SMSF tax tips and traps

As the end of the current financial year approaches, Craig Day provides SMSF trustees with some tax tips for the year end - along with the traps to avoid.

With the end of the financial year fast approaching, self-managed super fund (SMSF) trustees need to be aware of the issues that could affect the taxation or compliance of their fund. Here are a couple of tips and traps to consider.

Tip: Record amount and timing of indirect contributions

In taxation ruling TR 2010/1 Income tax: superannuation contributions, the Australian Taxation Office (ATO) defines a contribution as anything of value that increases the capital of a superannuation fund where the contributor’s purpose was to benefit one, some or all members of the fund.

As part of this, the ruling confirms that the capital of the fund may be increased indirectly by:

• Paying an amount to a third party for the benefit of the superannuation fund;
• Forgiving a debt owed by the superannuation fund; or
• Increasing the value of an asset owned by the fund.

The ruling also confirms that an indirect contribution made by way of satisfaction of a fund’s liability to a third party is made when the liability is extinguished.

Therefore, if a related company pays a SMSF’s accounting and audit expenses on the fund’s behalf and the company is not entitled to be reimbursed, the payment must be recorded as a contribution made to the fund on the date of the payment.

In this case, since a company made the payment, the trustee would need to allocate the payment as a concessional contribution to each member on a proportional basis and report the contributions to the ATO in the fund’s annual SMSF return.

Trap: Fail to retain evidence of in-specie contributions

Where a member makes a contribution to a fund by way of a transfer of listed shares or business real property, tax ruling TR 2010/1 confirms that the contribution will be made when the fund obtains ownership of the asset.

The ATO accepts that ownership of the asset, and therefore the making of the contribution, can occur at the time the fund becomes the beneficial owner of the asset and that beneficial ownership can be acquired earlier than legal ownership.

In this regard, the tax ruling confirms that a fund will become the beneficial owner of an asset when it obtains all the required transfer forms in registrable format — along with any other documentation required to procure registration as the legal owner of the asset.

For example, where a trustee takes possession of all the required documentation to procure registration as the legal owner of a listed share (ie, a properly executed off-market share transfer in registrable form) from a member on 30 June, but the company share register is not amended until 3 July, the contribution will be made on 30 June.

However, the ATO has warned that it will treat any in-specie contribution as being made when the super fund is registered as the legal owner of the asset unless the trustees (and contributor) retain sufficient evidence to identify precisely when the fund obtained beneficial ownership.

Such evidence would include minutes of any trustee meeting held to accept an in-specie contribution, the relevant transfer forms, and any other record of when the transfer took place.

Therefore, if the registration of legal ownership of an asset took place in a different tax year to when the fund became the beneficial owner of the asset, the failure to retain sufficient records to identify when the contribution was made could affect the contributor’s ability to claim a tax deduction for the contribution in a particular year, and will also affect which year the contribution will count against the member’s relevant contribution cap.

Tip: Acknowledge receipt of valid deduction notice

For a member to be eligible to claim a tax deduction on a personal contribution the member must provide a valid notice to the trustee of their intention to claim a deduction on the contribution — and the trustee must acknowledge that notice.

To remove any doubt, a SMSF trustee should therefore provide written confirmation to the member acknowledging the amount of the contribution, the date it was received and showing that the member intends to claim a deduction for a certain amount on the contribution.

The member should then lodge that confirmation notice with their tax return, since failure to do so can trigger an ATO audit to confirm the member’s eligibility to claim the deduction.

Tip: Value assets at market value

To assist in the preparation of the fund’s financial statements and to accurately report member benefits, trustees are required to value fund assets at market value on an annual basis. Market value is defined as an amount that an arm’s length buyer of an asset could reasonably be expected to pay a willing seller to acquire the asset.

Depending on the circumstances, a market valuation can be undertaken by a qualified valuer or a person without formal qualifications, such as the fund trustee. In either case the valuation must be based on reasonably subjective and supportable data.

However, the ATO does confirm that the use of a qualified valuer should be considered where the asset represents a significant portion of the fund’s value or where the nature of the assets indicates that the value is likely to be complex or difficult.

Trap: Pre-pay 12 months of interest expenses on a limited recourse loan

While individuals and small businesses are able to claim an immediate deduction where they prepay up to 12 months of interest expenses on an investment or business loan, this does not apply to super funds, including SMSFs.

Under the pre-payment rules where a SMSF trustee pre-paid interest on a limited recourse loan, the pre-payment would be apportioned over the period to which it relates and would only be deductible in the relevant year.

If a trustee pre-paid interest on a loan that would accrue during the 2010-11 financial year on 15 June 2010, 100 per cent of the payment would be apportioned to the 2010-11 year and would only be deductible in that year.

Tip: Assess the fund’s in-house asset levels

Where a fund has in-house assets it should monitor the value of those assets against the 5 per cent in-house asset limit in the lead up to the end of the financial year.

If the fund will be close to or in excess of the 5 per cent in-house asset limit due to changing asset values, the members might wish to consider making additional personal contributions to dilute the level of the fund’s in-house assets before 30 June.

Otherwise, if the total level of the fund’s in-house assets exceeds the 5 per cent limit as at the end of the financial year, it will then be too late to make any additional contributions.

In this case, the in-house asset rules require the trustees to enter into an arrangement to sell down the amount of the excess within 12 months.

Craig Day is senior technical services manager at Colonial First State.