Does your SMSF meet the sole purpose test?

If you have a self-managed super fund (SMSF), then you need to meet the sole purpose test to be eligible for the tax concessions that are normally available to super funds. The sole purpose test aims to ensure that SMSFs are maintained for the purpose of providing benefits to members upon retirement or for beneficiaries if a member dies before retirement.

When a sole purpose test is contravened, the fund will lose its concessional tax treatment and be subject to the highest tax rate. Members could also be disqualified as a trustee and face civil and criminal penalties such as fines or imprisonment. The test is divided into core and ancillary purposes, where regulated funds must be maintained for at least one core purpose and can add one or more ancillary purposes but cannot be run only for ancillary purposes.

The core purposes are paying benefits to:

• Members on or after retirement from gainful employment.
• Members when they have reached a prescribed age.
• Dependents if the member dies.

The ancillary purposes are:

• Termination of a member’s employment where the employee made contributions to the fund on behalf of the member.
• Cessation of employment due to physical or mental health reasons.
• Death of the member after retirement where the benefits are paid to the member’s dependants or legal representative.
• Death of the member after attaining a prescribed age where the benefits are paid to the member’s dependants or legal representative.
• Other ancillary purposes approved in writing by the regulator (ATO or the Australian Prudential Regulation Authority).

Super when you’re self-employed 

If you are a sole trader, or in a partnership, then you are not obligated to make super guarantee (SG) payments for yourself. However, you should still consider making personal contributions to super to help you save for retirement.

Your methods of contributing to super can depend on how you pay yourself. For example, if you receive a wage, then you can set up a regular transfer into super from your income before tax. If your income is from business revenue, you can periodically transfer a lump sum into your super depending on your cash flow.

When contributing to personal super contributions with your after-tax income, you may be eligible to claim tax deductions on them. Before claiming a deduction, you must give your selected super fund a ‘Notice of intent to claim or vary a deduction for personal contributions’ form, and received an acknowledgement from your fund.

You can contribute up to $25,000 a year in concessional super contributions, which are the contributions you can claim tax for, and an additional $100,000 a year in non-concessional super contributions, which you don’t claim deductions for. If you are aged 75 years or older, you are only able to claim tax deductions for contributions you made before the 28th of the month after you turned 75.

Proactive consolidation with ILBAs

Inactive low-balance accounts (ILBAs) are a new category account that needs to be reported and paid to the ATO. This was introduced in the Treasury Law Amendment (Protect Your Superannuation Package) Bill 2019 that came into effect on 1 July 2019 after first being announced in the 2018-19 Federal Budget.

ILBAs are designed to protect accounts from fee erosion. Where possible, the ATO will proactively consolidate super on behalf of an individual.

A superannuation account is considered an ILBA if the following criteria are met:

• No amount has been received by the fund for crediting to that account for an individuals benefit within the last 16 months.
• The account balance is less than $6,000.
• A prescribed condition of release has not been met.
• The account is not a defined benefit account.
• There is no insurance on the account.
• The account is not held in a self-managed super fund (SMSF) or small Australian Prudential Regulation Authority (APRA) fund.

Funds are required to identify ILBAs on 30 June and 31 December each year, then report and pay them to the ATO by the statement date.

• 31 October in the same year for accounts identified on 30 June.
• 30 April of the following year for accounts identified on 31 December.

Individuals that have an account that they do not want to be transferred to the ATO as an ILBA, can consolidate super accounts using ATO online services through myGov, contact their super fund for more information or authorise their super fund to provide a written declaration to the ATO.

Commutation authorities for SMSFs

Commutation authorities are issued by the ATO when a member of a SMSF has exceeded their transfer balance cap. A commutation authority will be issued after the member has received an excess transfer balance determination alerting them they have passed the cap.

The transfer balance cap is currently $1.6 million and is applied to the combined total of all superannuation accounts held by an individual. To receive a commutation authority, a SMSF member has either;

• Not commuted the excess amount in the determination in full by the due date, or;
• Has made an election for the ATO to send a commutation authority to their fund to have the excess amount commuted.

After receiving a commutation authority, individuals must then;

• Pay a superannuation lump sum by way of commutation. The commutation authority will detail the amount that must be commuted from a specified income stream for that SMSF member. Or;
• Choose not to comply with the commutation authority because the member is deceased or the ATO issued in relation to an income stream that is a capped defined benefit income stream.
• Send the ATO a transfer balance account report (TBAR) stating the details of the commutation or why you have chosen not to comply with the commutation authority.
• Notify your member in writing that you have complied or not complied with a commutation authority.

This will need to be done within 60 days of receiving the commutation authority. Though the Commissioner of Taxation issues the authority, they do not have the power to grant an extension of time to respond. If you fail to commute or respond to the ATO regarding the authority, the income stream will stop being in retirement phase, affecting the fund’s entitlement to exempt current pension income. You may also be liable for penalties or subject to compliance action.

Travels with my SMSF

Travelling overseas for an extended period of time is an exciting adventure and a chance to have a break. However, SMSFs do not take a break when you do, which is why it is important to ensure everything remains in line while you are away. SMSFs that breach the residency rules are taxed at the marginal rate of 49% rather than the concessionary rate of 15%. Before travelling, trustees must consider the implications to their SMSF.

Fund recognised as an Australian fund:
The SMSF will be recognised as an Australian super fund provided that the setup of and initial contributions have been made and accepted by the trustees in Australia, however, the trust deed does not have to be signed and executed in Australia. An SMSF that has been established outside Australia will also satisfy the test if at least one of the fund’s assets are located in Australia.

Management and control of the fund carried out in Australia:
The central management and control of the fund must usually be in Australia. This means the SMSF’s strategic decisions are regularly made, and high-level duties and activities are performed in Australia, such as formulating the investment strategy, reviewing the performance of the fund’s investments and determining how assets are to be used for member benefits. Generally, funds will meet this condition even if its central management and control is temporarily outside Australia for up to two years.

Active member test:
An “active member” is a contributor to the fund or contributions to the fund have been made on their behalf. To satisfy this test, the fund will need to have active members who are Australian residents and hold at least 50% of the total market value of the fund’s assets attributable super interests, or the sum of the amounts that would be payable to active members if they decided to leave the fund.

Do you need to pay superannuation for contractors?

A contractor can turn into an employee for legal and financial obligations, so when working with contractors, employers need to test whether they count as an employee or contractor for superannuation purposes according to the rules stated in the Superannuation Guarantee (SG).

The ATO states that even if contractors quote an Australian Business Number (ABN), they are identified as employees for superannuation guarantee purposes if they are paid mainly for their labour. Employers must make superannuation contributions to these workers if they are being paid:

• Under a verbal or written contract where more than 50% of the dollar value of the contract is for their labour.
• For their personal labour and skills and not to achieve a result.
• To personally perform the contract work and not delegate the work to someone else.

If any of the above criteria are not met, then employers may not have to pay superannuation. The minimum amount of super that needs to be paid is 9.5% of each worker’s ordinary time earnings (OTE), which is what employees earn for their ordinary hours of work such as commissions, allowances, bonuses, and shift loading.

Employers who attempt to avoid financial and legal obligations to workers by disguising an employment relationship as an independent contracting arrangement can be held liable for ‘sham contracting’ under the Fair Work Act 2009. This can incur fines up to $54 000.

Super law changes to NALI and LRBA

Integrity measures included in Treasury Laws Amendment (2018 Superannuation Measures No. 1) Bill 2019 have now been enacted with an effective date of 1 July 2018. There have been amendments made to non-arm’s length income (NALI) provisions and Limited recourse borrowing arrangement (LRBA) amounts will now be included in total superannuation balance (TSB) calculations.

NALI provision amendments:
From the 2018-19 income year onwards, the ordinary or legal income of a super fund will be NALI and taxed at the top marginal rate. This has been introduced to ensure SMSFs and other complying superannuation entities cannot evade the NALI rules by entering into schemes involving non-arm’s length expenditure, including where expenses are not incurred. Any capital gains from a subsequent disposal of an asset may also be treated as NALI.

LRBA amounts included in TSB calculation:
Where an SMSF has an LBRA that was made under a contract that has been entered into on or after 1 July 2018, the calculation of an individual’s TSB will now include any outstanding LRBA amount attributable to each member’s interest. This will apply if:

• The LRBA is with an associate of the SMS. In this case, all members of the fund whose interest is supported by the asset purchased with the LRBA must include their portion of the outstanding balance of the LRBA amount in their TSB calculation. Or;
• A member of the fund met a condition of release with a nil cashing restriction. In this case, the member must include the outstanding LRBA amount attributable to their super interest in their TSB calculation.

If you’ve already lodged your 2019 SMSF annual return and are affected by these new measures, you may need to amend your return.

Treasury Law Amendment for super measures moves forward

The Treasury Laws Amendment (2018 Superannuation Measures No.1) Bill 2019 has passed both Houses of Parliament and reached royal assent on 2 October 2019. First announced in the 2018-19 Budget, the Bill allows eligible individuals, whose income exceeds $263,157 and have multiple employers, to nominate wages from certain employers to not be subject to the superannuation guarantee (SG).

Individuals with more than one employer, who expect that their compulsory super contributions will exceed the annual concessional contributions cap for a financial year, will be able to apply for an exemption certificate to release some of their employers from their SG obligations. Individuals will still need to receive SG payments from at least one employer.

From 16 October 2019, eligible individuals will be able to download an application form from the ATO. The application will need to be submitted at least 60 days before the start of the quarter in which you wish to receive the exemption. The lodgment period for the quarter commencing 1 January 2020 has been extended. Applications lodged on or before 18 November 2019 will be accepted.

The application form provides the Commissioner of Taxation with the information required to make an assessment. This includes which employers the exemption certificate will apply to and the quarter in the financial year for which the exemption is sought. Exemption certificates may be issued for multiple quarters within a financial year but cannot cover more than one financial year. Employees will need to talk to their employers before making an application as this arrangement and any changes to payments will need to be negotiated.

Consequences of late SMSF annual returns

From 1 October 2019, if an SMSF is more than two weeks overdue on any annual return lodgment due date and hasn’t requested a lodgment deferral, the ATO will change their status on Super Fund Lookup (SFLU) to ‘Regulation details removed’. This status will remain until any overdue lodgments have been brought up to date.

On the first business day of each month, the new process will update SFLU depending on the situation:

• SMSF trustees who haven’t lodged their SMSF annual return on time and are more than two weeks overdue, the ATO will change their SMSF regulation status to ‘Regulation details removed’ on SFLU.
• All overdue lodgments were received for an SMSF during the previous month, the ATO will update SFLU to reinstate the SMSF’s ‘complying’ status.

By having a status of ‘Regulation details removed’, APRA funds won’t roll over any member benefits to the SMSF and employers won’t make any super guarantee (SG) contribution payments for members of the SMSF. While the fund’s status is ‘Regulation details removed’, members should alert their employer to make any SG payments into the employer’s default super fund or a fund of the member’s choice.

SMSF trustees who don’t think they can meet lodgment requirements should call, before the due date, to seek a deferral to lodge.

Returning to work after accessing your super

Retirement isn’t necessarily a permanent thing as even the best-laid plans can collapse when circumstances change. The Australian Bureau of Statistics (ABS) has found the most common reasons retirees return to employment are financial necessity and boredom. But what does this mean when you have already dipped into your superannuation funds? Depending on your circumstances, there are rules regarding how you can return to work after retirement.

For those who genuinely retired with no intention of ever returning to work but found that circumstances required them to, you can return provided that you work on a casual basis up to 10 hours per week. By meeting this requirement, you can still access your super whilst working, however, additional contributions made to your account after you met the definition of retirement will be preserved until you meet another condition of release.

In the event you access your super after an employment arrangement comes to an end once reaching age 60, you are able to work in a new position as soon as you like, provided the first arrangement ended. In this event, you will have access to the benefits that became available as a result of your first employment arrangement coming to an end.

When you turn 65, you don’t have to be retired or satisfy any special conditions to get full access to your super savings. This means you can continue working or return to work if you have previously retired, provided you complete the work test requirements before going back. If you return to work and earn more than $450 a month, your employer will be required to make superannuation contributions at the current rate of 9.5% until you reach age 75 where you can still work but receive no further super contributions, either voluntary or from your employer.