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Self Managed Super Fund (SMSF) Article
Keep up to date on rules and stay in front
By Tony Negline.
This article may be out of date.
6th October 2010
This week we conclude our review of changes or announcements made in the Self Managed Super Fund regulatory scene since March 2010.
The ATO's National Tax Liaison Group Super Technical sub-committee made up of Tax Office and industry representatives meets three or four times a year. The minutes of meetings held since March contain the following interesting items:
· Binding Death Benefit Nominations versus Reversionary Pensions
A super fund's trust deed might allow a member to execute a BDBN. If a super fund member has correctly executed one of these nominations then all of the member's benefits will be paid in accordance with that nomination. The benefit of this strategy is that it removes the need for trustees to decide who and how a death benefit should be paid.
A reversionary pension however entails the automatic continuation of the pension upon the death of a pensioner member with income payments being made to the nominated reversionary.
So what happens if a pension member has a reversionary pension and also a valid BDBN? Does a trustee automatically follow the BDBN or does it pay income payments to the reversionary pension?
The ATO provided the following view:
"There are no [super law] provisions that are relevant to determining which nomination a SMSF trustee is to give precedence where a deceased pension member had both a valid reversionary nomination and a valid BDBN in existence at the same time of the member’s death.
"While [the super laws] place restrictions on superannuation entity trustees accepting BDBNs from a member, as explained in [ATO] SMSF Determination 2008/3 the Commissioner is of the view that those provisions do not have any application to SMSFs. It must also be remembered that [these particular super laws] are necessary because of the general trust law principle that beneficiaries cannot direct trustees…
"If the governing rules of a SMSF authorise a death benefit nomination, the trustee must follow the fund’s rules and the general trust law and any other legislation which may be relevant.
"Notwithstanding those observations, the ATO's view is that a pension that is a genuine reversionary pension, that is, one which under the terms and conditions established at the commencement of the pension reverts to a nominated (or determinable) beneficiary must be paid to the reversioner. It is only where a trustee may exercise its discretion as which beneficiary is paid the deceased member’s benefits and/or the form in which the benefits are payable that a death benefit nomination is relevant."
In my view this ATO view is very clever.
In reality the ATO has demonstrated the importance of the wording of a super fund's trust deed. The ATO has also indirectly shown the concern most people should have about relying on general compliance and catch-all clauses to run their super fund in between trust deed upgrades.
· 10% assessable income test for personal super contribution tax deductions
Ordinarily a person can claim their personal super contributions if they satisfy the 10% assessable income test. This test says that if a person's assessable income, reportable fringe benefits and salary sacrifice contributions are less than 10% of a person's total income from all sources.
What happens if a person is not eligible eligible for a tax deduction for personal super contributions when leave entitlements are expected to be paid in June but are paid in the July of the following financial year. The ATO have said that in their view the leave entitlements will apply to the 10% assessable income test in the financial year in which they are received even when the entitlements actually relate to a previous financial year.
· Can a portion of an asset be segregated between non-pension and pension assets? Most SMSFs do not bother with segregating assets between pension and non-pension assets because it can be an administrative hassle. The ATO have said that if segregation is used then an asset cannot be used in both phases of super fund. This may mean that super funds using segregation may need to keep at least two bank accounts – one for non-pension assets and the other for pension assets.
· What is the Concessional Contributions Cap for individuals who turn 50 during a financial year but die before reaching that age? The ATO has suggested that caution be exercised in these circumstances. The only way to be certain about these issues is to contribute money into super after reaching age 50.
· Acquisition of assets from related parties – in the ATO's view SMSFs are not permitted to acquire assets from members which are in house assets under the super laws unless those assets are company shares or units in a unit trust. This is a very controversial view and some super commentators don't agree with it.
· Registering changes to trustees – the ATO noted that when a super fund needs to appoint a new trustee then there may need to be a Deed of Appointment given to a State or Territory's Registrar-General (or equivalent). Care should be used in this areaThe Self Managed Super Fund regulatory landscape is not static. The law is quite complex and disparate. Anyone with an interest in SMSFs needs to keep up to date with what's going on.
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