For those working with superannuation the following two strategies are worth considering prior to 30 June.
In‐Specie Asset Transfers
Announced last year under the Stronger Super reform, (although yet to be legislated) from 1 July 2012 SMSFs will be prohibited from conducting ‘off‐market’ transfers of assets between themselves and related parties. The prohibition will apply to assets where an underlying market exists for transacting the asset – most notably ASX listed shares and units in managed funds.
Up until 30 June 2012, a SMSF member can transfer personally owned shares to their SMSF via an off‐market transfer. The SMSF acquires the shares at market value on the date of the transfer, and the total amount is counted as a contribution…so contribution caps still apply. The SMSF can also purchase such investments from a member off‐market.
From 1 July, a member would need to sell their personally owned shares, wait for the sale to settle, contribute the cash to their SMSF, and then re‐purchase their shares in the SMSF. Given the T+3 settlement period of the ASX, a member could potentially be a non‐owner of their shares for up to a full week. With the volatility of share markets, particularly now, this could prove an expensive wait…especially if we are looking at the maximum Non‐concessional cap of $450,000.
For those using the current rules pre 30 June, current weakness in share markets may have the secondary benefit of a lower personal Capital Gains Tax bill.
Double Deduction
The recent publication of ATOID 2012/16 has given rise to a bit of excitement in SMSF land. In this ATOID, the ATO has addressed the timing issue of when a concessional contribution is made on behalf of a member in one financial year but is allocated in the following financial year for the purposes of the contribution caps.
ATO ID 2012/16 confirms that a contribution made in June is not necessarily counted as a concessional contribution in the financial year it is made. If it is only allocated to the members account in the following year then:
- For cap threshold purposes it is only contributed in the year it is allocated.
But the deduction for the taxpayer is available in the year the contribution is made.
- In addition, the concessional contribution is subject to contributions tax in the year the payment is made.
- The allocation of the contribution for member reporting purposes is reported in the following financial year.
For a self employed SMSF member, they could contribute $25,000 now and then a further $25,000 in June. The June contribution is held in reserve until July, at which time it is allocated to the member’s account – this must occur before 28th July. On the basis they qualify to do so, the member can claim a tax deduction for the full $50,000 contribution in the current financial year.
Key Issues that must be considered:
- The trust deed must permit the above practice.
- The sum of the concessional caps for both the current and following year are not exceeded.
- The contribution to be allocated must be made at a different time to the contribution to be unallocated and the unallocated contribution must be made in June and allocated within 28 days of month end.
- The unallocated amount is not a reserve and does not need to be dealt with separately in the investment strategy.
For those operating SMSFs or in the SMSF arena, this is a key decision and one you should be considering using for clients…particularly with the reduction in contribution caps in the coming financial year.
Regulation Update for SMSFs
Submissions close on Friday 1 June (this Friday) for the most recent Exposure Draft relating to the Stronger Super reforms. This exposure draft provides details of proposed Regulations to amend the SIS Regulations to require:
- Trustees of SMSFs to consider insurance for their members as part of their fund’s investment strategy;
- Money and other assets of an SMSF be kept separate from those held by a trustee personally and by a standard employer‐sponsor or an associate of a standard employersponsor;
- SMSFs to value assets of the fund at their net market value for reporting purposes.
Under the proposed regulations, trustees will be required to evidence they have considered the insurance requirements of their members “…when they formulate, regularly review and give effect to the fund’s investment strategy.”
Trustees must evidence this requirement by way of trustee minutes of meetings held during the year. In practice, this just seems like more red tape. I would have thought this increased regulation of the SMSF sector strikes to the heart of the term “Self Managed”. It is quite probably that most SMSF members don’t actually need insurance, and those that do would usually have alternative arrangements in place. In any case, comprehensive financial advice to a SMSF client should include their need for insurance.
From the trustees perspective, the issue is a little more concerning. What would be their personal liability if a member does not have insurance having been deemed by the trustees not to require it?
The proposed update to regulations also requires trustees to document decisions in relation to the regular review of the investment strategy of their SMSF. Trustees will need to review the way in which they document their investment decisions to ensure they include references to the Investment Policy of the SMSF.
It may seem obvious to most competent advisers that a SMSF must keep its assets separate to those of its members or related parties…yet contraventions of the existing covenant prohibiting such action are one of the most reported to the ATO. The changes to the Act will allow the ATO to enforce compliance with this requirement.
The final proposed regulation defines net market value “…as the amount that could be expected to be received from the disposal of an asset, in an orderly market, after deducting the costs expected to be incurred in realizing the proceeds of such a disposal.”
Currently, SMSFs can choose between valuing assets at historical cost or market valuation. This has obvious connotations when considering the minimum pension that must be paid annually to those SMSF members in pension phase. Another issue will be the cost of obtaining valuations for assets where a ready market does not exist. Trustees would do well to consider the future cash flow position of their SMSF to ensure any revaluation of assets does not impact the ability of the SMSF to meet ongoing minimum pension requirements.
If you are interested in these changes, or more importantly wish to lodge comments in relation to these changes, you have to be quick. The deadline for submissions to the Exposure Draft close on Friday 1 June 2012. For more information, refer to the Stronger Super website:
http://strongersuper.treasury.gov.au.
1 June 2012
