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Self Managed Super Fund (SMSF) Article
The Year Ahead
By Tony Negline.
This article may be out of date.
9th December 2009
The final DIY Super column for 2009 is a good time to mention some smaller issues which super fund trustees will have to consider and also to provide a view as what might unfold superannuation wise in 2010.
Firstly let's look at in-house assets – an in-house asset is a loan to or an investment in parties the law deems to be related to a super fund. It also includes the leasing of a super fund asset to any of those related parties. A related party includes the members of a super fund, their relatives and trusts or companies controlled by the members or relatives.
Ordinarily no more than 5 percent of the market value of a super fund's total assets can be in-house assets. Super fund trustees must continually test their in-house asset holdings to make sure their fund doesn't breach the 5 percent threshold.
When this 5 percent test is breached a super fund trustee has to develop a written plan on how they will reduce their in-house assets below the five percent limit by the end of the following financial year in which the breach first occurred. Trustees then have to implement this plan. The super fund's auditor signs-off on the reduction plan and that it has actually been implemented.
The law gives the regulator of a super fund, such as the Australian Taxation Office for Self Managed Super Funds, the ability to deem an asset not to be an in-house asset. Such assets would not counted as an in-house asset for the 5% market value test.
In October the ATO issued Practice Law Statement 2009/8 about this topic so that its staff might better understand when and how to exercise their discretion in this area.
The Practise Law Statement says that a discretion not to treat an asset as an in-house asset should not be given unless there are unusual or out of the ordinary circumstances. For example:
- The trustee has complied with all super law requirements when investing their super fund's assets, and
- The events which caused the 5% breach were unforeseeable and beyond the trustee's control
In the Tax Office's view the following events would not normally lead it to exercise its discretion that an asset is not an on-house asset:
- Changing economic conditions (such as the Global Financial Crisis)
- The trustee was ignorant of the super laws
- A trustee relied on the care and diligence of a professional who did not provide the necessary advice
- The super fund obtained "a significant benefit" from the investment
- The trustee wanted to avoid costs or difficulties to bring the fund's in-houses assets to below the 5% limit
Super fund trustees should apply for this discretion in writing. If the Tax Office refused to exercise their discretion then a trustee could apply, again in writing, to the ATO to have the first view reconsidered. Any trustee still dissatisfied could apply to the Administrative Appeals Tribunal to have a decision varied.
Many Self Managed Super Funds found their in-house asset position threatened because of the GFC. Those funds need to carefully consider what action they might take.
Onto another issue – new life expectancy tables. The Australian Government Actuary has issued the 2005/07 Australian Life Tables. They show that, on average, Australians continue to have longer lives.
For example 20 years ago a 65 year old male (born in the 1920s) could expect to live about 15.4 years. Men currently aged 65 (born towards the end of World War II) are expected to live 18.5 years.
These new life expectancy tables will be used by Centrelink when assessing "life time" pensions and annuities from 1 January 2009. Those intending to begin these types of income streams should do their numbers carefully and consider getting good advice.
And now what about the future? Next year will be very busy. It's a Federal election year and that implies policy change.
Additionally sometime in the first half of 2010 the Government will release the Henry Tax Review and its reaction to it. The Cooper Review into the structure of the superannuation industry will report to the Government around June '10.
There is a growing unease about what impact both these reviews might hold for superannuation in general and Self Managed Super Funds in particular.
Some rumours suggest the Henry Review might propose further reducing the tax effectiveness of superannuation for higher income earners. This could occur via higher taxes on contributions or further limits on the amount of contributions that can be made in a financial year. Alternatively, or even additionally, tax penalties might be introduced on larger super account balances when they are taken out of the super system.
Other gossip thinks the Cooper Review might come down hard on SMSFs.
Personally I remain hopeful that all these rumours will not come to pass. I am confident that both Henry and Cooper will avoid what G.K. Chesterton once said about the reformer - "The reformer is always right about what is wrong. He is generally wrong about what is right."Finally my best wishes to everyone for Christmas and the New Year. Thanks to all who have contacted me during the past year with comments, questions and article ideas. See you all in 2010.
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