If your SMSF has a property and a tenant in financial distress, you may be able to provide your tenant with rental relief under an agreed commercial arrangement. This may even be the case when the tenant is a related party or yourself.

Ordinarily, charging a tenant a price that is less than market value in an SMSF is usually a breach of superannuation laws. However, the ATO have provided guidance which allows SMSF landlords to provide for a reduction in or waiver of rent because of the financial impacts of the COVID-19.

For the 2019–20 and 2020–21 financial years, the ATO will not take action where an SMSF gives a tenant – who may also be a related party – a temporary rent reduction during this period.

What do you need to do?

There are some important things you should ensure are in place when you are providing a rent reduction to a tenant, especially when this is a related party.

• Ensure the relief only applies to rent.
  • Any relief offered to a tenant can only relate to the rent component of the lease agreement. The ATO concession does not extend to other lease incentives.

• Ensure that the reduction in rent is only temporary.
  • This means it should have an agreed period of time or agreed date where the rent is reviewed in light of the economic circumstances.

• The financial difficulty faced by the tenant is linked to the financial impacts of COVID-19.
  • Any negotiated rent relief will need to be measured against the COVID-19 financial impact suffered by your tenant.

• Clear arrangements which detail the amount of discount, waiver or deferral of the rent.
  • In evidencing that the rent relief is reasonable, it would be best practice if it is consistent with an approach taken by an arm’s length landlord.

• Ensure you have proper documentation which allows your independent auditor to be satisfied that the temporary rent relief satisfies all of the above.
  • This may take the form of a signed minute, renewed lease agreement or anything deemed appropriate to amend the terms of the lease temporarily.
  • Even if you are both the tenant and landlord, the above should all be documented.

These are extraordinary times and the ATO is providing this guidance to allow SMSF trustees to be flexible and agile.

If trustees act in good faith in implementing a reasonable and measured reduction in rent because of the impacts of COVID-19 they should not fall foul of the law.

How can we help?

If you need assistance providing rental relief or whether this is the right action for you and your specific circumstances, please feel free to give me a call so that we can discuss in more detail. Alternatively, you can refer to the SMSF Association’s trustee education platform, SMSF Connect.

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This includes breaches that may be inadvertent. This new legislation received Royal Assent on 18 March 2014 and will make new penalties available to the ATO for breaches that occur on or after 1 July 2014.

The legislation will also apply to contraventions that were made prior to 1 July 2014.

Examples of breaches of law include:
• loan to a member of the fund
• failure to prepare accounts in a year of income
• failure to keep minutes

The new penalties are designed to make it easier for the ATO to impose a monetary penalty on trustees who breach the law. The penalties will range from $850 to $10,200 depending on the type of breach that has occurred.

This monetary penalty will apply to the trustees personally and cannot be paid using the super fund’s assets.

The ATO has stated that if trustees are making progress in resolving the contravention by 1 July 2014 it will consider these circumstances in any request to remit any imposed administrative penalties.

These new penalties represent a significant change for SMSF trustees. The ATO’s ability to issue monetary penalties in the past has been restricted due to the severity of penalties available to them.

It is expected that the ATO will adopt a practice of imposing administrative penalties and require trustees to demonstrate that the penalty was unwarranted.

These changes have increased the risk that trustees will be exposed to financial penalties if a breach of the law occurs, so it is important that trustees ensure that they are vigilant in meeting all compliance requirements.

If you would like to discuss these chanes with our SMSF team then please do not hesitate to contact this office.

Disclaimer

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Following changes to the SMSF sector as part of the government’s Stronger Super review measures, SMSF trustees are now required by law to consider the need for insurance cover for members, such as life or disability insurance.
 

Considering insurance for one or more of its members will come under the SMSFs broader investment strategy, which trustees will need to ‘regularly review’, taking into account the changes in circumstances of the fund and its members. The new legislation does not require an SMSF to obtain an insurance policy on the behalf of its members, but rather demonstrate that the fund has considered insurance as part of its investment strategy.
 

It is critically important that trustees review their fund’s investment strategy and that all appropriate documentation is maintained to prove that regulations have been complied with. Compliance may be shown either through decisions taken in regards to the fund’s investment strategy, or if there has been no change, then the trustee minutes will show that the required actions have been taken.

Contact Leenane Templeton today for further information.

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Assets available to an SMSF include property, as well as shares and managed funds – however the usual superannuation rules continue to apply where the fund is purchasing an asset from a related party.

Some SMSF borrowing strategies

There are a number of strategies that enable individuals to take advantage of the rules.

Increasing the asset base.

Contributions rules place a limit on the amount of contributions that may be contributed to a fund. In addition, an investment in the SMSF borrowing arrangement is generally accounted for as net of liabilities. Where members are in a position to contribute assets such as property or shares this has the effect of enhancing SMSF borrowing.

Increased contributions.

Members may be able to transfer assets that they own into a fund, taking advantage of the borrowing rules. Members are then able to act as Trustee of the borrowing trust as well as the lender. The repayments made by the SMSF may then be contributed back into the fund by the member under the normal contribution rules.

Costs of finance

Financial products are readily available by lenders to take advantage of the rules allowing funds to borrow for investing.These products take into account the rules that only allow a loan to be secured against the investment it is funding, not total fund assets.

As a result of the higher risk profile, loans may attract a higher interest rate and require a deposit significantly higher than usually occurs with other standard investment loans. Trustees need to factor these risks and costs into their borrowing strategy.

The loan and the lender

SMSFs are able to use anybody as a lender, that is, they are able to obtain the loan from a bank, or other lending institutions, a member themselves, their business, a family member, company or trust. However while the law does not prevent the lender from being a related party, SMSFs must satisfy the sole purpose test and comply with existing investment restrictions such as those applying to in-house assets and prohibitions on acquiring certain assets from a related party of the fund.

Contact Leenane Templeton's professional staff to discuss how we can help you.

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In order to meet the definition of ‘business real property’ the property must be wholly and exclusively used in one or more businesses. When looking at this business real property Trustees should be wary of breaching the ‘in-house’ asset rules.

An ‘in-house’ asset is considered to be:

• Loan to or investment in a related party of the fund;
• An investment in a related trust of the fund; or
• A leased asset arrangement between the trustee and a related party.
   

The level of in-house assets that a SMSF can hold is currently limited to five per cent of a fund’s overall asset value.

The test applies at the end of each income year, as well as at any time that a new inhouse asset is acquired. Breaching this limit can result in the ATO deeming the fund to be non-complying, which may have major tax implications for the fund.

To be exempt from the ‘in-house’ asset rules the property must be subject to a lease arrangement on arm’s length terms.

Trustees are obliged to ensure that the fund deals with the related tenant as if the tenant was an unrelated party.

Trustees should ensure that rent is paid at the amount and frequency required by the lease, that annual increases required by the lease are complied with.

The rental payments cannot fall into arrears and all outgoing expenses are to be paid by the party specified in the lease.

There are serious consequences for SMSFs that fail to maintain the arrangement on arm’s length terms. In some circumstances auditors are required to immediately report the breach on non-compliant activity to the ATO.

An immaterial breach will also cause a contravention to be reported to the ATO if the breach occurs in more than one year or if the fund is recently established.

A breach may also result in an ATO audit of the SMSF, which can be a costly exercise.

Click here for our SMSF Advisors web site

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The Superannuation Complaints Tribunal's latest annual report shows that more than half of the complaints they received for the 2010-11 year involved superannuation administration issues.

Additionally, 33% involved the distribution of death benefits with a further 13% relating to the payment of disability insurance claims.

Some of the administration issues included:

• delays in the time taken action switches between investment options;
• delays in rolling money over to another superannuation fund;
• insurance premium deductions;
• investment returns;
• delays between the date of resignation or retirement and the rollover or payment of the benefit

"These are all further reasons why self managed super funds are a premium option for consideration" commented  Andrew Frith of the Self-Managed Super Specialists.  "When you are the trustee and the member of your self managed super fund the fund and the funds available for retirement are top of mind, not delegated to some large administration organisation which may or may not even be in Australia."

Speak with our award winning Newcastle financial advisor and self managed super fund expert  Andrew Frith
 

Do you have, a self-managed super fund? or are you thinking about a SMSF?   Leenane Templeton are running a SMSF Trustee Seminar on 17 October 2012.  The SMSF Seminar aims to give the trustees or would be trustees an insight into the issues and strategies available in self-managed or family superannuation funds.  Guest speakers will include Paul Chin – Senior Investment Analyst at Vanguard Investments and Andrew Frith, CEO of The Self Managed Super Specialists.  For more details email events@leenanetempleton.com.au   

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Most of the information we use in discussing longevity comes from actuarial life span projection tables which are commonly used by life insurance companies in determining costs for particular policies.

There have been some interesting discussions in recent press articles following predictions made by American futurist Ray Kuzweil, a very successful inventor and businessman  and recipient of many awards for technological development, including the first text-to-speech synthesisor (1975),  the first print-to speech reading machine for the blind (1976)  the first music synthesisor capable of recreating multiple musical instruments (1984), among many other inventions relating to artificial intelligence.  Ray, a MIT Computer Science graduate, who has been awarded many honorary doctorates, has written several books and is no slouch when it come to predicting technological change. 

In recent times one of his predictions, as espoused in his book, Fantastic Voyage: Live Long Enough to Live Forever (2004), has been creating much discussion on social media sites.  It is his idea that by 2030 biomedic technology will have advanced to the point where it will be possible to halt the body's ageing process.  He believes that tiny robots the size of red blood cells will patrol our circulatory systems and rejuvenate tired cells.  Then by about 2050 he predicts that we should be able to reverse-engineer a human brain and brain and upload it into a robot. People willing to give up their "wet" bodies, we are 50% – 60% water,  could not only live forever but also think at electronic speeds. 

Whilst to many of us this may seem far-fetched and not achievable, from a  social perspective it would appear that within a few decades longevity may become quite unpredictable if technological improvements become ever more exponential.  There will always be early adopters of technology, and Australians have historically been early adopters, however there would be significant implications for governments as well, especially as our expectations rise along with the costs of the technology.

Similarly, society may need to embrace a definition of retirement that is perhaps based on disability rather than age.

From a superannuation and retirement perspective these changes need to be factored into long-term planning, particularly as there is already clear evidence of significant improvements to health, lifestyles and longevity.  An inter-generational self-managed superannuation fund will be a tool to assist you with longevity and meeting your long-term living needs.

For longevity and retirement advice speak with our award winning Newcastle Financial advisor  Andrew Frith.

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In the new financial year, many DIY super funds will try to expand the diversity of their investment strategies. Including a residential property in a fund’s portfolio is beginning to be a popular choice. There are a number of rules and dangers, however, that potential investors should be aware of.

Most importantly, a fund cannot buy a property owned by a fund member or someone related to that member. Although a fund can acquire investments from a related party, such as shares, commercial property or units in certain managed investment trusts, it cannot purchase a residential property from a related party.

Some funds might wish to strategise and get around this prohibition by creating a unit trust. A unit trust is an arrangement whereby money from different investors is pooled to buy an investment. The value of the investment is converted into units which are issued to investors in proportion to the money they invested.

A family home, or residential property owned by a fund member, could be invested in by a unit trust. The fund will run into problems however, if it is entitled to more than half the units. Under super rules, where an asset is an in-house asset, no more than 5% of the market value of the super fund’s assets can be committed to the investment.

There are severe penalties if it is established that a unit trust was used to circumvent the prohibition on acquiring assets from related parties.

Investing in property might still be a good super fund strategy and it is worth considering the range of properties available. If a fund is going to diversify in the new financial year, be sure to get professional advice and ensure that the property investment does not break super rules.

This article is for guidance only, and professional advice should be obtained before acting on any advice herein. Neither the publisher Leenane Templeton The Self Managed Super Specialists nor the distributors can accept any responsibility for loss occasioned to any person as a result of action taken or refrained from in consequence of the contents of this publication. See our financial planning website for further information. This article relates to Australia, NSW and does not take into account any legislative or other changes made after 1 April 2011.

The post Beware the rules of DIY super funds and residential property appeared first on Newcastle Financial Planners & Financial Advisors.

According to the United Nations Population Division, we are all living through a period of ageing population that is unparalled in the history of humanity.  This process is a result of reduced mortality rates due to better living standards, and declining fertility rates.

Although this ageing population phenomenon is across the world the trend is significantly greater in developed countries.  According to statistics, it is predicted that by 2045 globally the number of people aged 60 or over will be greater than the number of people aged 15 or under.  However, in more advanced countries this milestone was reached in 1998, and the attendant issues have needed to be addressed in an on-going manner by governments. 

The reduction in the labour force, spending by older people differs significantly from that of younger people and government expenditure on items such as healthcare and pensions increases.  The economic changes exert added pressure to government budgets.  According to research from Standard and Poors, total age-related expenditure as a percentage of GDP is estimated to be in 2050, 27% in Japan, 29% in Italy, 30% in Germany and 32% in France.  Will these percentages be sustainable or will government debt rise to a level of unsustainability?

In Australia we have seen various federal governments introduce levies for healthcare and sustained pressure for people to be less reliant on the age-pension couples with an increase in retirement ages.  In more recent times similar practices have been introduced in other parts of the world many as a result of the global financial crisis and reduced government finances.

In addition to the ageing process, people in developed countries have been consumers of many luxuries and their greater expectations of service and of services will continue into retirement. Healthcare is expected to be a major driver of continued government reform. Added to this is the greater impact of a large voting ageing population, and even though the population is ageing and today’s 70 year old may be yesterday’s 60 year old, the human body inevitability declines with age, so the pressures on healthcare systems will also inevitability increase.

According to the US Bureau of Labor Statistics data, the expenditure on healthcare jumps significantly with age and they indicate that where average annual expenditure for ages 25 – 34 is under 5%, at ages 65 and over this jumps to 12%.  From a financial services investment this can be seen as opportunities for investments in healthcare and retirement living.

An increased retirement population also offers opportunities for recreational activities such as travel, sport and volunteer-based activities.  So not all is reliant on governments, and there will be opportunities in the years ahead for astute investors.

With future life expectancy likely to increase due to medical technology and healthier lifestyles it's important to plan for your retirement and superannuation. We are seeing in many countries the retirement age increasing but it's important to ensure that you have enough funds to live comfortably throughout your retirement life.

It's important to see a financial advisor to identify your needs and plan for your retirement. Unfortunately we often see people who have limited funds and have to cut out some of their more costly monthly payments to get through retirement.  Imagine the madness in reducing or cutting out private health insurance that has been paid for many years and is needed the most at this stage in life!  Speak with your financial planner and advisor today about your superannuation retirement funds.

Please click for further information about our self managed super funds specialists and for our  financial advisory service.

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According to Andrew Frith of the Self-Managed Super Specialists, headquartered in Newcastle NSW, it was refreshing to hear the Commissioner of Taxation, Michael D'Ascenzo, in his speech to the SMSF Professionals Association of Australia (SPAA) in February 2011, say that the ATO's "consistent message both to our people and to the community is to take care of family, friends, community and property first.  We can sort out tax and super issues later."

This was said following the devastating floods in Queensland, Victoria and Western Australia.  We have recently added the Illawarra and South Coast of NSW to this list.

One of the specific ways the Commissioner indicated assistance to self-managed super funds is where the fund may have acquired what are now flood or cyclone damaged buildings, in which case the ATO, in determining what is a repair or an improvement, whilst not having "a discretion to treat what is an improvement to be repaired, or a repair to be an improvement", they "will not be seeking to make fine distinctions having regard to what is available to repair what has been damaged".

The Commissioner went on to say "In financing repairs or incurring other costs, SMSF trustees may need to borrow funds and if SMSF trustees contravene the limited recourse borrowing provisions due to the natural disasters experienced Australia-wide, we would be favourably inclined to exercise the Commissioner's Discretion under section 42A(5) of the Superannuation Industry (Supervision) Act 1993 (SISA) to continue to treat the super fund as complying. 

Mr D'Ascenzo added "We are currently reviewing this matter with APRA and Treasury to ensure no unintended consequences arise."

Andrew Frith commented further how important it is for the taxpayer to know that there is human thought and a caring attitude behind the enormous bureaucracy that is the ATO.

Andrew Frith is the Chief Executive Officer of Leenane Templeton The Self Managed Super Specialists Pty Ltd.  Located in Newcastle, NSW, Australia.   Visit  Self Managed Super Funds web site for further information or visit our Newcastle Financial Planning Self Managed Super Fund Page.

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