SMSFs and Share Trading – CGT and Trading Stock

SMSF share trading, trading stock - CGTEvery so often there is a discussion of whether a SMSF can be in the business of share trading. There are two reasons for this discussion,

  • 1 – if the SMSF is in business does this breach the Sole Purpose Test, and
  • 2 – if the SMSF is in the business of share trading as opposed to investing in shares can the fund claim deductions for losses against other income

The Sole Purpose question is a topic for another day, however there is an answer to the second question, or really the answer is moot as the legislation does not allow (with some exceptions) SMSFs to claim deductions for losses on investments on revenue account.

Section 295.85 of the ITAA 97 applies to SMSFs, along with other types of superannuation funds. The effect of this section is to exclude a number of other sections from applying to a CGT event, including:

  • s6.5 – Ordinary Income
  • s8.1 – General Deductions

However the excluded sections can still apply to the event if it meets one of the exceptions – it is “attributable to currency exchange rate fluctuations” or the asset is one of the following:

  • “debenture stock, a bond, debenture, certificate of entitlement, bill of exchange, promissory note or other security;”
  • “a deposit with a bank, building society or other financial institution;”
  • “a loan (secured or not);”
  • “some other contract under which an entity is liable to pay an amount (whether the liability is secured or not)”
  • or the event is disregarded because of one of the sections contained in the table in s295.85:

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SMSFs choosing individual trustees over corporate trustees

When people set up an SMSF they are increasingly choosing individual trustees over corporate trustees, despite the advantages of a corporate trustee structure.

The Super System Review, also called the Cooper Review, was concerned about the number of new SMSFs set up with individual trustees in the years leading up to the release of the report in 2010. The cooper review panel was “attracted to the potential benefits provided by the corporate trustee structure” and also noted that it is “widely accepted by professionals and the ATO that a corporate trustee is superior”.

While unable to establish a cause for this trend, the review panel thought it could be the result of “limited advice or understanding of the benefits”, or the higher set up costs of a corporate trustee structure.

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Dividend Washing for double franking credits & SMSFs

Dividend WashingConcern by two successive governments over dividend washing by SMSFs and other taxpayers has lead to two consultation processes, many announcement and now legislation which some have argued has increased complexity and created issues of retrospective legislation.

What is Dividend Washing?

A dividend washing scheme was described in a recent speech by Matt Bambrick, Assistant ATO Commissioner:

“Dividend washing is a share trading strategy that enables a taxpayer to access double the franking credits attached to fully franked dividends even though the taxpayer effectively holds only one parcel of shares. The shares are purchased in a special market that allows the taxpayer, often an SMSF, to re-acquire shares with a dividend attached, after the ex-dividend date, allowing them to take advantage of the additional franking credits to offset their tax liability or receive a refund of the excess imputation credits.”

Dividend Washing Legislation

In May 2014 the bill Tax and Superannuation Laws Amendment (2014 Measures No. 2) Bill 2014 was introduced to the Parliament, passed both houses in June and received Royal Assent on 30 June 2014 – however the effect of the dividend washing rules apply from 1 July 2013.

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Industry vs retail fight over default super funds to continue

The fight over which funds will be default super funds is set to continue, despite a ruling by the Federal Court of Australia.

Federal Court – FSC v Industry Super Australia

The Federal Court of Australia has published the reasons for ruling that the expert panel to determine default super funds under modern awards was improperly constituted, in the case of Financial Services Council Ltd v Industry Super Australia Pty Limited [2014] FCAFC 92.

This Expert Panel of the Fair Work Commission (FWC) was tasked with conducting a review of the default super funds in modern awards, as part of the MySuper changes. The panel is required to comprise either the President of the FWC or someone appointed in the presidents place; at least three experts in the subjects of superannuation, finance or investment management; and three other members of the Commission, who don’t need to be experts.

For this panel the President chose to appoint the Deputy President to sit in his place, and appointed the other members. The issue arose when two of the three expert members of the panel were disqualified due to a conflict of interest and in their place the President appointed another expert and himself to sit on the panel.

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SMSFs & the Return Not Necessary (RNN) concession

Australian Taxation Office (ATO) - SMSFs & Return Not Necessary (RNN)

Update #2: The ATO has made a slight change to the RNN rules for SMSFs.

Update: the ATO have changed the SMSF RNN rules again.

The ATOs systems will no longer process an Nil return for a newly established SMSF which holds no assets.  The only time the ATOs systems will accept a SMSF Annual Return with $0 in assets is if it is marked as the Final Return – so that funds that were wound-up during the year can satisfy the requirement to lodge.

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Property schemes’ disclosure to investors ‘disappointing’: ASIC

ASIC review disclosure listed & unlisted property schemes - disappointingASIC has described the results of a review of disclosure by unlisted property schemes to investors, including SMSFs, as “disappointing”.

Mr Tanzer, the ASIC Commissioner, said the results were “disappointing especially when, at a time in the rise of self-managed superannuation funds, many Australians are looking to invest in real estate”. Mr Tanzer also warned that such property schemes “do carry risks as well as opportunities” and that the lack of disclosure is putting investors in a “vulnerable position”.

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Parliamentary committee wants to lift financial advice standards

Superannuation Legislation, Acts and BillsA joint parliamentary committee has commenced investigations into ways to lift the professional and educational standards of financial advisors.

The joint parliamentary Committee on Corporations and Financial Services is looking into proposals to “lift the professional, ethical and education standards in the financial services industry”.

This inquiry follows from a recommendation by the Senate Standing Committees on Economics into the performance of ASIC:

“Recommendation 54
The committee recommends that the Parliamentary Joint Committee on Corporations and Financial Services inquire into the various proposals which call for a lifting of professional, ethical and educational standards in the financial services industry.”

The committee also recommended that financial advisers hold, at least, a relevant university degree and have three years’ experience in a fiver year period – in addition to continuing professional development among other requirements.

This investigation by the Parliamentary Committee has received support from the FPA, with the CEO Mark Rantall saying that it will, along with the public register of financial advisers, “help advance the profession of financial planning”.

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Consultation to begin on public register of financial advisers

Consultation on public register of financial advisersThe Government has announced a dedicated industry working group to consult on the establishment of a public register of financial advisers.

This was part of the deal the Government made with the Palmer United Party to secure the votes to stop the FoFA change regulations being disallowed by the Senate.

As stated in the letter from Acting Assistant Treasurer Mathias Cormann to Clive Palmer, also stated in the media release following the vote:

“the Government will work in consultation with all relevant stakeholders, to establish an enhanced public register of financial advisers (including employee advisers), which includes a record of each adviser’s credentials and status in the industry.”

This part of the deal appears to be outside the 90 day limit on some of the other conditions, leaving more time for consultation.

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APRA super funds underperform investment benchmarks

APRA industry/retail super funds best return 2013/14 - Telstra Super, investment benchmarksAccording to data published by SuperRatings, APRA regulated super funds fell short of the relevant benchmarks for investing in Australian and international shares in 2013/14.

Recently published rankings of APRA-regulated Industry and Retail funds by SuperRatings shows that Telstra Super had the best performing ‘balanced investment option’ in the 2013/14 financial year, with 15.8%. Second place was held by Intrust Super at 14.0% and Unisuper and Australian Super tied for third at 13.9%. This compares to the median for a balanced option of 12.7% over the same period.

However, as noted by SuperRatings founder Jeff Bresnahan, the returns over a longer period are much lower, “over a 22 year period since the introduction of compulsory superannuation, Australian funds have returned 7.2% per annum”.

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Is a loan by a SMSF to a property trust an in-house asset? – ATO Ruling

The ATO has issued a ruling considering the in-house asset status of a loan to a property trust which the SMSF has invested in via a related unit trust. The ruling, ATO Interpretative Decision 2014/23, addresses the following scenario:

  • The SMSF has a holding in a unit trust, which is a related party of the SMSF
  • This unit trust holds less than 10% of the units in a Property Trust
  • The SMSF makes a loan to the Property Trust
  • This loan is subject to a “commercial loan agreement”

ATO ID 2014/23 SMSF loan to property trust with investment in unit trust

The question answered in the ATO ID is:

“Will a loan from a Self Managed Superannuation Fund (SMSF) to a Property Trust be treated as an in-house asset?”

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