14 Apr 2016

Super Snippets: April 2016

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

Snapshot

  • Rumoured changes to super in upcoming Federal Budget
  • Government releases discussion paper on purpose of super
  • ATO crackdowns on some SMSFs
  • Court decision on executor conflict of interest when claiming super death benefit

This is our last Super Snippets before this year’s Federal Budget (on 3 May). Let’s take a look at the potential changes to the current superannuation laws and other recent SMSF related developments.

Rumoured budget changes to super

The Treasurer, Scott Morrison, in a speech to a business summit mid-March, made it clear there would be super changes in the upcoming May Federal Budget. What those changes will be remain unknown.

Changes rumoured to be under consideration are:

  1. Contribution caps. The concessional and/or non-concessional contributionVoluntary contributions made to your super account out of after-tax income (savings). Non-concessional contributions are not tax deductible and can't be salary packaged. See the ATO website for more information. cap could be lowered. The bring forward ruleThe colloquial term for the rule that allows you to accelerate (bring forward) three years worth of non-concessional contributions to super. See the ATO website for details. could also be at risk of change.
  2. Transition to retirement (TTR) pensions. The TTR rules (see Transitioning to retirement? Shift your super into pension mode) could be modified to ensure recipients reduce work hours when accessing a TTR pension, or simply scrapped.
  3. Re-contribution strategy. This strategy (see Increasing your tax-free super: The re-contribution strategy) appears to be well and truly in the Treasurer’s sights given his repeated comments about super not being for estate planning. The re-contribution strategy could be affected either by contribution cap changes or limits on the amount of super that can be withdrawn.
  4. Tax on high-income earner contributions. The additional tax paid on super contributions by those earning $300,000 or more could be increased, or changed to kick in at a lower level of income.
  5. Capping pension income tax exemption. This is thought to be less likely but it’s understood the government has considered introducing a tax on earnings on super accounts in pension mode, once income is over a certain level (say $100,000). The concept sounds similar to Labor’s current pension tax proposal.

What should super members do about these potential changes?

Nothing is certain but there is a likelihood changes may be implemented with immediate effect on Budget night (3 May), especially with something like the TTR pension rules.

If you’ve been putting off starting a TTR pension, or implementing a re-contribution strategy, it would be prudent to put it in place prior to 3 May (if that’s possible). Typically existing arrangements are allowed to continue (‘grandfathered’) when there is a change in law, although that’s not always the case.

Super members planning on making voluntary contributions before 30 June might also consider making them prior to budget night, just to be safe. However changing contributions caps (or tax rates, in the case of high-income earners) mid-year is tricky, so we think it’s more likely any contribution cap change would take effect on 1 July this year or next.

If the benefits from a strategy are uncertain or minor, it may not be worth rushing to get it in place before the Budget. As always, we recommend seeking personal advice on your circumstance before making any final decisions.

Action point: If you’ve been thinking about starting a TTR pension, implementing a re-contribution strategy, or making voluntary contributions, consider doing so before the Budget on 3 May.

Purpose of super

A step already taken by the Federal Government is to follow up on the Financial System Inquiry recommendation that the purpose of super be enshrined in legislation. In March, Assistant Treasurer, Kelly O’Dwyer, released a discussion paper (titled The objective of superannuation) inviting submissions, which have now been received. We await further details.

Guidance on 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

In Super Snippets: Year to date (published in 2015) we highlighted the two ATO decisions (ATO ID 2014/39 and ATO ID 2014/40) on related party 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). The ATO’s view is that arrangements not on commercial terms could give rise to non arms length income (which is heavily taxed) and it subsequently advised (see Super Snippets: November 2015) that SMSF trustees had until 30 June 2016 to make sure any related party loans were on arms length (commercial) terms and conditions.

To assist advisers in determining whether a loan is on arms length terms, the ATO has now published a Practical Compliance Guideline (PCG 2016/5). The PCG provides safe harbour rules for a related party LRBA used to fund property or shares including interest rate benchmark, maximum LVRA LVR (loan to valuation ratio) is a financial ratio and is often used as a condition in lending facilities. It's calculated by dividing the loan balance by the value of the property which secures the loan. For example, if you had a $60 margin loan against shares worth $100, the LVR would be 60%., security requirements and maximum loan term.

Action point: If your SMSF has entered into a related party LRBA you must ensure it is on commercial terms (including for the current financial year) by 30 June. Speak to your adviser to ensure your loan complies with the PCG 2016/5 safe harbour guidelines.

ATO crackdowns on SMSFs with trust distributions and late lodgement

The ATO has advised that it will increase its focus on SMSFs that receive trust distributions. It is concerned that a number of funds have entered into non-arms length arrangements to divert income into super.

There have also been reports that the ATO is keen to crack down on SMSFs that fail to lodge annual returns on time. Late lodgement of annual returns is seen as an indicator of other compliance issues in the fund.

Court decision: Brine v Carter

In Where will your super death benefit go? we discussed the case of McIntosh v McIntosh, where a mother was appointed administrator of her deceased son’s estate and was found to have breached her fiduciary duties to the estate by claiming the son’s super death benefit.

A similar issue arose in the recent case of Brine v Carter [2015] SASC 205. There the de facto spouse of the deceased was appointed by Will, together with three sons from an earlier marriage, as executor of the deceased estate.

The deceased also had a superannuation account in respect of which he had lodged a non-binding death benefit nomination (in favour of the spouse). The spouse claimed the super death benefit, but the other executors became aware of it, made a claim on behalf of the estate and then asked the court to order the spouse to pay the benefit to the estate.

The court held that the spouse had a conflict of interest by acting as both executor under the Will and having a personal interest in the super death benefit. However, she was allowed to keep the super death benefit on the basis that the other executors had made a claim to the super fund (on behalf of the estate) and so were regarded as having consented to the conflict.

The court indicated that the decision would have been different if the other executors hadn’t been given the opportunity to make a claim for the death benefit.

Action point: Where a member wants a person to act as executor and also be considered for a super death benefit, express provision absolving the conflict of interest should be included in the Will. If you are in the position of being an executor and potential beneficiary of a super death benefit, other executors should be informed and you should consider renouncing the appointment as executor to eliminate the conflict of interest. Of course, seek expert advice on your circumstances before taking any action.

Other developments and reading material

Eviser members may also be interested in the following:

  1. ATO case study. The ATO has published a new case study that looks at whether gainful employment has ceased (for the purpose of starting an account based pensionThe 'usual' superannuation pension you receive on retirement. Your account contains an amount from which you can make withdrawals (subject to set minimums). These withdrawals (the pension) are generally tax-free for those over 60.) where a beneficiary of a trust also performs duties for the business run by the trust.
  2. ATO questions and answers. The ATO has expanded the SMSF related Q&As published on its website.
  3. ASIC review of integrated funds management businesses. The corporate regulator ASIC has released Report 474 outlining its findings after an extensive review of the conflicts management practices in vertically integrated funds management businesses.
  4. ASIC penalises financial publishing house. ASIC has penalised Port Phillip Publishing (publisher of Money Morning and a range of other publications and services) $21,600 for a misleading superannuation scare campaign it ran on its website.
  5. Best avoid landmines. An article by Simon Doyle, Head of Fixed Income & Multi-Asset at Schroders, on the implications of a global low return environment.

 

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