16 Nov 2015

Super Snippets: November 2015

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

Snapshot

  • Government responds to Financial System Inquiry
  • Rumoured superannuation rule changes
  • ATO gives SMSF trustees time to restructure related party loans
  • Federal Court confirms treatment of ‘sham’ SMSF loan

This will be the last Super Snippets article for 2015. We’ll publish the next Super Snippets in January, unless there are significant developments before then.

Let’s take a look at what's happened over the past month.

Government response to Financial System Inquiry

On 20 October, the Government released its response to the Financial System Inquiry. On the subject of ‘superannuation and retirement income’ it largely agreed with the inquiry recommendations.

The exception was limited recourseA loan is said to be ‘limited recourse’ when the claim of the lender is limited to the value of the assets used to secure the loan. This prevents the lender having any further ability to claim against the borrower. SMSF property loans are an example of a limited recourse loan (the law requires these loans to be limited recourse). borrowing arrangements (LRBAs), with the Government rejecting the inquiry’s suggestion that the carve out (for LRBAs) from the general prohibition on direct borrowing be removed. Instead it has said it will monitor leverageIf an investment is funded by way of borrowing (either partially or wholly) it is said to be ‘leveraged’ and the loan is referred to as ‘leverage. The terms may also describe the amount of borrowing used. For instance, where a $90 loan is used to purchase a $100 investment, it might be described as ‘90% leveraged’ or ‘nine?? times leveraged’. and risk in the superannuation system over the next three years.

For this stage at least, it looks like LRBAs are here to stay, although that may not stop lenders withdrawing from the market or increasing interest rates.

The Government agreed with the following recommendations of the inquiry:

  • Enshrining the objective of the superannuation system in legislation;
  • Improving efficiency during the accumulation phase, by tasking the Productivity Commission to develop and release efficiency criteria and to develop alternative models for allocating default contributions;
  • To support the development of comprehensive retirement income products;
  • Extending the choice of fund arrangements to more employees by removing deemed choices from enterprise bargaining agreements;
  • Improving the governance of super funds (the Government has already introduced legislation to require funds to have at least one third independent trustees and an independent chair);
  • Increased super member engagement (through publication of retirement income projections).

These recommendations are unlikely to have a major impact on SMSF trustees.

Possible superannuation rule changes

SMSF trustees may have more interest in some other changes the Government is rumoured to be considering.

The first is the potential removal of anti-detriment payments – increases to super death benefits as a result of contributions taxes being refunded. Anti-detriment payment strategies tend to be very complicated, with uncertain benefits, and are generally the domain of larger super funds, not SMSFs.

However if you’ve implemented an anti-detriment strategy you should talk to your adviser about the potential impact of the rules being removed or changed.

The second rumour – with the potential to affect many SMSF trustees – concerns the transition to retirement (TTR) pension rules (see The benefits of a transition to retirement strategy on how they work).  The Government is focused on the accumulation phase of super as the area where it should concentrate changes and the TTR regime is, according to reports, one of the items in the firing line.

We’d expect any changes to only be made on a prospective basis, so existing arrangements are unlikely to be affected. But if you’ve reached your preservation ageThe age at which you can generally access your super (subject to satisfying a condition of release). A person's preservation age depends on their date of birth. For those born before 1 July 1960 it's 55, but it will gradually increase to 60 over coming years. See the ATO website for more information. (55 or 56, depending on your date of birth) and have been putting off commencing a TTR pension you may not want to delay it too much longer. Similarly, those who will soon reach their preservation ageThe age at which you can generally access your super (subject to satisfying a condition of release). A person's preservation age depends on their date of birth. For those born before 1 July 1960 it's 55, but it will gradually increase to 60 over coming years. See the ATO website for more information. should be ready to act as soon as they are able (if a TTR strategy makes sense).

Related party loans

In ATO Interpretative Decisions ATOID 2014/39 and ATOID 2014/40, the ATO highlighted concerns about related party lending to SMSFs and said that it would seek to tax income from such arrangements as ‘non-arms length income’ (which is taxed at penalty rates).

It has now been reported that the ATO is giving SMSF trustees until 30 June 2016 to restructure existing related party lending arrangements to ensure they are on commercial terms. This doesn’t stop the ATO seeking to impose additional tax on related party arrangements before that time (especially when it is otherwise investigating a fund). But it seems that it won’t actively seek to find out about and attack such arrangements until 30 June 2016 has passed.

Action point: If you have a related party loan arrangement you need to ensure it is on commercial (arms length) terms. We recommend seeking a review of your arrangements from a professional adviser.

Federal Court confirms sham loan decision

In Super Snippets: Year to date we discussed the case of a couple who arranged for their SMSF to deposit $600,000 with a Samoan bank and then borrowed the same amount from that bank a few days later. The ATO said the arrangement was a ‘sham’ and treated the amount as a withdrawal from the fund, taxing them heavily – treatment subsequently confirmed in a decision by the Administrative Appeals Tribunal.

The decision has now been confirmed (on appeal) by the Federal Court (see Millar v Commissioner of Taxation [2015] FCA 1104).

Other developments and reading material

Eviser members may also be interested in the following:

  1. Life insurance commissions. The Government has announced that it has finally reached an agreement with the life insurance industry on changes to remuneration arrangements in the life insurance advice sector.
  2. ATO: Q&As on SMSFs. A range of frequently asked questions (and answers) on SMSFs have been published on the ATO website.
  3. ATO webinars. The ATO has published the timetable for a range of new webinars for SMSF trustees on setting up and running an SMSF, accepting contributions and managing investments, and paying benefits to members.
  4. ATO videos. The ATO has published a range of new SMSF educational videos to its website, as well as publishing those previously released on the ATO YouTube Channel.
  5. SMSF admin provider penalised for ‘false and misleading’ advertising. Another SMSF administration provider has been penalised after action by ASIC. In this case, Superannuation Warehouse Australia was ordered to pay a $25,000 penalty for false and misleading ‘free SMSF set up’ advertising.
  6. Thank you sir, may I have another? An article by Martin Conlon, Head of Australian Equities for Schroders, on the impact of interest rates on global markets.
  7. Dick Smith is the greatest private equity heist of all time. A blog post by Matt Ryan, of Forager Funds Management, on the acquisition and subsequent float of the Dick Smith business by Anchorage Capital.

 

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