SMSF LRBA: 0% Interest can equal 45% Tax

PercentThe ATO has recently issued a Private Binding Ruling which casts some doubt on 0% interest-rate limited-recourse borrowing arrangements (LRBAs). Should this interpretation be correct SMSFs with LRBAs at 0%, or indeed below-market rates of interest, could owe 45% tax on income relating to the LRBA Investment. Since 2010, based on a number of binding and non-binding ATO sources, there has been increasing comfort with the SIS compliance of related-party LRBAs, including at below-market rates of interest. This broader interest came as a result of minutes of the National Tax Liaison Group (NTLG) Superannuation Technical Sub-group meeting in June 2012, where the ATO said that such an arrangement could be consistent with s67A and s109:

“Yes. A lower than market interest rate or the absence of a requirement to pay interest on money loaned to the trustee by a related party will not prevent the arrangement from being a borrowing for the purposes of section 67A of the SISA”

“a fact that the borrowing is interest free does not cause a contravention of paragraph 109(1)(b) of the SISA as that fact does not make the terms and conditions of the borrowing more favorable to the related party lender than would be reasonably expected if the parties were dealing with each other at arm’s length in the same circumstances.”

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FSI Submissions – SMSF Borrowing and LRBAs

The Financial System Inquiry (the Murray Inquiry) has begun to release the submissions received, many of them make recommendations about SMSF borrowing and Limited-Recourse Borrowing Arrangements (LRBAs). The Financial Planning Association (FPA), noting that SMSF borrowing has been a ‘controversial issue’ with implications for the residential property market, recommends ‘the Government follows… Read More »FSI Submissions – SMSF Borrowing and LRBAs

FSI Submissions – SMSF Regulation

The Financial System Inquiry (the Murray Inquiry) has begun to release the submissions received. Several industry bodies have used their submissions to argue that changes to how SMSFs are regulated is not required. CPA  ‘ believes there is no evidence to suggest significant change is necessary regarding the structure, operation and/or regulation… Read More »FSI Submissions – SMSF Regulation

Derivatives Risk Statement and Reserve Strategy

Superannuation & SMSF StrategyUnder some circumstances the SIS Act and Regulations require a SMSF to have strategies other that the Investment Strategy, including a Derivatives Risk Statement and a Reserve Strategy:

Derivatives

SIS regulation 13.14 prohibits SMSFs from allowing charges to be created over fund assets, however as this is Superannuation there are a number of exceptions. The one of interest to this discussion is contained in regulation 13.15A. Broadly, this regulation allows a charge to be created over fund assets in relations to a derivatives contract, however there are a number of requirements.

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Are SMSFs ready for SuperStream?

Recent Update: As announced by the Government, there will be some delay allowed in the implementation timetable for SuperStream. 

The ATO is encouraging SMSFs to get ready for SuperStream.

From 1 July 2014 SMSFs will be required to be capable of receiving Employer Contributions information electronically through SuperStream. SuperStream is part of the Stronger Super reforms with the goal of improving the administrative efficiency of the Superannuation system. Up to now SuperStream has largely only been relevant for APRA funds, however from 1 July 2014 part of it will start to apply to SMSFs by requiring them to be able to received contributions information from employers. Integrating SMSFs into the SuperStream system will likely require the use of an SMSF Messaging Provider to act as an intermediary:

SuperStream SMSF Process

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The SMSF Trustee Declaration

SMSF Trustee DeclarationSince 30 June 2007 it has been a requirement for new trustees of SMSFs, or directors of the corporate trustee of a SMSF, to sign the Trustee DeclarationThe trustee declaration summarises many of the duties and restrictions of a  SMSF trustee and should be read carefully and understood, along with the ATOs ‘Self-managed super funds – key messages for trustees‘.

s104A of the Superannuation Industry (Supervision) Act 1993 requires that if a person becomes a trustee of an SMSF, or the director of a corporate trustee of an SMSF, they must:

  • Sign the Trustee Declaration within 21 days of becoming a trustee/director
  • Ensure the Declaration is kept for at least 10 years
  • Present the Declaration to the Regulator if requested

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New Features

There are some new features on the site: ATO Superannuation Rulings List of recent ATO Self Managed Super Fund Determinations, Interpretive Decisions, Self Managed Super Fund Rulings, Taxpayer Alerts & Law Administration Practice Statements AAT Decisions Recent court cases relating to Superannuation and SMSFs SASG/NTLG Minutes List of Superannuation Administration… Read More »New Features

The SMSF Investment Strategy

Superannuation & SMSF StrategySMSFs are required under the SIS Operating Standards (SIS Regulation 4.09, under SIS Act 31(1)) to ‘formulate, review regularly and give effect’ an Investment Strategy. Under s34 of the SIS Act contravening the Operating Standards can result in a fine of 100 penalty units, currently $ 17,000.

Under the Regulations the Investment Strategy must consider at least the following (para-phrased):

  • Risk and Return
  • Diversification
  • Liquidity and Solvency
  • Insurance cover for members

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