In a recent speech, Alison Lendon, Deputy Commissioner Superannuation, spoke to a number of issues that affect super funds and their trustees and advisers. The following are excerpts:
Applying to the ATO for advice
If trustees of superannuation funds want a written explanation of the ATO’s view on how the super laws apply to their SMSF, they can apply for ‘SMSF specific advice’.
While this advice isn’t legally binding, it will provide certainty to trustees about the application of the super laws to their fund, and the fact that trustees acted in accordance with the advice would be an important factor in their favour. We can assist with this application process.
The most common topics the ATO is asked about for specific advice are:
- confirming when a property meets the requirements to be ‘business real property’, and working through the acquisition of business real property from related parties;
- understanding the limitations of investing in related unit trusts;
- what’s an ‘improvement’ or a ‘repair’ to property acquired under a limited recourse borrowing arrangement (LRBA);
- the acquisition of assets from related parties and low-interest loans for LRBAs; and
- requests about collectable and personal use assets since specific requirements regarding their storage and usage were introduced in 2011, especially regarding insurance and gold bullion.
Related party transfers
From 1 July 2013, new legislation will broaden the types of assets currently prohibited from being acquired from a related party, but will also provide more transparent exceptions whereby acquisitions will be permissible.
By way of example, the acquisition of ‘business real property’ will be prohibited unless acquired at market value as determined by a qualified independent valuer. Similarly, listed securities acquired from a related party will also be prohibited unless they are acquired in a way that is prescribed under the regulations. The legislation will also introduce a prohibition on the disposal of SMSF assets to a related party, unless similar exceptions are satisfied.
The ATO has warned trustees of self-managed superannuation funds (SMSFs) to be cautious when investing in property.
The ATO is concerned that people are using their SMSFs to invest in property without fully understanding their obligations under the law, or that some people are seeking to take advantage of certain types of arrangements.
The ATO is primarily concerned with arrangements where:
- an SMSF invests in a related unit trust by acquiring units in the trust, and the unit trust acquires property, but the arrangement breaches the superannuation compliance rules in some way, such as where the property is subjected to a mortgage, or is acquired from or rented to a related party, when it would otherwise be prohibited; and
- an SMSF enters into a Limited Recourse Borrowing Arrangement (LRBA) to acquire an asset, and the arrangement does not comply with the strict conditions that must be met for SMSFs that borrow.
In particular, these borrowings must generally be used to acquire a single asset (that the fund is not otherwise prohibited from acquiring; e.g., SMSFs are prohibited from acquiring residential property from a related party), and the asset acquired cannot be held directly by the SMSF but must be held by a separate ‘holding trustee’ (or ‘custodian’), solely for the benefit of the SMSF.
The ATO has also stated that:
- the trustee of the holding trust must be in existence, and the holding trust must be established, by the time the contract to acquire the asset is signed; and
- the SMSF cannot borrow to acquire a vacant block of land and then use the same borrowing to construct a house on the land.
According to the ATO:
“The fine details are important and trustees need to be sure that property is the right investment for their SMSF and that the arrangement is legal.”
“Some of these arrangements, if structured incorrectly, cannot simply be restructured or rectified. The only option may be to unwind the arrangement which could involve forced sale of assets at an inconvenient time. This could be very expensive for the fund with potential stamp duty and tax consequences.”
SMSFs that do not comply with the superannuation laws may also become ‘non-complying’ for tax purposes and, if the SMSF or the unit trust needs to dispose of the relevant property, they may incur a CGT liability, or the SMSF (and any other unitholders) may be required to include a capital gain in their assessable income if they need to redeem their units in the unit trust.
In addition, the ATO states that where arrangements are deliberately entered into to get around the law, the fund’s trustees may be disqualified, face civil penalties or even face criminal charges.