Purpose of SMSF: Tax Reduction or Retirement Savings?
The sole purpose of a Self-Managed Superannuation Fund (SMSF) is to either reduce tax obligations or save for retirement. Manoj Abichandani, with extensive experience in SMSFs, sheds light on various aspects of managing SMSFs, including rules, auditing, and retirement income. This expert advice aims to guide individuals on optimizing their SMSF strategies effectively.
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What is the Sole Purpose of an SMSF reduce tax or save for retirement Manoj Abichandani B. Bus. (UTS), Tax Agent CTA, SMSF Specialist (UNSW) Manoj has worked in a Specialist SMSF CPA Firm for 26 years advising over 600 funds on various aspects of SMSF. Currently he works as a SMSF Technical Director for Deed Dot Com Dot Au Pty Ltd as a trainer and helps SMSF solicitor in updating their SMSF Trust Deed. He has written Australia s first online SMSF Audit Software where over 1200 + SMSF Auditors initiated over 82,000 SMSF audits in the past year.
WHAT IS THE SOLE PURPOSE OF AN SMSF REDUCE TAX OR SAVE FOR RETIREMENT Investments Rules to avoid Breach ATO powers to unmask Trusts and Sub-Trusts Aussigolfa Case Auditing tips on some unique investments Retirement Income Covenant Position Paper Released in July 2021
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Legal & Financial Disclaimer & Disclosure - Webinar is for educational purposes In providing the below information, neither Manoj Abichandani (presenter) or an employee of Deed Dot Com Dot Au Pty Ltd is providing any financial or Legal advice as any Financial advice is based on the information provided by you with regard to your financial needs and objectives. The information below is intended to provide only broad, general guidelines which may be helpful in assessing and making decisions about financial products and general information which is available elsewhere that may help meet your financial needs and objectives. This material may also contain general educational topics about investing, legal and financial matters. It is most important that you understand that your actual experience will differ from these illustrations and examples. That is why you should consult an appropriately qualified financial planner, legal advisor or Estate planner, who can assess your situation with updated data and assumptions on a periodic basis. Information provided here is not intended to be investment advice or a projection of future investment performance. No one can foresee the future and, it is not a projection of the potential return of any investment, nor is it a projection of future inflation rates or the state of the world or domestic economy. You should seek the guidance of a financial or investment professional before proceeding with any investment decision or any super contribution or set up Decision. Our examples and illustration does not contain your income tax calculations and legal concepts; it does not constitute tax or legal Advice. These illustration may require the guidance of a tax, legal or accounting adviser. In creating the illustration certain assumptions were made with respect to investment returns, the economy, and home loan interest rates . The reports and graphics included are directly dependent on the quality and the accuracy of the data and assumptions (including rates of return and future interest rates) . Where future rates of return are assumed, these returns do not reflect the fees and charges associated with Investments, which would reduce the results. You are encouraged to review and consider performance information, which you can request from your investment professional and other securities advisor who may recommended asset/s that may be referenced in this material when assuming any future rates of return for any super contributions & investment. Keep in mind that past performance is not a guarantee of future results. A prospectus or PDS must be read carefully when considering any investment in securities or super contribution in a fund. No liability is assumed resulting from the use of the information contained in this financial presentation and the examples used Responsibilities for financial decisions are exclusively in hand of the viewer and not in hands of the presenter.
What is the Sole Purpose of an SMSF Problem 1) Trustees are setting up SMSF s without knowing the Sole Purpose Test 2) Accountants are Setting up SMSF s disregarding the need for an AFSL 3) Financial Planners do not know how to write Statement of Advice 4) Accountants with limited licence of a Financial Planner are not savvy on SIS Rules 5) Over 30,000 new funds are created each year (Over 600,000 funds and $1 Million Trustees) 6) Younger trustees are setting up funds with low balance and investing in non-traditional investments 7) Over 13,000 SMSF s have never lodged their Income Tax Returns
Result :- Funds are being created for investments in Reduction of Tax payable Transition to Retirement Strategies Catch up Contributions Bit coins and other types of Crypto Currencies House and Land packages outskirts of Melbourne / Townsville / Sydney Off the plan units SMSF has no chance of getting the loan approved Early access of preserved benefits Roll over of less than $200,000
New Funds Created Population Net Total number of Total members of Year ended June 2020 June 2019 June 2018 June 2017 June 2016 June 2015 Establishments 21,717 20,341 25,333 30,313 32,767 33,729 Windups 13,656 16,942 24,635 14,757 13,618 13,718 establishments SMSFs 580,579 572,518 569,119 568,421 552,865 533,716 SMSFs 8,061 3,399 698 15,556 19,149 20,011 1,088,882 1,073,893 1,067,157 1,071,284 1,041,638 1,010,350 Establishment Net Total number of Total members of Quarter s Windups establishments SMSFs SMSFs March 2021 6,147 240 5,907 597,396 1,120,936 December 2020 5,693 591 5,102 591,489 1,110,568 September 2020 6,232 424 5,808 586,387 1,101,660
Member Size Proportion of funds by number of members (%) Number of members 1 2 3 4 Total 2018 19 23.5% 69.5% 3.4% 3.6% 100% 2017 18 23.1% 69.5% 3.6% 3.8% 100% 2016 17 23.0% 69.5% 3.7% 3.8% 100% 2015 16 22.9% 69.5% 3.7% 3.9% 100% 2014-15 22.8% 69.4% 3.8% 4.0% 100%
Age & Gender Members, by gender and age range Age ranges < 25 25 34 35 44 45 49 50 54 55 59 60 64 65 69 70 74 75 84 85+ Total All ages Male 0.5% 2.9% 10.5% 9.3% 10.8% 12.5% 12.9% 12.6% 12.4% 12.8% 2.6% 100% 52.7% Female 0.5% 3.0% 11.2% 10.1% 11.6% 13.1% 13.5% 13.1% 11.9% 10.2% 1.6% 100% 47.3% Total 0.5% 3.0% 10.9% 9.7% 11.2% 12.8% 13.2% 12.9% 12.2% 11.6% 2.2% 100% 100% end of column end of column end of column end of column
Taxable income of individuals who were SMSF members as at the end of June 2020. Members, by gender and income ranges Income ranges $0 to $20,000 >$20,000 to $40,000 >$40,000 to $60,000 >$60,000 to $80,000 >$80,000 to $100,000 >$100,000 to $150,000 >$150,000 to $200,000 >$200,000 to $500,000 >$500,000 Unknown Total Pensioners Male 19.9% 15.7% 10.5% 9.5% 9.4% 13.3% 8.2% 8.6% 2.7% 2.2% 100% Female 25.8% 20.3% 13.7% 10.0% 8.6% 9.0% 5.2% 4.3% 1.0% 2.1% 100% Total 22.7% 17.9% 12.0% 9.7% 9.0% 11.3% 6.8% 6.6% 1.9% 2.2% 100% Accumulators
Legislation Section 62 Sole Purpose Test (1) Each trustee of a regulated superannuation fund must ensure that the fund is maintained solely: (a) for one or more of the following purposes (the core purposes): (i) Members retirement (ii) Age 65 or Preservation Age (iv) Members Death for dependants or LPR (b) for one or more of the core purposes and for one or more of the following purposes (the ancillary purposes) (i) Provision of benefits after termination of employment (ii) Provision of benefits if cessation of work is due to ill health (iii) After Members Death to dependants and or to LPR (iv) Other benefits approved by the regulator
SMSFR 2008/2 - Application of the sole purpose test in section 62 Parra 5. Determining the purpose for which an SMSF is being maintained requires a survey of all of the events and circumstances relating to the SMSF's maintenance. This enables an objective assessment of whether the SMSF is being maintained for any purpose other than those specified by subsection 62(1). Parra 7. A strict standard of compliance is required under the sole purpose test. The test requires exclusivity of purpose, which is a higher standard than the maintenance of the SMSF for a dominant or principal purpose.
Benefits which are incidental, remote or insignificant to the members Breach of the sole purpose test include where: the trustees sought the benefit the decision making of the trustees was influenced by the benefits the provision of the benefit imposes a cost on the fund Factors that may indicate that the sole purpose test was not breached would include: the benefit is an inherent or unavoidable the benefit is remote or isolated, or is insignificant the benefit is on an arm s length commercial basis All investments are properly considered and consistent with investment strategy
Examples 1. Investment in a pooled holiday property Pay market rate Free upgrade if available Trustee did not seek this benefit Upgrade did not influence investment decision making Inherent feature of the investment 2. Individual Home or Unit House needs repair - Trustees stays in the house to get it significant repair and pays normal rates Business Travel If unit is empty trustee stays and pays normal rent
Examples 3. SMSF trustee invests in a company that owns a block of holiday apartments The members go this destination every year The trustee negotiate to stay for free this is NOT a standard feature The SMSF gets less income for free stay 4. Painting displayed at Trustees Home and pay rent to the SMSF even if members are retired 5. SMSF paid for travel & Accommodation to Trustees to inspect property 6. SMSF pays higher than market interest rate to a related party LRBA
Examples - Contribution Catch Up Contributions Husband & Wife have only Employer Contributions since 2018 19 Financial year of $6,000 and have sold Investment Property in 2021 22 with capital gain of $100,000 each Catch up Contribution $19,000 X 3 = $57,000 Gap in 2021 22 = $21,500 Total possible Concessional Contributions $78,500
SISR13.18AA SMSF - investment in collectables and personal use assets For section 62A applies to investments involving any of the following ( section 62A items ): Artwork ; jewellery; antiques; artefacts; coins, medallions or bank notes; postage stamps or first day covers; rare folios, manuscripts or books; memorabilia; wine or spirits; motor vehicles; recreational boats; memberships of sporting or social clubs. Strict Rules: 1. Asset must not be leased to related party 2. Item is stored in the private residence of a related party of the fund. 3. Within 7 days since the fund acquired the item - insured in the name of the fund. 4. A related party of the fund must not use the item. 5. Transfer of asset to related party requires independent valuation Temporary relief for assets held on 30th June 2011 had up to 1st July 2016
Court Cases Deputy Commissioner of Taxation (Superannuation) Vs Graham Family Superannuation Pty Ltd FCA 1101 SMSF Purchases property in 2007 and leases it to son Rent of $60,762 was outstanding by 30th June 2012 Trustees purchased items for themselves and then repaid the loan Issues: -Rented to a related party (Son) but at market value -Sole purpose may not have been breached as the investment was for retirement benefits -The question is more to do with Section 71 in-house asset rather than Section 62 Sole Purpose test - Husband had a dominant role in investments Penalty $30K Wife $10K - Fund was NOT made non-compliant over 90 breaches
Aussiegolfa Pty Ltd (Trustee) Vs FCT [2017] FCA 1525 Doma Com Fund (Managed Investment Scheme) SMSF $28,000 (1 Member) (Employee of Doma Com) $76,000 25 % Members Mother 50% Lease to Student Housing Authority Sub- Fund Members Sister SMSF 25% Sub-lease to Members Daughter
Aussiegolfa Pty Ltd (Trustee) Vs FCT [2017] FCA 1525 The ATO considered 1. The lease to daughter is a breach of Sole Purpose test 2. In-house asset investment in a related trust (Units held by the SMSF in the Doma Com sub-fund) SMSF Trustee : Investment is in Doma Com and not in the sub fund and Doma Com is a widely held unit trust Court Decided : Breach of Section 62 Sole Purpose Test (providing present benefits) SMSF Auditor: Do you check the name of the tenant on residential property? What if the lease is a relatives name?
Can a SMSF Conduct a business & breach Section 62? What is a business? Active buying and selling of shares day trading Buying Westpac shares and Westpac is conducting a business Annually buying a block of land / Sub- divide / build a duplex and sell Operate a news agency / accountancy practice / Caf Issues :- Is the business employing related parties - current day benefit (Section 62) What is the price being paid is it at arms length (Section 109 Issue) What are the risks being taken by the trustees of the fund borrowing (Section 67)
Large Size SMSFs Proportion of funds, by asset range of fund Asset Ranges $0 to $50,000 >$50,000 to $100,000 >$100,000 to $200,000 >$200,000 to $500,000 >$500,000 to $1m >$1m to $2m >$2m to $5m >$5m to $10m >$10m to $20m >$20m to $50m >$50m Total 2018 19 5.7% 2.7% 6.5% 21.7% 25.1% 20.8% 13.7% 2.9% 0.7% 0.1% <0.1% 100% 2017 18 5.7% 3.3% 7.6% 22.9% 24.6% 19.7% 12.6% 2.7% 0.7% 0.1% <0.1% 100% 2016 17 6.0% 3.7% 8.4% 23.4% 24.3% 19.0% 11.9% 2.5% 0.6% 0.1% <0.1% 100% 2015 16 6.2% 4.2% 9.3% 24.3% 24.2% 18.2% 10.9% 2.2% 0.4% 0.1% <0.1% 100% 2014-15 6.8% 4.6% 9.6% 24.0% 23.6% 18.0% 10.8% 2.2% 0.4% 0.1% <0.1% 100% 600 SMSF have more than $20M 2400 SMSF have more than $10M 13200 SMSF have more than $5M 40,800 Funds have less than $50,000 21% or 126,000 funds have less than $200,000 48% Accumulators 21% In the wrong Place 31% Pensioners
19.5% have more than $1.7M Typical Fund Balance Number of Funds % of Funds $ Per Fund 6 10.8 2.2 0.4 0.1 19.5 Millions of $ in Fund 61,200,000,000.00 226,800,000,000.00 99,000,000,000.00 36,000,000,000.00 21,000,000,000.00 444,000,000,000.00 1,700,000 3,500,000 7,500,000 15,000,000 35,000,000 36,000 64,800 13,200 2,400 600 117,000 117,000 funds will pay tax @ 15% on Income over $1.7M $444B will pay tax @15% If Income is 5% on $444B- then 22,200,000,000 is paying tax @ 15% of $3.33B Instead of 47% or $10.43B Tax loss of $7B approx
Criminal Charges - Kassongo Case Early Access 4th Jan 2007 ASIC initiated civil proceedings against Atan Kassongo - He dishonestly failed to ensure that the KSF was maintained in accordance with the sole purpose test Involved in the operation of an unlicensed financial services business Offering people early access to their superannuation funds 192 superannuates totalling $4,055,043 were deposited into the bank accounts of KSF. Kassongo then used KSF to obtain early access to these benefits by withdrawing and distributing the funds to the superannuants and agents engaged by him to assist in the early release scheme. Kassongo had retained over $600,000 for himself by way of commission This will now more or less stop due to Super Stream Ver 3
Auditors Role Identify Investments that offer a pre-retirement benefit to a member Providing financial help or a pre-retirement benefit to someone related to the fund, Investments are to the detriment of the fund Investigations: Is every home purchased by a SMSF leased to a related party? If there is an agent involved does not mean that a related party is not leasing the property Outstanding Rent or the fund renting for lower than Market Rent If there is smoke - there is a fire
For further Enquires please visit our websites: www.trustdeed.com.au www.onlinesmsfaudit.com.au www.justsign.com.au and chat with our agent. Alternatively, you - contact us 0296844199 or Email us at sales@trustdeed.com.au sales@onlinesmsfaudit.com.au sales@justsign.com.au
