Top Superannuation Q&As - May 2015
by Knowledge Shop Editor, on 18/05/2015, 11:15
This month's top super Q&As live from the Knowledge Shop Help Desk:
- Using borrowed funds to develop
- Utilising the remainder of the non concessional cap when the bring forward has been triggered
- What happens with a tax refund for a wound up fund?
- Bringing property into a SMSF and accessing the small business CGT concessions
- What happens to preserved member balances when the member commences a TTR?
1. Using borrowed funds to develop
I have a client who owns a vacant residential block of land in their SMSF. The block was purchased outright with no borrowings and the client is now looking to build a house on the property to rent out once built.Is the client able to borrow the funds required for the build under a LRBA?
The rules under SIS s67A would not allow this.
The rules allow the fund to borrow to acquire an asset but not for the costs to improve an asset:
(a) The money is or has been applied for the acquisition of a single acquirable asset, including:
(b) Expenses incurred in connection with the borrowing or acquisition, or in maintaining or repairing the acquirable asset (but not expenses incurred in improving the acquirable asset)
2. Utilising the remainder of the non concessional cap when the bring forward has been triggered.
One of the members of the SMSF triggered the bring forward provision in 2012-13 by contributing $400,000.
As the non-concessional contribution caps have increased from $150,000 to $180,000 for the year 2014-15, does it mean that for the 3 year period i.e. 2013, 2014 & 2015 he has the following limit to contribute:
2013 - $150,000
2014 - $150,000
2015 - $180,000
Less : $ 400,000 -----already contributed
Balance cap limit = $80,000
Or, he can contribute only $50,000 i.e. $450000-$400,000 ?
The 3 year cap limit is "locked in" in the first year that the member exceeds their annual non-concessional contributions cap. So, if the member first exceeded the annual non-concessional cap in 2013 (when the cap was $150k), they have effectively locked in $450k as the 3 year bring forward limit for the 2013, 2014 and 2015 years. They do not have access to the additional $90k ($540k - $450k).
As per the ATO:
"Where a bring forward has been triggered, the two future years' entitlements are not indexed. For example, if you trigger the bring forward on 15 March 2014, your bring forward cap for the three years will be $450,000, even though the non-concessional contributions cap is changing to $180,000 in 2014-15"
3. What happens with a tax refund for a wound up fund?
I have clients who want to wind up their SMSF in the current 2015 year & roll into another fund. As this won’t be processed until after 1 July 2015, what happens if there is a tax refund once we complete the 2015 tax return?
It is our understanding that the last step in the wind up process is to close the SMSF bank account - you leave this open for any refund etc.
As per the ATO SMSF newsletter edition 22, if the only remaining transaction for a SMSF is a roll-over of an ATO refund, then an income tax return will not be required for the following year.
The ATO state that, because there is no money in the fund at the date of wound up (even though the tax refund is due), the financials and the financial area, and the member information area of the tax return should be nil for all areas so that you can click the button that the fund is wound up and what date.
You also need to ensure that you notify them in writing within 28 days of windup.
Once the tax refund is due, you roll the money to the member/s new funds and close the bank account.
No return is due in the following year.
4. Bringing property into a SMSF and accessing the small business CGT concessions
We have husband and wife clients who are both aged 71. They have been running a bakery business for the last 40 years from a property owned in a partnership structure. The bakery operates out of 50% of the floor space and the other 50% is rented to a non-related party. The building was purchased in 1994 for approx $500k and is currently valued at $1.2k.
They also own three blocks of land that have a few breeding cattle on them. The blocks of land have a combined value of approx $1.2k.
What do we need to look at to get the bakery property into a SMSF and access the small business CGT concessions?
What do we need to look at to get the three blocks of land into SMSF and access the small business CGT concessions?
1. In order to access the small business CGT concessions the clients will first need to pass either the $6m net asset value test or one of the small business entity tests. For example, one of the small business entity tests can be passed if the property is an asset of a partnership and the partnership is classified as a small business entity (i.e. Carrying on the business with aggregated annual turnover of less than $2m).
2. If at least one of the tests above can be satisfied then the key issue for the clients will be whether the properties can pass the active asset test.
An asset passes the active asset test if it has been used in a business carried on by the taxpayer (alone or in partnership), a connected entity or affiliate for at least half of its ownership period or for at least 7.5 years. Note that an asset is not active if its main use is to derive rental income (other than from a connected entity or affiliate).
When it comes to the bakery, the key issue is whether the property has been mainly used to derive rental income. This is a question of fact. The ATO indicates that you would look at the relative area of the property used in the rental activities versus the business activities, as well as looking at the relative amounts of income derived from the activities. If 50% of the property has been used in the business activities and 50% has been rented to unrelated parties then the main use of the property is likely to be determined with reference to the level of income derived by the activities. If the business activity has derived significantly higher levels of income than the rental activities then it may be possible to conclude that the property is an active asset.
When it comes to the other 3 blocks of land, the key issue will be determining whether they have actually been used in carrying on business activities. This will depend on whether the cattle breeding activities have amounted to a business activity for a sufficient period of time. This will really depend on the facts. The ATO provides detailed guidance on whether something can be classified as a primary production business in TR 97/11. It would be a good idea to work through the factors set out in the ruling in order to determine the likelihood that the clients have been operating a business from the land. If so, it should be possible to argue that the land is an active asset.
3. If the basic conditions above can be met then it would be a matter of working through the relevant concessions to see which can be applied. For example, as the clients are over 55 it may be possible to apply the 15 year exemption to completely disregard any capital gain made on disposal of some or all of the properties. The main conditions that would need to be satisfied are that the properties have been owned for at least 15 years and the disposal is in connection with the retirement of the individuals involved. If this exemption cannot apply then it would be a matter of working through the other concessions such as the active asset reduction, retirement exemption etc.
4. As the clients are 71 years of age, if they are planning on contributing the properties or funds to superannuation then it would be necessary to check that the clients have met the work test - that they have worked at least 40 hours over a 30 consecutive day period in the year of the contribution.
5. Whether either of the properties can actually be transferred into the SMSF would really depend on whether the properties can meet the business real property definition under SIS section 66:
The definition is:
"business real property " , in relation to an entity, means:
(a) any freehold or leasehold interest of the entity in real property; or
(b) any interest of the entity in Crown land, other than a leasehold interest, being an interest that is capable of assignment or transfer; or
(c) if another class of interest in relation to real property is prescribed by the regulations for the purposes of this paragraph--any interest belonging to that class that is held by the entity;
where the real property is used wholly and exclusively in one or more businesses (whether carried on by the entity or not), but does not include any interest held in the capacity of beneficiary of a trust estate.
So if the entire "bakery building" is being used in one or more business (whether those businesses are carried on by the member or not) then it may meet the definition of business real property.
In regards to the blocks of land, this same issue needs to be addressed. Is the client or someone else carrying on a business on these blocks of land? Are a few cattle akin to running a business?
You would need to review what is in fact going on on the land and if the land is being used wholly and exclusively in a business. If not, then the asset cannot be sold or transferred to the fund as this may be in breach of SIS s66.
6. Contribution caps and limits need to be taken into account if this is a transfer and not an asset sale to the fund.
5. What happens to preserved member balances when the member commences a TTR?
A fund member is about to commence a Transition to Retirement pension. The member’s balance is currently classified as Preserved. There is some confusion regarding the change in classification of the member balance. As the pension is TTR does the member balance stay classified as Preserved until they completely retire or meet another condition of release e.g. turn 65? Or, is the member balance required to be reclassified as Restricted Non-Preserved? Can you please clarify what, if any, member balance amounts need or should be classified as Restricted Non-Preserved?
When the client starts a TTR, the preservation will not change - it will remain as preserved until a further condition of release is met. Restricted non preserved (RNP) benefits are only relevant for pre 30 June 1999 benefits. That is, if a client did not have RNP benefits at 30 June 1999 they never will have going forward. These benefits came from employment arrangements in place before the preservation rules changed on 1 July 1999.