SMSF Trustee Education

How much do you know about your responsibilities as trustee (or as director of a trustee) of a Super Fund?

The Institute of Chartered Accountants has released a very useful training tool for trustees of Self Managed Superannuation Funds: http://www.smsftrustee.com/

This program is designed in line with ATO expectations of trustees.

You can register and do the course on line at the website mentioned above. It will take you about an hour to do, and being fully automated, no-one assesses your results! It’s all about educating trustees. We recommend our clients visit this site and further their knowledge. Particularly in light of the Cooper Review recommendations, it will become increasingly important for trustees to know and be able to discharge their responsibilities.

Reading the materials contained in the program will give all trustees excellent information about:

• the investment restrictions imposed on trustees of a SMSF;
• the rules and limitations surrounding contributions and benefit payments within a SMSF; and
• administration involved with a SMSF.

Henry Review: it's politics not reform

The Commonwealth Government’s response to the Dr Ken Henry’s Review into Australia’s Future Tax System, released to the public on Sunday May 2, 2010 has been described as “a timid first step towards serious tax reform” by the Institute of Chartered Accountants in Australia.

The overarching objective of the Henry review was to build a stronger, fairer and simpler tax system to meet the challenges that lie ahead. While Dr Henry has delivered on what was asked of him, the Government has addressed only a handful of Henry’s recommendations.

Alan Kohler describes it this way: the Government is proposing to adopt 1.75 of Henry’s 138 recommendations, or slightly over 1 per cent. The Resource Super Profits Tax is one of the Henry recommendations, but the cut in the company tax rate represents only about a quarter of the recommendations about company taxation, and the small business concessions are about a half of what’s proposed.

The centrepiece of the Government’s response is a new ‘super profits’ tax on resources projects along with a boost to the superannuation guarantee and a cut in the company tax rate.

All commentators seem to agree the government’s response to the Henry Review is “short term, election year politics”; a missed opportunity to attempt real tax reform.

It will be interesting to see the debate unfold over coming weeks and months.

Cooper Review into Self Managed Superannuation

Last week’s announcement of the third round of preliminary recommendations of the Cooper Review into Self Managed Superannuation in Australia contains relevant considerations for all Sage Advisers’ clients.

Chief among the recommendations are:

• prohibiting investment in collectables and personal-use assets (such as artworks, stamp collections, wine collections, exotic cars, racehorses and yachts); 
• making the ATO's penalty regime more flexible to enable more effective and equitable regulation; and 
• reducing the potential to benefit illegally from related party transactions by prohibiting the acquisition of in-house assets and imposing restrictions on the way in which an SMSF can transact with related parties.

It is also proposed that there be an online SMSF resource centre to help SMSF trustees build skills and make better decisions. We will keep you up to date with any legislative changes which result.

The Future of Financial Advice

Treasury has announced a report indicating the future direction of the financial advisory sector: The Future of Financial Advice, Sen Chris Bowen, 26 April 2010 which aims to abolish commission based remuneration for financial advisers.

Sage Advisers’ clients should feel reassured to know that in all areas of proposed legislative and policy reform in relation to commissions (e.g. trailing commissions) payment structures, professional qualifications and regulations we are already compliant. Indeed, we are “ahead of the pack” in terms of our “fee for service” structure and our independence philosophy. We established our firm in the belief that a financial advisory firm in the 21st Century cannot operate under the commission based structure of remuneration with its inherent conflicts of interest.

We go further by benchmarking our portfolios against industry sector averages.

Sage Advisers welcomes the proposed government changes due for commencement in July 2012 based on what has been mooted to date. It will be interesting to see if the government has the courage to change the life and general insurance industry commission based structures as well?

Bamford v FCT continued

In our 20 January 2010 post we detailed the Full Federal Court decision in Bamford v Federal Commission of Taxation. The High Court of Australia handed down its decision in this matter in the meantime, on 30 March 2010. The case deals with the basis upon which beneficiaries of trusts should be assessed for tax purposes.

The relevant points to note from the decision are:-

• the term “income of the trust estate” is to be ascertained by the trustee according to appropriate accounting principles and the trust instrument; and 
• The “proportionate view” of beneficiaries’ entitlements is the approach to be applied when determining their “share” of the net income of the trust estate to which the beneficiary is presently entitled. Another way of saying this (in the words of Sundberg J) is to say the natural meaning to give to “share” is “proportion” rather than “part” or “portion”. 

The practical consequences of this case for discretionary trusts and their trustees and beneficiaries are:

• the annual distribution minutes must be calculated by reference to the trust deed determining the beneficiaries then presently entitled to a distribution from the net income of the trust estate on a proportionate basis rather than on a quantum or “dollar amount” basis; and 
• trustees must be aware of the provisions of the trust deed and take care that its administration is compliant with the terms of the deed, particularly in relation to the definition of “income”. 

Trust Deed Review

In light of the Bamford decision, it is important that trust deeds be reviewed so they:

• Contain an appropriate definition of 'income' ;
• Contain a power for the trustee to determine whether receipts are to be treated as capital or income and, in the absence of such a determination, that the income of the trust is deemed to be equal to the 'net income' under section 95 of the 1936 Act. 

Please speak to us if you are uncertain about the provisions of your trust deed.

Hold 'em or fold 'em?

Just as the Kenny Rogers classic “Coward of the County” ponders whether to play or to fold the cards, you may be facing a similar quandary in your investment portfolio.

The VIX Volatility Index has risen 30% in the last fortnight based on the debt crisis in Greece and the uncertainty facing the rest of Southern Europe.

There are considerable negative reports in the international press.

In contrast, the Australian stock market has recovered a significant proportion of its GFC related losses and we are constantly being told how strong our local economy is performing with our banks starting to announce extraordinarily strong results. But where are we headed?

The idea that you simply “hold onto your investments because eventually the market will go up” is not the best investment strategy.

Your risk appetite will differ from the next person. You know what keeps you awake at night and your family knows whether you can relax on the weekend. It is of critical importance that you communicate your “risk appetite” to us as your advisers. It may also change over time.

Selling can be a good risk minimisation strategy during times of uncertainty. It is something you should seriously consider. You can always buy back in... the next day, week or in months to follow.

R&D tax credits - Government support increased

In the May 2009 budget, the Commonwealth Government announced changes to the current R&D tax concession program to increase the level of support available and make the refundable credit available to companies in tax loss with no limit on the level of R&D expenditure they undertake.

The main points of the program are:

• Small firms with less than $20 million pa turnover will receive a tax refund of 45% when they file their tax return (= 150% concession) 
• Firms with more than $20 million pa turnover will receive a 40% tax credit on filing their return (=133% deduction) 

As an interim step, the R&D expenditure cap for the current tax concession offset will be increased from $1 million to $2 million for 2009-2010. The R&D Tax Credit legislation is not yet in final form but the system will come into effect from 1 July 2010.

TPD Insurance in Super

An important legislative change to insurance and superannuation funds has occurred which could have significant impact on your ability to claim tax deductions for premiums and could also impact on your ability to access an optimum payout if a claim is made down the track.

The Government recently announced it would provide transitional relief to defer the proposed changes to superannuation funds regarding their claims for deductions for Total and Permanent Disability (TPD) insurance premiums.

Now, funds may claim a full deduction for TPD premiums until 30 June 2011.

After that time the legislation will require a policy to meet the “disability superannuation benefit” definition.

This will require two medical practitioners to certify that because of the ill-health, the client is unlikely to ever be gainfully employed in a capacity for which he or she is qualified because of education, experience or training.

After 30 June 2011, insurance premiums will need to be split – with “any occupation” TPD insurance to be held inside the super fund and the balance of the “own occupation” cover held outside super. This will ensure full access to benefits in the event of a claim, and will also be most tax effective after the change in the legislation takes effect.

Please consider this important change when reviewing your insurances.

Tax treatment of trust distributions...what is "income of the trust"?

Bamford v Commissioner of Taxation

The Full Federal Court handed down an important decision in June 2009 Bamford v Commissioner of Taxation which clarifies the taxation treatment of trust distributions.

The ATO sought to limit the ability of the trustee to give effect to the terms of trust deeds in determining how a liability to tax will be determined.

The Court decided the terms of the deed should prevail in determining the ‘income of the trust’ to which beneficiaries are presently entitled and are assessed to tax.

The Court held that a strict proportionate approach (not absolute dollar amounts) will be used to determine the share of taxable income allocated to each beneficiary – that is the relative percentages of the ‘income of the trust estate’ will be applied to the ‘net income’.

This case should also remove the risk for trustees (with appropriately drafted deeds) that capital gains made by trusts will be assessed at penal rates (by the trustee) if the trust does not derive other income in the year. Instead, the capital gain will be taxed in the hands of the beneficiary.

Subject to this case being appealed to the High Court, it is now worthwhile clients considering a review of their trust deeds to ensure the deed provides the ability to redefine capital gains as ‘income of the trust estate’ and to otherwise optimise treatment of all types of income and gains.

Other consequences of this case include:

• Terms and mechanisms set up by a trust deed must be followed strictly 
• Trust distributions must be made in accordance with the trust deed 
• Trust minutes should be carefully drawn – any amendments to ‘net income’ will be allocated to beneficiaries including minors based on their percentages of the ‘income of the trust estate’ so that minutes distributing dollar amounts of net income to some beneficiaries and the balance to a stated beneficiary will not be effective 
• Written agreements should be put in place by 31 August (ATO’s administrative deadline for trust minutes) regarding the distribution of capital gains. 

The High Court granted leave for both parties to appeal this decision on 3 November - we shall watch and follow this appeal closely – otherwise, please speak with us if you consider it timely to review your trust deed.

Superannuation - Concessional Contributions Cap Reduced

What is a concessional contribution?

Concessional contributions include:

• compulsory and voluntary super guarantee contributions, 
• any of the fund’s costs met by you as the employer for the employee such as super administration fees and insurance, 
• salary sacrificed amounts, and 
• any amount an employee is allowed as a personal super deduction in their income tax return. 

The cap (or maximum) for individual contributions to superannuation has been reduced as follows:

1. If you are under the age of 50 as at 30 June 2010 - $25,000, indexed (was $50,000) 
2. If 50 or over at 30 June 2010 - $50,000, not indexed (was $100,000) until June 2012 

You should note a contribution is counted towards a cap in the year your super fund allocates it to your account, not when the contributor pays it.

Any contributions that are over the reduced cap will be taxed an additional 31.5% (in addition to the standard 15%) - a penalty worth avoiding!

Furthermore, any excess also counts towards the non-concessional contributions cap, which, if exceeded, means the tax payable could be extremely large – up to 93%!

Non-concessional contributions (NCCs) are personal contributions for which the individual does not claim a tax deduction; contributions made by a spouse; amounts in excess of the concessional contributions cap; and certain amounts transferred from an overseas pension arrangement which are not subject to tax in the fund.

You should note that the annual limit for NCCs is $150,000 (indexed) and that members under age 65 at any time in a financial year may contribute up to $450,000 by bringing forward up to two future years’ entitlements.

Any NCC in excess of this cap is taxed at 46.5%.

Please speak to us about the amount and type of contributions paid to your super fund in order not to exceed the new cap limits.