SMSFs, trusts and property development: Part 1
In January 2015, the first part of a two-part article, written by Sladen Legal's Phil Broderick, was published in the Tax Institute’s Journal, Taxation in Australia. This article considers the tax and regulatory issues of SMSFs undertaking property development either directly or through structures such as trusts.
Sladen Snippet – Super contributions clawed back from an SMSF because of breach of fiduciary duties
In the decision of Australian Annuities v Rowley Super, the Victorian Court of Appeal has held that over $1.6 million of super contributions made by a discretionary trust and members to a self managed superannuation fund (SMSF) could be clawed back to a liquidator on the basis that the director of the corporate trustee breached his fiduciary duties to the corporate trustee.
Sladen Snippet - Death benefits cannot be paid by journal entries
The Australian Taxation Office (ATO) has set out its view in ATO Interpretative Decisions, ATO ID 2015/2 and ATO ID 2015/3 that the superannuation laws and tax laws prohibit superannuation death benefits from being paid by mere journal entries.
In the ATO IDs, the taxpayer/beneficiary and self managed superannuation fund (SMSF) trustee wished to effect the death benefit to the beneficiary by the transfer of money from the deceased member's account, to the beneficiary's own account in the SMSF by way of journal entry (to save on transactions costs). The ATO noted that set offs can occur in a superannuation context, but that there needs to be “mutual liabilities between the taxpayer and the SMSF and there is an agreement between those parties to set-off the liabilities”. Here, the ATO found there was “not a mutual liability in this case as the taxpayer does not have a liability to the SMSF”.
SMSFs, trusts and property development: part 1
Self-managed superannuation funds1 (SMSFs) have been carrying on property development activities ever since they came into existence. Such activities are either done directly by the SMSF or more commonly through a structure (typically, a trust). Yet, despite this, there is still a common concern that such activities will cause the SMSF to become non-complying, or subject to penalties, on the basis that such activities, and in particular undertaking a property development business, are prohibited
Updated SMSF deed and our new SMSF corporate trustee stakeholders agreement
Sladen Legal has conducted a major review of our self managed superannuation fund (SMSF) documents including the SMSF deed, the SMSF deed update and the SMSF pension agreements. We are pleased to announce our new SMSF corporate trustee stakeholders agreement.
Sladen Snippet – Draft legislation released for look through approach for LRBAs
Treasury has released a draft bill to enact a “look through” approach to apply to limited recourse borrowing arrangements (LRBAs) for income tax and capital gains tax (CGT) purposes, with effect from 1 July 2007. Under a LRBA the asset must be held by the trustee of a separate trust (referred to below as a bare trustee). This has raised a number of issues in relation to how the tax laws interact with the holding of the asset, the super fund and the bare trustee.
Sladen Snippet - Do recent Court decisions point towards leniency in the new SMSF penalty regime?
Two Federal Court decisions from 2014, DCT v Lyons and DCT v Graham Family Superannuation Pty Ltd have demonstrated the Court’s relatively lenient approach to applying penalties under the Superannuation Industry (Supervision) Act 1993 (SIS Act) for cases involving multiple numbers of very serious breaches.
Sladen Snippet - Related party LRBA loans must be benchmarked
Further to the recent Australian Taxation Office (ATO) release of two ATO Interpretative Decisions, ATO ID 2014/39 and ATO ID 2014/40, as outlined in a recent Sladen Snippet, the ATO has released further information on what factors will be considered when applying the non-arm’s length income (NALI) rules to non-commercial limited recourse borrowing arrangements (LRBAs).
Sladen Snippet - ATO releases ATO ID’s on non-commercial LRBA loans
The ATO has released two ATO Interpretative Decisions (ATO IDs), being ATO ID 2014/39 and ATO ID 2014/40 on the application of the non-arm’s length income rules (NALI) to non-commercial limited recourse borrowing arrangements (LRBAs).
Sladen snippet – Recent successes with excess contributions
Sladen Legal had two recent successful applications to disregard or reallocate excess non-concessional contributions, with the result that significant excess contributions assessments were extinguished or reduced to a nominal amount.
In the first case the client inadvertently triggered the bring forward rule by paying what she thought was an insurance premium, but was in fact a contribution to a retail superannuation fund (that in turn funded an insurance policy held by the fund). The client also made a $150K non-concessional contribution in that year followed by a $450K in the following year (causing excess non-concessional contributions of over $150K). The Commissioner of Taxation agreed that special circumstances existed and agreed to reallocate the “insurance” contribution to the second year reducing the excess contributions tax from over $70K to approximately $1,500.
Unit trusts and superannuation – does the look-through approach exist?
Based on the principle of the separation of legal entities, it would not be expected that the actions of the trustee of a unit trust (or other trust) would be imputed on its unit holders. But does that hold true under the superannuation system? For instance, can the actions of a unit trust trustee cause its unit holding superannuation fund trustee to breach the superannuation laws? Or, to put it more succinctly, does the “look-through approach” exist?
SMSFs Engaging in Property Developments
This paper was presented by Phil Broderick on SMSFs Engaging in Property Developments, at the Ninth Annual SMSF Conference of the Television Education Network, on 4-5 September, 2014.
Self managed superannuation funds (SMSFs) have been carrying on property development activities ever since they came into existence. Yet despite that, there is still a common concern that such activities will cause the SMSF to become non-compliant, or subject to penalties, on the basis that such activities, and in particular undertaking a property development business, are prohibited.
Superannuation funds and public trading trusts
When superannuation funds consider structuring through, or investing in, another private entity, the choice is generally between a company and a unit trust. When the decision is made to invest in a unit trust, it is primarily made in order to take advantage of a unit trust’s “flow-through” nature under the current tax laws. However, this flow through nature will be lost if the unit trust is deemed to be a public trading trust.
Incorporating Superannuation into Estate Planning: Common Challenges
This paper was presented by Phil Broderick at the Legalwise Seminar on Will Drafting and Estate Planning, held on 12 August, 2014.
Superannuation benefits do not automatically form part of a member’s estate upon the death of the member. As such, a member’s will cannot deal with their super benefits, unless the benefits are paid to the estate of the member.
Consequently, a person’s super benefits must be dealt with separately in the estate planning process. Rather than dealing with super in a person’s will the tools for dealing with super death benefits are binding death benefit nominations (BDBNs), reversionary pensions, and the control of the decision making process through the control of the super fund trustee.
Sladen Snippet - Loan from an SMSF to an unrelated unit trust, not an in-house asset
The Australian Taxation Office (ATO) has confirmed in ATOID 2014/23 that a loan from a self managed superannuation fund (SMSF) to a unit trust, where the SMSF and its related entities held less than 10% of the units in the unit trust, and did not otherwise ‘control’ the unit trust, will not be treated as an in-house asset.
Sladen Snippet - ATO confirms adult children can be super dependants
The Australian Taxation Office has confirmed in ATOID 2014/22 that an adult child can be a death benefits dependant under the superannuation laws. In the particular facts of the ATOID, the adult child had given up work to care for a terminally ill parent and received no financial support from anyone, other than the parent, during that time. The child was found to be both financially dependent on, and an interdependent of, the child’s mother. Consequently, any death benefits paid to the adult child would be tax free.
Sladen Snippet - SuperStream Start Date Delayed
Sladen Snippet - Super announcements in the 2014 Budget
Many people in the super industry approach each budget with some trepidation given the number of changes to the superannuation system over the years. This year, however, the industry received a pleasant surprise with only two changes, one being the ability to withdraw excess non-concessional contributions and the second being changes to the increases to the super guarantee rate.
Transferring property from trusts to SMSFs without duty
Moving business real property into a self managed superannuation fund (SMSF) can have significant tax advantages. These include concessional tax treatment to the SMSF on rental income of 15%, and capital gains tax on the sale of the property at the rate of 10% (if the property is held for 12 months or more). While if the SMSF is in “pension phase”, the income tax and capital gains tax rates can drop to 0%. In addition, if the member is aged 60+ any payments from the SMSF to the member will be tax free.