Robert Goodman Accountants Blog

While many trustees will know that self-managed super funds (SMSFs) are required to prepare and implement an investment strategy, what they may not know is that specific factors have to be considered in forming the investment strategy including the risk of inadequate diversification. It is an area where the ATO has released further guidance on after finding that a significant proportion of SMSFs were holding 90% or more of their retirement savings in one asset or a single asset class (typically property).

The ATO has released further guidance on investment strategy requirements for trustees of self-managed superannuation funds (SMSFs). The guidance comes on the heels of ATO contacting 17,700 SMSFs in late 2019 where the SMSF annual return data indicated that they may be holding 90% or more of their retirement savings in one asset or a single asset class.

According to the ATO, it has concerns that these SMSFs may not have given due consideration to the risks associated with a lack of diversification when formulating and reviewing their investment strategy as required by law. It is also looking at SMSFs that have used limited recourse borrowing arrangements (LRBAs) to acquire the single asset or asset class (typically property).

Most trustees know that every SMSF is required by law to prepare and implement an investment strategy which needs to be reviewed regularly. But what they might not know is, by law, the following specific factors must be considered in the context of the whole circumstances of the fund:

  • risks involved in making, holding and realising, and the likely return from your fund's investments regarding its objectives and cash flow requirements;
  • composition of your fund's investments including the extent to which they are diverse (such as investing in a range of assets and asset classes) and the risks of inadequate diversification;
  • liquidity of the fund's assets (how easily they can be converted to cash to meet fund expenses such as the cost of managing the fund and income tax expenses);
  • fund's ability to pay benefits (such as when members retire and require a lump sum payment or regular pension payments) and other costs it incurs; and
  • whether to hold insurance cover (such as life, permanent or temporary incapacity insurance) for each member of your SMSF.

It is the second point in relation to diversification that the ATO has concerns over. While it notes in the guidance that trustees can still choose to invest all their savings in one asset or one asset class (such as property or shares), where that has occurred, the trustee should document that they have considered the risks associated with the lack of diversification.

In addition, trustees should also include how they still think the investment will meet the fund's investment objectives including returns and cash flow requirements.

Your SMSF auditor should be checking during the annual audit whether your fund has met the investment strategy requirements for the relevant year. Where your SMSF does not comply with the investment strategy requirements, you can rectify that by addressing the breach before the finalisation of the audit.

For example, if your strategy failed to adequately address the risk of diversification, you can fix it by attaching a signed and dated addendum to the strategy or a trustee minute which adequately addresses the requirements and show it to your auditor before he finalises the audit. If you do not address a breach that meets certain criteria, the auditor will be required to lodge an auditor contravention report (ACR) with the ATO which may lead to the imposition of penalties.

Need to review your strategy?

Remember, the law requires all trustees to invest in accordance with the best interest of all members and trustees should be aware of any legal risks that may result from investing in one asset class. If you're not sure whether your SMSF strategy is compliant, we can help.

IMPORTANT: This communication is factual only and does not constitute financial advice. Please consult a licensed financial planner for advice tailored to your financial circumstances Email us at Robert Goodman Accountants at reception@rgoodman.com.au.  © Copyright 2020 Thomson Reuters. All rights reserved. Brought to you by Robert Goodman Accountants. 

"Downsizer" contributions let you contribute some of the proceeds from the sale of your home into superannuation – but there are several important eligibility requirements. Learn which areas the ATO says are tripping up superannuation members and ensure you get it right.

Are you thinking about selling the family home in order to raise funds for retirement? Under the "downsizer" contribution scheme, individuals aged 65 years and over who sell their home may contribute sale proceeds of up to $300,000 per member as a "downsizer" superannuation contribution (which means up to $600,000 for a couple).

These contributions don't count towards your non-concessional contributions cap and can be made even if your total superannuation balance exceeds $1.6 million. You're also exempt from the "work test" that usually applies to voluntary contributions by members aged 65 and over.

The government reports that as at June 2019 over 4,000 people around Australia had taken advantage of the scheme in its first year, representing total superannuation contributions of over $1 billion.

The downsizer scheme is a good opportunity for many Australians to boost their retirement savings, but you must ensure you're eligible before making a contribution. If you don't qualify, your contribution could count as a non-concessional contribution and cause you to breach your contributions cap. Here are some areas where the ATO is seeing mistakes with the eligibility rules:

The 10-year ownership requirement

In order to qualify, you, your spouse or a former spouse must have owned the property for the 10 years prior to the sale.

The ATO explains that it's not necessary for the same person to hold the property during those 10 years, as long as it was held by some combination of the person, their spouse and/or former spouse throughout the 10 years.

However, there's an additional requirement: the property must be owned by you or a current spouse (not a former spouse) just before you sell. This means, for example, that where a couple divorces and the property is transferred to one spouse under the property settlement, when that spouse eventually sells the property they can potentially make a downsizer contribution, but their ex-spouse cannot.

Another thing to watch is the 10-year ownership period. The ATO says that the ownership period is generally calculated from the date of settlement of purchase to the date of settlement of sale. If you signed a contract to purchase "off the plan" and the settlement occurred much later, be aware that the ownership period for downsizer purposes only starts upon settlement.

The main residence exemption requirement

Another key requirement is that the capital gain from the sale must be wholly or partially exempt from capital gains tax (CGT) under the "main residence exemption". If your home is a "pre-CGT asset" (ie acquired before 20 September 1985 and therefore not subject to CGT), it must be the case that the capital gain would hypothetically qualify for the main residence exemption, in whole or in part, if it had been acquired on or after 20 September 1985.

You won't qualify for any main residence exemption where you've never used the property as your main residence – perhaps because it's a rental property permanently leased to tenants, or your holiday home.

But thankfully, even a partial main residence exemption will allow you to make downsizer contributions. Common situations giving rise to a partial exemption include using your home to generate income (in addition to living there); where the land adjacent to your home's dwelling exceeds two hectares; or where you've only lived on the property for part of the ownership period.

The main residence requirement is not related to the 10-year ownership requirement, so it's not necessary that the property was your main residence during that 10-year period. It's only necessary that you have (or would have) at least a partial main residence exemption.

Want to boost your super?

The key to a successful downsizer strategy is to plan ahead and ensure you'll meet the relevant requirements. Contact our office for expert advice on this and other retirement savings strategies.

IMPORTANT: This communication is factual only and does not constitute financial advice. Please consult a licensed financial planner for advice tailored to your financial circumstances Email us at Robert Goodman Accountants at reception@rgoodman.com.au.  © Copyright 2020 Thomson Reuters. All rights reserved. Brought to you by Robert Goodman Accountants. 

You may have heard a lot recently about super funds providing either opt-in or opt-out insurance and have wondered how will affect you and your retirement savings. Perhaps you've heard horror stories about super funds cancelling people's insurance. Don't fret, in most cases cancellation of insurance only happens in limited instances, and your fund will most likely notify you before any cancellation occurs. As for opt-in and opt-out insurance, the changes are coming, but not until 1 April 2020, so if you're affected you'll have plenty of time to prepare.

Insurance within superannuation has always been a mixed blessing, good for some who enjoy having cheaper insurance, while others see as an erosion of their super balances. It doesn't matter which camp you fall into, the recent changes to the way super funds provide insurance may impact you depending on your super balance, age, and when your last contribution was.

Since July this year, super funds have been required to cancel insurance on accounts that have not received any contributions for at least 16 months unless the member elects to continue the cover. In addition, inactive super accounts with balances of under $6,000 will either be automatically consolidated by the ATO with other accounts you may hold or transferred to the ATO. If your super is transferred to the ATO, any insurance will also be cancelled.

This applies to life insurance, total and permanent disability (TPD) insurance and income protection (IP) insurance that you may have with your super fund. Before cancelling your insurance, your super fund will most likely notify you, although if you're worried about your insurance being cancelled, you can contact your super fund to discuss your options.

Remember, once your insurance is cancelled, you can no longer make a claim and it doesn't matter how long you had held the policy previously.

Whilst this change is designed to stop people from paying unnecessary insurance premiums, it can have unintended consequences for those on longer periods of leave such as parental leave and long-term sick leave. The best thing to do is to engage with your super fund regularly to ensure that an adequate level of insurance is maintained and you're not paying too much for insurance cover you don't need.

Another change coming to super funds in the not too distant future of 1 April 2020 is opt-in insurance for members under 25 years old and those with account balances of less than $6,000. From that date, members under 25 who start to hold a new choice or MySuper product will need to explicitly opt-in to insurance. Currently, the onus is on the member to opt-out of insurance if they do not want it. This change is designed to protect younger people on their first jobs from super balance erosion stemming from unnecessary insurance but may disadvantage those who assume that they will automatically have insurance based on previous rules.

For members with active super account balances less than $6,000, super funds will be required to notify them of the change in the opt-in insurance requirements by 1 December 2019. This will give members plenty of opportunity to opt-in to the relevant insurance policies by 1 April 2020 if they choose to do so.

However, if you work in a "dangerous occupation" such as a member of the police force, fire service or ambulance service, among other occupations, the change in the opt-in insurance requirement will not apply to you even if you're under 25 years or have balances below $6,000.

The insurance changes may be good for some and not so for others, it is difficult to strike the right balance between the two camps. The best thing you can do for yourself is have an awareness of your superannuation, including fees, insurance and other outgoings. After all, it is your hard-earned money and you want it to be working hard for your retirement.

Need help?

Do you need help in figuring out if you're affected by the changes in insurance rules in superannuation? Perhaps you'd like help in working out how much insurance cover you really need to protect you and your family? Or maybe you'd just like to get your super organised by consolidating your accounts? We can help you with this and more, contact us today.

IMPORTANT: This communication is factual only and does not constitute financial advice. Please consult a licensed financial planner for advice tailored to your financial circumstances Email us at Robert Goodman Accountants at reception@rgoodman.com.au.  © Copyright 2020 Thomson Reuters. All rights reserved. Brought to you by Robert Goodman Accountants.  


From Accountant's Daily 8/1/20. 

SMSF trustees hoping to make donations to charitable causes associated with bushfire relief out of their super may run into problems unless they have triggered a condition of release, according to SMSF Alliance.

 

The SMSF administrator's principal, David Busoli, said in an email update that the issue of funding large-scale donations to bushfire relief charities was likely to come up among clients in the coming days as damage from Australia's bushfire disaster escalated.


"SMSF members, as trustees, are more vulnerable to breaching early access provisions as they directly control access to their member accounts," Mr Busoli said.


"They need to be aware that SMSFs are prohibited from making donations as there is a clear breach of the sole purpose test. Alternatively, any member may draw on unrestricted non-preserved monies, then one they hold the withdrawal personally, do with it as they wish."


Mr Busoli said members could only draw from funds in their SMSF to make a donation if they had met a condition of release, which could involve either fully retiring or finishing a job after the age of 60.


"Apart from actual retirement after preservation age, a useful trigger of release between the ages of 60 and 65 is the cessation of a situation of employment as retirement is not required," he said.


"It may be triggered if a member loses their job or ceases it voluntarily. It may even be invoked if the member is working at both a full-time and part-time job and ceases either of them."


Members under the age of 60 would not be able to access their super for donation purposes, but may be able to do so under financial hardship provisions if they had been personally affected by the fires, Mr Busoli said.


"For an SMSF member, the ATO, not the trustee, decides on whether a trigger of release due to compassionate grounds is allowable," he said.


"Qualification is difficult. Compassionate grounds generally involve medical expenses and related issues but also include making a payment on a loan, or council rates, to prevent the loss of the member's principal place of residence, but only if the member is legally responsible for making the mortgage payments."


If the member qualified for release on compassionate grounds, they could only access a maximum amount up to three months' worth of loan repayments plus 12 months' interest on the outstanding loan balance. However, this amount would be less if the full amount was not required to stop the foreclosure, Mr Busoli said.

Need more information?

If you're confused about the prohibition for an SMSF making donations unless the member has triggered a condition of release or other aspects of SMSFs we can explain it to you in simple to understand terms, contact us today.

Email us at Robert Goodman Accountants at reception@rgoodman.com.au.  © Copyright 2020 Accountant's Daily. All rights reserved. Brought to you by Robert Goodman Accountants.  IMPORTANT: This communication is factual only and does not constitute financial advice. Please consult a licensed financial planner for advice tailored to your financial circumstances  

Over 17,000 SMSFs that are heavily invested in one asset class will soon receive a "please explain" from the ATO to check whether they can justify their diversification risk. Diversification is just one of five key matters that all SMSF trustees must regularly review as part of their legally required investment strategy. Know the essential requirements and ensure your fund's strategy is up to scratch.

You've probably heard of the requirement to have an "investment strategy" for your SMSF, but do you really know what's required?

Making an investment strategy is not only a formal legal requirement, but also a useful prompt for SMSF trustees to define their own retirement goals, carefully consider their investments and seek advice if needed. And having a well-reasoned investment strategy will always work in your favour in an ATO audit situation.

So, what exactly is required? There's no prescribed format for what your strategy must look like, but it must be in writing and must be "reviewed regularly".

The ATO recommends reviewing the strategy when a member joins or leaves the fund or when the fund begins paying an income stream to a member, but arguably it should be reviewed periodically even when these events do not occur. Each time you review the strategy, the outcome of your review should be recorded in writing.

By law, SMSF trustees must have regard to all relevant circumstances of the fund when setting the investment strategy. This could include a wide range of factors like the age of the members, their ability to make contributions and their level of risk tolerance. However, there are five specific matters that trustees must take into account. These are discussed below:

(a) Risk

Trustees must consider the risk involved in making, holding and selling the fund's investments, and the likely return they're expected to generate (having regard to the fund's objectives and expected cash flow requirements). Trustees should ask themselves: is this an appropriate level of risk for the members at this point in their lives?

(b) Diversification

How diverse are your SMSF's assets? Trustees must consider whether inadequate diversification will expose the fund to unnecessary risk.

If you've heavily invested in a particular asset or asset type, could a market downturn or other investment risk have a significant adverse effect on the value of member benefits and/or income earned by the fund? The ATO says it's contacting over 17,000 SMSFs that appear to have 90% or more of their fund invested in a single asset class. Therefore, trustees should always be prepared to explain their investment decisions with a well-written investment strategy.

(c) Liquidity and cash flow requirements

Liquidity means how easy it is to sell an asset and convert it to cash. Trustees must consider their liquidity needs in light of the fund's cash flow requirements (see more on "liabilities" below.) If your fund has "lumpy" assets like real estate and minimal cash, this could present a cash flow problem.

(d) Liabilities

Trustees must consider their ability to meet both existing and future liabilities. This would include things like the SMSF's operating expenses, tax liabilities, insurance premiums and costs of managing its assets (eg real estate).

Two important liabilities that trustees often need to consider when planning fund investments are:

  • Income stream payments to members. Once a member commences an income stream, there are minimum amounts that must be withdrawn each year in cash.
  • Loan repayments on any "limited recourse borrowing arrangement" undertaken by the fund to buy an asset.

(e) Insurance

It's possible to hold various types of insurance within superannuation, including cover for death, total and permanent disablement, temporary incapacity and terminal medical conditions. The trustees must consider whether the SMSF should hold cover for its members, which requires the trustees to consider the particular circumstances of the members.

Does your strategy stack up?

The ATO's warning about diversification is a timely reminder for SMSF trustees to review their strategies. Contact our office if you have any questions about investment strategy requirements or for assistance documenting your fund's strategy. We can refer you to our independent financial planner to update this for you. 

IMPORTANT: This communication is factual only and does not constitute financial advice. Please consult a licensed financial planner for advice tailored to your financial circumstances Email us at Robert Goodman Accountants at reception@rgoodman.com.au.  © Copyright 2020 Thomson Reuters. All rights reserved. Brought to you by Robert Goodman Accountants.  

Previously, it was thought that any benefit provided directly or indirectly to members or related parties of an SMSF from an investment would contravene the sole purpose test. However, a Full Federal Court decision has reframed the sole purpose test which will provide some flexibility to trustees on certain investments. Notwithstanding this decision, investments in SMSFs remain a complex area with many pitfalls and getting it wrong could mean the fund loses concessional tax treatment along with civil and criminal penalties for trustees.

To be eligible for superannuation fund tax concessions, SMSFs are required to be maintained for the sole purpose of providing retirement benefits to members, it is what is known as a sole purpose test (s 62 of the SIS Act). Failing the test could expose trustees to civil and criminal penalties in addition to the SMSF losing concessional tax treatment. Therefore, it is important when making SMSF investments that the investment does not provide a benefit directly or indirectly to members or related parties.

Whether a fund's investment contravenes the sole purpose test by providing a benefit directly or indirectly to members or related parties depends entirely on the circumstances of each case. Recently, the Full Federal Court decided that an SMSF investment in a fund to acquire a fraction interest in a property to be leased at market rent to the member's daughter did not breach the sole purpose test.

The Full Court said s 62 does not suggest that an SMSF will not be maintained solely for the core and/or ancillary purposes simply because the trustee enters into a transaction with a related party. It noted that the property was to be leased at market rent therefore there was no current day financial benefit to be obtained by either the member or his daughter. The only benefit would be some comfort or convenience, which was considered to be merely incidental.

However, the Full Court said if the lease was not at market rent, then an inference could readily be drawn that the fund was being maintained for a collateral purpose of providing discounted housing to a relative, which would contravene the sole purpose test.

In response to the Court's decision, the ATO noted that a trustee of an SMSF could potentially breach the sole purpose test by investing in the fund mentioned in the case if the facts and circumstances indicate that the SMSF was maintained for the collateral purpose of providing accommodation to a related party. Which will be determined by considering all the facts and circumstances surrounding the trustees' behaviour.

Nevertheless, to provide certainty for the investors in this particular fractional property investment, the ATO said it will not take compliance action if the trustee signs a declaration that avoids (ie the Sole Purpose Test Declaration):

  • entering into an investment based on its potential to provide related-party accommodation;
  • influencing the fractional property investment fund or a relevant property manager to engage a related party as a tenant of the property; and
  • influencing a related party to become a tenant of the property.

In addition, a copy of this declaration must be retained and provided to approved auditors. The ATO must also not find evidence that indicates the trustee has acted inconsistently with the terms of the signed declaration.

The takeaway lesson from this case is that SMSFs are complicated, and investments in SMSFs even more so. It should be noted that while the Full Court found the SMSF had not breached the sole purpose test, it ultimately ruled against the trustee as it found that the investment was an in-house asset and breached the 5% limit. Crucially, the ATO warned it may still apply compliance resources to scrutinise whether an SMSF investment in fractional property investments contravenes other provisions of the SIS Act (eg in-house asset rules).

Confused?

If you're the trustee of a super fund and are not sure about whether an investment you've made may have breached the sole purpose test, we can help you find out. If you're confused about in-house asset rules or any other aspects of SMSFs we can explain it to you in simple to understand terms, contact us today.

IMPORTANT: This communication is factual only and does not constitute financial advice. Please consult a licensed financial planner for advice tailored to your financial circumstances Email us at Robert Goodman Accountants at reception@rgoodman.com.au.  © Copyright 2020 Thomson Reuters. All rights reserved. Brought to you by Robert Goodman Accountants. 

SMSFs vs other types of funds: part 2

Insurance and dispute resolution might not be high on your list of things to consider when starting up an SMSF, but these issues do affect SMSFs differently to public offer funds. What will you do if a dispute arises between SMSF members, and what does taking out insurance in an SMSF practically involve? Avoid any rude shocks by ensuring you've planned for these issues before you jump in.

Before setting up an SMSF, it's essential to be fully informed about the pros and cons of an SMSF structure. In this second instalment of our two-part series on the key differences between SMSFs and public offer funds, we look at some important issues relating to insurance and dispute resolution.

Insurance

It's possible to hold various types of insurance through your superannuation fund, including death, total and permanent disablement (TPD) and temporary incapacity.

For many Australians, using superannuation benefits to pay insurance premiums makes insurance more accessible and convenient.

While you can purchase insurance within an SMSF, large funds can generally offer cheaper premiums because of the group discounts these funds can access. Another possible advantage of large funds is that members are automatically accepted for a certain level of coverage without needing a medical exam or detailed personal information, which is more likely to be required for an SMSF-held policy. For these reasons, some SMSF members choose to keep a separate account in a public offer fund just to access the insurance.

If you're an SMSF trustee, you're in charge, so there are a couple of things to keep in mind in relation to insurance:

  • As part of your SMSF's investment strategy, you're required to consider (and regularly review) whether the fund should hold insurance cover for its members.
  • Not every type of insurance can be held in superannuation. For example, trauma policies aren't allowed, and there are restrictions on some types of TPD policies. Seek professional advice before choosing your policies.
  • You should also seek advice about the tax consequences of holding insurance in the fund, including deductibility of premiums and how life insurance proceeds might affect the taxation of your death benefits.

If you're a member of a public offer fund, it's important to check what insurance you're signed up to and assess whether you're getting value for money. Many members are signed up for insurance on a default (opt-out) basis, and may be unaware they're paying for duplicate policies across multiple accounts or unnecessary coverage as part of a bundled arrangement.

Dispute resolution

What happens when you're not happy with the trustee of your fund? Perhaps your claim for benefits has been mishandled, or the trustee has made an error? Members of public offer funds can complain to the Australian Financial Complaints Authority (AFCA), a free dispute resolution service that has the power to make binding decisions in order to resolve your matter.

However, dispute resolution is an entirely different matter for SMSFs. SMSF trustees may complain to AFCA about financial services problems they encounter with third parties (eg an insurance company or bank), but AFCA cannot hear a complaint about the decision or conduct of an SMSF trustee. This means that SMSF members cannot complain to AFCA about decisions that the other trustees have made (and similarly, potential beneficiaries of a deceased member's death benefits cannot complain to AFCA about how the trustees have paid out the benefits).

In these cases, the parties would need to go through the legal system to resolve the matter. This could mean alternative dispute resolution, or even court, but it must be privately funded. The SMSF's governing rules may outline dispute resolution procedures that bind the trustees, so it's worth giving this some thought in advance to ensure the trustees are as prepared as possible for any disagreement.

Weighing up your super options?

Contact our office to start exploring whether an SMSF can help you achieve your retirement goals.

IMPORTANT: This communication is factual only and does not constitute financial advice. Please consult a licensed financial planner for advice tailored to your financial circumstances Email us at Robert Goodman Accountants at reception@rgoodman.com.au.  © Copyright 2019 Thomson Reuters. All rights reserved. Brought to you by Robert Goodman Accountants. 

Recording the market value of your SMSF's assets is an important trustee responsibility. But how do you prove "market value", how often must you value assets and when do you need to hire an expert valuer? Fortunately, with some help from the ATO's guidelines and your professional adviser, asset valuation needn't be a headache for trustees.

To keep your SMSF's auditor and the ATO happy, it's essential to take asset valuation seriously. By law, SMSFs must record all of their assets at "market value" – an important requirement that allows funds to accurately report the value of members' benefits. Additionally, there are a number of SMSF investment rules that specifically require a "market value" to be assessed, so failing to correctly value assets could land SMSF trustees in hot water.

For example, SMSFs are generally prohibited from acquiring assets from related parties – with some notable exceptions such as "business real property" (broadly, 100% commercial property) and listed shares. However, these exceptions only apply if the assets in question are acquired at market value. Knowing the market value of fund assets is also essential to complying with the in-house asset rules and certain laws covering the sale of collectables and personal use assets.

What is market value?

Under superannuation law, "market value" is defined as the amount that a willing buyer would reasonably be expected to pay in a hypothetical scenario where all of the following conditions are met:

  • the buyer and seller deal with each other at arm's length;
  • the sale occurs after proper marketing of the asset; and
  • the buyer and the seller act "knowledgeably and prudentially".

How does this work in practice? In an audit, your SMSF's auditor (and ultimately the ATO) will expect you to be able to provide evidence supporting your valuation. This should be based on "objective and supportable" data, and should demonstrate a "fair and reasonable" valuation method.

The ATO says a method is fair and reasonable if it is a good faith, rational process that takes into account all relevant factors and can be explained to a third party.

In general, it's not compulsory to use a qualified external valuer (that is, someone who holds formal valuation qualifications or has specific skills or experience in valuing certain assets). It's the methodology and supporting evidence that makes a valuation sound, not the identity of the person who performs the valuation. However, there are some situations where using a qualified valuer is compulsory or recommended:

  • If your SMSF holds collectables or personal use assets (eg artwork), you must by law use a valuation from a qualified independent valuer before disposing of such assets to related parties.
  • The ATO also recommends that you consider using a qualified independent valuer for any asset that represents a large proportion of your fund's total value, or if the valuation is likely to be complex or difficult given the nature of the asset.

Specific assets

As noted above there are specific requirements for collectables, and the ATO has also developed guidelines for other classes of assets.

The ATO says real estate doesn't need to be valued each year, unless there has been a significant event since the last valuation that may affect the value. This could include market volatility or changes to the property.

Listed shares and managed units are easy to value, and should therefore be valued at the end of each financial year. Unlisted shares and units (eg investments in private companies or trusts) are more difficult to value than listed assets and require consideration of a range of factors. Trustees should seek professional assistance with valuing unlisted investments.

Need help getting it right?

For some assets, determining market value can be a complex process that requires professional input. Don't go it alone – get the right advice and ensure your valuations stand up to ATO scrutiny. Contact our office to discuss the ATO guidelines in more detail or to begin assessing your SMSF's valuation needs.

IMPORTANT: This communication is factual only and does not constitute financial advice. Please consult a licensed financial planner for advice tailored to your financial circumstances Email us at Robert Goodman Accountants at reception@rgoodman.com.au.  © Copyright 2019 Thomson Reuters. All rights reserved. Brought to you by Robert Goodman Accountants. 

Thinking about a gearing strategy for your SMSF? It's possible to borrow from a related party, but you must structure the loan terms correctly or else face significant tax penalties. Practically, this means there's a limit on the loan-to-value ratio (LVR) you can set up, plus other requirements for the interest rate and other key terms.

When planning a borrowing in your SMSF to buy an asset such as property or shares (known as a "limited recourse borrowing arrangement" or LRBA), you have a choice of borrowing from a commercial lender or a private party. This could even be a related party of the SMSF, such as the SMSF members or the members' family trust.

Bypassing the banks might seem like a convenient option, or a great way to draw on wealth you hold outside the SMSF to build your retirement savings. But you need to be aware that related-party LRBAs that don't reflect "arm's length" or commercial terms will create big tax headaches for the trustees.

What's the problem?

The "non-arm's length income" (NALI) rules essentially penalise uncommercial dealings by an SMSF that favour the fund. This tax penalty applies where the SMSF:

  • enters into an arrangement where it does not deal with the other party at "arm's length"; and
  • earns more income than it might have been expected to earn under an arm's length arrangement.

As a result, the income from the arrangement is taxed at a hefty penalty rate of 45%.

So how does this risk arise for LRBAs? In an audit situation, the ATO would first determine whether the SMSF's LRBA is on "arm's length" terms. For this purpose, the ATO would examine terms like the interest rate, the loan-to-value ratio (LVR) and the term of the loan. The ATO would compare these to the terms that would hypothetically exist under an arm's length (or commercial) arrangement.

If the terms aren't arm's length, the ATO would then consider whether the SMSF has earned more income than it would under an arm's length arrangement.

This is where the law becomes technical, but it's sufficient to say that at least some of the income from the arrangement will be taxed as NALI at 45% and in some cases, all of the income will be considered NALI. For an LRBA to buy property, the relevant income from the arrangement would be the rental income.

In short, if the terms of your related-party LRBA aren't what the ATO considers "arm's length", you're exposing your SMSF to a NALI risk and a potentially complex dispute with the ATO about exactly how much penalty tax you owe.

The safe harbour

Fortunately, the ATO has developed guidelines to provide some certainty. If your LRBA meets these, the ATO considers that the arrangement is on arm's length terms. There are different guidelines for property LRBAs and listed share LRBAs. For property (both residential and commercial), the terms must be as follows:

  • Interest rate: benchmarked to a certain RBA indicator rate, which is 5.94% for 2019–2020. The rate can be either variable or fixed for up to five years.
  • LVR: maximum of 70%.
  • Term: maximum of 15 years.
  • Repayments: principal and interest, payable monthly.
  • Security: registered mortgage over the property.

There must also be a proper written loan agreement in place, and naturally the arrangement must also comply with all laws that apply to LRBAs.

If your arrangement doesn't meet the ATO's guidelines, it doesn't necessarily mean it's not on arm's length terms. However, you won't have certainty that the ATO will accept it. Instead, you would need to demonstrate, using documented evidence, that it reflects an arm's length dealing.

Explore gearing options

If you're interested in using an LRBA to help grow your super, contact us for expert advice. We can help you consider your lending options and ensure your LRBA is structured for compliance certainty.

© Copyright 2019. All rights reserved. Source: Thomson Reuters.  IMPORTANT: This communication is factual only and does not constitute financial advice. Please consult a licensed financial planner for advice tailored to your financial circumstances. Brought to you by Robert Goodman Accountants. 

Taking an extended job posting overseas? If you currently have an SMSF, you'll need a strategy for managing your super to ensure your fund doesn't breach any residency rules. Know your options and plan before you go.

When SMSF trustees travel overseas for an extended period, there's a risk their fund's "central management and control" (CMC) will be considered to move outside Australia. This causes the SMSF to become non-resident, resulting in very hefty penalty taxes. It's essential to plan for this before departing overseas.

The first step is to consider whether your absence will be significant enough to create a CMC risk. A temporaryabsence not exceeding two years isn't a problem, but whether the ATO considers your absence temporary or permanent will depend on your particular case. Your adviser can take you through the ATO's guidelines. If you think you'll have a CMC problem, the next step is to consider possible solutions.

Option 1: Appoint an attorney

Usually, every SMSF member must be a trustee (or director of its corporate trustee). However, an SMSF member travelling overseas can avoid CMC problems by appointing a trusted Australian-based person to act as trustee (or director) for them, provided that person holds the member's enduring power of attorney (EPOA).

Sounds simple? Just a word of caution: the SMSF member must resign as a trustee (or director) and be prepared to genuinely hand over control to their attorney.

If the member continues to effectively act like a trustee while overseas – for example, by sending significant instructions to their attorney or being involved in strategic decision-making – there's a risk the CMC of the fund may really be outside Australia.

You'll also need to comply with the separate "active member" test, which broadly requires that while the SMSF is receiving any contributions, at least 50% of the fund's total asset value attributable to actively contributing members is attributable to resident contributing members. To illustrate this, in a Mum-and-Dad SMSF where both spouses are overseas, a single contribution from either spouse could cause the fund to fail this test and expose the fund to penalties. In other words, you may need to stop SMSF contributions entirely while overseas. Consider making any contributions into a separate public offer fund.

Option 2: Wind up

Not prepared to give control of your super to an acquaintance? You might consider rolling your super over to a public offer fund and winding up the SMSF. This option completely removes any CMC stress (as control lies with the professional Australian trustee), and you can make contributions into the large fund without worrying about the "active member" test.

However, you'll need to sell or transfer out the SMSF's assets first – real estate, shares and other investments – and this may trigger capital gains tax (CGT) liabilities. These asset disposals will be partly or even fully exempt from CGT if the fund is paying retirement phase pensions, so talk to your adviser about your SMSF's expected CGT bill if you choose this wind-up option.

Option 3: Convert to a small APRA fund

Another option is converting the SMSF into a "small APRA fund" (SAF). Like SMSFs, SAFs have a maximum of four members but instead of being managed by the members they are run by a professional licensed trustee. This takes care of any CMC worries, and on conversion the fund won't incur any CGT liabilities because the assets remain in the fund – only the trustee structure changes.

The downside is that an SAF may be expensive because you'll be paying a professional trustee to run your fund. You'll also need to comply with the "active member test" so, as in Option 1, you may need to stop all contributions into the SAF.

Let's talk

If you're moving overseas for a while, contact us to start your SMSF planning now. We can help you explore your options and implement a strategy to protect your superannuation against residency problems.

 © Copyright 2019. All rights reserved. Source: Thomson Reuters.  IMPORTANT: This communication is factual only and does not constitute financial advice. Please consult a licensed financial planner for advice tailored to your financial circumstances. Brought to you by Robert Goodman Accountants.