subsequent financial year.

Up until now, the ATO’s systems didn’t recognise the strategy was possible. As a result, it would automatically issue penalty notices to anyone using it and the person had to object (a time consuming and costly process).

Now the ATO has released a form – Request to adjust concessional contributions – so that those using the strategy can report details to the ATO. This avoids the objection process and reduces the hassles and cost associated with the strategy.

Action point: If you’re using the contributions reserving strategy make sure you use the new form. If you’ve previously rejected the strategy because of the problems with the ATO systems, you may wish to reconsider.

ATO determinations on reserves

The ATO has published determinations (ATO ID 2015/21 and ATO ID 2015/22) that provide examples of two (highly uncommon) situations where the allocation of reserves by super funds may be treated as a concessional contributionThe 'normal' contributions made to your super account. Concessional contributions include compulsory contributions made on your behalf by your employer, voluntary contributions made out of your salary package and cash contributions by self-employed people (who are entitled to a tax deduction for it). Concessional contributions are either made from 'pre-tax' income or are tax deductible. See the ATO website for more information. (and potentially causing a breach of the concessional contributions capThe annual cap (for each year ended 30 June) on the amount of concessional (pre-tax or tax deductible) contributions a person is allowed to contribute to super. For more information on cap amounts see the ATO website.).

The first is where a fund self-insures death and disability payments to members, and as a result has created a self-insurance reserve. In this case, allocations from the reserve (to fund a benefit) could be treated as a concessional contributionThe 'normal' contributions made to your super account. Concessional contributions include compulsory contributions made on your behalf by your employer, voluntary contributions made out of your salary package and cash contributions by self-employed people (who are entitled to a tax deduction for it). Concessional contributions are either made from 'pre-tax' income or are tax deductible. See the ATO website for more information..

The second is where a ‘complying lifetime pension’ is commuted. In this case, the complying lifetime pension may be supported by a pension reserve account, which would be allocated to the member. As a result, the balance of the reserve may be a concessional contributionThe 'normal' contributions made to your super account. Concessional contributions include compulsory contributions made on your behalf by your employer, voluntary contributions made out of your salary package and cash contributions by self-employed people (who are entitled to a tax deduction for it). Concessional contributions are either made from 'pre-tax' income or are tax deductible. See the ATO website for more information..

Action point: As noted, both of these scenarios are highly uncommon (and self-insurance is in the process of being phased out). Typically, SMSFs don’t create any reserves at all. Just be aware of these determinations (and the potential for concessional contributionsThe 'normal' contributions made to your super account. Concessional contributions include compulsory contributions made on your behalf by your employer, voluntary contributions made out of your salary package and cash contributions by self-employed people (who are entitled to a tax deduction for it). Concessional contributions are either made from 'pre-tax' income or are tax deductible. See the ATO website for more information. to arise) if you’re ever dealing with self-insurance or complying lifetime pensions.

AMP freezes investment property lending

In Super Snippets: May 2015 we reported that National Australia Bank had stopped making SMSF property loans. Now AMP has announced a freeze on new investment property loans, including those for SMSFs.

It’s another reminder for members to be extra cautious when it comes to SMSF borrowing or to avoid it altogether. We’ve previously highlighted the risk associated with SMSF loan ‘review events’, especially for borrowers with high loan-to-value ratios (LVRs) and without the financial capacity outside super (or the contribution cap capacity) to refinance any SMSF loans.

Tribunal decisions

Members may have an interest in two recent decisions of the Administrative Appeals Tribunal.

In the first (Baker and Commissioner of Taxation [2015] AATA 469), the Tribunal found that a United States IRA (Individual Retirement Account) was not a ‘foreign superannuation fund’, nor was it a ‘scheme for the payment of benefits in the nature of superannuation on retirement or death’ for the purpose of the Tax Act. As a result, the taxpayer was unable to access the tax concessions for transfers from foreign super funds.

Key reasons for the decision were US IRAs, which while similar in some respects to Australian super funds, did not have prohibitions on investments that could be undertaken in the account, and allowed withdrawals before retirement.

Action point: If you’re considering transferring funds from overseas pension, retirement and similar accounts, seek professional advice first on the Australian tax implications.

The second Tribunal decision (OEM Supplies Pty Ltd and Commissioner of Taxation [2015] AATA 532) dealt with the issue of whether a person (Mr Hunt), who supplied website related services to a company, was an employee for the purposes of the compulsory super guarantee.

The Tribunal found that Mr Hunt was a contractor, not an employee, and was not entitled to compulsory super contributions. Key reasons for this finding included:

  • Mr Hunt was free to decide how the tasks should be undertaken and to engage others to assist;
  • the remuneration arrangement involved Mr Hunt taking economic risk (he bore costs associated with the website and part of his remuneration was on the basis of volume of sales);
  • the business of Mr Hunt was advertised (both on the website and elsewhere) and he performed services for other parties.

Action point: If you own a business that engages contractors, or you work as a contractor, this case sets out the list of factors that the court will take into account when considering whether a contractor is actually an employee (and entitled to compulsory super).

Other developments and reading material

Eviser members may also be interested in the following:

  1. ATO case study on life insurance and buy-sell agreements. In Super Snippets: May 2015 we discussed the ATO decision on life insurance and buy-sell agreements (ATO ID 2015/10). The ATO has now published a case study explaining how its decision works in practice.
  2. ATO determination on super death benefits being paid with journal entries. In Super Snippets: Year to date we discussed two determinations – ATO ID 2015/2 and 2015/3 – that explained the ATO’s view that super death benefits cannot be paid by journal entries (they must be ‘cashed’). These determinations have now been withdrawn and replaced by a single determination (ATO ID 2015/23). While some of the technical points have changed, the ATO’s overriding view – death benefits cannot be paid by journal entries – remains the same.
  3. ASFA report on dividend imputation. The Association of Superannuation Funds of Australia (ASFA) has published a report on dividend imputation (franking). A key finding was that abolishing imputation would have a large negative impact on retirees, superannuation fund members and low to middle income earners. The full report can be accessed here.
  4. Dixon Advisory hit with ASIC infringement notice. ASIC announced that well known financial group Dixon Advisory has paid two $10,200 penalties after receiving infringement notices for including potentially misleading material on its website.
  5. Latest GMO Quarterly Letter. GMO has released its latest quarterly letter with articles by Ben Inker (Price-Insensitive Sellers) and Jeremy Grantham (Ten Quick Topics to Ruin Your Summer).
  6. Magellan Flagship Fund (ASX Code: MFF) Annual Report. MFF has released its 2015 Annual Report to shareholders. Members may be particularly interested in the Portfolio Manager’s Report on page 6.

 

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