If you sleep in your office, for more than 19 days in a year, your fund will
pay tax on all its assets @ 46.5%!
We live in a funny country, here are some examples
- Strangers can sleep in houses owned by our super fund, but we cannot; In
other words, tenants can look after our retirement investment but we cannot;
- Our Super fund can lend money to any business, like a fixed deposit (even
to cowboys like BNB) even if all the banks have refused to lend to them - but our
super fund can not lend money to our own business, even if your banker is happy
to lend to your business at a higher rate;
- If you have a personal debt due to chronic illness or your business has been
damaged due to cyclones and downturn thereafter, you cannot decide to take the
option of borrowing from your SMSF, instead, the ATO has told us that the better
option is to put yourself in liquidation; forget reviving your business with
your super money, that is for your retirement, that is, if you ever retire.
- In the unfortunate event, if you do take the money out of your super fund
(more than 5% of its assets), It does not matter, if you return the money back
to your super fund, in say 4 years with 10% interest, instead of the legislated
12 months, by making the fund non-compliant the ATO will ensure that there is
penalty tax to be paid to them - which will impose a greater tax burden on the
fund and will affect the fund as a retirement vehicle for you;
- The ATO and the SIS Act do not prohibit trustees of SMSF to invest in
companies like Fincorp, Westpoint etc or other high risk investments as long as
the governing rules of the fund and investment strategy allows it.
- The super fund's auditor will not lodge a contravention report if the
trustees lose 100% of their capital by investing in any unrelated investments
but will lodge a contravention report if 6% of super money is not returned by a
related party.
- Finally, (drum rolls please) your super fund can purchase your office
and lease it to your business, but if you sleep in your office for 19 days (5%
of 365), it will be a residential lease, which is not allowed. (Sorry John, I
know that it is a cheaper option, but you cannot sleep in the office anymore,
if Jenny throws you out of the house again).
What is NOT allowed
If you do any of the things mentioned above, it will make your SMSF
non-complying which means all the income of the fund will be taxed at the
highest marginal tax rate. Furthermore
income of the fund includes all the assets of the fund, less any
non-concessional contributions, hence all previous years concessional
contributions & income will be taxed at the highest tax rate of 46.5%.
Self-managed superannuation funds can have the advantage of 
concessional
taxation, but to obtain this, the fund must comply with the rules which
include, first and foremost, rules requiring that fund dealings be at
arms-length, in particular avoiding any actions that might be considered special
advantages to the members before retirement. For example, hanging pictures
belonging to your SMSF in your lounge, before retirement. Such advantage is
called an in-house asset.
In- House asset Rule
An "in-house asset" includes a loan to, or an investment in, a "related
party" of a fund, "related parties" being widely defined in the SIS Act.
Basically, if the fund leases or lends more than 5% of its assets to a related
party, it contravenes the In-house asset rules. Further, Section 84(1) of SISA requires
that the trustee must take all reasonable steps to ensure that the market value
ratio of the fund's in-house assets does not exceed 5% within 12 months.
The SIS Act ensures that the paramount consideration of 
superannuation
investment is retirement income (but can be any investment as per the
investment strategy of the fund). In that regard, the "sole purpose test", as set
out at Section 62 of the SIS Act, provides that a fund must operate for the
sole purpose of providing benefits for members at retirement and not earlier.
Retirement age is member's preservation age of 55 years or later.
Prohibited arrangements include those that provide financial assistance to related
parties. Additionally, funds must not themselves run a business as part of an
investment strategy, because of the inherent risks that may present to
retirement savings. However, funds can invest in any risky business like agricultural
business at any time such as timbercorp etc.
The above matters were decided in a recent AAT case Click here to read
further, the ATO welcomed the decision click here to read what our tax
commissioner had to say.
What do we want to do tomorrow?
The above is our past, but is this what we want from our superannuation
system? My father was able to buy our family home, because he could take a loan
from his super fund in another country, where he still lives after 45 years!
How many families today live in rented places, whilst their 
super funds are
holding the required deposit for a family home? Is a family home for retirement
purposes? I know it is the law, but how can we change this law? Who makes these
funny laws? Do we really elect governments who write these funny laws? Can my
or your any action, force the government to change the law?
By changing this law, will it create employment in the building industry?
And reduce burden of un-employment benefit payments on the current or future
governments? Did someone conduct a study on "after effects of allowing super
funds to lend money to members to purchase their own home"? Is this allowed in
other countries?
I know there will be a small percentage of people who will rot the system,
but majority will benefit. Do you know a politician who wants to be popular?
Pass this email to him/her.
Readers comments (with our without names) will be circulated in the next
newsletter, please respond to sales@trustdeed.com.au
By Manoj Abichandani SSA SSAud
SMSF Specialist Advisor
SMSF Specialist Auditor
Team Leader - Technical Division
www.trustdeed.com.au
