The draft ruling confirms that the ATO believes that a:

superannuation income stream ceases as soon as the member in receipt of the superannuation income stream dies, unless a dependent beneficiary of the deceased is automatically entitled under the superannuation fund’s deed, or the rules of the superannuation income stream, to receive an income stream on the death of the member.

THe consequences of this is that any fund investment sold at at profit to fund the payment of death benefits to the member’s benficiaries with be taxable capital gains for the fund.

This ruling will not comes as a surprise as many commentators have reached the same interpretation of the law.

One way to avoid or mininise this additional tax sting on death is for the trustees to try to avoid building up large unrealised capital gains. Where the fund invests in listed investments such as shares, the trustees could regularly sell growing shares and repurchase them at the same price. This would realise the capital gain while the fund is still tax exempt.

Feedback
on the system from large funds has been very positive, with the new
system reducing rollover processing times and removing the need to
request further documentation from members to verify SMSF membership
(for example, certified copies of SMSF trust deeds). The new system also
provides confidence that a rollover request to an SMSF is legitimateThis
new service has obvious benefits for SMSF trustees wishing to roll over
into their SMSF from large funds.

However, SMSF trustees who have not
kept up to date with their administrative obligations (for example,
informing the ATO of any changes to their SMSF membership) may find that they
will not be able to roll over to their SMSF.

SMSF
trustees are required under the super regulations to inform us of any
changes to their SMSF within 28 days of the change. This includes
changes to:

• the name of the SMSF or corporate trustee
• addresses (including postal, registered and addresses for the serving of notices)
• trustees, directors and membership.

Where a large super fund does not have a successful member match for a
rollover request, they will direct their member to contact the ATO.

The major revenue measures concerning superannuation proposed in the Budget included:

• Excess contributions tax: The Government will
  provide eligible individuals who breach the concessional contributions cap by
  up to $10,000 with a one-off option to request that these excess contributions
  be refunded to them. This new refund option will only apply to first time
  breaches from 1 July 2011.
• Minimum pension drawdowns: The minimum annual
  payment amounts for pensions and annuities will be reduced by 25% for 2011-12
  and will return to normal in 2012-13. In this respect, the Government will
  begin to phase out the 50% pension drawdown relief that has been provided for
  2008-09, 2009-10 and 2010-11 financial years.
• SMSF regulation: To implement the range of
  “Stronger Super” reforms to the self-managed superannuation fund (SMSF)
  sector, the Government will provide $40.2m to the Tax Office and $8.4m to ASIC
  from 2010-11 to 2014-15. The cost of this measure will be offset by an
  increase to the SMSF levy from $150 to $180 with effect from the 2010-11
  income year and the introduction of SMSF auditor registration fees from 1 July
  2012.
• Concessional contributions for those 50 and over:
  The Government will set the proposed higher concessional contributions
  cap at $25,000 above the general concessional cap for eligible individuals
  aged 50 and over with total superannuation balances of less than $500,000.
• Other measures: Other superannuation measures
  announced concerned: SMSF trustee-director a parent or guardian of minor;
  superannuation co-contribution indexation freeze extended; greater use of TFNs
  for superannuation; and superannuation on payslips.

And finally, the annual fees for having your own fund , the supervisory levy, will increase from $150 to $180

The respondent established an SMSF in August 2005 with a rollover payment of $40,032. Shortly thereafter, he began withdrawing amounts to meet pressing financial needs. In total there were 41 illegal early release payments totalling $64,000 during 2006 to 2010. The applicant, in his capacity as a Deputy Commissioner of Taxation (Superannuation), applied to the Federal Court to impose a civil penalty on the trustee under s 196 of the SIS Act.

The Court held that the trustee had contravened ss 62(1) (sole purpose test) and 65(1)(b) (financial assistance to member) of the SIS Act through at least 30 unauthorised withdrawals. The Court imposed a civil penalty of $12,500, after finding that the contraventions were “serious”. However, the Court agreed to treat the contraventions as a single contravening course of conduct and took into account the respondent’s admissions and cooperative conduct. (Olesen v MacLeod [2011] FCA 229, Federal Court, Barker J, 17 March 2011.)

The details of the case show that the trustee was alerted by the fund’s auditor in 2007 that the withdrawals made in 2006 and 2007 were a contravention of the SIS Act. The ATO audited the fund in respect of 2008 and found further breaches yet the trustee continued to make illegal withdrawals in 2009 and 2010. I believe he got off very lightly.

Partners Superannuation Services research has revealed 11.25 per cent of self managed superannuation funds (SMSFs) breached in-house assets limitations during 2008.

Under the Superannuation Industry Supervision (SIS) Act, an SMSF is not allowed to hold in-house assets that total more than 5 per cent of the value of the fund.

In-house assets include loans to, investments in, or the lease of equipment to businesses owned by the fund or those associated with the fund.

The rule had presented itself as a problem to SMSF trustees in the past, with 10 per cent of funds transgressing in 2007.

However, one of the main reasons for the breaches of the limit last year was the fall in investment markets.

“For example, if your fund previously had $100,000 worth of assets, a 5 per cent loan would be $5000. However, should the value fall to $50,000, $5000 would in effect translate to 10 per cent,” Partner Superannuation Services director Martin Murden said.

Despite these breaches SMSFs were improving their compliance track records, according to Murden.

“Clearly fund trustees are making a much greater effort to truly understand what is expected of them in their roles,” he said.

“They’re reading the literature which is now readily available through the Australian Tax Office and they’re attending seminars … which aim at informing and educating trustees about their rights and obligations.”

The survey was based on a sample size of over 500 SMSFs audited during 2008.

They will be covering information that is relevant to SMSFs.

Stephen Hall, Superannuation partner at Thomson Hall recommends that all trustees attend.

Topics covered will include:

• Tax obligations for SMSFs, and
• Recent changes to super and how these changes relate to SMSFs.
• What is a SMSF?
• Trustee obligations
• Investment restrictions
• Contribution and benefit payment rules
• Recent changes to super
• Our compliance program
• Where to go for help

Also, new topics that the ATO will be covering in these seminars include:

• SMSF annual return
• Instalment warrants (which are a way that super funds may borrow money for the purchase of investment assets)
• In-house asset transitional arrangements
• Trust deeds
• Crystallisation calculator
• Benefits calculator

Details of locations, dates and registration information are at the ATO Super website

On 15 October 2007 the Federal Court declared that the trustees for the Axent Group self managed superannuation fund (SMSF) had breached superannuation legislation by selling a property belonging to the fund and using the proceeds of nearly $150,000 to pay a private debt.

The couple had accessed assets in the superannuation fund before meeting any conditions of release such as retirement or reaching preservation age.

Deputy Commissioner Raelene Vivian said the action was part of an increased compliance focus on SMSFs by the Tax Office.

“The main purpose of SMSFs is to provide for retirement. Trustees who access their superannuation without meeting a condition of release are breaking the law and risking their retirement savings.

“The Tax Office provides a range of educational material to ensure trustees are aware of their roles and responsibilities.

“It’s vital SMSF trustees make sure they understand their legal and regulatory obligations as they are legally responsible for managing their fund.

“SMSFs which do not comply with the legislation are at risk of prosecution, penalties and additional tax,“ Ms Vivian said.

ATO press release
For more information about SMSFs, whether they are right for you and an SMSF checklist visit www.ato.gov.au or contact Stephen Hall or Gavin Thomson at Thomson Hall

Many funds had, for years,been investing in instalment warrants until the Australian Taxation determined that some warrants constituted a borrowing by the fund.

Instalment warrants are now an eligible form of gearing for an SMSF, following an amendment to the Superannuation Industry (Supervision) Act that allows a gearing exception to the ban.

The amendment became effective late last month.

The asset must be one that the super fund trustee is permitted to acquire and hold directly.

The gearing exception covers unlisted and listed instalment warrants and certain geared acquisitions such as real estate.

It means SMSF trustees will potentially be able to borrow far more in order to buy shares or lifestyle assets, such as boats, cars, artwork and property.

An instalment warrant allows the buyer to pay an initial fee to acquire an underlying asset with an option to pay a second fee to acquire the legal title of that asset.

Before 1999, SMSFs could borrow through a unit trust arrangement, but Australia’s then prime minister, Paul Keating, overhauled the provision.

Townsends Business and Corporate Lawyers special counsel Michael Hallinan said it was possible the Federal Government had not realised the scope of the legislation.

Speaking at a seminar on October 17, Hallinan said the impact would go far beyond the title “investment by superannuation funds in instalment warrants”.

“Arrangements other than instalment warrants will be included in the borrowing provision,” Hallinan said.

Hallinan said lenders would have no recourse to sue an SMSF trustee for defaulting on the loan arrangement, for example, if a trustee borrowed to buy property.

“If a super fund defaults on the loan, the lender will use the mortgage to obtain the house,” he said.

Townsends principal Peter Townsend said SMSFs that could not afford to buy into the tough Sydney property market would now be able to.

Townsend said “Once the rubber hits the road, there’s going to be enormous interest in this,” .

Hallinan said the because the arrangements were more complex than normal gearing, they were likely to involve more parties and higher fees.