12 May 2015

Super Snippets: May 2015

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

Snapshot

  • Major parties make pre-Budget announcements
  • Limited recourse borrowing agreements
  • Taxpayer Alert on franking credits
  • ATO determination on life insurance policies and buy-sell agreements

The past month has been busy, with the May federal budget approaching and the Australian Tax Office (ATO) focusing closely on transactions being implemented through SMSFs.

Pre-Budget announcements

In the lead up to Budget night (12 May) the major parties have been busy talking about superannuation.

On 22 April, Labor announced two policies it would introduce if elected to government. Firstly, it proposes to re-introduce its ‘pension tax’ on earnings of more than $75,000 a year during pension phase. Secondly, it wants to lower the threshold at which the extra tax on super contributions for high-income earners kicks in, to $250,000 (from $300,000 currently).

There’s a lot of water to go under the bridge before either of these policies are enacted (for a start, Labor still need to be elected). We also need more detail on how the first proposal, in particular, will work in practice.

At this stage Labor’s announcement should simply serve as a reminder that, unless there’s a cost in doing so, levelling out balances between couples (by contributing more to the smaller account or implementing a re-contribution strategy) can be a good idea to help reduce exposure to future law changes.

The government appears to have ruled out major adverse changes to superannuation in the upcoming budget. However, whether that’s simply because they will occur down the track remains to be seen.

It has however indicated that it will tighten the Age Pension assets testOne of the two tests that determine eligibility for the Age Pension (the other is the Income Test). The test that applies (dominates) is the one which gives the worst result. Details of how the Assets Test calculations and limits can be found at the Department of Human Services website. (see attached Media Release). The changes, effective January 2017, are expected to improve the pension outcome for those with a low level of assessable assets, but reduce it for many others. Those near the current ‘cut-offs’ for receiving a part pension are expected to lose the age pension completely (the government has published the attached tables for home owners and non-home owners with details of the changes).

Fortunately the government has indicated that, for now at least, the ‘cut-off’ levels for the Commonwealth Seniors Health Card will remain unchanged.

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 agreements (LRBAs)

The rumour mill has been in over-drive on the topic of borrowing by SMSFs, using LRBAs, and whether the government will change the rules or ban them.

At this stage, the government appears to have ruled out banning LRBAs in the upcoming budget and whether they change the rules remains to be seen. However, there have been reports that at least one major lender (National Australia Bank) has decided to stop entering into new LRBAs with SMSFs.

This is a worrying development for highly leveraged SMSF trustees, especially those who don’t have the financial capacity outside super to refinance their loans (through additional contributions or related party loans).

If there’s a mass exodus of lenders from the SMSF lending market, it’s more likely that we’ll see lenders using ‘review events’ (which can be as simple as the fund moving into pension phase) to require loans to be repaid, or interest rates on SMSF loans start to diverge further from those charged on standard home loans. The risk is that those who can’t refinance their loans through alternative means end up forced to sell their property investment.

Action point: If you’ve taken out a 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). loan to buy property in your SMSF check your documents and make sure you’re aware of any ‘review events’ which can enable the lender to recall your loan. To limit the risk of becoming a ‘forced seller’ make sure you’ve got the financial capacity outside super to reduce or pay off your SMSF loan (by making additional contributions or related party loans).

Taxpayer Alert on dividend stripping/franking creditsTax credits available to shareholders receiving 'franked dividends'. The credit represents tax already paid by the company and is able to be offset against a shareholders’ own tax liability. Any excess is refunded as cash to individuals and super funds. Also known as an 'imputation credits'.

On 30 April, the ATO released TA 2015/1 relating to cases where the shares in a private company are transferred to an SMSF (or to a trust from which an SMSF is entitled to receive distributions). This is typically done where the private company has accumulated profits, previously taxed, and is able to pay a franked dividend to the SMSF, which is entitled to a full or partial refund (or rebate) of franking creditsTax credits available to shareholders receiving 'franked dividends'. The credit represents tax already paid by the company and is able to be offset against a shareholders’ own tax liability. Any excess is refunded as cash to individuals and super funds. Also known as an 'imputation credits'..

The ATO take the view that one or more of the dividend stripping, franking creditA tax credit available to shareholders receiving a 'franked dividend'. The credit represents tax already paid by the company and is able to be offset against a shareholders’ own tax liability. Any excess is refunded as cash to individuals and super funds. Also known as an 'imputation credit'. or general anti-avoidance provisions apply. In this case, the franking creditA tax credit available to shareholders receiving a 'franked dividend'. The credit represents tax already paid by the company and is able to be offset against a shareholders’ own tax liability. Any excess is refunded as cash to individuals and super funds. Also known as an 'imputation credit'. benefit could be reversed and penalties applied.

Unfortunately, when it comes to franking creditsTax credits available to shareholders receiving 'franked dividends'. The credit represents tax already paid by the company and is able to be offset against a shareholders’ own tax liability. Any excess is refunded as cash to individuals and super funds. Also known as an 'imputation credits'., the anti-avoidance provision (section 177EA) is drafted very broadly and gives the ATO a lot of power to reverse the tax treatment of (and penalise) transactions it does not like. That’s not to say these types of transactions can’t work (and noting that we don’t provide tax advice), but they are tough to get right and avoid problems with the ATO.

Action point: If your SMSF has entered into a transaction whereby it is receiving franked dividends from a private company (either directly or indirectly) you should seek professional advice immediately on the impact of this Taxpayer Alert.

ATO decision on life insurance policies and buy-sell agreements

Many business partners have entered into life insurance polices and buy-sell agreements, using superannuation. Typically, a partner will take out a life insurance policy through their super account with the premiums paid for by extra contributions funded by the business.

If the partner dies, the life insurance payout is used to make a death benefit payment to their spouse, who then transfers the deceased’s share of the business to the other partner (or partners).

On 1 May, the ATO published an interpretative decision on this type of arrangement (ATO ID 2015/10). Their view is that it breaches 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.' and also section 65 of the SIS ActThe Superannuation Industry (Supervision) Act 1993. It is the main piece of law governing the operation of superannuation funds (including SMSFs). (financial assistance to members).

As a result of this decision, we expect many super members who’ve entered into these types of arrangements will have to terminate them, to avoid ongoing breaches of the SIS ActThe Superannuation Industry (Supervision) Act 1993. It is the main piece of law governing the operation of superannuation funds (including SMSFs)..

Action point: If you’ve entered into a buy-sell agreement or arrangements similar to the one described, we recommend seeking professional advice immediately.

Other developments and reading material

Eviser members may also be interested in the following:

  1. ATO webinars: Superstream for employersThe ATO is running a series of webinars for employers on the new Superstream data standards to help them prepare for the upcoming 1 July deadline.
  2. Australia: The years of living dangerously. An article by Lazard’s Australian equities team on the risks posed by Australia’s housing market and banking sector.
  3. The beginning of the end? Last week’s rout in global bond markets. A blog post by Morphic Asset Management on recent rises in global bond yields.
  4. Platinum market update: April 2015. The latest market update from Platinum Asset Management, highlighting areas where they have concerns and where they see opportunities.

 

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