This is a subject that most people who have a SMSF probably do not give much thought to. However, the audit is the end result of everything that has happened during the year.  So that what you do with your SMSF is then examined by the Auditor and you are given either a clean Audit Report, or the Auditor may have to, in some instances qualify the report which will cause, in most cases, the Tax Office to investigate the fund.

The ATO is auditing a far greater number of Superfunds than it was in the past. They are returning back to the Auditor items where the Auditor has not made a qualification.

We recently had a call from the ATO in relation to an Audit of a SMSF where the Trustee of the fund had apportioned an accounting fee by thirds and allocated one third to the Fund as an expense. The invoice he received did not actually cover work for the fund therefore the payment was considered to be of benefit to the member.

As Auditor I had picked up this minor indiscretion and had advised the money be returned by the member (less than $1000) in the following year.  I believed this transaction to be an honest mistake so I did not qualify my Audit report appropriately and got a rap over the knuckles by the ATO.

My point is, that if minor transgressions such as above, can lead to contact from the ATO and further, could lead to a full investigation you need to be aware that all payments made from a Superfund must be on account of fees, or accounts charged directly to the Superfund, in this way the Auditor is able to give a clear Audit Report.
The same situation arises with the use of Superannuation fund assets. If a member is able to access and use superfund assets then this would have to be reported by the Auditor as the assets would probably be considered to be purchased for the use of the member. If you bought real estate through your Super fund and the real estate consisted of an apartment or a house in a holiday area and the members of the fund used the property, then unless they paid full commercial rent, this would have to be reported. The same thing could apply to where you have invested in other assets which could be utilised by members.

This is placing a greater responsibility on Auditors even though the responsibility has always been there.  Auditors have tried not to qualify a report where they felt that the matter had been rectified or was of such a minor nature that it did not require reporting. The attitude of the Tax Office has changed all that, so that even where a problem has been rectified it still has to be qualified in the Auditor’s report.

My advice is that where you have any doubts as to whether or not a payment or use of a SMSF asset would be considered to be on behalf of a member, then contact you’re Auditor and discuss the matter with him, prior to making such payments or prior to using the SMSF assets.

Any way this is just a quick rundown on the current problems with the audit of superannuation funds and should you have any questions you should contact your accountant, or if you wish to contact us we are only too happy to discuss the matter with you

Next month we will look at a different subject…….

1. Taxpayers aged 65 or over must pass the ‘work test’ for the fund to be able to accept the contribution.

Medicare Levy – 2009/10

General Rate

 Low-income Thresholds – Individuals

The 2009/10 Medicate Levy low-income thresholds for individuals are as follow;

1. No Medicare Levy is payable on taxable income levels at or below the Threshold Amount.
2. Where taxable income falls within the Phase-in Limit, Medicare Levy is payable at 10% of the excess over the Threshold Amount.
3. The Medicare Levy of 1.5% applies to the entire amount of taxable income.

Medicare Levy Surcharge Thresholds¹

 A surcharge of 1% is imposed on top of the 1.5% Medicare Levy where a taxpayer, their spouse or dependants do not have private patient hospital cover and the taxpayer’s ‘income for Surcharge proposes’, exceeds the relevant threshold from the following table². 

 A taxpayer’s “income for surcharge purposes’ (from 2009/10) is the sum of:

-          their taxable income (including the net amount on which family trust distribution tax has been paid);

-          reportable fringe benefits;

-          reportable superannuation contributions;

-          exempt foreign employment income;

-          total investment loss (including net financial investment losses and net rental losses)

Less any taxed component of a superannuation lump sum received which does not exceed the taxpayer’s low rate cap.

1. A policy taken out where the annual excess is greater than $500 for singles ($1,000 for couples), is deemed not to provide private patient hospital cover.
2. Where a single taxpayer has dependants, the ‘income for surcharge purposes’ of the dependants does not count towards the family threshold.
3. Where a married couple has dependants, only the ‘income for surcharge purposes’ of the spouses is taken into account.

Family Thresholds

A taxpayer who:

• Has a spouse (married or de facto) on the last day of the income year;
• Has not remarried after their spouse died during the income year; or
• Who is eligible for the notionally retained sole parent rebate, the housekeeper or the child-housekeeper rebates (or would be entitled if they did not qualify for the Family Tax Benefit Part B); may be eligible to pay no (or a reduced) Medicare Levy if their family income is within the thresholds set out below.

 The 2009/10 Medicare Levy thresholds for families are as follows:

1. Family Income is the combined income of a taxpayer and their spouse. If the taxpayer does not have a spouse, Family Income is the taxpayer’s taxable income only. No Medicare Levy is payable on taxable income levels at or below the Family Income Threshold.
2. The Medicare Levy shades in at 10% for every dollar where family income exceeds the Family Income Threshold. There is no ‘Phase-in Limit’ stated for families as there is with individuals since the figures change with the number of dependants. Instead, a formula is applied to reduce the levy payable by families to 10% of the amount by which family income exceeds the Family Income Threshold. The reduction is calculated as: A – (0.085 x (B – C)) where A is 1.5% of the relevant Family Income Threshold, B is the Family Income and C is the Family Income Threshold. Where the levy is also payable by the spouse, the reduction is shared according to the proportion that the taxable income of each bears to the total family income.

The levy payable by the relevant taxpayer is 1.5% of their entire taxable income

 

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ATO trials payments by credit card
The Tax Office is trialling payment by credit card for all taxation liabilities between $10 and $10,000.
To make a credit card payment taxpayers will need:
• A Visa, MasterCard or American Express card; and

• Their ATO electronic funds transfer EFT code to use the Government EasyPay website or telephone service.
A Card payment fee applies to transactions made using this service. This fee is the non-GST component of the fee the Tax Office incurs from its banker for these transactions.
The fees are:
Card type Fee
Visa/MasterCard 0.65%
American Express 1.25%

What if super guarantee creates excess contributions?
Editor: At the same meeting, the Tax Office was asked what if super guarantee obligations meant that a taxpayer exceeded their concessional contributions cap. Again, the answer was negative.
Q. Would the Commissioner exercise his discretion under S.292-465 ITAA 1997 if excess contributions arose due to contributions required under the Superannuation Guarantee (Administration) Act 1992?
For example, if an individual received a $100,000 p.a. cash salary from three unrelated employers, they would have $27,000 in mandated contributions paid on their behalf each financial year. This will cause them to exceed their concessional contributions cap.
A. In the absence of additional relevant factors, no.
ATO’s technical explanation
S.292-465 of the ITAA 1997 prescribes that the discretion may only be exercised in cases where the Commission considers that:
 There are special circumstances; and
 Making the determination is consistent with the object of Division 292, which is set out in S.292-5.
It is clear from the case law that special circumstances are unusual circumstances or circumstances out of the ordinary.
Whether circumstances are special will vary from case to case as the context requires, but in this context they must make it unjust, unreasonable or inappropriate to impose the liability for excess contributions tax.
The Commissioner does not consider that current operation of the law, where mandated contributions result in an assessment for excess contributions tax to be unjust, unreasonable or inappropriate.
Ref: NTLG Superannuation Technical Sub-group minutes – 8 September 2009.

Ref: NTAA Voice edition 189

ATO comes down hard on UPEs to bucket companies

The ATO has now issued Draft Taxation Ruling TR2009/D8 which, generally speaking, means that where a trust has an unpaid present entitlement (UPE) to a private company, the UPE will constitute a “loan” by the private company to the trust, for purposes of Division 7A and may be treated as a dividend.

“Carve-out” for existing UPAEs

However, UPEs existing prior to 16 December 2009 (in practical terms those arising from income years up to, and including, 30 June 2009) are not affected by the ATO’s new interpretation, and will therefore not generally be treated as loans (or dividends).

It is important to note this “carve-out” does not extend to situations where the trust and the private company have taken active steps to convert a UPE into a loan.

In such a situation, the ATO position has always been that a loan exists for Division 7A purposes.

ATO’s new view – draft ruling TR 2009/D8

The draft ruling considers how Div. 7A applies to certain private company loans, where:

• That private company has a UPE from an associated trust that is part of the same family group of entities as the company; and
• Funds representing the UPE are able to be used by the trust (whether or not they are intermingled or available, by being paid back to, reinvested in, or lent back to the trust by any relevant sup-trust).

Draft ruling has two operative parts

1. 1.        Converting a UPE into a loan

Where a private company beneficiary’s UPE is extinguished and converted into a loan back to the trust, the position in the draft ruling effectively accords with the ATO’s pre-existing view and is not contentious.

2.  UPEs automatically becoming loans

The draft ruling provides that a UOE will amount to a loan for purposes of S.109D by way of:

The provision of a financial accommodation; or

An “in-substance” loan.

The only way to prevent this conclusion is for:

• The company to call for the payment of that UPE – by (probably) no later than the date of lodgment of the company’s relevant income tax return; or
• The funds representing the UPE are invested for the company’s absolute benefit, and there is no benefit accruing to the main trust from the use of those funds (i.e., the funds are kept separate and not intermingled).

Note: It would still be possible to enter into a written loan agreement for such loans.

Where are we right now?

Editor: This is a draft ruling and it is possible but not likely, that the ATO will change its view. In addition, the Tax Office’s position has not been tested in Court.

However, members should put themselves in a position to consider and act on their options before 30 June 2010. We will continue to have discussions with the Tax Office and will provide options to members well before 30 June 2010.

Note: For more practical assistance, this matter will be fully covered and discussed in the upcoming Tax Hot Spots seminar. This is a huge issue for tax practitioners and we strongly suggest that members make the time to attend this seminar.

ref: NTAA Voice edition 189

Caps apply to contributions made to your super fund for a financial year. Any super contributed over the cap amount is subject to extra tax. The cap amount and how much extra tax you pay once you exceed it, depends upon whether the contributions are:

concessional – which are generally made to a super fund for or by you in a financial year and are included in the assessable income of the super fund (for example super guarantee, salary sacrificed amounts and any amount you are allowed as a personal super deduction in your income tax return).

non-concessional – which are generally made to a super fund by or for you in a financial year and are not included in the super fund’s assessable income (for example, personal contributions you make from your after-tax income).

Summary of contribution caps

*The $25,000 concessional cap will be indexed annually from 2010-11 onwards to average weekly ordinary time earnings (AWOTE) and rounded down to the nearest multiple of $5,000.

*The transitional concessional contributions cap is for those aged 50 years or older and is available until 30 June 2012.

If you are considering making extra contributions to super, ensure you understand all the implications