Top Superannuation Q&As - Sept 2015
by Knowledge Shop Editor, on 02/10/15 07:40
How good is your superannuation knowledge? This month's top superannuation Q&As, live from Knowledge Shop's help desk, demonstrate how much advisers really need to know - nothing is simple in super anymore:
- Is a shed an improvement to a property purchased with an LRBA?
- Using the CGT concessions to contribute the proceeds of a sale of business
- Minimum and maximum pension amounts for multiple member accounts
- Can business partners set up a unit trust and use their SMSFs to buy equipment for the business?
- Can an SMSF invest in a private company which is also the member's employer?
1. Is a shed an improvement to a property purchased with an LRBA?
We have a client that purchased a property via an LRBA arrangement and is now considering putting a shed on the property. The property is worth $1m and the shed is worth between $50,000 - $100,000. Would this constitute a different asset? Pursuant to SMSFR 2012/1, section 35 indicates a garden shed would be ok. Is this relative to the cost of the property and the cost of the shed?
It would seem that a shed costing between $50,000 - $100,000 would appear to be reasonable on a property worth $1m. Can you please advise whether you think this would constitute a different asset for the purposes of contravening the LRBA legislation?
This would really depend on what the specific requirements are of the client. I have set out some initial comments below:
An SMSF cannot borrow to improve an asset. This is prohibited under SIS s67A.
An SMSF can use its own funds to improve an asset that is held under a LRBA so long as the state of the asset - its functional use - does not change.
Another way of putting this is: "The single acquirable asset identified when the LRBA is put in place must continue to be the asset that is held on trust under that LRBA, unless its replacement is covered by section 67B. If the character of the asset as a whole has fundamentally changed, the exception under section 67A to the borrowing prohibition ceases to be satisfied from the time the alterations or additions are made to the asset. If the borrowing is maintained the trustee of the SMSF will contravene subsection 67(1)."
Paragraph 25 of the ruling you refer to (SMSFR 2012/1) states in the example for a farm on a single title:
"Each of the following additions is an improvement:
- a further set of cattle yards;
- a further bore, tank; windmill and trough;
- a further dam;
- a further shed;
- a further two kilometres of fencing."
It would therefore suggest that the SMSF could not borrow to fund the new shed as this would be an improvement.
Also if you refer to paragraph 35 of the ruling - Item 10: "The improvements listed in Column 3 of Table 1 at paragraph 25 of this Ruling - These improvements do not result in a different asset as the changes do not fundamentally change the character of the asset held under the LRBA."
This paragraph suggests that the addition of a further shed to the farm in paragraph 25 would not fundamentally change the asset - hence if the SMSF had its own resources to pay for this (NO BORROWINGS) then it may be allowed.
2. Using the CGT concessions to contribute the proceeds of a sale of business
My client sold her business this month. The company qualifies for the 15 year small business CGT exemption. The company sold the business and my clients are both 50% shareholders (with her husband).
She worked full time this year but salary sacrificed 100% of her salary to super, so has not received any salary for 2016 (she is 71 years old).
The company has received a $1.5 million capital gain. My client wishes to pay off debt of approx $600,000 and put $900,000 into super under the capital gains tax cap. Does she have only a 50% entitlement because of her shareholding ($750,000) and will then have to make a non-concessional contribution of $150,000? Her husband does not satisfy the work test and cannot contribute to superannuation.
Does she still pass the work test if she salary sacrifices 100% of her income into superannuation? She definitely does more than the required hours of work in the 30 day period.
1. If the company passes the conditions to apply the 15 year exemption then the entire capital gain made by the company can be disregarded. However, in order to ensure that the payment of the exempt amount to the shareholders is tax-free there are some conditions that need to be met under section 152-125 ITAA 1997. One of the conditions that needs to be met to ensure that the entire exempt capital gain is distributed tax-free to the individuals is that the payment to each individual does not exceed their stakeholder participation percentage in the company.
If the clients each have a 50% small business participation percentage in the company then the company would need to pay 50% of the exempt capital gain to each individual to ensure that the payments are tax-free.
If the client receives half of the exempt capital gain from the company and wants to contribute this to super under the CGT cap in section 292-100, then any additional contributions she chooses to make cannot be allocated to the CGT cap and would need to be made in connection with the other normal super contribution caps.
2. The work test requires "gain or reward". If the client has chosen to salary sacrifice this, then they should still meet the work test.
3. Minimum and maximum pension amounts for multiple member accounts
Regarding all clients that are in transition to retirement in their SMSFs, when calculating the members balance at 30/06/2015 to derive their min and max pensions for the 2015-16 financial year, is the member’s balance:
- The total of the pension account (as shown on the statement of financial position)? Or
- The total of the unrestricted, non-preserved amounts in both the pension and accumulation accounts?
We have recently had variances in how pensions have been calculated and wish to clear this up as there has been mention that only unrestricted non-preserved amounts can be drawn as a pension regardless if from accumulation or pension balances.
The minimum and maximum pension calculations are based on the PENSION balance at the commencement of the pension and then the pension balance on 1 July of each following year.
If the member has money left in accumulation account, these ARE NOT used when determining the pension amounts.
A member can commence a TTR pension when they obtain preservation age (currently 56 years old). These pensions can be commenced with either the members’ entire balance or a portion of their balance.
The member does not have to have unrestricted non-preserved benefits to commence a TTR - in fact, if the member had unrestricted non-preserved benefits in their account they could start a STANDARD pension instead of a TTR.
TTR Pensions can be commenced with preserved benefits.
4. Can business partners set up a unit trust and use their SMSFs to buy equipment for the business?
Two couples (husbands & wives) work in a medical practice together as business partners. Each couple contributes to their own SMSF (two SMSFs).
The couples want to set up a unit trust and buy equipment for the medical practice using money in the two SMSFs.
Can the unit trust then rent the equipment to the medical practice without breaching the related party rules etc.? I think they are still Part 8 associates.
If they truly are "business partners", and they, as individuals, are carrying on a partnership together (as defined under ITAA 1997 section 995-1) then these individuals may get caught as Part 8 associates (related parties).
As per SIS s70B, a part 8 associates includes:
"(c) a partner of the primary entity or a partnership in which the primary entity is a partner;
(d) if a partner of the primary entity is an individual--the spouse or a child of that individual;
(a) an association of persons (other than a company or a limited partnership) carrying on business as partners or in receipt of ordinary income or statutory income jointly;"
If they are therefore partners and hence related parties, you would need to add together both their SMSF interests in the trust to see if it is a related trust of either / both SMSFs; If the trust is controlled by the members of the SMSF alone OR together with their Part 8 associates.
"Control of trust
(2) For the purposes of sections 70B, 70C and 70D, an entity controls a trust if:
(a) a group in relation to the entity has a fixed entitlement to more than 50% of the capital or income of the trust; or
(b) the trustee of the trust, or a majority of the trustees of the trust, is accustomed or under an obligation (whether formal or informal), or might reasonably be expected, to act in accordance with the directions, instructions or wishes of a group in relation to the entity (whether those directions, instructions or wishes are, or might reasonably be expected to be, communicated directly or through interposed companies, partnerships or trusts); or
(c) a group in relation to the entity is able to remove or appoint the trustee, or a majority of the trustees, of the trust.
Group in relation to an entity
(3) For the purposes of subsection (2):
"group", in relation to an entity, means:
(a) the entity acting alone; or
(b) a Part 8 associate of the entity acting alone; or
(c) the entity and one or more Part 8 associates of the entity acting together; or
(d) 2 or more Part 8 associates of the entity acting together."
So, if they are therefore partners and hence related parties, then the trust would be a related trust of both SMSFs and will therefore get caught as an in house asset. The exemption given to the in-house assets test under SIS Reg 13.22C would NOT be available as there are assets of the trust leased to a related party (business) that are not business real property:
"(c) the company, or a trustee of the unit trust, is not a party to a lease arrangement with a related party of the superannuation fund, unless the lease arrangement:
(i) is legally binding; and
ii) relates to business real property;"
5. Can an SMSF invest in a private company which is also the member's employer?
Can an SMSF invest in a private company which is also their employer?
The private company has 100+ shareholders.
The member is not a director of the company; they’re an employee of the private company the SMSF wants to invest in.
The member will be purchasing the shares from a fresh allotment of capital from the company.
This may be possible. Some things to check include:
- The funds investment strategy: what it allows etc. This may need to be amended first.
- The funds trust deed: what it allows etc.
- That the employer is not a standard employer sponsor: check deed and associated paperwork in the fund to make sure that the employer has not been registered / signed up to be a standard employer sponsor. If there is such paperwork then any investment in that employer entity will be an in house asset (as the employer would be classified as a related party). If no such arrangement exists then the employer would not be a related party and hence the investment would not be an in house asset.
An employer who contributes to the fund under an agreement between the member and the employer is referred to as an employer sponsor and is not a related party.
An employer who contributes to the fund under an agreement between the employer and the trustee is referred to as a standard employer sponsor and is a related party.
We assume that the SMSF alone or together with the funds related parties do not have more than 50% of the voting rights and do not otherwise control the company - refer to SIS s70E(1).