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Self Managed Super Fund (SMSF) Article
SMSF expenses paid by another entity
By Tony Negline.
This article may be out of date.
8th September 2004
The Australian Taxation Office appears ready to back-flip for the second time in the space of one month.
In early August this year the ATO announced that it had reversed its long standing views on the popular ‘withdraw and re-contribute’ strategy.
In late August the ATO released for public comment Draft Miscellaneous Tax Ruling 2004/D2 which is titled, “What is the tax treatment of an expense incurred by a superannuation fund that is paid by an employer or eligible person on behalf of a superannuation fund and that is journalised as a superannuation contribution?”
The title hardly portrays something of great moment but this ruling actually represents a full 180 degree turnaround from previously announced ATO positions.
This draft ruling says that an employer sponsor or a member of a fund can pay super fund expenses out of their own pocket and the super fund can then deem that payment as fund contributions. If expense payments are deemed to be contributions by the fund then the fund must ensure those contributions are treated like all other contributions. This means that all tax issues, including surcharge must be done correctly.
This type of transaction is fairly straight-forward. Typically a super fund incurs an expense, such as professional fees, tax or insurance premiums, and someone associated with the fund pays that expense and the trustee recognizes the expense payment as a contribution.
There are several reasons why this might be suitable for a super fund. Convenience and cost savings for everyone concerned are the most common reasons.
For example John Smith is a member of the Smith Self Managed Super Fund. All of John’s life insurance requirements are provided by life insurance policies with XYZ Life.
John personally owns some of these policies. For keyman insurance purposes John’s business owns another life policy on his life. And the trustees of the Smith Self Managed Super Fund also own some life policies where John is the life insured.
Some of you might think that this seems a complicated set of arrangements and would not be implemented all that often. The need for this type of structure around life insurance requirements is quite high particularly for small businesses and executives. To determine the ownership of life insurance policies can sometimes be a complicated business because it is easy to make it too convoluted which unnecessarily increases costs. At the same time it is easy to make it the ownership arrangements too simple and thereby potentially cause problems, typically unnecessary tax, if the life insured died.
One barrier to arranging life insurance affairs using a structure similar to John’s is accurate administration to make sure the owner of a policy actually pays what they are meant to pay.
Under the ATO’s original view, the Smith SMSF had to pay for its own life policy. No one else could pay for it including John or his employer. Under this scenario, a contribution might be paid to the fund and then that contribution is then paid out of the fund to meet the costs of life insurance.
The ATO’s draft miscellaneous ruling says that ATO prefers that super funds expenses are paid directly out of the fund itself and for super contributions to be made directly to the fund. In the ATO’s view “this provides clarity because the outgoings of the employer or eligible person and the fund directly match the tax treatment”.
However the draft ruling goes on to say that it is acceptable that other entities pay super fund expenses and treat that payment as a contribution.
One matter not dealt with by the ruling is the treatment of expenses paid by third parties who owe the member or employer money. For example suppose John Smith’s employer had an outstanding invoice. During negotiations about how and when the invoice was to be paid it was agreed that the creditor would directly pay some of the employer’s super guarantee liability including looking after the premiums on the life insurance contract owned by the Smith SMSF.
Under this type of arrangement the employer would inform the super fund’s trustee that its contribution has been paid by someone else.
Presumably the ATO would not be happy with this type of arrangement. One possible reason for having concerns is that it could be difficult to record these types of transactions with 100% accuracy especially where there are many transactions involved. Whether or not the ATO would allow this type of transaction is yet to be seen.
A copy of the draft ruling can be downloaded from the following link:
Those who wish to comment on the draft ruling are invited to forward their submission to the ATO by 8 October.
It would be foolish to rely on this draft ruling until it is finalised.
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