Regulation Round ups

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Regulation Round-up: Quarter I, 2015

ATO ID 2014/39 and ATO ID 2014/40

Trustees of SMSFs should take care when entering into limited recourse borrowing arrangements (LRBA) involving a related party as the lender.

In two recent interpretative decisions, the SMSF trustee borrowed funds from a related party at nil interest. The ATO view is the terms of the loans were not set on an arm’s-length basis and the fund derived a benefit that exceeded what would have been derived if the arrangement had been arm’s length (section 295-550(5)(b)).

The logic used was that if the parties were dealing at arm’s length, the loan arrangement (as constructed) would not have been entered into and the SMSF would not have derived the earnings.

As a result, the investment returns were deemed to be non-arm’s-length income and taxed at the top marginal tax rate. To avoid penalties, SMSF trustees should set up loan arrangements in line with commercial practices of non-related members. Any existing arrangements should be reviewed.

Tax look-through for LRBA trusts and instalment warrants

Exposure Draft – Tax and Superannuation Laws Amendment (2015 Measures No 2) Bill 2015: Instalment Warrants

Uncertainty around tax implications for instalment warrants and assets held under an LRBA is set to be removed with these legislative proposals.

The amendments will provide a ‘look-through’ for tax purposes so it is clear the beneficial owner (that is, the investor or SMSF trustee) is the taxable entity for both income and capital gains.

The trust is effectively ignored for tax purposes, in line with existing industry practice. Some exceptions will apply and instalment warrants will only qualify if set up as a limited recourse arrangement.

Pension payment standards and TTR

SMSFD 2014/1

If a transition-to-retirement (TTR) pension includes unrestricted non-preserved (UNP) benefits, the member may be able to commute these amounts.

The ATO confirmed these commutations count towards the minimum payment (even if paid in specie), but not the 10 per cent maximum payment.

However, a full commutation does not count towards either the minimum or maximum because it is effectively made after the pension ceases. In this way it may be possible for a member to withdraw more than the 10 per cent maximum from a TTR pension if the account includes UNP amounts.

Cross-ownership restrictions on insurance

The ATO recently stated its view that insurance policies held inside superannuation cannot be structured under cross-ownership arrangements.

New regulations that commenced on 1 July 2014 only allow new policies to be commenced inside superannuation if the insured benefits match a Superannuation Industry (Supervision) Act condition of release.

The ATO confirmed its view that cross-ownership strategies do not meet this requirement as the recipient of benefits may not meet a condition of release.

Cross-ownership has increasingly been used as a risk management strategy for LRBAs, but this may no longer be possible. Advisers should look for other strategies to inject liquidity into the SMSF.

Refunds for excess non-concessional contributions

Tax and Superannuation Laws Amendment (2014 Measures No 7) Bill 2014

Problems with excess non-concessional contributions (NCC) may soon diminish, with legislation introduced into parliament that includes proposals for refunds of excesses.

Under the proposals, if excess NCCs that have been contributed on or after 1 July 2013 are withdrawn, the excess contributions tax can be avoided. If withdrawn, the ‘associated earnings’ must also be withdrawn and are taxed at marginal tax rates.

The associated earnings are proposed to be calculated using an average of the general interest charge rate for each of the quarters of the financial year in which the excess contributions were made.

This amount will be compounded on a daily basis from 1 July of the financial year that the excess contributions were made (contributions year) to the day the tax commissioner makes the first determination. If the NCC cap is exceeded, the ATO will issue a determination to the client.

The determination will state the amount of the excess and the associated earnings amount for those contributions.

If clients choose not to withdraw the excess contributions, they will continue to pay excess contributions tax.

Cancellation of auditor registrations

It has long been recognised asset allocation, not security selection, is the key driver of long-term investment results. One of the most powerful insights of modern portfolio theory is the finding that allocating capital across risky assets can actually reduce overall portfolio risk, due to the benefits of diversification.

ASIC has cancelled the registration of 440 SMSF auditors because they:

  • did not undertake the competency exam (373 auditors), and
  • failed the competency exam (67 auditors).

These auditors can reapply for registration and sit the exam. The exam cannot be attempted more than twice in a 12-month period.

Two auditors were disqualified for overstating the number of audit reports completed in an attempt to avoid sitting the exam.

SMSF trustees can check whether an auditor is registered by searching the auditor register at www.connectonline.asic.gov.au.

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