SPRING 2008
New ATO SMSF Rulings provide guidance on prohibited
financial assistance and complying with the Sole Purpose Test
Trustees of Self Managed Superannuation Funds (SMSFs) should be aware of two new rulings recently issued by the
Australian Taxation Office.
Self Managed Superannuation Fund Ruling SMSFR 2008/1 deals with the prohibition against providing financial
assistance to members or relatives of members of an SMSF while SMSFR 2008/2 deals with ensuring that an SMSF is
maintained for the core purposes of providing retirement benefits, death benefits and other approved purposes.
As a worst case scenario where an SMSF breaches the above provisions or other Superannuation Law provisions it is
possible for the Australian Taxation Office (ATO) to make the SMSF non-complying which is extremely punitive. See the
separate article in this newsletter on the effects of non-compliance.
The new rulings are reviewed below.
Prohibited financial assistance
Under Superannuation Law trustees of SMSFs are prohibited
from:
fund money to a member or relative s65(1)(a) of
• lending
the Superannuation Industry (Supervision) Act) (SIS Act);
and
from using fund resources to provide financial assistance
to members or relatives of members of the SMSF
s65(1)(b) of the SIS Act).
The new ruling SMSFR 2008/1 sets out the ATO’s views on
the latter point as the SIS Act does not define “financial
assistance”. The ruling aims to clarify the types of activities
covered by the prohibition.
•
What is financial assistance
The ATO’s view is that “financial assistance” means the
taking of actions by SMSF trustees that diminish or may
diminish the worth of the fund in favour of members or
relatives to the prejudice of the members’ retirement savings.
It can cover assistance given even if the assisted party did
not request it.
For a contravention of the SIS Act to occur the assistance
must be “financial assistance”. The ATO sets out various
transactions that constitute financial assistance, such as the
making of a gift, the forgiveness of a debt or the giving of a
guarantee or indemnity.
The assistance must also use the resources of the fund. If the
assets of a SMSF are reduced as a result of the giving of
financial assistance, the assistance has made use of the fund
resources. However, the fund resources can also count as
being “used” even if they are in no way reduced or there is
positive effect on the net assets of the SMSF.
The financial assistance must also be given to a member or
relative of a member of the SMSF. “Relative” includes the
member’s spouse, parent, grandparent, brother, sister, uncle,
aunt, nephew, niece, lineal descendent and adopted child
(or their spouses) of the member or the member’s spouse.
The ATO states that if a relative of the member is a partner
or sole trader, then financial assistance to the partnership or
sole trader counts as being given to the relative of the
member.
Examples of financial assistance
While the provision of financial assistance depends on the
circumstances of a case, in the ATO’s view the trustee of an
SMSF contravenes the financial assistance rules by
providing any of the following in regard to a member or
relative:
• gifting an SMSF asset;
• selling an SMSF asset for less than market value;
• purchasing an asset for greater than market value;
• acquiring services in excess of what the SMSF requires;
• giving a security or charge over SMSF assets;
• paying an inflated price for services acquired;
• forgiving debts;
(Cont'd over page)
Also in this issue…
The
The
The
The
Punitive result of SMSF Non-compliance
Sole Purpose Test
New SMSF Annual Return
Bastion Update
Self Managed Superannuation Fund Specialists • Group Life & Disability Insurance
2
3
4
4
The punitive result of an SMSF
being made non-complying
In regulating SMSFs the ATO seeks to ensure compliance
with both the SIS Act and its associated Regulations. Where
a fund breaches SIS this is known as a ‘Contravention’ and
must be reported to the ATO by the Fund’s Auditor.
The ATO aims to work with Trustees to ensure any breaches
are rectified. However, where a fund fails to satisfactorily
rectify the breach, the breach is repetitive or of a serious
nature, the ATO may impose one or more the following:
• accept
an undertaking from the trustees to rectify the
breach;
• freeze the assets of the fund
• disqualify the Trustees
• suspend or remove the trustees
(If the trustees are
removed the ATO will appoint an acting trustee who must
act as directed by the ATO);
• Seek civil and/or criminal penalties in the courts; and/or
• Make the fund non-complying.
It is the ATO’s intention to take a firm approach with trustees
who do not genuinely make the effort to comply or those
who set out to deliberately avoid their legal obligations.
Where the fund is made non-complying it will lose its
concessional tax treatment and its taxable income will be
taxed at a rate of 45% rather than the 15% rate for that of
a complying fund.
Additionally if a SMSF is made a non-complying
superannuation fund for a year of income and it was a
complying superannuation fund for the previous year, the fund
assessable income will include the total market value of its
assets less any member contributions where a tax deduction
has not been claimed. This is extremely punitive and can result
in the loss of a significant proportion of fund assets.
A non-complying fund remains non-complying until it
receives a notice of compliance with taxable income
continuing to be taxed at 45% rate. However, assets are
only treated as income in the first year of non-compliance.
For contributors to the fund there can be additional issues
regarding the deductibility of contributions received by the
fund, the satisfaction of Superannuation Guarantee
obligations and non-eligibility for Government Cocontributions. A non-complying fund is not eligible for an
exemption of income related to current pension liabilities.
As an example consider the John & Jane Superannuation
Fund with the following:
The effect of non-compliance means the tax liability for the
year will be calculated as follows:
Assessable Income
Fund Assets
$480,000
Investment Income
$55,000
Contributions
$30,000
Less Deductions
Fund Expenses
$4,500
Death Cover Premiums
$0
Taxable Income
$560,500
Tax Liability
$252,225
$600,000–$120,000
No $900 deduction
$560,500 @ 45%
If we consider that the 15% tax liability that would apply if
the fund maintains its complying status is $11,940 the
additional tax of over $240,000 is a significant reason for
Trustees to ensure that their SMSF is run correctly and
complies with SIS.
At Bastion for our administration clients we review funds
against a compliance checklist to raise any potential noncompliance issues with the trustees and assist with their
rectification.
Prohibited Financial Assistance
Examples
of
financial
(Cont’d from page 1)
assistance
• releasing
someone from a financial obligation, even
where the amount is not yet due and payable;
• delaying recovery of a debt;
• satisfying or taking on a financial obligation;
• giving a guarantee or indemnity; and
• giving a security or charge over SMSF assets.
Other arrangements
Some arrangements other than those listed above may or
may not breach the prohibition. This depends on whether,
objectively in light of the commercial reality and the facts of
the case, the arrangement or transaction in substance
provides financial assistance to a member using the
resources of the SMSF .
Factors that assist in determining whether such assistance
arises include the following:
• the SMSF is exposed to a credit risk or the financial risk
•
• Fund assets with a market value of $600,000.00
• Since inception total member non-concessional •
(undeducted) contributions of $120,000.
•
In the year the fund was made non-complying there was:
• $55,000 of investment income (no imputation credits) •
• $30,000 of contributions
• $900 of death cover premiums
• $4,500 of fund expenses
•
of a member or relative;
the arrangement is not at arm’s length and is favourable
to a member or relative;
the arrangement is outside usual commercial
arrangements for SMSFs;
the arrangement is inconsistent with the investment
strategy of the SMSF;
an amount is paid by the SMSF and then repaid to the
SMSF in a manner similar to the repayment of a loan;
and
there is diminution of the assets of the SMSF, whether
immediately or over a period of time.
Indirect assistance
According to the ATO, even indirect financial assistance to
relatives counts as being financial assistance.
The following elements can indicate indirect assistance:
• the financial assistance is such that it would not have
been given by the third party entity had the SMSF not
entered into an arrangement with that entity that uses
SMSF resources;
• the third party entity, in effect, passes on the financial
assistance given to it by the SMSF, including the situation
where the financial assistance passes through a chain of
third party entities before reaching the member or
relative; or
• there is some other factor that indicates that financial
assistance given by the third party entity was in some
way reliant, conditional or dependent on SMSF
resources .
Examples of where indirect assistance may be provided are
where:
• a third party provides financial assistance to the member
or relative upon the condition that the SMSF enter into
some arrangement with the third party
• an entity such as a company or trustee of a trust receives
financial assistance from the SMSF and then in effect
passes on that assistance to the member or relative.
The sole purpose test extends to all activities undertaken by
the SMSF during its life cycle and broadly encompasses the
following:
• accepting contributions;
• acquiring and investing fund assets;
• administration of the SMSF, including maintenance of the
structure of the SMSF;
• employing and using fund assets; and
• payment of benefits, including benefits
on or after
retirement.
Even the provision of benefits by a SMSF to members that
are incidental, remote or insignificant may breach the sole
purpose test and will depend on all the facts and
circumstances of the case. In general, benefits other than
those covered by the sole purpose test, which are not
inherent or unavoidable consequences of legitimate
activities of a SMSF will contravene the sole purpose test.
The table below outlines
consider to be relevant to
whether a fund has not
maintained in accordance
the factors that the ATO may
a particular case in determining
been maintained or has been
with the sole purpose test.
Maintenance not in
accordance with sole
purpose test
Maintenance in accordance
with sole purpose test
The trustee negotiated for or
sought out the benefit.
The benefit is an inherent and
unavoidable part of other
activities undertaken by the
trustee that are consistent with
the provision of benefits under
section 62 of the SIS Act.
When assessed together, the
benefit is remote, isolated or
insignificant.
The Sole Purpose Test
The new ruling SMSFR 2008/2 outlines the ATO’s views on
the application of the sole purpose test to the provision of
benefits by a SMSF to its members.
The benefit has influenced
the decision making of the
trustee to favour one course
of action over another.
In particular, the ATO details the factors that need to be
taken into account in determining whether trustees of a
SMSF have maintained their fund solely for the purposes
specified in s62 of the SIS Act.
The benefit is provided by
the SMSF to the member or
another party at a cost or
financial detriment to the
SMSF.
The benefit is provided by the
SMSF on arm’s length
commercial terms and is
consistent with the financial
interest of the SMSF and at
no cost or financial detriment
to the SMSF.
There is a pattern of events
that when viewed in its
entirety amount to a material
benefit being provided.
All of the activities of the
trustee are in accordance
with the covenants set out in
section 52 of SIS.
The sole purpose test prohibits a trustee of a SMSF from
maintaining a fund for other than the following permissible
purposes:
•
core purposes – mainly for the provision of benefits
relating to retirement or death benefits for, or in relation
to, a member; and
All of the SMSF’s investment
and activities are properly
documented and considered
in accordance with a
properly formulated
investment strategy.
• ancillary purposes – mainly for the provision of benefits
on the cessation of a member’s employment or other
death benefits and approved benefits not specified in the
core purposes.
Any trustee that maintains a SMSF for a purpose other than
that mentioned above is in contravention of the sole purpose
test.
The sole purpose test may be breached where there is a
non-retirement purpose behind an investment. Examples
could be a holiday home owned by an SMSF used by
members or the purchase by the SMSF of works of art which
are then hung in the home of a member.
Administering the sole purpose test
The ATO is of the view that during the entire existence of an
SMSF, the trustees are required to maintain the SMSF in a
manner that complies with the sole purpose test at all times.
Current Day Benefits
The provision of current day benefits may contravene the
sole purpose test. Current day benefits may consist of the
following:
• benefits provided before a member’s retirement; or
• benefits provided before an employment termination or
death to the member or a related party.
The Sole Purpose Test (Cont’d)
Trustee must answer a series of Yes/No responses to
• The
questions regarding compliance with various aspects of
Collectables and Boutique Investments
Investments consisting of collectables and other boutique
items such as works of art, antiques, jewellery, classic cars
and wines, pose particular issues as these assets may
confer a personal benefit and thus provide significant
current day enjoyment by use or access to these assets. The
ATO is of the view that trustees need to be able to show (by
relying, for example, on an independent expert opinion)
that the acquisition of the asset represents a reasonable
investment of the SMSF.
Conclusion
Although not legally binding on the ATO, the new SMSFR
2008/1 and SMSFR 2008/2 nevertheless provides a
positive indication of the ATO’s position on how they will
assess the provision of financial assistance and also apply
the sole purpose test. The onus is on fund trustees to be
cautious about giving any form of benefit to themselves
and/or their relatives.
Please contact our office or your financial advisor if you wish
to discuss any fund transactions involving related parties.
The New SMSF Annual Return
This year, SMSFs will be required to lodge a new look “Self
Managed Superannuation Fund Annual Return” to the ATO by
the fund’s lodgement date in the same way as in previous years
the SMSF lodged a Fund Income Tax and Regulatory Return.
The Annual return contains the details that were previously
included in the Fund Income Tax and Regulatory Return,
however there are some new features:
Specific member information has been included which
now reports contributions by type made to the fund,
allocation of earnings to each member, rollover amounts
to and from the fund in respect of each member, pension
payments and lump sum payments and the closing
balance of each members’ account.
This reporting of contribution details replaces the
separate Member Contributions Statement that was
previously lodged with the ATO.
The return also includes the Supervisory levy of $150
(previously $45) when calculating the total amount due
or refundable. Previously the payment of the Supervisory
levy was advised by a notice sent by the ATO.
•
•
Additionally the new return seeks the following additional
information:
Important Information
Any advice contained in this newsletter is general advice only. The
reader’s particular objectives, financial situation and needs have not
been taken into account. To avoid making a decision not appropriate
to you, the content should not be relied on or act as a substitute for
receiving financial advice suitable to your circumstances. When
considering a financial product the reader should obtain the relevant
Product Disclosure Statement and read it
•
•
the SIS operating standards. Previously, Trustees were
simply required to answer one question which asked
“Did the Fund comply with all relevant SIS requirements?”
The Annual Return includes the date upon which the audit
of the fund was completed. The significance of the
inclusion of the “date audit completed” is that the Trustee
now indicates that the SMSF has actually been audited
prior to the lodgement of the return.
Also included are questions which discloses if the Auditor
of the fund also provides other services to the Fund eg
Tax Agent, Advisor, Accountant or Administrator.
The Bastion Update
Business Update
In September 2008 Bastion installed Viztopia Practice
Management Software from MYOB as a better means of
managing our :
• client’s contact information;
• client administration tasks; and
• accounts receivable.
We expect this approach to be of significant benefit to the
business and our clients in the future.
Recent Staff Changes
Kara Harvey has joined Bastion as an Administration
Assistant. We welcome Kara to the team.
About Bastion Superannuation
Solutions
Bastion Superannuation Solution specialises in the provision
of administration and compliance services to self managed
superannuation fund trustees and advisers.
For further information on our range of services please see
our web site.
Our range of services include:
• Self managed superannuation fund establishment
Administration including preparing financial
• Fund
accounts and maintaining member records
• Superannuation compliance and technical guidance
Life Insurance Pool for superannuation fund
• Group
members
with updating self managed superannuation
• Assistance
fund trust deeds
Bastion Superannuation Solutions Pty Ltd
AFSL 278 280 ABN 70 105 016 984
Level 3, 400 Queen Street, Brisbane
GPO Box 1859 Brisbane Qld 4001
Phone: (07) 3004 1100
Facsimile: (07) 3221 9811
Email: [email protected]
Website: www.bastionsuper.com.au
Self Managed Superannuation Fund Specialists • Group Life & Disability Insurance