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> Dr. Super

John McIlroy is known as one of Australia's leading authorities on superannuation and self managed super funds (SMSF) and is CEO of one Australia's leading self managed super providers. John is a noted expert and has written 4 bestselling books on superannuation for investors. He is frequently sourced as an authority for various newspapers and magazines on self managed super issues.

Over the 25 years that John has been involved with self-managed superannuation funds he has been a financial adviser to trustees, a trustee of his own fund for over 20 years, provider of administration services and trainer of financial advisers.

John is widely regarded as a leader in the development of new products and services in Australia having been involved in the development of Australia's first superannuation master trusts in 1985, one of Australia's first allocated pensions in 1987, advanced SMSF services from 1995 and Managed Discretionary Accounts from 1998.

John is currently a Director of the Small Independent Superannuation Funds Association (SISFA) which represents self managed funds, and has been a member of the Australian Tax Office National Superannuation Liaison Group.

About Multiport
Multiport is one of Australia's leading providers of administration, reporting and compliance services for self managed super funds, investment portfolios, charitable foundations and managed funds.

Multiport also provides an administration platform for managed accounts including separately managed accounts (SMA) and individually managed accounts (IMA) operating under model portfolio and investment mandate structures. By combining its SMA and IMA capability with portfolio administration Multiport is able to deliver a Unified Managed Account solution to financial advisers.

For more information about Multiport go to www.multiport.com.au.

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Dr. Super
post Posted: Aug 15 2012, 11:32 AM
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Can You Lend Money To Your SMSF Interest-Free?

SMSFs can borrow money to invest provided the arrangement meets the rules for SMSF borrowing arrangements. One of the key rules is that the loan must be made on a limited recourse basis.

The question has arisen as to whether the loan to the SMSF could be interest free, and if so, does this cause the ATO to potentially treat the forgone interest as a contribution to the fund (which could lead to excess contribution problems).

The ATO has now publicly released comments discussing these questions and although the comments are qualified, they are still very favourable. The ATO suggests that provided there is a borrowing in place (which means there must be a loan agreement and it is intended by all parties that the loan will be repaid), the absence of interest on the loan would not preclude the arrangement from being a borrowing.

The ATO also doesn’t see that there is a contribution issue for the fund to consider simply because there is a low interest rate on the loan to the fund. You need to consider all aspects of the borrowing arrangement in question.

Like many super strategy issues, anyone contemplating building up their super through an ‘interest free’ loan should check out all the rules carefully as it is not black and white. Making a completely interest free loan to your own fund is perhaps not the smartest idea around. Proceed with care.




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henrietta
post Posted: Oct 5 2011, 08:17 AM
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In Reply To: Dr. Super's post @ Sep 9 2011, 10:52 AM

Hi John

I have a SMSF and now that my kids have kids, was wondering if the fund could buy, without borrowing, a unit for us to stay in when we visit them. I suspect that trustees may not be able to use a property owned by the super fund.

Any explanations would be most welcome , as would any alternative suggestions. We are in pension phase by the way.

Cheers
J

 
Dr. Super
post Posted: Sep 9 2011, 10:52 AM
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Good reasons to not have your kids in your SMSF

Parents operating an SMSF should think very carefully before admitting their kids to the fund.

One rule of operating an SMSF is that all members must be trustees. Where the trustees are individuals this can mean having up to 4 individual trustees. Where a company acts as trustee this means there would be 4 directors.

One good reason for not including the kids was highlighted by a recent case – Triway Superannuation Fund and Commissioner of Taxation. The fund which was set up in 2002 had 3 members being mother, father and son and hence 3 trustees. The son had a drug addiction and over a period spent nearly all of the money in the fund and all of their retirement benefits were lost. In 2006 the son became bankrupt.

The parents as trustees concealed this for several years, apparently on the advice of their tax agent, until 2008 when they disclosed it to the ATO. The ATO treated it as a non complying fund and the AAT eventually upheld this decision. Not a good outcome!

There are several other reasons why having your kids in your fund can be a problem. If the children have relationship breakdowns it can get messy when divorce proceedings occur.

There is also the case where a father appointed his daughter to the position of 2nd trustee and when the father died the daughter had effective control of the fund and paid the benefits out to herself, much to the disgust of her brother.

A family fund might sound like a good idea but parents need to be aware of the potential problems. If you have kids in your SMSF and have any concerns let me know.

 
Dr. Super
post Posted: Aug 2 2011, 12:32 PM
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In Reply To: chookboy's post @ Jul 31 2011, 04:38 PM

Hi
It depends on how he applied to get his benefit. If he applied on the grounds of total and permanent disability with supporting medical statements then it does not matter what he does with the money. If however he applied on the grounds of hardship requiring the funds for accomodation purposes and this was found to be untrue then that could become a problem for him.
Regards
John

 
chookboy
post Posted: Jul 31 2011, 04:38 PM
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In Reply To: Dr. Super's post @ Jul 22 2011, 02:58 PM

Hi John,

I have a friend who was recently diagnosed with a mental illness @ 50 years of age. A letter was sent to his superfund explaining the situation and asking them to release the superfunds so that he could gain secure housing. He has now received the funds and paid 15% tax. He is now considering using the funds for something else. I've said that the letter was sent saying it was for a specific purpose, he says how will they know any difference. I am worried that he might get into trouble. Any advice?



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Don't count your chickens until they hatch!
 
Dr. Super
post Posted: Jul 22 2011, 02:58 PM
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In Reply To: mosaic1996's post @ Jul 18 2011, 03:44 PM

Hi Graeme,

It is an issue that's come up a couple of times in recent discussions/articles. I tend to agree with your view that gearing in pension mode is an acceptable strategy. Within the pension rules it discusses the issue of a charge over pension assets but this appears to confuse the members obligations vs the trustees of the SMSF who do have the capacity to undertake gearing/IW strategies.

John

 


Dr. Super
post Posted: Jul 22 2011, 11:08 AM
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Avoiding a big tax bill when an SMSF pension stops

The headline on the front page of the AFR today was “ATO ruling confirms tax liability after death” and the article pointed out that SMSFs would be hit the hardest with tax bills because of the ATO view.

The ATO has released a draft tax ruling which outlines their view of what happens from a income and capital gains perspective when a pension payable from a fund ceases to be payable.

But rather than being a new and controversial view the ATO is simply confirming what many practitioners in this area have understood to be the case. On the death of an SMSF pensioner, the pension ceases, and unless there is someone else automatically entitled to receive the pension, the income tax exemption for pension funds ceases.

The main impact of this can be the effective re-introduction of capital gains tax, and sometimes the potential tax bill can be many tens of thousands of dollars.

So can you do anything to avoid this tax?

The answer is yes and involves making sure that SMSF beneficiary nominations are correctly designed to meet the ATO requirements, making sure that SMSF trustees apply careful tax management annually and planning pension payments properly.


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mosaic1996
post Posted: Jul 18 2011, 03:44 PM
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John,

Thanks for for your response to my previous question.

ClearDocs have rasied an interesting issue. I'm inclined to think that IWs in pension mode will be OK = otherwise the listed IW market will be upset.

Have you seen this issue raised before? Do you have an opinion?

Pensions and limited recourse SMSF borrowing: are they compatible?
Jun 2011The law:

  • allowing SMSFs to borrow also allows trustees to give security over limited assets to the lender; and
  • about SMSF pensions prevents the capital of a pension, or the pension income, from being used as security for a borrowing.
This article:

  • analyses the tension between the two laws; and
  • suggests that because of the two incompatible requirements, SMSF trustees and their advisers should be careful if paying pensions from an SMSF with borrowings.
Kate Hocking

What's the inconsistency in the law?


The Superannuation Industry (Supervision) Regulations 1994 (Regulations) prohibit the capital value of a pension and the income from it, from being used as security for a borrowing. It is not clear whether this restriction operates against the member of the SMSF, the trustee of the SMSF, or both.

If the restriction is found to operate against trustees of SMSFs, and a trustee fails to comply with it by granting security over a pension asset, then the trustee would be in breach of their trustee obligations. Depending on the severity of the breach, the ATO may take action to protect the assets of the fund and impose regulatory penalties and sanctions on the trustee.

If the restriction applies only to members, then the consequences of a breach are likely to be less significant — at least in terms of the assets of the SMSF.

Section 67A of the Superannuation Industry (Supervision) Act 1993 (SISA) permits the trustee of an SMSF to borrow money to acquire an asset under a limited recourse borrowing arrangement. In these circumstances, the lender's right of recourse if the borrower defaults, is limited to rights in the underlying asset. The law allows the trustee to provide security to the lender, on the condition that the security is restricted to the asset which is the subject of the borrowing arrangement.

How should we interpret the Regulations?

There are no legislative documents showing Parliament's precise intention about the restriction in the Regulations. So the words about the restriction should arguably be given their ordinary meaning. On the face of it, this means the Regulations would be read as limiting both the SMSF trustee and the member from using current pension assets as security for borrowing.

But two additional considerations are relevant:

1. The ATO in a release related to the introduction of the account based pension impliedly expressed its view that the restriction operates against the SMSF member only (and not the trustee). Indeed, there is no reference to the SMSF trustee. You can read a copy of this ATO release here. Although this is not conclusive, as the ATO's release was made in the context of an account based pension, it is arguable that the ATO would take a similar view on how the provisions apply to other types of pensions.

2. Before the September 2007 amendments to the SISA and the Income Tax Assessment Act 1997 (ITAA97), SMSF trustees where prohibited (subject to limited exceptions) from borrowing to acquire assets for the SMSF. For this reason, it was unnecessary for Parliament in 1994 when introducing the relevant Regulations, to state specifically that the trustee could not use the capital value of a pension (and income from it), as security for a borrowing.

These observations lend support to the argument that the law applies only to the SMSF member.

So the restriction may apply to trustees. What can I do? First, some comments on segregating pension assets

When an SMSF pension begins, the SMSF is likely to have segregated and non-segregated pools of assets.

Commonly, the trustee and the members of the SMSF agree between themselves (and in accordance with the SMSF's deed) as to which assets of the fund they wish to segregate. Segregated assets are then invested, held in reserve, or otherwise dealt with for the sole purpose of discharging pension liabilities in respect of members' superannuation income stream benefits from the SMSF.

Under the ITAA97, income and capital gains from segregated current pension assets are exempt from tax. For this reason, members may elect to segregate pension assets to qualify for these tax advantages.

Assets not specifically included in a pension account balance (for an allocated pension, a market-linked pension or an account-based pension) will not be considered as segregated current pension assets. This means that income derived from these assets will not be exempt from tax.

How does this help in the context of the SMSF's borrowing arrangements?

If the SMSF (through a custodian of a custody trust) has entered into, or intends to enter into, a limited recourse borrowing arrangement to acquire an asset for the SMSF, then trustee should ensure that any security provided is not over an asset that comprises part of the 'capital value' of the pension being paid to the members. This avoids the tension between the two requirements the law sets. This is critical because if the borrower defaults in its obligations to the lender, then the lender may be entitled to call on its security. If this property that formed all or part of the security is sold to repay the lender, then the member has lost the asset funding their pension. In that case, it is arguable that if the security applied in that way, the SMSF has breached the Regulations by granting the security.

So, if an SMSF uses the segregated assets method to fund its pension, then any asset acquired under a limited recourse borrowing arrangement could be allocated to the non-pension accumulation asset pool. The security could then be granted over that non segregated asset.

Clarification from ATO

Maddocks will shortly apply to the ATO for interpretive advice on the Regulations to clarify whether the restriction discussed in this article operates against a member, the trustee, or both of them. Once the position is clear we will publish a Cleardocs update on the matter.

Cheers,
Graeme

 
Dr. Super
post Posted: Jul 18 2011, 02:46 PM
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In Reply To: mosaic1996's post @ Jul 5 2011, 06:38 PM

Hi Graeme,

Apologies for the delay in responding.

While using an 'unlisted' instalment warrant structure to buy shares is possible, there are some negative implications to consider. These include the initial time and cost expended to get the structure in place. There are also considerations around having to dispose of the entire asset (ie: all units held of a particular share) under each structure rather than a partial disposal so there is less flexibility. You would also require a separate instalment warrant for each asset purchased, so a decision to purchase BHP and RIO shares would require a separate instalment warrant structure for each.

If paying off part or all of a loan balance under the instalment warrant structure it wouldn't be considered an inspecie contribution, as the asset is already owned by the fund but it would be considered a normal contribution and would count towards the caps. To be an inspecie contribution the contributor must be transferring an asset, not cash.

John

 
mosaic1996
post Posted: Jul 5 2011, 06:38 PM
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In Reply To: Dr. Super's post @ Jun 30 2011, 03:11 PM

G'day John,

Do you have any advice/comments on using one or more Installment Warrants (not the listed variety, but one set up by the fund) to buy shares. Same structure as your previous "purchasing property" post.

If a member pays off part or all of the loan, and counts this as a contribution, would it be reported as an in specie contibution? In other words, is a non-cash book entry contribution classifed as an in specie contribution or just a normal contribution? Same question when a member/trusteee pays fund expenses and is not reimbursed = contribution.

Cheers,
Graeme

 
 


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