Complex rules don’t help self-managed super funds

feature-piggy-bank-tax-200Thousands of self-managed super funds continue to be set up. Their attractions seem to know no bounds. However, there are a large number of rules and regulations that govern these types of super funds and trustees need to be acutely aware of them.

For instance, special rules dictate how certain income of an SMSF is exempt from tax. That is called exempt current pension income. The ordinary income and statutory income that a complying super fund derives from assets set aside or used to pay current pensions to members, which would otherwise be assessable income, is deemed to be exempt income where the relevant conditions are satisfied. This is commonly referred to as ECPI.

Broadly, the exemption applies in respect of superannuation income stream benefits payable by the fund. In order to claim the exemption for current pension liabilities in the fund’s tax return, the trustees must commence the payment of the superannuation income stream benefit. In the case of an SMSF, all of the fund’s assets should be re-valued to the current market value prior to commencing a pension.

As the exemption only applies to complying superannuation funds (including SMSFs), a fund must ensure it maintains its complying fund status for the relevant income year.

The Tax Office has recently reminded trustees of SMSFs that it has made changes to how ECPI must be reported in the 2012 SMSF Annual Return. The changes are part of the ATO’s ongoing compliance focus on SMSFs that are paying income streams and claiming amounts of income as ECPI but may be inaccurately claiming deductions. The Tax Office says it intends to review the ECPI entitlements of a number of SMSFs as part of its ongoing compliance activity.

Specifically, Label Y (Exempt current pension income) has been inserted in Section B (Income) of the 2012 SMSF Annual Return and replaces former Label K (which was previously recorded in Section C: Deductions). According to the Tax Office, this new layout is consistent with how the relevant legislation treats the income as exempt and will assist SMSF trustees to accurately claim deductions.

Broadly, the gross income of an SMSF derived from assets held to provide for current pension liabilities is exempt from income tax. This gross income amount is shown as part of the total shown in Labels A to U. To ensure the income derived from assets held for current pension liabilities is not taxed, it is necessary to deduct an identical amount at Y.

However, the Tax Office says that the exempt income shown at Y should not be reduced by the amount of expenses incurred in deriving that income. Doing so would understate the deductible amount of ECPI and would result in some of that income being subject to tax. The Tax Office also notes that any expenses incurred in gaining or producing ECPI are not deductible, and those expenses should not be shown anywhere at item 11 (Deductions) on the annual return.

As you can see, complying with the SMSF rules is no walk in the park! Attention to detail is important.

SMSF member information for 2013

For the 2013 SMSF annual return, the Tax Office has indicated that the reporting of member information will be expanded to include former members who have left the fund during the income year by rolling out their benefits.

From the 2012-13 income year, trustees will need to report all current members with an interest in the fund at June 30 (section F), and deceased members and all former members who held an interest in the fund at any time during the income year (section G). That is, the annual return will need to provide information (in either section F or G) for every member, including those:

  • for whom no contributions were received during the year;
  • who were only paid an income stream during the year;
  • who had a nil closing balance at the end of the year;
  • who left the fund during the year by rolling out their benefits or being paid a lump sum.

Rollover benefit statements

From July 1, 2013, the Tax Office says super funds will need to use a new Rollover Benefit Statement form for all rollovers. The new form will also affect contributions information reported in the 2014 SMSF annual return.

From July 1, 2013, all contributions received by a super fund during a financial year will be required to be reported to the Tax Office by that fund and not by another fund when the contributions are transferred in a rollover. For example, the Tax Office says that an SMSF trustee will need to report all contributions received in the 2013-14 financial year in section F of the 2014 SMSF annual return, even if some of those contributions are rolled out to another fund before the end of the 2013-14 financial year.

Also from July 1, 2013, the RBS will no longer be used to provide contributions information to another fund with a rollover.

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