Self Managed Superannuation Fund Borrowing

As a Trustee of a Self Managed Superannuation Fund (SMSF) you have many complex decisions to make in steering your fund through the maze of legislative requirements confronting you. The job is made more difficult when there is ambiguity within the industry as to when you are allowed to borrow money for the super fund to acquire and maintain assets.

On 14 September 2011 the Australian Tax Office released a Draft Ruling, SMSFR 2011/D1, clearing up some previous ambiguities with the borrowing powers available under the legislation.

There had previously been confusion within the industry as to what limited recourse borrowing arrangements (LRBA) could be entered into by SMSF’s, particularly when the SMSF was borrowing money to complete works on assets already owned by the fund.

Sections 67A and 67B of the Superannuation Industry (Supervision) Act 1993 (SISA) deal with SMSF borrowings, specifically s 67A states that a Trustee of an SMSF may borrow money for an existing asset owned by the fund only if that money is directed to the repair or maintenance of the asset, not the improvement of the asset. Under the ATO draft ruling this position has been clarified to now mean that:

“To determine if an asset has been repaired or maintained or whether it has been improved, reference is made to the asset’s qualities and characteristics at the time when the asset is acquired under the LRBA”

More than this, the decision has provided definitions as to what “repair”, “maintenance” and “improvements” mean under the Act.

This draft decision means elringtons is now ideally placed to provide advice as to a fund’s proposed borrowings giving our clients peace of mind knowing their decisions complies with the SISA. Before you enter into any borrowing schemes for your Self Managed Superannuation Scheme contact our Business Services team to fully understand your duties and obligations.

To Contact our Business Services Team:

p: 02 6206 1300 | e: info@elringtons.com.au

Self Managed Superannuation Funds

Where does my Super go when I die?

An important tool in estate planning is the use of binding death nominations which require a superannuation fund’s trustee to pay the balance of a deceased member’s account as he or she directs.

Many people wrongly assume that their superannuation will pass to their beneficiaries according to their will, they do not realise  that a superannuation fund trustee has the discretion to pay the balance of a deceased member’s account (a death benefit) to any one or more of the deceased member’s dependants in whatever proportion the trustee decides.  This discretion may be exercised by the trustee in ways that the member did not want.

There is however a mechanism set out in the superannuation law by which a person can give a binding direction to the trustee of the person’s superannuation fund.  This is called a binding death nomination.

In all funds except Self Managed Superannuation Funds (SMSFs) regulated by the Australian Taxation Office, binding death nominations must be made in a specific format and must be renewed at least every three years.

The Australian Taxation Office has determined that in funds regulated by it there is no need to renew binding death nominations. So members can complete them as they may wish, file them and only change them if their circumstances change.

However there is an historical catch.  It was considered until the ATO made its determination that the renewal restriction applied to all funds, including SMSFs. Accordingly all superannuation fund trust deeds drawn up until recently either contained a direct requirement for renewal at least every three years or referred to legislation that required it.  If a SMSF deed contains the requirement, or imports it from legislation, then the requirement must be met, even if the ATO does not consider it is necessary.

The way to correct this is to amend the SMSF deed and, often, the form attached to the deed for the nomination purpose.

Anyone who wishes to include a binding death nomination as part of their estate planning related to their Self Managed Superannuation Fund should have their deed reviewed at the same time.

For further information contact: Wills and Estates

Super’s Magic Pudding: a Plus for Baby Boomers

Once money is put into super the general rule is that it must stay there until the person entitled to it reaches preservation age.

There are some exceptions to this rule – for example, you might be able to access money before then if permanently incapacitated or suffering severe financial hardship.

The preservation age for a person’s super depends on when they were born. If you were born before 1 July 1960, it is 55. However, it increases incrementally through the next four years to the preservation age of 60 for those born after 30 June 1964.

This makes super often less attractive to younger people, who may be more interested in paying off a mortgage. However, by lowering the deductible contribution limit to a standard $25,000.00 per annum after 1 July 2011 (unless the contributor is over 60 in which case the limit remains at $50,000.00), the Government wants to encourage people to save for superannuation sooner rather than later.

There is now no age at which you have to remove your super – you can keep your entitlements in super funds indefinitely, although this might cause them to be subject to a de facto death duty if, say, the funds revert to adult children. The exception is if someone stops being an Australian resident, then the departing Australian superannuation payment must be paid as a lump sum to them.

The transition to retirement rules allow a person, provided they have reached the preservation age, to take a transition to retirement pension out of a fund before they actually retire.

This rule is particularly attractive to people over 60. They will be able to withdraw tax-free pensions from their fund and use the money withdrawn to make additional tax deductible contributions to the fund (thus getting free tax deductions). However people over 55 and under 60 can still benefit substantially.  Whilst they are liable to tax on the pension they gain the advantage pointed out in the next paragraph.

Once the fund goes into pension mode, no tax, including Capital Gains Tax, will be payable on income derived from assets allocated to the pension fund – a magic pudding if ever there was one.

As for paying out a pension, the starting point to consider is not tax, it is whether the rules of the fund allow payment of the sort of pension required – and some, particularly true of older funds, might not. Self Managed Superannuation Fund deeds can be amended to add provisions to take advantage of these rules.  Once someone becomes entitled to a pension from a concessionally taxed fund, there is a minimum amount, based on one’s age, that must be taken out each year.

For further information, please contact the Wills and Estates team

Employer Super Contributions are Compulsory

Under the superannuation guarantee law, most employers must pay super contributions (in addition to gross salary and wages) into a complying superannuation fund or retirement savings account so that their eligible employees can enjoy the benefits of super in their retirement.

At common law, an employee is a person who performs work under the control of another in exchange for payment for services that he or she provides.

However, the definition of an employee for superannuation guarantee law purposes is more expansive, and includes any individual who receives payment in the form of salary or wages in return for their labour or services. This definition may include individuals who would be classified as contractors at common law. Generally speaking, you have to pay super for an employee if they’re between 18 and 69 years old (inclusive) and you pay them $450 or more (before tax) in salary or wages in a month. It doesn’t matter whether the employee is full time, part time or casual.  Employees who are under 18 years old must meet the above conditions and work at least 30 hours per week to be entitled to superannuation guarantee.

This issue was recently addressed in On Call Interpreters and Translators Agency Pty Ltd v Commissioner of Taxation (No 3) [2011] FCA 366. On Call Interpreters and Translators Agency Pty Ltd (On Call) engaged interpreters to provide services to hospitals, welfare agencies’,  and educational, health and legal services providers. On Call classified many of their translators and interpreters as contractors and not employees and thus did not pay their superannuation contributions. However, the ATO argued that the relevant translators and interpreters were employees within the extended meaning for superannuation guarantee purposes. The court found in favour of the ATO, and directed On Call to meet their superannuation guarantee obligations.

The correct classification of an individual as an employee for superannuation guarantee law is critical. This is because employers are liable to provide the minimum level of superannuation guarantee for their employees. A failure to do so will result in employers being liable to a non-deductible superannuation guarantee charge. Additionally, employers may also be liable for other penalties and charges depending on their circumstances, for example failing to keep proper records, or making false or misleading statements to the ATO.

At elringtons, we can advise employers of their superannuation guarantee law obligations. We can also assist employees who think they may not be receiving their full super entitlements. For more information, please contact:
Matthew Bridger | e: mbridger@elringtons.com.au | p: 02 6206 1300 http://elringtons.com.au/wp-content/uploads/2011/07/Specialist-accreditaion.jpg

De Facto Partners Now Entitled To Superannuation Splitting Orders

By Carlos Turini – Family Law Specialist

In a separate article, De Facto Partners’ Property Disputes Now in the Family Court, we described the major amendments recently introduced to the Family Law Act 1975 (Cth) from 1 March 2009 to allow former partners in a de facto relationship involved in a property dispute to bring an application in the Family Court or the Federal Magistrate Court.

One of the most significant reforms is that a de facto partner may now seek superannuation ‘splitting orders’ or ‘flagging orders’ as part of a property disputed under the Family Law Act.

Pursuant to a superannuation splitting order, a court would create a separate, personal superannuation entitlement granted to the non member of the superannuation fund.

A court may instead ‘flag’ the entitlement of a non member to a superannuation fund until such time as he/she will receive the appropriate share of the member’s entitlements.

De facto partners were not previously entitled to superannuation splitting orders or flagging order under State or Territory legislation.

Property orders covering superannuation entitlements are particularly significant in Canberra where, frequently, a party may have accumulated entitlements under public servants’ funds such as the:

  • Commonwealth Superannuation Scheme (CSS);
  • The Public Sector Superannuation Scheme;
  • or the Defence Force Retirement and Death Benefits Scheme (DFRDB)

Such entitlements are sometimes worth hundreds of thousands of dollars.

If a party is already receiving a superannuation pension, the other party may be entitled to receive a share of that pension.

If a party has accumulated superannuation entitlements which have not yet  been commuted, the other may be entitled to a substantial share of those entitlements which he/she may receive as a new, personal, superannuation entitlement.

For more information or to make an appointment please contact:

Carlos Turini at: cturini@elringtons.com.au or call Carlos on: 02 6206 1300

Further Reading:

De Facto Relationships : “Contracting out of the Family Law Act”

De Facto Property Disputes – Now in the Family Court