Important ATO Ruling for SMSFs
This is an update on an important ruling (LCR 2021/2) that has just been finalised by the ATO in relation to superannuation funds.
It is very important that you understand the implications of this ruling when your self-managed superannuation fund acquires anything. If you, as trustee of your self-managed superannuation fund, contravenes what is said in this ruling, the tax rate that applies to your superannuation fund could increase from 0%/15% to 45% on some or all of the income derived by your fund. This can occur very easily and innocently.
What is the issue?
If your superannuation fund acquires anything and pays less than the market value or nothing for the thing acquired, the increase in tax rate to 45% will very likely apply. Here are some examples.
Example 1 - Assume that your superannuation fund owns a rental property. You obtain three quotes from painting businesses to paint the exterior of the property. The three quotes average $15,000. You don’t want to pay this amount. Shortly after, you are having dinner with a cousin. You tell him the prices quoted and complain about how high they are. Your cousin then offers to paint the house for the cost of the paint plus $5,000. This will come to about $8,000. You are pleased with getting a good deal and give your cousin the go-ahead to paint the house.
This is an acquisition of something that is at less than market value in a non-arms-length transaction. The result of this is that the profit made from the rental property will be taxed at the rate of 45% for as long as your superannuation fund holds that property. Further, there exists a risk that any capital gain made on the property will also be fully taxed at the rate of 45%.
Example 2 - Assume that your superannuation fund owns an extensive share portfolio of securities listed on the ASX. Your daughter, who is not a member of the superannuation fund, is undertaking an accounting degree and is proficient in the use of Microsoft Excel. Your daughter offers to undertake the accounting and various computations on an ongoing basis in relation to your share portfolio for no charge.
Again, this is an acquisition of services at less than market value in a non-arms-length transaction. The result of this is that the dividend income derived from the share portfolio will be taxed at a rate of 45%.
What you must do
You will see that the above two examples are arrangements that could be very easily, and innocently, entered into by a self managed superannuation fund. You must ensure that anything that is acquired by your superannuation fund (e.g. real estate, services, goods etc.) are acquired on an arm’s-length basis with full market value being paid for whatever is being acquired. This can, in certain circumstances, include services provided by you as a trustee of your superannuation fund.
If you are in any doubt about an acquisition that your superannuation fund is to make, get in contact to discuss the issue. The downside could be very costly.