Quarterly technical and regulatory update of issues impacting SMSFs.

1. Webinar:
THE CHANGING FACE OF SMSFs
June 2014
© The SMSF Academy 2014

2. @thesmsfacademy

3. This presentation provides general advice only. No direct or implicit recommendations are
given in this presentation. This means that the general advice provided has not been
prepared taking into account any individual’s financial circumstances (i.e. investment
objectives, financial situation and particular investment needs).
The SMSF Academy Pty Ltd believes that the information in this presentation is correct at the
time of compilation but does not warrant the accuracy of that information. Save for statutory
liability which cannot be excluded, The SMSF Academy disclaims all responsibility for any loss
or damage which any person may suffer from reliance on this information or any opinion,
conclusion or recommendation in this presentation whether the loss or damage is caused by
any fault or negligence on the part of presenter or otherwise.
© The SMSF Academy, 2014
GENERAL ADVICE DISCLAIMER

4. FEDERAL BUDGET 2014-15
Webinar – Changing Face of SMSFs

5. Inspector General
of Taxation (IGT)
report:
Australian Taxation
Office’s approach to
superannuation excess
contributions tax

6. REFUND OF
EXCESS NON-
CONCESSIONAL
CONTRIBUTIONS
1 July 2013
30 June 2014 30 June 2015
Lodges SMSF
Annual Return
Release authority to refund excess
NCC plus earnings added to
individual’s assessable income

7. HOW WILL
EARNINGS BE
CALCULATED?
Unknown?
Previously proposed that earnings
simply taxed at top MTR?
Administration difficulties & costs –
how to calculate earnings?
Liquidity issues?
Apply a rule as a proxy for an actual
earnings rate?
Scope to advantage some taxpayers
not others

8. Temporary
Budget
Repair Levy

9. 47%
Non-complying
super fund tax rate
increases from 45%
47%
Non-arm’s length
income of a super
fund increases from
45%
49%
No-TFN contributions
income of a super
fund increases from
47%
Temporary Budget Repair levy introduced for 2014-15
will impact a range of tax rates calculated on the top
marginal tax rate plus Medicare levy
DASPs will increase to 38% (taxed) and 47% (untaxed) during this period

10. EXCESS NON-
CONCESSIONAL
CONTRIBUTIONS TAX
49%
(45% MTR + 2% Medicare + 2% Repair levy)
47%
Example
John (46) mistakenly makes $35,000 of concessional
contributions for 2014-15, an excess of $10,000.
This CC excess from 1 July 2013 is automatically
refunded as assessed to John with ECCC & SIC
charged.
Where John does not release an amount from super to
pay his individual amended assessment, this excess will
remain as excess NCCs.
Assuming John has already contributed $450k (or
$540k) during this period.
Where John is subject to the top marginal tax rate, this
excess contribution has scope to be taxed at 98% (i.e.
49% personally and 49% on excess NCC).
The law will limit the maximum tax payable to 95%, by
reducing the rate of NCC tax that would otherwise
apply.
Excess untaxed rollover amounts tax
will also increase from 47% to 49%

11. REFORMS FOR AGE PENSION &
COMMONWEALTH SENIOR’S HEALTH
CARD (CSHC)

12. AGE PENSION
REFORMS
CSHC
REFORMS
Government has indicated further
increasing age pension age (from 65 to
67 by 2023, now to age 70 by 2035)
Income & Asset test thresholds to be
fixed for three years (from 1 July 2017).
From 1 September 2017 indexation of
pension linked to CPI, not AWOTE.
Deeming thresholds also to be reset
from 1 Sept 2017:
• $46,600 down to $30,000 for singles;
and
• $77,400 down to $50,000 for couples
From 1 January 2015, non-
assessable income streams
will be included in the
assessment criteria for the
CSHC.
Eligibility thresholds will begin
indexing from September
2014.

13. CESSATION OF NATIONAL
RENTAL AFFORABILITY
SCHEME (NRAS)
Government is not proceeding
with round 5 of NRAS.
Current NRAS approved properties
receive tax incentives through both
State and Federal Government
contributions (2013-14):
• Federal Govt. - $7,763
• State Govt. - $2,587
Qualifying property must be rented
out at 20-25% discount to its market
value.
Tax rebate can be applied against
fund’s assessable income.

14. CHANGES TO 2014
SMSF ANNUAL RETURN
Webinar – Changing Face of SMSFs

15. For the first time, the SMSF Annual Return will
see trustees pay the full supervisory levy in
the year of operation, not in arrears.
2014 SMSF ANNUAL RETURN
Changes have been
made to calculate the
levy for first year funds.
New label (N) to allow for adjustments to
the Supervisory levy where lodging for the
first time.

16. SMSF
APRA
Regulated
Fund
Fund trustees must report all contributions
received during 2013-14 financial year,
even where some or all of the
contributions were rolled to another fund
during that income year.
REPORTING CONTRIBUTIONS
FOLLOWING A ROLLOVER

17. SMSF Annual Return will only capture the SMSF Auditor Number –
removed auditor’s professional body and member number (no
longer required).
SMSF AUDITOR INFORMATION

18. DIVIDEND WASHING
Webinar – Changing Face of SMSFs

19. Dividend washing allows an entity
to obtain multiple franking credit
entitlements in respect of a single
underlying economic interest.
To remedy the use of the scheme,
the Government will legislate
change to close this tax loophole
retrospectively from 1 July 2013.

20. Elizabeth & Co
Custodians (for
GAV Super Fund)
holds #10,000
ABC shares
Fully franked
dividend declared of
10 cents by ABC Ltd
E&Co dispose of all
#10,000 shares
after trading ex-
dividend. Retains
right to FF dividend
Special Market
opens for trading
Special Market
closes for trading
Special trading period
E&Co purchases #20,000
shares in ABC Ltd in special
cum-dividend market
Franked dividend
entitlement in
respect to
#20,000 newly
acquired shares
E&Co continues
to hold #20,000
ABC Ltd shares
EXAMPLE
#10,000 of new shares are
substantially identical
interests – GAV Super will
not be entitled to franking
credits for new shares.

21. BANK ACCOUNTS & SEGREGATED
CURRENT PENSION ASSETS
Webinar – Changing Face of SMSFs

22. The use of sub-
accounts within
bank accounts to
support the
payment of income
streams.
Receipts and
outgoings that
require
apportionment &
reasonable
timeframe
Contributions
made in error to a
segregated bank
account
Essential incidental
expenses that apply
‘generally’ to the
fund without
apportionment
FOCUS OF TD 2014/D7
1 2 3 4

23. John & Jane Citizen hold listed shares,
residential property and a bank account in
their SMSF.
John wishes to start pension and segregate
the listed shares as current pension assets,
requiring $50,000 of the cash balance to
support commencing value of income
stream.
Trustees resolve to create sub-accounts
rather than establish a new bank account
SUB-ACCOUNTS & SMSFs

24. As part of ongoing administration of fund,
trustee and accountant calculate
attributed receipts and expenses relevant
to each member and record to the
respective sub-account.
TD 2014/7 confirms that the $50,000 set
aside in the sub-account is a current
pension asset for purposes of s.295-285 of
ITAA 1997.
SUB-ACCOUNTS & SMSFs

25. ATO WARNING
ON RELATED
PARTY LRBAs

26. 67A & 67B, SISA
RELATED PARTY LRBA JOURNEY…
ATOID 2010/162
TR 2010/1
SMSFR 2009/2
Para’s 35 & 48
() Private Rulings
1012369819768
1012414213139
() Private Ruling
1012582301006
More to follow…

27. Member Member
X Y
Member
Z
Retired – under
65
Under 50
Holding Trust
SMSF
Lenders
Limited Recourse
Beneficial
interest
Related Party loan
More than 10 years
> RBA Cash Rate
3rd party tenant
Commercial rate of
rent paid to SMSF
Lender willing to reduce
interest charged to nil in
order to take pressure off
meeting minimum pensions
EARLIER VIEW
Commercial
building
Authorisation Number: 1012414213139

28. Authorisation Number: 1012414213139
RELATED PARTY LRBA
Questions: Answer
Will a discounted amount of interest be considered a
contribution?
No
Will the annual rental derived be considered non-arm’s length
income?
No
Will any capital gain realised by the fund on the sale of the
property be considered non-arm’s length income?
No
Is a 0% interest rate deemed to be a scheme with dominant
purpose of gaining a tax benefit under Part IVA of ITAA 1936?
No

29. Drawing 2 x
pensions each
from the SMSF
X
Listed
shares
Holding Trusts
SMSF
Authorisation Number: 1012582301006
TODAY’S VIEW
FAMILY TRUST
Asset = $X
Loans = $Y
NET ASSETS = $0
Corporate Trustee
NewCo.
Y
Listed
shares
Z
Listed
shares
SISR
13.22C
Units
Unit trust
(Cash &
deposits)
Multiple
LRBAs
Series of loans
provided (2 or
more) as required -
complying s67A
with SAA definition
SMSF loans

30. SMSF
FAMILY
TRUST
loan
• To repay the loan as single lump
sum at end of loan term
• (or earlier as otherwise agreed)
• No term specified for loan
• (advanced could be for several decades)
• 0% interest rate on borrowing
• Lender will be granted first
ranking mortgage
• No guarantee required by
lender for loan(s)
• Family Trust to provide 100% LVR
Features of the related party SMSF loan:

31. Authorisation Number: 1012582301006
RELATED PARTY LRBA
Questions: Answer
Will a discounted amount of interest be considered a
contribution?
No
Will the income derived by the fund be considered non-arm’s
length income?
Yes
If NALI, would this be considered a contribution to the fund? No
If asset used as security sold at a loss thereby reducing amount
due under LRBA, would shortfall be considered a contribution
(debt forgiveness)?
No

32. The ATO’s argument…

33. Federal Commissioner of Taxation v AXA Asia Pacific Holdings Ltd [2010] FCAFC 134;
(2010) 189 FCR 204; (2010) 2010 ATC 20-224; [2011] ALMD 2345; (2010) 81 ATR 180
‘Any assessment of whether parties were
dealing at arm's length involves 'an assessment
[of] whether in respect of that dealing they
dealt with each other as arm's length parties
would normally do, so that the outcome of their
dealing is a matter of real bargaining'
Justices Edmonds and Gordon

34. Conclusion of the Commissioner

35. The arrangement is deemed greater than would otherwise be expected
(final requirement of subsection 295-550(5) of ITAA 1997)
If the parties were dealing with each other at arm’s length, then the amount
of income derived through the arrangement would be:
Conclusion of the Commissioner
$NIL - on the basis that no
lending on the proposed
terms by the Family Trust
might be expected and
therefore no income might
be expected to be
derived by the Fund
through the Custody Trust;
or
1 Less than under the proposed
arrangement – on basis that
the Family Trust might be
expected to lend on
commercial terms that involve
lower than 100% LVR. Lower
borrowed amount might be
expected to derive less
income
2

36. RISK AREAS?
Interest rates
lower than
commercially
available
Higher than
commercially
available LVR
An unspecified
term for the
loan
No charge or
lack of
personal
guarantees
No regular
payment plan
for the loan in
place
Authorisation Number: 1012582301006
13.22C LRBA
arrangements?

37. Confused?
Expect clarity through an ATO
interpretative decision (ATOID)
soon…
Maybe a test case?

38. Webinar Q&A
Podcast in follow-
up email
Follow up email
with survey for your
valuable feedback
Any final questions?
http://thesmsfacademy.polldaddy.com/s/2014-06-changing-face-of-smsf

39. INSURANCE & SMSFs
• Changes from 1 July, key issues
and strategies
• Included for members
• Non-members: $99 (incl. GST)
– Keep an eye out for special
offers!
Thursday, 17 July 2014
11:00am, AEST
9:00am
11:00am
11:00am
11:00am
10:30am
11:00am
 Proficient
NEXT WEBINAR

40. Aaron Dunn
The SMSF Academy
www.thesmsfacademy.com.au
SMSF Dunn Right,
http://thedunnthing.com
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