14 Oct 2015

Super Snippets: October 2015

As a special this month we're making Super Snippets – our monthly report on developments affecting SMSF trustees – available to all members.

Snapshot

  • Enduring power of attorney changes in Victoria may affect estate planning strategies
  • All new SMSFs must now lodge annual returns
  • ASIC media release on ‘self-managed’ super options
  • Federal Court decision disqualifying and penalising SMSF trustees making related party loans
  • Family Court confirms ‘super splitting’ can only be used by couples

While there have been no major superannuation developments in the past month, there have been several publications and changes of interest to SMSF trustees. Let’s take a look at the key developments.

Changes to Victoria’s enduring power of attorneyAn EPOA is a legal agreement that allows someone to appoint another person to make financial and property decisions on their behalf. Unlike an ordinary power of attorney, an EPOA continues to operate even if the donor (the person who granted it) loses legal capacity (for instance, becomes mentally ill). rules

Recent changes in Victoria to the laws on the operation of an enduring power of attorneyAn EPOA is a legal agreement that allows someone to appoint another person to make financial and property decisions on their behalf. Unlike an ordinary power of attorney, an EPOA continues to operate even if the donor (the person who granted it) loses legal capacity (for instance, becomes mentally ill). could put existing estate planning strategies at risk. The new rules prohibit attorneys from entering into conflicted transactions unless they have prior approval from the principal (for instance, an SMSF member who has granted an attorney).

The new rules have the potential to affect existing estate planning arrangements. For example, where the attorney had been given the power to make a binding death benefit nominationAlso known as a BDBN. A BDBN is a document given by a super fund member to the super fund trustee. A valid BDBN legally compels the trustee to pay death benefits as directed by the member. on behalf of a fund member, with the attorney as a beneficiary, this would no longer be possible.

Action note: If you are based in Victoria and have an estate planning strategy in place that relies on the use of an enduring power of attorneyAn EPOA is a legal agreement that allows someone to appoint another person to make financial and property decisions on their behalf. Unlike an ordinary power of attorney, an EPOA continues to operate even if the donor (the person who granted it) loses legal capacity (for instance, becomes mentally ill)., check with your legal or financial adviser to ensure that it won’t be compromised by the new rules.

Lodgement of annual returns by new SMSFs

The ATO has advised that all SMSFs registered after 1 January 2015 will have to lodge an annual return regardless of the amount of assets held.

Funds registered before 1 January 2015 (that have no assets) can continue to request that the fund’s record be marked as ‘return not necessary’, or request the registration be cancelled.

ASIC media release on compliance issues with superannuation trustees

On 15 September, ASIC issued a media release (15-251MR) providing an overview of compliance issues identified during its surveillance of responsible entities and superannuation trustees that hold Australian Financial Service Licenses.

An area identified by ASIC in relation to superannuation trustees was the promotion of ‘self-managed’ (pick your own) super options.  ASIC’s concern is that some super providers are giving the false impression that these types of accounts offer the same degree of control and choice as an SMSF.

Some people (especially those with lower balances) may find that pick your own super options (for example, AustralianSuper’s Member Direct or ING DIRECT Living Super) are a cost-effective alternative to setting up an SMSF, but they aren’t the same thing. Typically, they will have investment restrictions and drawbacks (compared to an SMSF) and won’t give the members the same tax flexibility.

Federal Court decision

A recent Federal Court decision serves as a reminder of the dangers involved in an SMSF making loans to its members or other related parties.

In this case (Deputy Commissioner of Taxation (Superannuation) v Ryan [2015] FCA 1037) the SMSF trustees (Mr and Mrs Ryan) owned a dry cleaning business that was having financial difficulties. This resulted in the fund making a number of loans to the couple over the course of several years, to fund living expenses and loan repayments.

The loans totaled almost $210,000 and less than $30,000 was repaid. The loans were also interest free, unsecured and had no repayment term. As the loans were the bulk of the fund’s assets it was in breach of the ‘in-house assets testA test performed at 30 June each year to check if 'in-house assets' (related party investments and loans) exceed more than five per cent of a super fund's assets. See ATO website for more details.’ in multiple financial years and these breaches were not rectified.

The Court found the Ryans to be in breach of four sections of the SIS ActThe Superannuation Industry (Supervision) Act 1993. It is the main piece of law governing the operation of superannuation funds (including SMSFs).:

  • Section 62(1) – for breaching the ‘sole purpose testThe 'sole purpose test' is contained in section 62 of the SIS Act. The object of the test is to ensure that the super fund is being run for the sole purpose of providing retirement benefits to members (plus ancillary payments like death benefits). Common breaches of the sole purpose test are members of a fund (or their relatives) using property of the fund (for instance hanging art belonging to the fund in their home) or borrowing money from the fund. More information can be found on the ATO website.
  • Section 65(1)(a) – by lending the fund’s money to members
  • Section 84 – for causing the fund’s in-house assets to exceed 5 per cent of the market value of the fund’s assets
  • Section 109(1)(b) – by entering into ‘non-arms length’ transactions on terms unfavourable to the fund

As a result, they were disqualified from acting as SMSF trustees and each penalised $20,000.

Family Court decision

In a recent property settlement hearing in the Family Court (Stant & Stant and Anor [2015] FamCA 734) the parties asked the Court to use the ‘splitting provisions’ of the Family Law Act to order the transfer of part of the husband’s super account to his mother-in-law (to settle a debt).

However, the Court found that it did not have the power to make such an order. The splitting provisions of the Family Law Act only allow super to be split between couples – either married or de facto.

Other developments and reading material

Eviser members may also be interested in the following:

  1. SMSF statistical report June 2015. The ATO has published the latest statistics for the SMSF market, including information on asset allocationThe way you spread your portfolio among different types of investments (asset classes). For example, if you had $10,000 to invest you might decide on an asset allocation consisting of 50% term deposits and 50% shares., population and establishments.
  2. New videos on ATO YouTube Channel. The ATO has released a new series of educational videos on YouTube. Videos released in the past month are What happens when a member dies?, The annual audit, What happens if your fund breaches the law? and Paying an income stream Part 2 (a follow up to an earlier video, Paying an income stream).
  3. ATO focus for SMSF compliance for 2015/16. In a recent speech to the Chartered Accountants Australia and New Zealand, Assistant Commissioner Kasey Macfarlane outlined the ATO’s compliance focus and approach for the coming year and issues attracting the ATO’s attention.
  4. An unusual couple of centuries. A look at world economic growth in recent centuries, published on the Platinum website.  
  5. Colonial articles on global infrastructure. Two recent articles from Colonial First State Global Asset Management. The first (The Yield Report) takes a look at the impact of interest rate increases on infrastructure investments and the second (Infrastructure Travel Diary) is an update on North American infrastructure assets.
  6. Deciding where to place your confidence and trust. A recent article from Allan Gray Australia on what to look for in a fund manager.

 

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