Removing the requirement to transfer asset to SMSF post-borrowing

The ATO has issued a draft legislative instrument that, if finalised, will remove the need to transfer an asset from a custodian trust to the SMSF once the limited recourse borrowing arrangements have concluded.

The ATO has held the view that the exception in section 71(8) SIS which exempts the investment by an SMSF in a related trust which holds the asset under an LRBA arrangement from being an in-house asset does not apply once the borrowing is paid down. This has meant that the asset must be transferred from the custodian trust to the SMSF at the conclusion of the borrowing.

The ATO has identified problems generally with these arrangements. For example, section 71(8) strictly doesn't apply initially when the trust is created if the asset which is the subject of the borrowing is not yet in the trust, or where the asset is in the trust but the borrowing hasn't been drawn down. Also, at the end of the borrowing, even if the trustee intends to transfer the asset to the SMSF, there will be a gap between the date when the borrowing is paid down, and the date when the asset is transferred out of the custodian trust. In each of these instances section 71(8) doesn't save the custodian trust from being treated as an in-house asset.

The draft legislative instrument will cure these problems. It will provide that the investment in the custodian trust is not an in house asset during the initial set up period provided it is reasonable to expect that the arrangement will satisfy the section 71(8) requirements. Moreover, the legislative instrument will remove completely the need to move the asset out of the custodian trust at the conclusion of the borrowing.

Interestingly the legislative instrument is intended to be back-dated to 24 September 2007 - when the original LRBA provisions came in.

Don’t be reserved about double dipping

A recent announcement by the ATO has provided further certainty around a superannuation strategy commonly used to address either a potential excess contributions tax problem, or to bring forward deductions for superannuation contributions.

The strategy can be illustrated by the following example:

• 42 year old Harry makes a personal contribution of $50,000 to his self managed superannuation fund (SMSF) in the last few days of June 2014. The trustee of the fund applies $25,000 to Harry’s member account immediately, and the remaining $25,000 to an unallocated contributions account. Then on 2 July 2014 the trustee allocates the second $25,000 to Harry’s member account. 
• Harry is able to give notice of his intention to deduct the full amount of the contribution ($50,000) in the 2013/14 financial year. The full amount of the contribution will be included in the SMSF’s assessable income in that same financial year. 
• A $25,000 contribution is included in Harry’s concessional contributions for the 2013/14 financial year, and a further $25,000 contribution is included in his concessional contributions for the 2014/15 financial year. 

The upshot is:

• Harry has claimed a deduction for 2 years’ worth of concessional contributions in the same year. 
• The SMSF has included 2 years’ worth of contributions in its assessable income. 
• Harry has not breached his concessional contribution cap in the 2013/14 financial year and, provided no further concessional contributions are made and allocated to Harry in the 2014/15 financial year, he will not breach his concessional contribution cap for that year. 

When adopting this strategy it is important to bear in mind the following:

• The ATO announcement only applies from 1 July 2013. 
• The ATO announcement does not expressly confirm that the approach will not cause a breach of the member’s concessional contribution cap, but this is the only conclusion that can be drawn from this and previous ATO announcements, and from the application of the relevant legislation and regulations. 
• The relevant rules require an allocation to be made by a fund within 28 days from the end of the month in which the contribution was made, so the ability to allocate to a subsequent financial year only applies in respect of the contributions made in June of the preceding financial year. 
• The trust deed for the fund needs to allow for the application of an amount to an unallocated contributions account – in other words, a reserve. It is important to check the deed and to have documentation evidencing the application to the unallocated contributions account and subsequent allocation to the member account. Also, where a reserve is created, the fund needs to implement a reserving strategy. 
• There is some doubt (not resolved by the ATO announcement) whether this strategy is available for a single member SMSF. The concern is whether, if the fund has only one member, is it ever possible to say that an amount is held on an unallocated basis, or in a reserve. 
• The amount allocated to the subsequent financial year counts against the member’s concessional contribution cap for that year. This reduces the capacity to otherwise receive concessional contributions by or in respect of the member in that year within the cap, although contributions made in June of that year could be applied to an unallocated contributions account, and then allocated before 28 July of the next financial year. 

Freeze on Super Changes - how solid is it?

Minister Bowen yesterday announced a "Five Year Freeze On Superannuation Changes". Whilst the headline might suggest a wider freeze, a close examination of the wording of the announcement indicates there are limitations.

Firstly the announcement states the government will make no "major" changes, leaving the way open for not-so-major changes.

Secondly, and perhaps most notably, the announcement refers only to a freeze on superannuation tax policy. Changes to tax policy which have an impact on superannuation funds haven't been taken off the table, nor have changes to superannuation compliance policy for example.

Thirdly, the announcement says that the moratorium will be "enshrined" in legislation, which gives the sense that these changes will somehow be entrenched, but in reality there is unlikely to be any impediment against the legislation being amended to remove the freeze in the future.

Finally, although the announcement is welcomed on the basis that adverse changes to superannuation tax policy will not be made, it also shuts down the possibility of positive changes also being made. For instance, there is now no prospect of concessional caps being increased over the next five years, other than as a consequence of statutory indexation.