SMSFs need an ABN and TFN

ABN and TFN

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SMSFs need a TFN and ABN. SMSF’s corporate trustees need an ACN. And all members need a TFN.

SMSFs need an ABN and TFN

That was quick and confusing, so let’s go through this once more.

Your SMSF needs a TFN

Tax File Numbers (TFN) are issued by the Australian Tax Office (ATO) and identify a tax payer.

Your SMSF has to prepare an annual return and hence needs a tax file number. This number is like your SMSF’s id. Without it the ATO can’t process the information in their system.

Your SMSF needs an ABN

Australian Business Numbers (ABN) are issued by the Australian Business Register (ABR) and identify a business.

Your SMSF needs an ABN…….Not actually true. There is no legal obligation for an SMSF to get an ABN. Neither the SIS Act nor SIS Regulations stipulate an ABN. And so the ATO can’t force you. Your SMSF can be a complying super fund without an ABN. 

But life is a lot easier when your SMSF does have an ABN. The business community expects your SMSF to have an ABN so many forms will ask for it. And eSAT doesn’t work for SMSFs without an ABN.

eSAT is the electronic superannuation audit tool auditors can use for their annual compliance audit or to lodge an auditor contravention report.

Your Corporate Trustee needs an ACN

Australian Company Numbers (ACN) are issued by the Australia Securities & Investments Commission (ASIC) and identify a company.

A corporate trustee is a company so they need an ACN by definition. Every company – be it a special purpose company or not – automatically gets an ACN upon registration. You are not an Australian registered company if you don’t have an ACN.

Assuming your corporate trustee doesn’t run a business or derive any income directly, they neither need an ABN nor a TFN.

All Members Need a TFN

Every member has a beneficial interest in the SMSF’s assets and income. And so the ATO wants to know who these members are. And they do that through a TFN. So every member needs a TFN.

If you get stuck, please email or call us. There might be a simple answer to your query.

 

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Collectables and Personal Use Assets

 

Disclaimer: numba does not provide specific financial or tax advice in this article. All information on this website is of a general nature only. It might no longer be up to date or correct. You should contact us directly or seek other accredited tax advice when considering whether the information is suitable to your circumstances.

Liability limited by a scheme approved under Professional Standards Legislation.

Collectables + Personal Use

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Super is all about gratification delay. Suffer now. Retire later. But collectables and personal use assets mean instant gratification. 

Collectables and Personal Use Assets

When your SMSF acquires collectables and personal use assets, you have fun right now. There is no gratification delay. The legislator doesn’t like that.

Before 2011

Life was good before 2011. Back then you could get your SMSF to buy Aboriginal art and hang it on your living room wall. Or buy a vintage car and drive it around on weekends. Or buy a Tiffany ring and wear it next to your wedding ring.

And then you just hoped for capital growth some time in the future. That was enough to pass the sole purpose test – sort of.

But the legislator didn’t like that one bit. They struggled to see the sole purpose in your expensive paintings and vintage cars. And so they addressed the issue in two steps.

s62A SIS Act

They added a definition in s62A of the SIS Act to clarify what the term ‘collectables and personal use assets’ actually includes.  

s62A lists collectables and personal use assets – ranging from artworks, artefacts and antiques over jewellery, coins and stamps to vehicles, motorbikes and recreational boats.

Paragraph 13.18AA SIS Reg

And then they added paragraph 13.18AA to the SIS Regulations to do the heavy lifting. Para 13.18AA lists clear rules about the usage, storage, insurance, lease and subsequent sale of collectables and personal use assets. 

Since the term ‘collectables and personal use assets’ is quite a mouth full, they are often referred to as ‘s62A items’.

s62A items must not be leased to or used by a related party, not be stored or displayed in the private residence of a related party and not be sold to a related party below market value and without an official valuation. The asset must be insured in the name of the fund. And any decision regarding the storage of the asset must be well documented and kept for 10 years. 

The purpose of all these rules is to prevent a member from receiving a benefit before a condition of release has been met.

Usage

You and related parties must not use collectables and private use assets in any way. Any use – however insignificant, incidental or arbitrary – counts as usage. 

So if your SMSF owned a vintage car, you or other related parties must not drive it. Not even to get the car to a work shop for maintenance or restoration work. If you want the car moved, ask a third party not related to your SMSF. 

Storage

You can store your SMSF’s s62A items in any way you like as long as it is not a related party’s private residence.

Private residences are a huge No No when it comes to collectables and personal use assets. The legislator doesn’t want these assets anywhere near a private residence where a related party’s private use or display would be impossible to track.

But other premises – for example an office, warehouse, factory, boat shed, trailer – are ok even if a related party owns or leases these premises. Any storage outside of private residences is ok as long as the storage does not amount to a display.

When you store a s62A item, you need to keep a record why you decided to store the items the way you did.

Display

You and related parties must not display your SMSF’s s62A items in any way.

So if you store your SMSF’s art works in your office building, they must be packed away. You can’t display them in your reception, meeting room, office or wherever else you might have an empty white wall.

There is only one way s62A items can see the light of day. And that is when they are leased to an unrelated party at arm’s length – for example to an art gallery.

Insurance

Your SMSF must insure any collectables or personal use assets within seven days of purchase. The policy must be in your SMSF’s name, but it doesn’t matter whether the items are insured under separate policies or collectively under one.

The need for insurance in the SMSF’s name is probably the greatest hurdle. Insuring s62A items is often prohibitively expensive, if you manage to find an insurer. Many insurance company don’t insure lifestyle assets, and when they do charge accordingly.

Leasing

If your SMSF holds collectables or personal use assets, it must not lease these to a related party. A lease is only permissible if at arm’s length to an unrelated party.

So your SMSF could lease art work to an art gallery at arm’s length as long as no related party has any connection with this art gallery.

Selling

The legislator doesn’t really want your collectables and personal use assets in your SMSF in the first place. So all doors are open for you to sell them again. 

You can sell your collectables and personal use assets to anybody you like. Even a related party.  You just have to make sure that the sale is at market value determined by a qualified and independent valuer. Qualified means they know what they are talking about. They have formal valuation qualifications or their professional community values their specific knowledge, experience and judgement in the matter. Independent means that they are not a related party.

Superannuation Investment Rules

The rule in para 13.18AA is one of six superannuation investment rules. But there are five more.

Any acquisition of collectables and personal use assets must pass the sole purpose test, be at arm’s length, not from a related party and keep in-house assets below 5% of total assets.  And the SMSF can’t borrow money to buy the collectable or personal use asset.

If you acquire collectables or personal use assets you need to pass all six investment rules.

If you get stuck, please email or call us. There might be a simple answer to your query.

 

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Disclaimer: numba does not provide specific financial or tax advice in this article. All information on this website is of a general nature only. It might no longer be up to date or correct. You should contact us directly or seek other accredited tax advice when considering whether the information is suitable to your circumstances.

Liability limited by a scheme approved under Professional Standards Legislation.

In-Specie Contributions

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When your SMSF receives in-specie contributions, two things happen in one go. Your SMSF receives a contribution. And your SMSF acquires an asset.

In-Specie Contributions

There are two ways for an asset to move into your SMSF. The trustee can either buy the asset. Or the trustee can receive the asset as an in-specie contribution.

Let’s use an example. Let’s say you bought an apartment 10 years ago, negatively geared it against your income. And you did well. But now the mortgage is paid off, so you start paying marginal rates on your rental income. So you do an in-specie contribution into your SMSF.

In-Specie Contributions

In-specie contributions are complex. They come with baggage. A ton of strings attached. Four to be exact.

1 – An in-specie contribution is a contribution, so you need to watch out for contribution caps.

2 – But an in-specie contribution is also an acquisition, so you also got the superannuation investment rules to deal with.

3 – An in-specie contribution usually comes from a related party – who else would transfer an asset into your fund? So you got all the rules around related party transactions to comply with, especially s66 of the SIS Act.

4 – And an in-specie contribution might require a loan. So you need to get around s67 of the SIS Act telling you not to borrow money.

No Change of Legal Ownership

For in-specie contributions no cash changes hands. There is no actual sale of the asset. No change of legal ownership.

The trustee – be it an individual or corporate trustee – owned the asset before the contribution. Not as a trustee in trust for the members. But in their own right as an individual or company.

After the contribution the individual or corporate trustee are still the legal owners of the asset.  Nothing changed in that respect.

Transfer of Beneficial Ownership

What changed is the beneficial ownership of the asset. The contribution was a transfer of beneficial ownership.  

Before the contribution the trustee – be it an individual or corporate trustee – held both the legal and beneficial ownership of the relevant asset.

After the contribution the trustee is still the legal owner of the asset. But beneficial ownership is now in the hands of the members. The trustee only holds the asset in trust for members. Because after all an SMSF is only a fiduciary relationship.

Trustee on Title

For an in-specie contribution the trustee needs to own the asset before the transfer – not as a trustee but in its own right. A trustee can only hold an asset in trust for members if it is the legal owner of the asset.

This is often an issue when assets are held in individual names but the SMSF has a corporate trustee, particularly when the asset is property. If the land register lists the title in individual names and the SMSF has a corporate trustee, there is no room for an in-specie contribution.

This comes up more often than you might think. Mum and dad investors buy a commercial property in individual names and negatively gear it against their salary and wages.  Once the property is positively geared, they transfer it into the SMSF through in-specie contributions to move future lease income and capital gains into the concessional tax environment of super. At least, this is what they intend to do.

But if the SMSF has a corporate trustee, then this doesn’t work since the corporate trustee doesn’t have legal ownership of the asset. The title is in individual names.

But in practice it depends on whether the auditors let this through. And whether the ATO ever looks closer. 

Part Transfer

The transfer doesn’t need to cover the entire asset. It can just be part of an asset. For example 25% or 50%.  So if an asset’s value exceeds the annual contribution and bring-forward caps, you can contribute the asset over time.

Let’s say a small business owner transfers 50% of his business premises into an SMSF using the bring-forward rule. So he now holds 50% as trustee and the other 50% directly. He waits three years and then starts transferring the remaining 50% in several tranches.

Contribution

Whether you make a contribution in-specie or in cash, the normal contribution caps still apply. So if you want to transfer your business premises into your SMSF and its market value exceeds contribution caps, you do the transfer in stages over several years.

You can’t make any more non-concessional contributions, once your TSB hits $1.6m. TSB stands for Total Superannuation Balance. Think of it as everything you got in super.

So with that limit, it gets much harder to get an entire building into an SMSF. Anything that is worth more than $1.6m won’t fit. You would just transfer a portion into the SMSF and keep the rest outside of super.

Acquisition

An in-specie contribution is an acquisition the SMSF makes. And so all six superannuation investment rules apply. You need to….

1 –  Pass the sole purpose test – s62 SIS Act
2  – Act at arm’s length – s109 SIS Act
3  – Keep in-house assets below 5% – s82 SIS Act
4  – Not acquire assets from related parties – s66 SIS Act
5  – Not hold assets for personal use – s62A SIS Act + para 13.18AA SIS Reg
6  – Not borrow money – s67 SIS Act

Look at s66 / # 4 again. Not acquire assets from related parties. But an in-specie contribution is exactly that. It is an acquisition from a related party. So this would put an end to any in-specie contributions.

But s66 contains three exceptions. Listed securities, business real property and in-house assets below 5%. So those three asset groups can still come into the SMSF via an in-specie contribution. 

Related Party Transaction

An in-specie contribution almost always comes from a related party. Never say never, but who else would transfer an asset into your fund?

Since the asset comes from a related party, the legislator wants to make sure that the transfer happens at arm’s length. That the asset comes in at market value – not more and not less. So you got s66, s82 and s109 of the SIS Act to contend with.

Loan

There is no point in making an in-specie contribution for $3.50. So in-specie contributions are usually about substantial asset values. And that makes it more likely that a lender has a charge over the asset that allowed the asset’s acquisition in the first place. 

If that is the case, the lender is unlikely to consent to an in-specie contribution. So you would refinance the loan and change it to an LRBA – probably with a different lender – to get around s67 of the SIS Act . 

So looking at all this, you can probably see that in-specie contributions are doable but complex. 

If you have a question, please email or call. There might be a simple answer to your query.

 

MORE

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Disclaimer: numba does not provide specific financial or tax advice in this article. All information on this website is of a general nature only. It might no longer be up to date or correct. You should contact us directly or seek other accredited tax advice when considering whether the information is suitable to your circumstances.

Liability limited by a scheme approved under Professional Standards Legislation.

Super Investment Rules

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The SIS Act lists various superannuation investment rules that are to to keep your super safe  until you retire.

Superannuation Investment Rules

Superannuation is highly regulated in Australia. Especially four areas have the legislator’s full attention. How much goes into super. What happens to it while inside. How much moves into pension mode. And how much comes out. 

How much goes into super is all about concessional and non-concessional contributions. What happens while inside is all about superannuation investment rules. How much moves into pension mode is all about transfer balance accounts and caps. And how much comes out is all about conditions of release and benefit payments.  

Insider Deals

Government and retail super funds are unlikely to do insider deals with you. You are just one small fish in a big pond.  But your SMSF might be a temptation too hard to resist when cash is tight. So investment rules are especially relevant for SMSFs, since there is so much room for dodgy deals. 

Take the arm’s-length rule as an example. Imagine the arm’s-length rule didn’t exist. Your SMSF could buy below market from related parties and bring extra super in. Or sell below market to related parties and move extra super out. And this points to the highest risk when it comes to SMSFs – related parties. Dodgy deals with related parties.

Related Parties

And so investment rules focus on related parties. This is where the risk is. Your SMSF has two related parties – you and your ‘Part 8 associates’. Part 8 of the SIS Act covers related party transactions – hence the term ‘Part 8 associates’.

You is simple. It is just you. But determining your Part 8 associates is not that simple. It involves a lot of people – your family, fellow SMSF trustees, business partners in a partnership, any entities you or another Part 8 associate controls and so on.

Your family alone includes your spouse, children and close relatives, which includes your and your spouse’s siblings, parents, grandparents, uncles, aunts, nephews and nieces. Can you see how this can get complicated?

Part 8 discusses control in great detail. But to keep it simple, just think of majority. Think of 51% or more. Think of you and your Part 8 associates running the show.

So these related parties are the focus of Australia’s superannuation investment rules. 

Investment Rules

There are six investment rules that govern what happens to your super while inside your fund. Protecting your super from you and your Part 8 associates.

You must pass the sole purpose test and act at arm’s length. You must keep in-house assets below 5% of total assets.  And you must neither acquire assets from related parties, nor acquire or hold assets for personal use, nor borrow money. That’s it. Just those six rules. But there are plenty of exceptions.

# 1   Pass the Sole Purpose Test

The sole purpose test in s62 (1) of the SIS Act is the core of Australia’s superannuation framework. It requires trustees to focus on the provision of retirement benefits and/or death benefits.

 s62 (1)  Each trustee …must ensure that the fund is maintained solely: (a)  for one or more of …the core purposes; or (b)  for one or more of the core purposes and for one or more of the …ancillary purposes..

# 2   Act at Arm’s Length

Trustess must act at arm’s length. No deals with related parties. s109 (1) states this very clearly.

s109 (1)  A trustee …must not invest …unless:  (a)  the trustee …and the other party …are dealing with each other at arm’s length….

But then there is a back door. You can do business with related parties as long as your terms and conditions are at arm’s length. 

s109 (1) (b): or…  the terms and conditions…are no more favourable to the other party than … if the trustee …were dealing with the other party at arm’s length…

# 3   Keep In-House Assets Below 5%

Dealings with related parties carry a huge inherent risk. To contain this risk the legislator wants to keep super assets connected to related parties at a minimum – below 5%. 

s82 (2): If the market value ratio of … in-house assets as at the end of…a…year of income exceeds 5%, the trustee of the fund…must prepare a written plan. …

(4)  The plan must set out the steps …to ensure that: (a)  … in-house assets …are disposed of during the next … year…; and (b)  the value of the assets so disposed of is equal to or more than the excess amount….

Keep in-house assets below 5%. If you don’t, you need to come up with a plan how to get in-house assets below the 5% threshold again in the following year. 

There are three categories of in-house assets listed in s71(1) of the SIS Act. Loan, investment or lease – connecting the SMSF to a related party.

s71 (1):…an in-house asset …is an asset …that is a loan to, or an investment in, a related party…, an investment in a related trust…, or an asset….subject to a lease…between a trustee … and a related party…

Lease

Lease might mean a lot more than you think. Para 13.22A of the SIS Regulations defines lease arrangements much wider than other parts of the law. 

SIS law assumes a lease whenever a related party controls the use of the asset, even if there is no lease agreement that would be enforceable by legal proceedings.  

Para 13.22A:…any agreement, arrangement or understanding in the nature of a lease (other than a lease) between a trustee of a superannuation fund and another person, under which the other person is to use, or control the use of, property owned by the fund, whether or not the agreement, arrangement or understanding is enforceable, or intended to be enforceable, by legal proceedings.

Think of a holiday home owned by an SMSF. If a related party stays there even just one night, SIS law assumes a lease.

Excluded

Certain assets are specifically excluded from being in-house assets per s71(1) SIS Act.

The three exceptions most relevant to SMSFs are 1) business real property, 2) widely held unit trusts (at least 20 entities have fixed entitlements to at least 75% of the trust’s income and capital) and 3) property owned as tenants in common but not leased to a related party.

# 4   Not Acquire From Related Parties

Section 66 (1) of the SIS Act is like a sledgehammer. It says that as the trustee of a super fund you must not acquire any assets from a related party even if it is at arm’s length. Oommpphh. That hits hard. Much harder than s109. 

s66 (1) SIS Act: … a trustee ….must not intentionally acquire an asset from a related party of the fund.

But there are exceptions to this rule. Listed securities, real property, in-house assets and relationship breakdowns are the most relevant ones.

Listed Securities

If the asset is a listed security, then there is a definite market value at the time of transfer, hence the exception in s66 (2) (a) SIS Act.  

s66 (2):  Subsection (1) does not prohibit a trustee …acquiring an asset from a related party of the fund if: (a) the asset is a listed security acquired at market value…

Real Property

SMSFs may acquire business real property from a related party at market value. Small business owners often use this exception to transfer business premises into their SMSF.

s66 (2)  Subsection (1) does not prohibit a trustee …acquiring an asset from a related party…(b) if …the asset is business real property of the related party acquired at market value…

Business real property is defined in s66 (5) of the SIS Act. It is any real estate – any freehold, leasehold or indirect interest in real property or Crown land – used wholly and exclusively for business.  Farm land is regarded as wholly and exclusively used in a business even if up to two hectares is used for domestic or private purposes.

In-House Assets

The in-house asset rules are like a materiality threshold. It is the legislator saying, “Let’s not sweat the small stuff”.

If an asset is insignificant – less than 5% of total assets – then it is ok to acquire it from a related party at market value. Thanks to s66 (2A) SIS Act.

s66 (2A):..does not prohibit the acquisition of an asset by a trustee …from a related party… if: (a)  …the asset … is an in-house asset…and (b)  …acquired at market value; and (c)  ..would not result in…in-house assets …exceeding the level permitted by Part 8.

But here is s83 SIS Act to remind you what to do if it does exceed 5%..

s83 (2): If the market value ratio of the fund’s in-house assets exceeds 5%, a trustee of the fund must not acquire an in-house asset.

Relationship Breakdowns

And then there are relationship breakdowns. When you separate, s66 (2B) of the SIS Act gives you the option to move super from one spouse to the other. 

s66 (2B): …not prohibit a trustee …acquiring an asset from a related party …[if] …the member and …spouse …are separated; and …there is no reasonable likelihood of cohabitation being resumed; and …the acquisition occurs because of…the breakdown of the relationship …and  the asset represents…the member’s own interests …or .. entitlements as determined under …the Family Law Act 1975 …

For more details see s71EA SIS Act.

# 5    Not Use Assets for Personal Use

s62A SIS Act together with paragraph 13.18AA of the SIS Regulations have very strict rules around collectables and personal use assets.

It starts with a long list of collectables and personal use assets in s62A of the SIS Act. The list ranges from artworks, artefacts and antiques over jewellery, coins and stamps to vehicles, motorbikes and recreational boats. And then para 13.18AA tells you what to do and not to with these assets.

Collectables and personal use assets must not be leased to or used by a related party, not be stored or displayed in the private residence of a related party and not be sold to a related party below market value and without an official valuation. The asset must be insured in the name of the fund. And any decision regarding the storage of the asset must be well documented and kept for 10 years. 

As with any investment the acquisition of collectables and personal use assets must comply with all the other superannuation investment rules.

# 6  Not Borrow Money

This one sounds very straight forward. An SMSF trustee must not borrow any money.

s67 (1):  …a trustee of a regulated superannuation fund must not: (a)  borrow money; or (b)  maintain an existing borrowing of money.

But there are four important exceptions. A trustee can borrow money to pay a benefit, surcharge or security transaction. The only requirement is that the borrowed amount does not exceed 10% of fund assets and is paid within a set number of days. For benefit and surcharge payments it is 90 and for security transactions 7 days.

And then there is one more exception. And this is a big one. A trustee can borrow money as part of a limited recourse borrowing arrangement (LRBA). 

LRBAs

An SMSF is allowed to borrow in order to purchase a single acquirable asset – provided the requirements under sections 67A are satisfied.

s67A (1) (a):  …the money is…for the acquisition of a single acquirable asset…, (b)  …held on trust … and (c)  the…trustee has a right to acquire legal ownership …and (d)  the rights of the lender …are limited to …the acquirable asset; and  (e)  … the …trustee’s rights are limited … to the acquirable asset; and  (f)  the acquirable asset is not subject to any charge …except as .. in (d) or (e).

This single acquirable asset is then put into a bare trust with the lender only having recourse against this one asset in case of a default. Other fund assets are safe. 

In the past the loan for the LRBA might have come from a third-party like a bank. But nowadays it usually comes from a related party since most banks no longer lend to SMSFs. 

If the loan comes from a related party, you need to act at arm’s length. You do this by sticking to market terms and conditions.

Safe Harbour

But acting at arm’s length is not that straight forward, so the ATO gave you PCG 2016/5 as a safe harbour.

PCG 2016/5 – arm’s length terms for Limited Recourse Borrowing Arrangements established by self-managed  superannuation funds (issued on 6 April 2016)

If your LRBA complies with this PCG, the Commissioner will accept your LRBA as being at arm’s length.

If you choose not to follow the safe harbour rules – they are not compulsory – you need to demonstrate that the terms of the borrowing arrangement – including a benchmarked interest rate – are at arm’s length. Otherwise the income generated from the asset is considered non-arm’s length income and hence taxed at top marginal rates.

So these are the six superannuation investment rules you need to follow as the trustee of an SMSF. 

 

MORE

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Disclaimer: numba does not provide specific financial or tax advice in this article. All information on this website is of a general nature only. It might no longer be up to date or correct. You should contact us directly or seek other accredited tax advice when considering whether the information is suitable to your circumstances.

Liability limited by a scheme approved under Professional Standards Legislation.