Another financial year is coming to a close and once again we are all busy undertaking tax planning for our clients. Reviewing and planning for your SMSF is just as, if not more, important.
– While conducting audits for the 2014 year, I have encountered common problems that could have been avoided with pre 30 June planning.
– And unfortunately, a number of the issues could not be fixed post 30 June – resulting in breaches or adverse tax consequences.
I have set out below the issues that continually arise, along with suggested planning steps to follow pre 30 June.
Planning for 30 June 2015
Problem 1: Not paying minimum, or exceeding maximum, pension payment.
If a Fund is paying an account based pension (ABP) to a member, it is under obligation to pay at least a minimum payment based on the member’s age at commencement date or 1 July 2014 (whichever is the later date). As well, if the income stream is a transition to retirement pension (TTRP) there is a 10% maximum payment per year.
Minimum Payment Table
|65 to 74
|75 to 79
|80 to 84
|85 to 89
|90 to 94
|95 or more
An underpayment may result in the pension being deemed to have ceased at 1 July 2014, thereby losing the ability to claim a tax emption on related SMSF investment earnings.
As well, in the case of a TTRP an underpayment or overpayment can be treated as an illegal early access payment and taxed at penalty rates.
- Ensure each SMSF paying an ABP / TTRP makes a minimum payment and in the case of a TTRP does not exceed 10%.
- Review planning opportunities to convert existing accumulation balances to ABP/TTRP.
- Ensure you have a copy of the commencement minutes on file.
Problem 2: Exceeding contribution limits
Exceeding contribution limits will in most cases result in additional taxes and charges and a lot of client headache.
The tax treatment of both excess concessional and non-concessional contributions has changed over the past year, to change what I believe was harsh and unfair treatment. However, the new regime still involves additional taxes and charges being applied and extra compliance paperwork for the SMSF and ultimately for you and your client.
Contribution Caps for year ended 30 June 2015
||Age at 30 June 2014
||Aged 48 or under
||Aged 49 or over 1
- If 65 or over at time of making the contribution the member needs to pass the work test.
- Three year bring forward cap of $540,000 can apply
- Review whether members over 65 meet the work test requirement before they make contributions.
- Advise members of their CC and NCC contribution cap limits leading up to 30 June.
- Check if any contributions can be classified as exempt, ie CGT retirement exemption.
- If contribution limits have been exceeded, review whether any ability for the SMSF to refund the contribution, and/or review options available to deal with ATO excess tax determinations.
Problem 3: Lack of complying Investment Strategy
This is the most common issue that I experience. A large number of SMSFs do not have a complying strategy.
A breach of Regulation 4.09 can lead to penalties and ATO audit action. Also Trustees are at risk of failing their duty of care, especially in relation to insurance. They could be at risk of being sued – for example where a spouse of a member sues the trustees in the event of the death of the member where insurance was not considered.
- Review each SMSF’s investment strategy for compliance with Regulation 4.09.
- In particular address the need for the Trustees to consider insurance for its members. I believe that it is not enough for the strategy to make a generic statement regarding insurance. The Trustees should consider each member individually and document the decision as to why or why not insurance was taken out.
- Please! Also remember to include in the audit documents you send through to me – thanks!
Problem 4: Valuation of Assets
Assets are required to be shown in each year’s financial statements at market value.
Over or under valuing the net assets of the Fund can result in numerous problems. Some include:
- Exiting members being over or under paid.
- Trustees not meeting the minimum/maximum pension payment requirements.
- Trustees could be liable for resulting consequences.
- Review ATO guidelines on market value.
- Advise SMSF clients where you feel a valuation needs to be obtained on a particular asset.
- Obtain representation from Trustees as to their opinion on current valuation.
Problem 5: LRBA’s where the lender is a related party
The ATO has recently released two rulings outlining their view on related party non-LRBAs. They consider that income from affected assets could be taxed as non-arm’s length income at the top marginal tax rate.
Top marginal tax rate could apply to net income from asset.
- Are loan interest and payment terms in line with normal commercial terms?
- Is the mortgage registered?
- Has the agreement been adhered to?
- Read more on recent ATO rulings.
- Consider amending loan terms.
Problem 6: Non-Arm’s Length Dealings
The ATO requires Trustees to deal with related parties on a commercial arm’s length basis.
- Breaches of sections 62 and 109 of the SIS Act resulting in penalties and audit action.
- Income from affected assets can be taxed at top marginal tax rate
- Are all dealings with related parties conducted on arm’s length basis?
- Are dealings inside related trusts conducted at arm’s length?
- Is a commercial lease in place for properties leases to related parties?
- Is there third party evidence to support market value of dealings?
Problem 7: Assets held in incorrect name
This would be the second most common problem I come across. There are lots of situations that occur to cause problems in this area. They can be:
- Changing from individual to corporate trustees.
- A SMSF with individual trustees adds a new trustee.
- Share Registries won’t record four names.
- Land Titles Office won’t record the SMSF being the beneficial owner.
- Breach of Regulation 4.09A resulting in penalties and further audit action.
- Assets at risk of being caught up in action against an individual trustee.
- Inability to deal with an asset in the event of the death of a trustee.
- Assets being inappropriately dealt with.
- Review and ask Trustees to rectify ownership documents to reflect correct Trustee name/s.
- In the case of difficulties, consider entering into a declaration of trust over the asset.
- NSW land titles has more information on registering a declaration of trust over NSW land.
If you would like help with any of these issues, please contact Allied Business Accountants or Joel Curry directly on 1300 TRISUP or 02 4961 2788