Top Super Q&As - Feb 2016
by Knowledge Shop Editor, on 15/02/16 11:54
This month's top super Q&As live from the Knowledge Shop Help Desk:
- Value of Business Real Property Transferred into a SMSF
- Tax implications on the Death of a Member
- Steps to Administer Excess Non-Concessional Contributions
- Acquiring an Investment Property through an SMSF from A Related Party Developer
- Exceeding the Maximum Transition to Retirement Pension Payment
1. Value of Business Real Property Transferred into a SMSF
I have a client who is looking to transfer their business real property into their SMSF. In terms of the dollar value that is used for the disposal price (for capital gains tax purposes), how is this value determined? Does there need to be a valuation performed? If so, by who? (e.g. a real estate agent)
The CGT provisions contain market value substitution rules that can apply when transactions are made for no consideration or where the parties are not dealing at arm’s length (e.g. section 116-30 ITAA 1997). The CGT rules do not generally contain any specific rules when it comes to arriving at the market value of an asset. The taxpayer can choose to obtain a valuation from a professional valuer or work out the value on their own. The key issue is ensuring that the valuation is based on independent and objective data. Also, the valuation should take into account the highest and best use of the property (TD 97/1). See the ATO guide, How do you obtain the market value.
See also the ATO’s guidelines for market values for property.
From a SIS perspective, the acquisition from the related party can only be carried out if it is done at market value. Again there is nothing set out specifically on how this is arrived at - BUT it is the trustees’ responsibility to ensure it is done at market value.
We also suggest that you refer to the ATO’s SMSF valuation guidelines.
2. Tax implications on the Death of a Member
I have a client who recently passed away. His son and daughter are the beneficiaries of his estate. We are due to wind up the SMSF and distribute the money according to his Will. What are the tax implications of this distribution to his children?
Before you do anything you should make sure that the provisions contained in the SMSF trust deed are adhered to; such as death benefit nominations, reversionary pensions etc. As I am sure you are aware, super benefits do not automatically form part of the deceased estate so it may be that the clients Will is not relevant. Legal advice should be sought on this.
Section 302-10 ITAA 1997 will need to be taken into account where the trustee of a deceased estate receives a superannuation death benefit in their capacity as trustee. If the section applies then it is necessary to determine whether death benefit dependants of the deceased have or will be expected to benefit from the payment.
If the beneficiaries are not death benefit dependants of the deceased then the payment is taxed in the hands of the trustee of the estate in the same way that it would be if it had been paid to a person who was not a death benefits dependant of the deceased. Also, the benefit is treated as income to which no beneficiary is presently entitled regardless of whether the amount is subsequently paid to the beneficiaries.
If the beneficiaries of the estate are all non-dependants then the tax treatment of the death benefit payment should be as follows under section 302-140 and section 302-145:
- The tax free component (if any) is non-assessable non-exempt income and should not need to be reported on the tax return for the deceased estate;
- The taxable component of the payment is included in the assessable income of the estate;
- The trustee of the estate should be entitled to a tax offset to ensure that the rate of tax paid on the element taxed in the fund is capped at 15%; and
- The trustee of the estate should be entitled to a tax offset to ensure that the rate of tax paid on the element untaxed in the fund is capped at 30%.
The trustee of the deceased estate should not be subject to the Medicare levy.
We have assumed that the beneficiaries are adult children and not dependents of the deceased.
When amounts are actually distributed to the beneficiaries they should not report these amounts on their tax returns as the tax has already been dealt with through the estate.
3. Steps to Administer Excess Non-Concessional Contributions
Our client has a SMSF and is the sole member of the fund. She has made excess non-contributions of $40K in 2015 financial year. She has already used the bring forward rule from the 2013 financial year.
Q1. Would you please advise the administration steps for the Trustee and client personally if the client chose to release contributions above the non-concessional cap?
Q2. Assuming the fund has made a total income of $40,000, deductions of $7,000, so its taxable income is $33,000. Will the answer be different if the fund has made a total income of $40,000, exempt pension income of $35,000, deductions of $7,000, so taxable income is NIL.
Q1. The main issue is that these amounts are not withdrawn until the member has been given authority to do so - usually by way of a release authority by the ATO.
The fund should report all the contributions that are received.
The ATO will then issue a determination of excess contributions. Your client can object to this if there are grounds.
The ATO notice will set out how much is excess contributions and the deemed earnings on these excess contributions.
If the client elects to have the excess NCC refunded, they must also access the deemed earnings on the excess contributions. The earnings will be added to the individuals’ assessable income. Note that the fund will only release up to 85% of the deemed earnings as these amounts will have been included as income for the fund and taxed accordingly. However, the ATO will include 100% of the earnings in the individuals I return with a 15% non refundable tax offset.
If the member DOES NOT use the refund option then the excess contributions would be taxed in the fund at the top marginal rate (as has occurred in the past).
As per the explanatory memorandum:
- A notice of excess non-concessional contributions determination is issued by the Commissioner to the taxpayer that sets out the amount of excess contributions, the earnings on these contributions and the total of these two amounts.
- The member can then elect to:
- Release the total amount stated in the determination (the excess amount plus 85% of the associated earnings); or
- Not release any amount because they no longer have any superannuation; or
- Not release any amount for another reason (earnings will not be included in assessable income but excess non-concessional contributions tax will apply).
- This election must be given in the approved form within 60 days of the date of issue of the determination and must state the fund or funds from which the amounts will be released and how much from each fund.
- If an election is not made, the Commissioner will issue an assessment to the individual for excess non-concessional contributions tax
- The Commissioner will then issue a release authority (or authorities if multiple funds) to the funds nominated in the election in respect of those excess contributions (and earnings).
- The fund must then pay to the individual the lesser of the amount set out in the authority and the maximum amounts that can be released from the fund within 21 days of the issue of the release authority or a longer period where allowed.
- If the member holds multiple interests in the fund, the fund (with direction from the member) can determine from which interest the money will be released.
- The fund must then notify the Commissioner in the approved form of any amounts that have been released or unable to be released. This must be done within 21 days of the date of the release form.
- The fund must also advise the member of the amount released within 21 days of the date of the release form. Penalties apply if this is not done.
- Where an amount is (can) not be released from the nominated fund, the Commissioner will notify the member and ask for a further election to be made within 60 days.
Q2. The deemed earnings are determined by the ATO based on a formula that averages the GIC rate over 12 months (4 quarters). See General Interest Charge rates
The ATO notice of excess non-concessional contributions will set out the amount of the excess NCC and the deemed earnings.
The ATO website sets out:
What are associated earnings?
The associated earnings amount is to recognise that your excess non-concessional (after-tax) contributions amount has benefited from investment in your superannuation fund.
How are the associated earnings calculated?
The associated earnings are calculated using three key elements:
- The excess non-concessional amount – the non-concessional contributions amount above your cap
- The associated earnings rate – the rate used to calculate associated earnings is the average of the general interest charge rates for the four quarters of the relevant financial year in which the excess non-concessional contributions were made
- The associated earnings period – the period used to calculate associated earnings is from 1 July of the financial year in which the excess contributions were made and ends on the date of the original excess non-concessional contributions determination letter.
The associated earnings rate is applied on a daily compounding basis to the excess non-concessional amount for the length of the associated earnings period.
What is the associated earnings rate?
The rates for the following financial years are:
2013-14 - 9.66%
2014-15 - 9.61%
4. Acquiring an Investment Property through an SMSF from A Related Party Developer
An SMSF has been set up and the fund wishes to acquire an investment unit.
The block of units has been constructed by a development company that one of the members of the fund is a director and shareholder of.
My view is that the fund cannot acquire this as it is a related party situation. Please review and confirm.
If the company is sufficiently influenced by or a majority voting interest is held by the members of the fund or their related parties / part 8 associates, then the asset would usually need to be business real property in order for the SMSF to be allowed to acquire that asset.
Refer to SIS Section 70E(1) to determine if the company is a related company:
Having said that, if the company is in the business of developing property, it could be that the asset is in fact business real property. As per SIS s66:
"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."
Further to this, as per the ATO ruling on business real property - SMSFR 2009/1:
Example 37: Land development
366. Trevor is a land developer whose business involves purchasing land for development, obtaining council approvals, hiring contractors, building, selling.
367. Trevor purchases land for development and obtains approval to build seven units on the land.
368. Trevor is a member and trustee of an SMSF. As trustee of his SMSF he wishes to purchase one of the units.
369. Taking into account the use of the property in Trevor's land development business at the time surrounding the purchase, the units will meet the requirements of the business use test if purchased:
- off the plan before any activity occurs on the land;
- after construction has commenced;
- after the selected unit reaches lockup;
- after all units have been completely finished but the landscaping is in progress;
- after the entire development has been completed and the units are being actively marketed;
- after the units have been completed for 2 years and the remaining units have been sold but one unit remains and was rented to an unrelated party at market rates; and
- one unit used as a display home.
370. At each stage above, the units are being used wholly and exclusively in Trevor's land development business and will therefore meet the requirement of the business real property definition. In circumstances where the unit is purchased shortly before or after development activities are undertaken on the land, the application of the broader approach to the 'wholly and exclusively' test ensures that the business use test is met. However, the presence of additional facts such as private use of the unit, an indefinite hold on development activities or the failure to pay market value may change the outcome because of the 'wholly and exclusively' test and may give rise to other regulatory issues.
As you can see, residential property in these circumstances can be business real property. If the above can be met, the SMSF may be able to acquire the asset even if being acquired from a related party. Any transaction should be carried out at market value.
5. Exceeding the Maximum Transition to Retirement Pension Payment
A self-managed super fund has paid more than the maximum transition to retirement pension payment to its members as they do not realise the proportion of the maximum pension limit if they start the pension during the year.
Are there any rectifications for this contravention? For example, can the member return the excess funds to the SMSF to fix this?
What are the potential outcome of this contravention to this SMSF?
From what you have set out, the maximum has been exceeded due to "they start(ed) the pension during the year". We assume you have pro-rated the maximum based on the number of days remaining in that financial year.
So you are aware you DO NOT pro rata the MAXIMUM pension amount for a transition to retirement pension. The maximum of 10% is based on the value of the pension at commencement. So even if the pension started say on 25th June - you could still take 10% from that pension.
You do need to pro-rata minimum pension calculations but you don't for the MAXIMUM.