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Self Managed Super Fund (SMSF) Article
Sound advice for managers of small funds

By Tony Negline.

This article may be out of date.

8th April 2009

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Suppose someone came to you with a great new strategy for your small super fund.  The strategy involves the use of related companies and possibly trusts and enables you to gain personal access to your super fund monies before retirement.

How would you go about researching if this strategy is okay?

ASIC encourages investors to apply a nifty slogan to help critically analyze the suitability of any transaction – "If it sounds too good to be true, it probably is."  They also provide some good information on their financial tips and safety checks website (www.fido.gov.au) about many aspects of investing including details of the latest scams.

The Tax Office issues Product Rulings that say how a product or transaction will be treated for tax purposes.  The ATO must stand by the tax information provided in these Rulings as long as the organization seeking the ruling implements the transaction in the way they said they would.  The ATO regularly audits product providers to ensure they have been true to their word.  The tax office must abide by these rulings even if it later decides that the law should be interpreted in a different way or a Court decides that the ATO was wrong in its initial interpretation.  The only way the ATO cannot stand by these rulings is if the Parliament decides to amend the law retrospectively.

These product rulings can look at all income tax matters including capital gains tax and offsets such as franking credits and access to tax deductions.  They can also address GST matters.

Anyone thinking of relying on an ATO Product Ruling needs to carefully analyze the questions that have been asked because the ATO only answers those questions and provides no further information or guidance.  If requested the tax office will address tax matters from a super fund perspective in these rulings.

Some product providers do not get these rulings.  They often argue that their product does not need one because its tax impacts are fairly straightforward or well established.  What happens if a Court doesn't agree?

A super fund trustee can't assume that ATO Product Rulings are only granted over good investments.  All of these rulings begin by saying that the ATO "does not sanction or guarantee this product.  Further, we give no assurance that the product is commercially viable, that charges are reasonable, appropriate or represent industry norms, or that projected returns will be achieved or are reasonably based."

Where would a small super fund trustee go to work out if a proposed transaction was okay from a super law perspective?

An obvious place to turn is legal or other sources of advice.  This can be very helpful.  But the advice is often only as good as the questions being asked and only as good as the knowledge of the person providing the advice.

Additional help may be near at hand.  By about July this year the Tax Office will begin issuing rulings from a super law perspective for small super funds.  There will be two types of rulings.  One will be for product and transaction structurers called "SMSF Product Advice".  The other will be for individual super funds looking for some guidance about their own circumstances called "SMSF Specific Advice".

These rulings will not be binding on the tax office.  In short it wants to reserve the right to change its mind but says it would not take adverse action if someone followed these rulings.

The ATO will be made public once the organization making the request has said that they would like it published.  It is unlikely that a product provider would want a ruling published if the ATO believes that their product has problems from a super law perspective.  Presumably those who have sought these rulings will want to advertise that they have been granted one.

In other news, the government has announced that it will reduce the automatic increases in Pay As You Go tax instalments that small enterprises including small super funds will have to pay in the 2009/10 income year.

Ordinarily the increase is 9% each year however the government has said that for 2009/10 it will only increase by 2%.  It is open to smaller taxpayers to decide how much they much PAYG they should pay the ATO but this is a dangerous game because if your estimate is only slightly wrong penalties apply.  As a result most small taxpayers simply accept what the ATO demand on each PAYG instalment notice.

"This reduction does not apply to taxpayers who calculate their instalments based on the instalment rate notified by the Australian Taxation Office. Their payments will automatically adjust when they apply the given rate to their actual income for the quarter," said the Treasurer in a Press Release.

This change has been made to assist smaller tax payers with cash flow issues caused by the drop off in economic activity.

Finally it is important for all small super fund trustees to understand the timing of when they can receive income payments.  The majority of Australian companies pay dividends in February, March, August and September.  Smaller amounts are paid in November and December.

It has been expected that income dividends paid this year would be much lower than previous years.  All the relevant data for March is unavailable but dividends paid during January and February 2009 for companies included in the S&P ASX 200 are down 23% on the same period in 2008.

Some companies are struggling but some companies are using the current market conditions to quietly write off some major capital expenditure.

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