As we begin a 2022/23 financial year, it is time to think about what might have changed and what SMSF trustees need to prepare for.
Changes to SMSF contribution rules?
1 July 2022 brings new contribution rules. While monetary limits have not changed, there are some changes around the eligibility to make contributions, along with the member’s age.
There is no longer any requirement to meet a work test up to age 75 years if you are making employer or salary sacrifice contributions or non-concessional contributions. If you are planning on making personal concessional contributions between the ages of 67 and 74 years, you will still be required to meet the work test. That is, you must work 40 hours in 30 consecutive days at least once during the year.
A full review and analysis of superannuation contributions will be available in Super News next month, subscribe to our insights to receive an email when it is released.
The current ATO focus – Non Arm's Length Income (NALI)
Non Arm's Length Income (NALI) can be particularly onerous for SMSFs. NALI is defined as income derived from a scheme or arrangement that means the SMSF is receiving more (or less) income than would be expected in a commercial or arm's length arrangement. NALI is taxable at 45 per cent, rather than the concessional rates of up to 15 per cent for SMSFs.
A change in the income tax legislation last year provided clarity that NALI tax rates could be applied to SMSF income not only where income was more than commercial rates, but also where expenses are incurred at less than commercial rates (or not incurred at all, when they should be). This is particularly relevant for expenses that are payable, or paid, to related parties.
While the Australian Taxation Office (ATO) has advised they will not be taking specific compliance action in relation to this change until 1 July 2023, they are not prevented from applying the law if examples of non arm’s length expenses (NALE) are found. Trustees should review their current arrangements with related party transactions to ensure that they are all on commercial or arm's length terms and that any possible discount scenarios are in line with normal commercial practices.
When is it possible for Non Arm’s Length Expenses (NALE) to be present?
Generally, NALE will be present when the SMSF pays the trustee, member, or a related party for services (or does not pay for services) at a special (SMSF) rate that is below normal commercial terms. A distinction is made between whether the trustee is providing those services as trustee of the SMSF or in their individual (or professional or business) capacity. This distinction is important because, if trustees are conducting activities or providing services in their capacity as a trustee, they are not permitted to charge the SMSF for those services.
Some examples of when NALE might be present include:
The SMSF acquires a property - The Trustee is a conveyancer and does not charge the SMSF a fee for the conveyancing services.
The SMSF acquires a property with a loan from a related party - The interest rate charged on the loan is below commercial interest rates.
The trustee is a financial advisor and utilises their professional tools and work time to manage and monitor the fund's investments - No fee is charged.
The trustee is a plumber, electrician or tradesman and does repair work to the SMSF property in work hours - No fee is charged.
The trustee is a licenced real estate agent & uses their business to manage a SMSF property - A discounted fee (50 per cent) is charged.
The SMSF trustee is an accountant & the accountant's firm prepares the SMSF financial reports and tax return - No fee is charged.
The SMSF trustee is a builder and provides building services to the SMSF to construct property - The SMSF pays for all materials but not time.
This is a new and potentially complicated area of SMSF rules and if you are in any doubt, we suggest you contact your WE adviser for assistance identifying:
In what capacity you, as the trustee, are providing services or conducting activities
Whether a fee should be charged to the SMSF, and how to determine what is a commercial fee.
The ATO has published guidance on the application of these rule changes, but as this is a new area of law there are no hard and fast rules that can be applied.
What are auditors looking for in SMSF records?
It is time to consider getting your SMSF records together for the preparation of annual financial and taxation returns and auditing. Satisfying the auditor can be a demanding and sometimes frustrating process. Your WE adviser will be able to assist you with this, but key documents might include:
Cash & Term Deposits
Bank Statements for the whole year (and particularly the statement at 30 June 2022).
Term deposit statements that confirm the balance at 30 June 2022, or post year end statements that confirm that the Term Deposit still existed at 30 June 2022.
This is important as term deposits can of course be broken so a statement dated in say April/May is no guarantee that the Term Deposit was still in place at 30 June.
Portfolio reports, holding statements, dividend statements and any contract notes.
Objective & supportable data/documentation to support the current market value of the property.
This does not necessarily need to be an independent valuation – the auditor will want to know HOW you arrived at the market value.
Property manager statements or current lease agreement.
If the property is leased to a related party, the lease agreement must be a legally enforceable lease agreement (per legislation).
Signed (and if applicable audited) financial statements for the private entity.
Documentation to support the assessment of the market value of the units or shares, including documentation to support the market value of any underlying assets (particularly if property based entity).
Loans to Others
Loan Agreement and repayment schedule.
Evidence of security taken (if secured loan).
Documentation to support the trustee’s assessment of the recoverability of the loan.
This will be particularly important if there are no regular repayments, or the borrower has defaulted on the terms and conditions of the loan.
Gold/Bullion Collectibles ‘Other’ Investments
Documentation to support the existence of the asset/investment (this may include photographs).
Documentation to support the current value or the investment.
A current investment strategy that includes a consideration of
The current circumstances of the members.
Diversification of investments (or acknowledgment of the risks of non-diversification).
Liquidity requirements of the SMSF and how these are met.
Whether or not personal insurances are available to members.
If you are unsure, please contact your WE Adviser most auditors are happy to provide a detailed checklist of what they require to complete their audit which we can procure for you.