August 2021 - Practical Systems Super

SuperStream rollover events clarified

Aug 27,2021 Comments Off

The ATO has released examples of rollover events to support SMSF trustees in adhering to the SuperStream rules set to take effect from 1 October.

In a website update, the regulator outlined the circumstances where a trustee or authorised agent will be required to process fund rollovers using the new service.

Family businesses within a fund will be among those not required to send contributions via SuperStream due to the link of ownership between the appropriate business and membership, which meets the related-party exemption.

However, funds that involve a self-employed member in a fund that also includes family members working for non-related employers will need to use SuperStream to gain access to employer contributions.

SMSF members initiating a rollover request from an Australian Prudential Regulation Authority fund will need to request the transfer using the service from 1 October, as will trustees rolling out any member funds or winding up an SMSF after that date.

“From 1 October 2021, where your SMSF cannot interact via SuperStream, you cannot roll money out of your SMSF, including at wind up,” the ATO said.

It noted SuperStream will be a faster service for funds seeking to release excess contributions, but use of the service is not mandatory in this circumstance.

In addition, it warned funds to ensure their SMSF messaging provider allows SuperStream rollovers and to inform the ATO if they change providers.

In a separate update, the ATO stated all contributions made by a SuperStream rollover had to be reported during the financial year via the SMSF annual return and funds were also required to complete a transfer balance account report to report the debit that arises in the member’s transfer balance account if they commute a retirement-phase income stream before rolling over the assets.

Source: smsmagazine.com.au

SMSF trustees warned on increasing exposure to compliance risks affecting collectables

Aug 20,2021 Comments Off

SMSFs can be increasingly exposed to various compliance risks surrounding collectables, as the asset class requires continued consideration of administrative impacts on the fund.

In a recent update, an SMSF expert said that, since 2016, when the full implementation of the restrictive rules surrounding SMSF investments in collectables commenced, there has been a marked reduction in the number of funds holding this class of investment.

“We are now seeing some increased exposure as trustees look for alternative investment options, but I suspect that many are not also considering the restrictions and ongoing administrative ramifications involved,” he said.

Collectables and personal-use assets include artwork, jewellery, antiques, artefacts, coins, stamps, books, memorabilia, wine, cars, bikes, recreational boats and club memberships. Bullion is not included as its value is based on intrinsic weight and purity.

Mr Busoli noted collectables can’t be leased or used by a related party or stored in a private residence of a related party. Funds can only lease them to unrelated parties, so the SMSF can lease artwork to an art gallery provided the gallery is not owned by a related party and the lease is on arm’s length terms.

“If the SMSF owns a vintage car, related parties can’t drive it for any reason — not even for maintenance purposes or to have restoration work done — because this constitutes use of the asset,” he explained.

“Storage must be remote from the trustee’s private residence which includes any part of the land on which it’s situated. So, a vintage car cannot be stored in a purpose-built shed, and a record must be kept of the reasons for deciding where to store the items.”

They must also be insured in the name of the fund. If they constitute only a part of a policy held by another party, they must be specified, and the fund must be noted as the owner and beneficiary. If the fund is unable to insure them appropriately, they must be disposed of.

“Collectables and personal-use assets can be sold to a related party provided the sale is at market price as determined by a qualified, independent valuer, which is a more onerous requirement than for other asset classes,” he explained.

“I suspect that trustees will be less inclined to want to participate in this class of investment when made aware of the rules.”

Source: SMSF Adviser

Covenant pointless for SMSFs?

Aug 13,2021 Comments Off

The imposition of a retirement income strategy on SMSFs under a new covenant will not create any benefit to funds members, but rather generate further costs undermining the intent of the strategy, a legal firm has warned.

Townsend Business and Corporate Lawyers said the federal government’s proposal for every superannuation fund to have a retirement income strategy under the Retirement Income Covenant would be unsuitable for SMSFs, which were only likely to pay it lip service.

The legal firm made the claim in a submission to Treasury in response to a position paper released by Superannuation, Financial Services and the Digital Economy Minister Jane Hume.

The paper stated the covenant will impose a duty for super fund trustees to develop and document a strategy to assist retirement or near retirement age members to maximise their retirement income, manage risks to the sustainability and stability of their retirement income and to provide flexibility in accessing super savings during their retirement.

In claiming the covenant and strategy would not generate any practical benefit to SMSF members, the law firm pointed out limited retirement income options were available to an SMSF.

“The only retirement income stream product which can be issued by SMSFs are account-based pensions,” it said.

“The only means of increasing retirement income is to dial up the pace of capital consumption or the adoption of investment strategies involving greater investment returns at the cost of higher increased investment risk.

“There is no scope for augmenting pension capital by the trustee issuing some form of pooled income stream product – as the membership base of SMSFs is too small for pooled products.”

It added that because pooled retirement income products were unavailable to SMSFs, they operated in a different way to non-SMSFs in ensuring retirement income was sustainable over the long term.

“Longevity risk can only be managed by moderating the pension drawdown rate; investment risk can only be moderated by a weighting towards defensive assets as against growth assets; and selection risk can only be moderated by having a cash component sufficient to support one or two years’ pension payments,” it said.

“The member could purchase, from a third party, a lifetime income stream. However, this is a decision best left to the individual member and their willingness to accept the significant capital cost of such guarantees.

“Finally, it should be noted that the current regulatory design features of account-based pensions are at cross purposes with the sustainability and stability goal set out in the paper and, also, the retirement consumption pattern noted in the Retirement Income Review.

“The age-related and increasing minimum drawdown requirement undermines management of the longevity risk and the requirement to make pension payments in cash rather than in specie asset transfers increases both investment and selection risks.”

It said given these limitations with SMSFs, and the small size of the membership of most funds, there was no scale within the funds for the expense of implementing a strategy on each member’s retirement savings.

“Compliance with the RI (Retirement Income) Covenant will be formalistic at best and the regulator will be required to challenge the performance of the RI Covenant, which will be beyond the regulator’s resources and skills,” it added

Source: smsmagazine.com.au

SMSF Association urges rethink on NALE

Aug 6,2021 Comments Off

The SMSF Association is urging the Federal Government and the Federal Treasury to review the non-arm’s length expenditure (NALE) rules following an ATO ruling handed down last week.

Peter Burgess, Association Deputy CEO/Director of Policy & Education, addressing the organisation’s Technical Summit, says the ATO ruling is the outcome of changes made to the non-arm’s length income (NALI) rules back in 2019, which, “in our considered opinion, could have punitive consequences that we doubt are intended.”

“Today’s ruling confirms the ATO’s draft position that NALE can have a sufficient nexus to all the ordinary and/or statutory income derived by the fund.

“This means situations could arise where an SMSF, which does not incur a general expense on arm’s length terms, would have all its income taxed as non-arm’s length income (NALI) – regardless, it would seem, of the monetary value of the service provided.

“Even though the ruling makes it clear the ATO does not consider the general expenditure issue to be a significant compliance risk that would warrant a particular focus, we urge the Government to review these provisions to avoid any undue concern or confusion.”

Mr Burgess acknowledges the underlying policy rationale of the NALE rules is to ensure all SMSF transactions occur on arm’s length terms.

“Although we accept the underlying policy intent, the penalty imposed on SMSF trustees who may not see the harm in entering arrangements with related parties on favourable terms to their SMSF, can be very significant and grossly disproportionate.”

On a positive note, the ruling does provide several examples of situations where the trustee provides a service to their own fund for no charge that does not result in NALE.

“The ruling provides some wriggle room for SMSF members to provide services to their own SMSF using their own business skills and experience and they don’t need to charge their fund for that service.

“For example, a financial planner who has an SMSF can use their skills and knowledge in formulating an investment strategy for their fund and this service can be provided to their fund without charge.

“Even if they use their business assets in a minor or infrequent way, it will still not be classified as a service they need to charge their SMSF for.

“But the ruling does draw the line at services that can only be provided if the SMSF member holds a particular licence or qualification, or the service is covered by an insurance policy relating to their business”,

“In these instances, the SMSF member is required to charge their fund an arm’s length fee for the service provided, or risk some or all of the fund’s income being taxed as NALI,” Burgess says.

Source: SMSF Association

1800 951 855

[email protected]

Archive August 27, 2021

SuperStream rollover events clarified

SMSF trustees warned on increasing exposure to compliance risks affecting collectables

Covenant pointless for SMSFs?

SMSF Association urges rethink on NALE