This month's top superannuation Q&As live from the Knowledge Shop Help Desk:
- Property flipping and renovating inside an SMSF
- Treatment of recontributions
- Tax treatment of contribution splitting for the receiving spouse
- Segregating a property asset between SMSF members
- When is an actuarial certificate necessary post 1 July 2017?
- The pooled approach and transitional CGT relief for pensions in excess of $1.6m
- The treatment of a SMSF in excess of the $1.6million Transfer balance cap.
1. Property flipping and renovating inside an SMSF
I have a client asking if they can buy property in their superannuation fund, renovate it themselves, then either rent it out or sell it for profit. They mentioned their friend’s accountant said it can be done and a lot of their clients do it but to me it just looks like an area fraught with danger.
Firstly, the fund cannot use borrowing for this as LRBA's demand that it doesn't change the characteristics of the asset, whereby renovating the property would significantly change this. Can you confirm if this is correct?
They would also not be able to get any personal use or enjoyment from this asset, so at no stage when the property is owned by the superannuation fund could they live in the property or stay on the land, again can you please confirm if you believe this to be correct.
If the clients do the renovations themselves, do they need to be reimbursed for labour costs from the superannuation fund?
Are there any other main concerns that you would raise? And as an overall, do you believe that that can be done inside superannuation?
There are a number of issues to consider with this and everything that you have set out is valid and would need to be adhered to.
There are issues with the payment for services provided to a SMSF. If the client is the trustee of the fund, then arguably they should only be paid for services that are provided that align with the SIS s17B rules. We suggest that you refer to these in full.
Any such payment would need to be at arm’s length - IF ALLOWED - as per the SIS s17B rules. If the SIS s17B rules cannot be met, the client should not be paid for the services and we suggest should not carry these out.
TR 2010/1 should also be reviewed. This suggests that if there is a value shifting outcome; where the funds’ assets are increased because of the renovation, then there could be a deemed contribution.
There may also be an issue if the related party provides all the building materials necessary to carry out the project; the main issue being the prohibition on the SMSF acquiring an asset from a related party under SIS s66.
As per another ATO ruling SMSFR 2010/1, the following is set out:
"Performance of a service
If a trustee or investment manager enters into a contract with a related party entitling the SMSF to the performance of a service by the related party, the performance of that service is the substance of the transaction and not any rights that the SMSF might also acquire to have that service performed. Therefore, the acquisition of the performance of a service does not contravene subsection 66(1).
If goods or materials that are insignificant in value and function are provided to an SMSF as part of a service it is the Commissioner's view that it remains the performance of a service only. If, however, goods or materials are provided to the SMSF that are not insignificant in value and function there is an acquisition of assets (being the goods or materials). See Examples 5 and 6 (paragraphs 57 to 60), Appendix 1 of this Ruling.
Example 6 - performance of a service - goods not insignificant in value and function
The following examples illustrate the performance of a service for the SMSF along with the provision of assets that are not insignificant in value and function.
A member of an SMSF buys and installs ducted air-conditioning in a rental property owned by the SMSF. An asset is acquired as the ducted air-conditioning components are not insignificant in value and function.
A member of an SMSF buys all necessary building materials and builds a house in situ on land owned by the SMSF. The member does some of the building work and also pays contractors to do some of the building work. A service is performed for the SMSF and assets are acquired from the member as the building materials are not insignificant in value and function.
Subsection 66(1) is contravened in each of the above circumstances..."
In December 2010, the National Tax Liaison Group (NTLG) Super Sub group meeting with the ATO stated its views on SMSFs and related party builders.
In the minutes, the ATO states that in cases where an SMSF engages a related party to construct a building on land owned by the SMSF, the related party must provide building services only, and not any materials to avoid breaching section 66 of the SIS Act.
In some cases, there may be the ability to include an 'agency' clause in the building contract whereby the related party builder sources the required materials to carry out the work but acquires these as an agent for the trustees of the SMSF - the related party never becomes the legal owner of these materials. You may want to seek specific advice around the above issues.
It would be our view that any arrangement with a related party should be conducted on arm’s length terms and evidence should be maintained to show that this has occurred. Issues can arise under the contribution rules if the capital value of fund is increased - such as improving an asset of the fund - where this is done to benefit one or all members.
Please refer to TR 2010/1 for further guidance.
2. Treatment of recontributions
On the 23/06/2017, a member withdrew $300,000 and re-contributed that amount as a non-concessional contribution.
She is 60 and met a condition of release (retired).
The accountant has treated the withdrawal amount as the following:
- Lump Sum withdrawal of $300,000 from Accumulation Account. Tax-free as there are no untaxed elements.
- Non-concessional contribution of $300,000 to Accumulation Account.
Is this correct? Or does this original $300,000 need to be rolled into a Pension Account and then withdraw the lump sum from this account?
If the accumulation account holds unrestricted non-preserved benefits - which it arguably would if the client is retired, then the client can access these benefits. The client does not necessarily need to commence a pension to access benefits.
Also check that the trust deed allows lump sum payments.
3. Tax treatment of contribution splitting for the receiving spouse
Can you please advise on the treatment of Spouse Contribution Splitting components to the receiving spouse? Is it a taxable or tax-free component?
The splittable amount would be from the taxable component and would remain the same.
It is our understanding that these are taken up as contributions for the member who was the initial recipient of the contribution - not the spouse who then receives the amount under the splitting arrangement.
As per the ATO:
"When a contributions-splitting super benefit is rolled over or transferred to another super entity, you must provide a statement to that other entity within seven days of making the payment. When completing the statement note that, for a contributions-splitting super benefit:
- the 'contributions amounts' (question 15 on the RBS form) are always nil – the contributions made are reported for your member not for their spouse
- the 'rollover amount' (question 13) is always of a taxable component, never tax free – only contributions making up this component are splittable."
If the splitting is within the same fund, then the above treatment / assessment against the caps should be the same.
- It will not be a non-concessional contribution for the wife. The amount split to the wife's account is not a non-concessional OR a concessional contribution. "the contributions made are reported for (the first) member not for their spouse " who receives the amount after is has been split to them.
- It is taken up as contributions for the member who was the initial recipient of the contribution - not the spouse who then receives the amount under the splitting arrangement.
- The amount is assessed as a contribution for the husband and forms part of his cap - NOT the wife's.
- Splittable contributions only include concessional contributions, so taxable component.
4. Segregating a property asset between SMSF members
My client is in a fund with his wife and two children. We understand the segregation of assets within a fund for investment purposes but not tax purposes.
Can an asset be segregated to more than one member if their member balances permit i.e., 50% to Mum and 50% to Dad? Our software allows for the asset to be split between the two however we thought that it was unable to occur.
My client and his wife are purchasing a property, which they would like segregated to their member accounts and not their children’s. Is this possible?
Segregating or identifying assets for investment purposes (member investment strategies) is still allowed post 1 July 2017. It would be important to check the funds trust deed to make sure that this is allowed; that it allows assets to be held for different members or class of members.
It is our understanding that an asset could be identified as being held for more than one member; again, so long as the deed allows. As per our understanding, one asset could not be seen to be both a segregated current pension asset and also a segregated non-current pension asset - it has to be one or the other.
5. When is an actuarial certificate necessary post 1 July 2017?
Our client has a fund 100% in pension phase for the 2017 year and needs to commute the pension on 30 June 2017 to comply with the $1.6 million transfer balance cap. In accordance with the new SMSF changes from 1 July 2017, do we still need to request the actuarial certificate for the day the fund will be in accumulation phase?
Do we need to request the actuarial certificate even when the actuarial certificate provider will issue the actuarial certificate with 100% exempt income percentage (because of rounding off from 99.85%)?
Our understanding is that if the fund was entirely in pension phase from 1 July 2016 until sometime just before 1 July 2017, then the fund trustees would claim Exempt Current Pension Income (ECPI) based on the segregated asset method for the income received by the fund during this period.
Keep in mind that under the segregated asset approach, capital gains and losses are disregarded.
So any income received when the fund is 100% in pension phase - so from 1 July 16 to 29 June 217 - would be exempt (100%).
If the trustees move an amount of money back to accumulation phase immediately before 1 July – for example on 30 June (or anther date) then the fund would be seen to be unsegregated / pooled on and from that date - even if only for one day. If the trustees want to claim ECPI for income received whilst unsegregated / pooled - even if only one day, then the ATO view seems to be that they will need to obtain an actuarial certificate that covers income received during that period, again even if only one day.
The above approach is our understanding of the ATO view for ECPI calculations. This may differ from the process that has been used by many accountants and administrators in the past, that in many cases - where an actuarial certificate is obtained, that the actuarial % may have actually been applied to all the income received over the entire year even when segregation may have automatically applied. Technically not correct (as per the ATO).
From what we have seen recently, it seems that the ATO is not applying compliance resources to review if the Trustees have applied the actuarial % to ALL income for the 2016-17 financial year even if the fund was entirely in pension phase for some of the year, BUT this "lenience" seems to only be for the 2017 financial year - not later years.
Keep in mind that, as per our understanding, the fund trustees are not compelled to obtain an actuarial certificate if they are not claiming ECPI for a period - for instance where no (or very little) income is received for that period as the cost may outweigh the tax benefit the fund receives. In some cases, a SMSF may not actually receive income for that short time. However income is usually received on that day from assets such as managed funds and cash / fixed interest etc.
"We have heard that trustees are concerned about being required to obtain an actuarial certificate for a part of the year when they switch from using the segregated method to the proportionate method in preparation for the changes. This is especially significant where they are only using the proportionate method for a short period – perhaps only for one day.
I want to make it clear that a SMSF trustee does not have a regulatory obligation to get an actuarial certificate. They do need the actuarial certificate to support their claim for exempt current pension income (ECPI) for that period for income tax purposes.
So if the SMSF claims ECPI under the segregated method for the entire year apart from one day, the trustee should determine whether the cost of obtaining a certificate outweighs the benefit of exempting part of that remaining day’s income."
The following has been taken from ‘Superannuation heading towards July 2017’ an article written by James O'Halloran - from the ATO:
"Media suggestions that you may not need to obtain an actuarial certificate to claim ECPI using the proportionate (unsegregated) method if you are only using this method for a short amount of time.
I want to stress that actuarial certificates are required to claim ECPI for income tax purposes for any period that the SMSF uses the proportionate method.
With an increasing number of SMSFs likely to be switching to the proportionate method in order to comply with the super changes, this topic has been of high interest.
Many of these funds will only be using this method for a very short period of time during the 2016-17 financial year. This requirement for an actuarial certificate remains irrespective of this short duration.
Based on this, we suggest trustees should determine if the fund has any income in the relevant period and if it does, you should consider whether the cost of obtaining a certificate outweighs the benefit of exempting part of that period’s income.
A trustee may decide not to claim ECPI on that income, in which case they will not be required to obtain an actuarial certificate.
However, I can confirm that the ATO will not allocate compliance resources to review actuarial calculations where an actuarial certificate obtained by an SMSF is for the full 2016-17 year, instead of the shorter period within the year that the SMSF is using the proportionate method.
Provided that the actuarial certificate includes the period of the year the SMSF is unsegregated, the trustee can rely on the actuarial certificate."
6. The pooled approach and transitional CGT relief for pensions in excess of $1.6m
We have an SMSF with four members; mum, dad, son and daughter with the following accounts:
- Mum – 4 account based pensions and 1 market linked pensions (100% in pension mode)
- Dad – 3 account based pensions and 1 market linked pension (100% in pension mode)
- Son – 100% accumulation phase
- Daughter – 100% accumulation phase
Up until 30 June, Mum’s total pension accounts totalled $6m.
Up until 30 June, Dad’s total pension accounts totalled $4.5m.
Son and daughter both have around $450k each in accumulation phase.
The fund does not have segregated assets and has always used the proportional method.
My question is in relation to the transitional CGT relief for funds that have had pension accounts in excess of the $1.6m cap. Can you please confirm that the fund would be entitled to apply the transitional CGT relief to ALL of its assets? Based on the market values at 30 June the total capital gains would be in excess of $3m.
The fund has carried forward capital losses of around $920k. How are these treated under the CGT transitional relief rules? Will they be applied to the capital gains before applying the relief?
If the fund does not elect to use the CGT relief and the deemed capital gains are assessed in the 2017 tax return, we assume the percentage applicable to the son and daughter will be taxable in the 2017 tax return. How will the carried forward losses be apportioned on this capital gain?
If there are any other issues to consider.
From what you have set out, the SMSF trustees have been using the POOLED approach and continued to use the POOLED approach from 9/11/16 - 30/6/17.
Based on this and our understanding of the rules, the Trustees can use the transitional CGT relief rules for any or all the funds’ assets; so long as:
- The asset was held in the fund as at 9/11/16
- Is still held as at 30/6/17
- The trustees take steps to comply with the $1.6m transfer balance cap
- Make the required election in the funds 2017 return
If the trustees apply the transitional relief but do not defer the notional gains that arise then it is our understanding that the 2017 deemed capital gains are offset against current year capital losses, then with carried forward capital losses. They would then apply the general CGT discount (1/3rd) to the amount remaining and then the fund's ECPI is applied to determine the amount that is subject to tax in the 2017 year.
If the trustees apply the transitional relief and choose to defer any notional gains that arise then you would not apply any capital losses against the notional gains that arise in the 2017 year. You would however apply the CGT discount (if available) and the fund's ECPI to determine the amount that is deferred and carried over until the relevant asset is sold.
7. The treatment of a SMSF in excess of the $1.6million Transfer balance cap
Our client has an SMSF of which he is the only member where the balance is in excess of $1.6 million. As at June 2016 he is 64 years old but has not commenced a pension.
Do we need to take any action in this 2017 tax return to:
- Segregate the excess over $1.6m in financials and/or ITR; and
- In relation to establishing a cost base on assets up to $1.6m?
As the member is entirely in accumulation phase as at 30 June 2017, they are not affected by the super reforms (with regards to the 1.6m Transfer balance cap), hence there is no need to segregate and the cost bases cannot be reset. The tax return should then be prepared as usual.
More details can be found in the ATO’s Law Companion Guidelines.