Trustees can declare their hand to the ATO and put forward a proposal t to resolve any contraventions. Louie Douvis
A reader who transferred money from a DIY super fund to finance property repairs asks whether this can be re-contributed. But there could be more to this question than meets the eye, says John Wasiliev who seeks answers for your questions on super.
Q: I transferred a small portion of my self-managed superannuation fund (SMSF) to my bank to use on upcoming investment property repairs. Only $3500 was transferred all up. I still have the funds in the bank and the job hasn't gone ahead. Is it OK for me to transfer the money back to my SMSF if the repairs don't go ahead? Fraser
A: While it may seem as if your SMSF transaction involves a trifling amount, says superannuation strategist Darren Kingdon of Kingdon Financial Group, unfortunately your question does raise some potentially significant compliance issues for your super fund.
In the first instance, assuming the repairs are for personal property and not any SMSF-owned property, an SMSF is prohibited from lending or providing any form of financial assistance to a member. This also raises other issues including the sole-purpose test which broadly stops super money being used for current day benefits. Therefore, on the surface your action may be a technical breach of the super rules.
However, a remedy might be where the benefit paid could be categorised as a member payment. To qualify for this, there would have to be a member who has satisfied what is known as a condition of release allowing them to access their super as either a lump sum or an income stream payment.
If the payment cannot be treated as a member benefit, then it's likely to give rise to an auditor contravention report to the Australian Taxation Office as official notification of the breach. In Kingdon's experience, the ATO tends to treat honest mistakes that are immediately rectified more favourably than those that are not immediately addressed.
From time to time SMSF trustees do make mistakes. When things do go wrong, says PricewaterhouseCoopers SMSF director Liz Westover, human nature will often result in people putting their head in the sand and hoping it all goes away. It generally doesn't go away and as time goes by, matters only get worse. So how do you best resolve these situations?
A great initiative from the ATO is the SMSF early engagement and voluntary disclosure service. Westover describes it as one where trustees can essentially declare their hand to the ATO and put forward a proposal to resolve any issues and contraventions. Tackling problems using this service will often result in a far better outcome for members/trustees than if the ATO was to find out about them through normal regulatory processes such as a contravention report.
That said, says Westover, not every breach needs to go through this program,
Minor breaches can often be dealt with by self-rectification and working with advisers and your fund auditor to sort through the issues. Typically, however, a trustee, with the help of their accountant or auditor, may use this service where there are more serious unrectified contraventions including a number of outstanding annual return lodgements, non-complying loans or early release of benefits.
The voluntary disclosure program is not a free ride, says Westover. Where serious non-compliance is involved, penalties may still be imposed (although often reduced).
As difficult as it can be for a trustee to admit to an error or non-compliance, getting it resolved sooner and voluntarily will generally give a better outcome all round.
Q: I am interested in understanding if the costs levied against a super fund for expenses such as adviser fees, annual tax returns, investment management expenses and audit fees count against the minimum amount that must be withdrawn from super each year. For example, say a fund has $1.8 million and two members aged between 60 and 65 who want to withdraw minimum pensions of $72,000 (based on a minimum requirement of 4 per cent) and the fund has expenses that come to $8000. Does this mean the couple could then only withdraw $64,000, or $72,000 minus $8000? Sam
A: The super pension rules don't quite work that way, Sam. It's true that once you start a pension from your super, an annual minimum amount is required to be paid each year.
This annual minimum is based on each member's account balance and a percentage factor based on your ages. If you are under 65, this factor is 4 per cent; once you turn 65, it become 5 per cent. It increases beyond that at regular intervals to 14 per cent once you reach 95.
For example say one partner in your fund is 65 with $1.2 million in super and the other is 60 with $600,000 in super. The older partner must withdraw 5 per cent of $1.2 million (or $60,000) while the younger partner must withdraw 4 per cent of $600,000 (or $24,000). The total in this case is $84,000.
These minimum amounts must be withdrawn in a financial year which runs from July 1 to June 30. No less than the minimums must be taken in order to qualify for a tax exemption available to the investment earnings generated by the investments that finance these pensions. Not paying the minimum for one or both pensions will mean the proportion of investment earnings they represent of the fund will be taxable.
As far as the expenses involved in running the fund, they are offset against the fund's taxable investment earnings. But once a fund has gone into pension phase from a tax perspective, any income and capital gains is subject to zero tax within the fund. A fund can therefore have no taxable income but it is still necessary to keep tabs on the value of investments and amounts like the proportion of a member's account that may be tax-free because it was sourced from after-tax contributions.
This information is required where any super is later distributed as a death benefit to a beneficiary not entitled to inherit a super benefit tax-free, like a superannuation non-dependant. Another important consideration that must be monitored is any dividend imputation tax credit entitlements within the fund investment portfolio. Where there is no taxable super in the fund, these credits can be received as a cash refund from the Australian Taxation Office which can, in turn, enhance a fund's investment return.
These answers must be taken as general advice only. Email journalist John Wasiliev with your questions at firstname.lastname@example.org. John is a veteran writer on superannuation and has written for the AFR for 33 years.
By John Wasiliev
16 May 2018
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