Top Superannuation Q&As - May 2016
by Knowledge Shop Editor, on 20/05/16 08:30
This month's top superannuation Q&As live from the Knowledge Shop Help Desk:
- Do death benefits from a SMSF have to be cashed out?
- Is a loan from SMSF to a private company an in-house asset if the SMSF is a minority shareholder in the company?
- Transfer of Units in a Unit Trust to a SMSF from a Member
- Can you include super contributions that were paid in June and receipted in July?
- Post Budget Audit of superannuation fund
1. Do death benefits from a SMSF have to be cashed out?
A husband and wife are in pension mode in their SMSF. The wife dies and does not have a reversionary pension elected, but has a binding death nomination nominating her husband.
Can the death benefit be retained in the fund rather than the funds cashed to be paid out and then having to be recontributed? I thought the SIS Act stated all death benefits had to be cashed out?
You are correct that, death benefits from super cannot be completed by way of journal entry; from one member to another. These benefits need to be "cashed" from the super fund. See ATO ID 2015/23.
However, this does not necessarily mean that the trustees are required to pay the amount as a lump sum. The deed may allow the trustees of the fund to pay these benefits by way of a death benefit pension. Cashing can include a pension.
The form in which benefits may be cashed under this regulation is any one or more of the following forms:
(a) in respect of each person to whom benefits are cashed:
(i) a single lump sum; or
(ii) an interim lump sum (not exceeding the amount of the benefits ascertained at the date of the event mentioned in subregulation (1)) and a final lump sum (not exceeding the balance of the benefits as finally ascertained in relation to the event);
(b) subject to subregulations (2A) and (2B):
(i) 1 or more pensions;
(ii) the purchase of 1 or more annuities.
However, you will need to check the trust deed of the fund to see how death benefits can be paid under the deed. Many would allow:
- A lump sum from the fund.
- A death benefit pension from the fund.
You should also check the death benefit nominations for any other specific requirements that may need to be adhered to.
So deed permitting, the SMSF may be able to pay the death benefits by way of a death benefit pension which would allow the benefits to remain inside the super fund.
Note that where the spouse takes the death benefit out as a lump sum and then recontributes the amount back into the fund, these amounts will be fully preserved - meaning they will not be able to access the funds until they then meet a condition of release. The contribution caps should also be considered.
2. Is a loan from SMSF to a private company an in-house asset if the SMSF is a minority shareholder in the company?
A SMSF loans more than 5% of its assets to a private company. The SMSF owns less than 50% of the shareholding in the Private Company and therefore has no control. The member is not a Director of the private company but is an employee. Is the loan to the private company an in-house asset, and if so, if the SMSF lends more than 5% of the SMSF's assets to the private company is this a breach of the in-house asset rules?
You would need to check if the private company is in fact a related company. A related company is, as per SIS s70B:
(f) a company that is sufficiently influenced by, or in which a majority voting interest is held by:
(i) the primary entity; or
(ii) another entity that is a Part 8 associate of the primary entity because of another paragraph of this section or because of another application of this paragraph; or
(iii) 2 or more entities covered by the preceding subparagraphs.
Sufficiently influenced by, or in which a majority voting interest is defined under SIS 70E:
Sufficient influence/majority voting interestFor the purposes of sections 70B, 70C and 70D:
- a company is sufficiently influenced by an entity or entities if the company, or a majority of its directors, 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 the entity or entities (whether those directions, instructions or wishes are, or might reasonably be expected to be, communicated directly or through interposed companies, partnerships or trusts); and
- an entity or entities hold a majority voting interest in a company if the entity or entities are in a position to cast, or control the casting of, more than 50% of the maximum number of votes that might be cast at a general meeting of the company.
So, if the company is sufficiently influenced by, or in which a majority voting interest is held by the fund members and their part 8 associates, then this would become a related company and hence the loan from the SMSF would be caught as an in-house asset.
You will also therefore need to see who the other shareholders are and determine if they are related parties / part 8 associates of the SMSF. Where they are, you will need to add their interests to the interests held by the SMSF to determine any application of the above. Work through all of SIS s70B for this.
Where the company is a related party / part 8 associate, the loan (and even the investment) may get caught as an in-house asset.
Another issue to work through is to determine if the employer is a Standard employer-sponsor, as these are related parties / part 8 associates of an SMSF.
As per SIS s16(2):
- If an employer so contributes, or would contribute, wholly or partly pursuant to an arrangement between the employer and a trustee of the regulated superannuation fund concerned, the employer is a standard employer-sponsor of the fund (as well as being an employer-sponsor of the fund). If the employer only so contributes, or would contribute, pursuant to arrangements between the employer and a member or members of the fund, the employer is not a standard employer-sponsor.
Most SMSFs would not have a standard employer sponsor, they have employer sponsors.
Again as per SIS s16:
(1) An employer-sponsor of a regulated superannuation fund is an employer who:
(a) contributes to the fund; or
(b) would, apart from a temporary cessation of contributions, contribute to the fund;
for the benefit of:
(c) a member of the fund who is an employee of:
(i) the employer; or
(ii) an associate of the employer; or
(d) the dependants of such a member in the event of the death of the member.
As you can see from the above, there is a difference here - and note that standard employer -sponsors are caught as related parties whereas employer sponsors are not.
Any investment in or loan to a standard employer sponsor would be caught as an in-house asset and hence the 5% limit would apply to all in-house assets - whereas an investment in or loan to an employer sponsor would not be caught as an in-house asset.
You will also need to refer to the SMSF trust deed and investment strategy for any fund specific rules or requirements.
3. Transfer of Units in a Unit Trust to a SMSF from a Member
We have a section 13.22C compliant unit trust where the units are owned by related individuals and one of the individual’s SMSF.
Can the SMSF buy units in the unit trust from the individual who is also a member of the fund?
SIS Section 66 prohibits an SMSF from acquiring assets from related parties - unless an exemption applies:
The member of the SMSF would be considered a related party of the SMSF.
However, there is an exemption under SIS s66(2A) that allows an SMSF to acquire an asset from a related party if that asset is or would be an in-house asset in the SMSF. That is, Section 66(2A) of the SIS Act permits a super fund to acquire units in a trust that complies with SIS Reg 13.22C - this includes acquiring the units from a related party of the fund.
This must be carried out at market value.
The client should make sure that the trust continues to meet the SIS Reg 13.22C requirements on an ongoing basis otherwise an in-house asset may arise.
For completeness, it is always worth a full review of the trust to ensure that SIS Reg 13.22C is complied with and that no event under SIS Reg 13.22D has occurred.
4. Can you include super contributions that were paid in June and receipted in July?
My client paid super contributions by EFT in late June 2015. The funds were receipted in the self-managed super fund's bank account on 1 July 2015. Can the contributions be included as an accrual for the financial year 2014-15 in the accounts of the super fund?
TR 2010/1 discusses what is a contribution and when a contribution is received:
In the ruling the ATO is very specific that a contribution is made when the contribution is received by the super provider.
In regards to contributions made by way of EFT, which appears to be your case, the following is set out:
"If the funds are transferred by an electronic transfer of funds to the Super provider, a contribution is made when the funds are credited to the super providers bank account'.
See paragraphs 183 to 187.
Given the above, our initial view would be that the contribution would be a 2016 year contribution, the year the contribution was actually received.
There are comments in TR 2010/1 around linked accounts - and it sets out that where accounts are held at the same financial institution, there may be some scope for the contribution being accounted for in the 2015 year. See paragraph 187 of the Ruling.
"187. A superannuation provider's account statement would normally provide the best evidence as to when a contribution is received. However, in limited circumstances, other evidence may be used to determine when a contribution is made. For example, a transfer of funds between the linked accounts of a member of a self-managed superannuation fund and the fund held at the same financial institution may result in a contemporaneous debit and credit to the respective accounts with the funds being immediately available for use of the self-managed superannuation fund. When such a transfer occurs on a week-end, it is common for bank statements to show the transaction occurring on the next business day. Evidence, such as a computer print-out recording the receipt of the amount into an account of the superannuation provider, may be used to establish the timing of the contribution".
We suggest that there needs to evidence that the capital value of the fund was increased - and when - and if the only evidence is the fund's bank statement showing the July date, then it could be a July contribution. If there is a copy of the internet transfer of both bank accounts on the correct date that clearly shows that the contribution was made in June, there may be scope for the contribution to have been received in the 2015 year.
5. Post Budget Audit of Superannuation Fund
The recent Federal Budget announced several changes to SMSFs that appear to have additional auditing requirements imposed. In particular, SMSFs that have unlisted assets, especially those with Unit Trusts aside from all the other unlisted assets will now need greater attention to valuations in the event that the assets exceed $1.6m for members that are in pension phase.
Does an auditor of an SMSF that has a Unit Trust require that Unit Trust to be audited independently (possibly by a Registered Company Auditor) or can the SMSF Auditor rely on the financial statements and Tax Return of the Unit Trust prepared by a practicing accountant, which is invariably is the same accountant that prepares the Annual Return and financial statements of the SMSF?
Our understanding of the proposed changes is that the $1.6m cap is a limit on the purchase price of the pension. We believe that the pension balance can exceed the $1.6m due to earnings and growth on the underlying assets after the pension has commenced.
We agree that attention will need to be paid to the value of unlisted trusts for the purposes of assessing the value for the purchase price of the pension. However, there is already a need for assets to be marked to market value for financial reporting purposes under SIS Reg 8.02B.
It is our current view that this would not require a registered company auditor to audit the accounts of the trust.
For valuation issues, refer to the following ATO guide for SMSFs.