Month: January 2018

The ATO has announced that it has extended the due date for lodgment of 2016-17 SMSF annual returns to 30 June 2018. The ATO said it has made this decision in recognition of the major decisions that SMSF trustees and their advisers need to make in this first financial year of operation of the super reforms.

Deputy Commissioner James O’Halloran said the ATO has received feedback that accounting and advisory firms are currently focused on helping SMSF trustees to make informed decisions in relation to the major super changes being implemented as part of the 2016-17 annual return, such as eligibility for transitional CGT relief. Accordingly, the ATO has decided to extend the lodgment date for 2016-17 SMSF annual returns to 30 June 2018. Mr O’Halloran said this will relieve some of the compliance burden so that SMSF trustees and their advisers can focus on these important matters.

The extended lodgment timeframe will mean that all SMSFs who are eligible for transitional CGT relief as a result of the $1.6 million pension transfer balance cap (and the transition to retirement income stream (TRIS) changes) will have additional time to make the relevant elections before the due date for lodgment of their 2016-17 SMSF annual return.

As 30 June 2018 falls on a Saturday, the lodgment due date is effectively Monday, 2 July 2018. Under the existing tax agent lodgment program, annual SMSF returns would generally be due by 15 May 2018, provided that the SMSF return was not required to be lodged earlier.

Transitional CGT relief is available for complying superannuation funds (including SMSFs) with pension assets impacted by the $1.6 million pension transfer balance cap or the TRIS reforms. Broadly, a fund’s assets supporting a superannuation income stream may need to be reallocated or reapportioned to accumulation interests before 1 July 2017 to comply with the pension cap reforms. The CGT relief enables a complying fund to preserve the income tax exemption for capital gains accrued, but not yet realised, on CGT assets held by a fund throughout the period 9 November 2016 to 30 June 2017.

The CGT relief is not automatic and applies on an asset-by-asset basis. The fund must choose for the relief to apply. The choice is irrevocable, and must be made by the time the trustee is required to lodge the fund’s 2016-17 SMSF annual return. The approved form for making the choice is the CGT schedule as part of the fund’s annual return.

The CGT rules are subject to different conditions depending on whether the superannuation fund uses the segregated method or the proportionate method to calculate its exempt current pension income. The rules are complex and require careful consideration against the specific circumstances of each fund.

The SMSF Association has called for the active member test to be excluded from the residency requirement for a superannuation fund to qualify for concessional tax treatment.

SMSF Association CEO John Maroney said the super fund residency test effectively compels self-managed super fund (SMSF) members who are temporarily living overseas to switch to an APRA-regulated fund while they are outside the country. Mr Maroney said the definition of an “Australian superannuation fund” in s 295-95 of the ITAA 1997 means SMSF members who continue contributing to their fund while overseas face penalties, as well as having it taxed as a non-complying fund at 47%.

There are currently 3 elements to the residency test that a fund must satisfy to be treated as an “Australian superannuation fund” – (i) it must be established in Australia; (ii) central management and control of the fund is in Australia; and (iii) the “active member” test relating to contributions made to the fund by non-resident active members for taxation purposes (they can’t exceed 50%): Ruling TR 2008/9. If a fund fails to satisfy any one of the 3 tests, it will not be an Australian superannuation fund.

The SMSF Association argues that removing the active member test in s 295-95(2)(c) would ensure that SMSF members who are working overseas could still contribute to their fund where their SMSF balance exceeds 50% of the fund’s assets. Rather, the Association believes that the residency of a super fund should be determined on the same principles as all other entities for income tax purposes, that is, the place of establishment and the location of the management and control of the entity.

AUSSIEGOLFA PTY LTD (TRUSTEE) V FCT

The Federal Court has ruled that a self-managed superannuation fund (SMSF) investment in a property trust to acquire a fractional interest in a property (to be leased to the member’s daughter) breached the sole purpose test and in-house asset rules under ss 62 and 71 of the SIS Act: Aussiegolfa Pty Ltd (Trustee) v FCT [2017] FCA 1525 (Federal Court, Pagone J, 14 December 2017).

Background

In March 2015, the applicant, as the trustee of a single-member SMSF, invested $28,080 in units in the DomaCom Fund, being a managed investment scheme (MIS) that enables investors to hold fractional interests in property. The invested money was originally held in a cash pool within DomaCom pending the acquisition of a property to be selected by the SMSF trustee. The DomaCom Fund in turn created units in a sub-fund that enabled the SMSF to hold 25% of a property purchased in July 2015 by the responsible entity for $104,000. The property was student accommodation in Burwood Victoria. The other 50% of the units in the sub-fund were held by the mother of the SMSF member (with the other 25% held by his sister’s SMSF).

The custodian of the DomaCom Fund entered into an exclusive leasing agreement with a student housing authority which rented the property to students unrelated to the SMSF for $869 per month. Subsequently, in April 2017, the SMSF member arranged for the student housing authority to lease the property on the same terms to his daughter (a teaching student). The SMSF member was also an employee of the DomaCom Fund and essentially commenced the court proceedings to test the related party use of residential property by SMSFs.

The ATO considered that the leasing arrangement with the daughter breached the sole purpose test and the in-house asset rules as the units amounted to an investment in a “related trust” of the SMSF for the purposes of Part 8 of the SIS Act. The Commissioner also made a determination under s 71(4) of the SIS Act that the units held by the SMSF trustee in the DomaCom sub-fund were to be treated as an investment in a related trust. The SMSF trustee contended that the relevant investment was in the DomaCom Fund (rather than the Burwood property sub-fund) which did not breach the 5% limit for in-house assets under s 82 of the SIS Act, and it was an exempt “widely held unit trust” (s 71(1)(h)).

Decision

In dismissing the SMSF’s application for declaratory relief, the Court ruled that the investment in the units breached the sole purpose test in s 62 of the SIS Act due to the leasing arrangement with the daughter of the SMSF member. The Court found that the investment in the units in the DomaCom Fund was for the collateral purpose of providing housing for a relative, which was not a core purpose, or ancillary purpose, in s 62.

The Court considered that the investment was inconsistent with the underlying objective of s 62 of not providing present benefits or use to members of a SMSF or their relatives. The Court noted that a high standard was adopted by s 62 of the SIS Act as an important pillar to ensure that superannuation funds achieve the objectives of providing retirement benefits and not current day use or benefits. In this respect, the Court said that the reasoning in the landmark “Swiss Chalet” case (AAT Case 10,301 (1995) 31 ATR 1067) remained apt and broadly applicable despite the different facts. While there may be circumstances in which a lease to a related party would not breach the sole purpose test, the Court said the evidence of this case was that the purpose of the SMSF investment in the student accommodation through the DomaCom Fund was, in part, to provide housing for the member’s daughter.

In-house asset rules

The Court also ruled that the SMSF breached the in-house asset rules under ss 71(1) and 82 of the SIS Act after finding that the relevant investment was the units in the Burwood property sub-fund which was separate from the DomaCom Fund.

Notwithstanding that the DomaCom Fund Constitution (as amended) expressly provided that no unit or class of units “gives rise to a distinct trust”, the Court found that the Constitution and product disclosure statements (PDS) created a separate trust in respect of the Burwood property sub-fund. While the responsible entity had trust obligations to other beneficiaries, the Court said it owed no fiduciary duties to the other beneficiaries in respect of the Burwood property which it held for the benefit of the unit holders of the sub-fund. The Court also noted that the rights and entitlements of the units in the sub-fund included 100% of the distributable income or capital in relation to the Burwood property.

In finding that the Burwood property sub-fund was a separate trust, the Court said it was not an exempt “widely held unit trust” under s 71(1)(h) of the SIS Act. A unit trust does not become a widely held unit trust just because it is held by a trustee who holds other funds on trust with similar fiduciary duties to others, the Court said.

The Court further held that the Burwood property sub-fund was a “related trust” under s 10(1) of the SIS Act as the group of Part 8 associates in relation to the SMSF had a fixed entitlement to more than 50% of the capital or income of the trust and, therefore, controlled it under s 70E(2). Accordingly, the Court ruled that the investment in the Burwood property sub-fund (representing 7.83% of the SMSF’s assets), breached the 5% limit for in-house assets.