Tax on pension earnings – not proceeding
On 6 November 2013, the Government announced that they would not be proceeding with the tax on pension earnings announced by the former Labor Government on 5April 2013. If implemented this measure, subject to certain transitional rules, would have taxed people’s superannuation pension earnings above $100,000 in the draw-down phase. The complexity and compliance costs associated with this measure were extreme and, according to the Government, this measure was essentially undeliverable.
Acquisition and disposal of assets from related parties
The proposal by the previous Government to prohibit off-market transfers of listed securities (shares) between an SMSF and a related party will not be proceeding. This measure would have required all other related party transactions to be supported by a valuation from a suitably qualified independent valuer. It is important to note that all such transfers still need to be at market value.
Six property potholes for SMSFs to avoid
Monica Rule, who worked for the Australian Taxation Office for 28 years and is the author of ‘The Self Managed Superannuation Handbook – Superannuation Law for Self Managed Superannuation Fund in Plain English’, recently wrote about some of the property traps that SMSF investors should be on the lookout for. The link to this article, published in Cuffelinks, is here.
Do you employ 20 or more employees or are you an employee of a business with 20 or more employees and have an SMSF. If so, then read on. If not, Superstream is unlikely to impact you.
From 1 July this year it will be compulsory for employers with 20 or more employees (large employers) to pay contributions to your SMSF electronically. It is estimated that there are about 150,000 SMSFs that are impacted. From 1 July 2015 it will be necessary for all employers (including small employers with 19 or less employees) to make contributions electronically. In both cases there is an exception to the rules where contributions are made to funds for ‘related parties’ of the employer. This is expected to remove around 25% of SMSFs from having to comply with the rules.
Under the new rules SMSFs will be required to receive contributions using an ecommerce standard so that contributions can be received by direct credit or B-Pay and the contribution data message is to be received electronically via a nominated electronic address.
There are three pieces of information that an employer must have by 31 May 2014 if contributions are to be made to the fund from 1 July. These are:
- The fund’s Australian Business Number (ABN);
- Confirmation of the fund’s bank account details; and
- An electronic service address.
Nearly all SMSFs have an ABN and a suitable bank account to receive the contributions. However, all SMSFs that wish to receive employer contributions under the new rules will be required to have access to an electronic service address which can be obtained via a range of service providers. A register of the service providers can be obtained from the ATO or your SMSF professional can help you to locate them. If you are currently using an administration service for your SMSF the administrator will understand what is required to access the electronic service address and may have already let you know what is happening. The electronic service address from providers is either free or at a low cost to the fund.
If you are a large employer, that is an employer with 20 or more employees, it is expected that payroll systems will need to be updated to include the additional information by the required time to enable contributions to be made to the SMSF. The ATO is currently updating the Election of Superannuation Fund choice form so that contributions can be made by employers to the nominated SMSF.
Please contact me or your Fund administrator if you will need assistance to ensure that your fund will be ready for the change on 1 July this year and that your employer contributions from ‘large’ employers continue to be made to your SMSF without any interruption.
Private Binding Ruling casts doubt on SMSF related party loan arrangements
The legislation in relation to limited recourse borrowing arrangements (LRBA’s) places few restrictions on what you can do other than such things as you must have a “single acquirable asset”. There are no rules specifying permissible loan-to-valuation ratios (LVR’s), interest rates or who can act as the lender. This has led some to believe that a 0% interest rate was acceptable, thus effectively allowing Members to boost the SMSF’s assets without breaching contribution caps.
However, in a recent Private Binding Ruling(PBR) the ATO confirmed that the income earned by a SMSF that entered into a non-arm’s length Limited Recourse Borrowing Arrangement (LRBA) with a related party would result in non-arm’s length income and that income would be taxed at 45% (rather than the normal 15%).
In the PBR the ATO looked at the whole of the circumstances of the particular arrangement and concluded that the parties to the loan were not acting at arm’s length on the basis that the loan terms included:
- a nil interest rate, and
- a 100% loan to value ratio (LVR).
As a result, the ATO then determined the level of income generated under the arrangement would be higher than the amount the fund would otherwise have received given that a third party lender would not have agreed to lend:
- any monies on the proposed ‘nil interest’ terms, and
- at such a high LVR given the nature of the assets to be acquired (listed shares) and the limited recourse nature of the loan.
This should be taken as a guide to the ATO’s likely approach to similar types of arrangements going forward so Trustees should ensure that any related party LRBA are established on purely commercial arm’s length terms, including for both the interest rate and loan to value ratio.
Government changes ‘strong argument’ to cut SMSF levy
Recent Government measures that oversaw the clearing of a backlog of tax amendments should allow the SMSF levy to be reduced substantially in the May Budget, says Jordan George, Senior Manager, Technical & Policy, for the SMSF Professionals’ Association of Australia (SPAA).
He says the SMSF levy is a cost-recovery mechanism for the Australian Taxation Office (ATO), but with these measures cutting the number of SMSF programs being administered SPAA believes there is a strong case for reducing the levy.
The levy for 2013-14 is $259, a 36% increase from $191 in 2012-13.
“These measures, such as related party transactions, SMSF bank verification, SMSF roll-overs being included as a ‘designated service’ under the Anti Money Laundering and Counter Terrorism Financing Act 2006, and taxing super benefits received illegally at the top tax rate, are no longer part of the SMSF architecture, so it seems to fair to assume the cost of administering the SMSF sector has fallen accordingly.
“In addition, the Government’s announcement on clearing the tax amendment backlog pointed to the levy being adjusted to address these changes, and SPAA would urge it to do so in the lead-up to the Budget and then make the appropriate announcement.
“The ATO has agreed to provide evidence for the most recent increase in the levy and why the cost-recovery process for SMSFs had increased, but the industry has yet to see the evidence.”
The importance of meeting the requirements for a SMSF Pension (income stream)
It is generally well understood that one of the major benefits of Superannuation, as compared with holding assets personally or via another entity, such as a company, is that once a Pension is commenced all earnings of the Fund supporting the Pension – both income and capital gains – are not subject to any tax..This income is referred to as exempt current pension income (ECPI). However, an SMSF paying such a benefit is not automatically entitled to the exemption – it must meet certain conditions.
To claim the ECPI exemption in the SMSF annual return, there are steps that must be taken prior to commencing the payment of the super income stream benefit, such as ensuring that all of the SMSF’s assets are re-valued to their current market value.
Also, it is imperative that the Fund meets the minimum pension payment requirements. These have varied over recent years but are currently as shown in bold in the last column:
|Age||Percentage of account balance|
|95 or more||14%||7%||10.5%||14%|
Age is either at:
- 1 July in the financial year in which the payment is made
- the commencement day if that is the year in which the pension or annuity commences.
TR 2013/5: Income tax: when a superannuation income stream commences and ceases confirmed the ATO’s view that a pension ceases when a fund does not pay the required annual minimum pension amount.
The ATO subsequently published frequently asked questions (FAQs) on their website to highlight that in (very) limited circumstances the Commissioner may exercise his general powers of administration to allow a fund to continue to pay a pension and claim exempt current pension income even though the annual minimum pension payment requirements have not been met. To date the Commissioner has received a number of requests from SMSF trustees to grant this exception to allow the pension to continue. In order to provide further clarification on the common circumstances when this exception has been granted the ATO has updated the FAQs.
In addition the ATO has updated the relevant web content to provide further clarification on issues relating to when a pension ceases due to commutation and death as well as the timing of pension payments. For more information refer to:
- SMSFs: Stopping and starting a pension
- SMSFs: Minimum pension payment requirements – frequently asked questions
- Timing of a pension payment
The exempt current pension income (ECPI).exception also does not apply to a Transition to Retirement Income Stream (TRIS) which has paid a pension amount in excess of the maximum limit of 10% of the account balance.
Contribution Caps in 2014-15
The Australian Tax Office recently announced the key superannuation rates and thresholds for 2014-15, which have been adjusted in line with Average Weekly Ordinary Time Earnings (AWOTE). These increased thresholds are potentially very helpful to those looking to boost their retirement savings. In summary the changes are:
- The general concessional contributions cap is $30,000 for 2014-15 (up from $25,000). For 2014-15, the higher temporary concessional cap of $35,000 (not indexed) applies for those aged 49 years or over on 30 June 2014.
- The non-concessional contributions cap is $180,000 for 2014-15 (up from $150,000). As a result, the non-concessional cap under the bring-forward rule over three years is effectively $540,000 from 2014-15 (up from $450,000).
- The CGT cap amount is $1.355m for 2014-15 (up from $1.315m).
- The maximum contribution base is $49,430 per quarter for 2014-15 (up from $48,040).
- The ‘lower income threshold’ is $34,488 for 2014-15 (up from $33,516). The ‘higher income threshold’ is $49,488 (up from $48,516).
- The ETP cap amount and the superannuation lump sum low rate cap is $185,000 for 2014-15 (up from $180,000).
- The genuine redundancy and early retirement payments – tax-free amounts for 2014-15 are: base amount – $9,514 (up from $9,246); service amount – $4,758 (up from $4,624) for each whole year of service.
It is important to note that these rates and thresholds are subject to change prior to 30 June 2014 so we won’t be sure until after the May Federal Budget as to whether the increases will apply. Should the increased concessional cap be confirmed it will offer the scope to change salary sacrifice arrangements, for example.
This newsletter is not advice and provides information only. It does not take account of your individual objectives, financial situation or needs. You should consider talking to a financial adviser before making a financial decision.