Presentation slides from the Changing Face of SMSF webinar presented by Aaron Dunn on 28 February 2013. Webinar covers at the latest technical and regulatory issues impacting self managed super funds, including: - Stronger Super draft regulations with related party acquisitions and disposals, and changes to the supervisory levy - ATO guidance regarding when an income stream starts and stops within a SMSF - Latest NTLG Super technical minutes (Dec 2012) covering limited recourse borrowing arrangements, insurance premiums for LRBAs, etc. - Impact of recent private ruling issued on anti-detriment payments (what it could mean for SMSF trustees) If you wish to view the webinar, you can purchase this online for $99 (incl. GST) at www.smsf101.com.au. CPD points will be allocated for SPAA members.

1. Changing face of
SMSF
Quarterly technical & regulatory webinar
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• Webinar will be available to purchase on-demand via
SMSF101 website for $99 (incl. GST)
• This session will be issued with SPAA CPD points
once assessed

3. General Advice Disclaimer
This presentation provides general advice only.
No direct or implicit recommendations are given in this document. This means that the general advice
provided has not been prepared taking into account an individual‟s financial circumstances (i.e.
investment objectives, financial situation and particular investment needs). You should assess
whether the advice is appropriate to your individual financial circumstances before making an
investment decision. You can either assess the advice yourself or seek the help of an authorised
representative through an Australian Financial Services License (AFSL) holder.
SMSF101 Pty Ltd (“SMSF101”) and The SMSF Academy Pty Ltd (“SMSFA”) believes that the
information in this presentation is correct at the time of compilation but does not warrant the accuracy
of that information. Save for statutory liability which cannot be excluded, SMSF101 & SMSFA
disclaims all responsibility for any loss or damage which any person may suffer from reliance on this
information or any opinion, conclusion or recommendation in this presentation whether the loss or
damage is caused by any fault or negligence on the part of presenter or otherwise.

4. Changing Face of SMSF
STRONGER SUPER REFORMS
DRAFT REGULATIONS

5. Related Party acquisitions & disposals
• Tax Laws Amendment Bill (2013 Measures No.1) Bill 2013
• Amends existing prohibition (section 66, SISA) on acquiring assets
from related parties, subject to certain exceptions
• Introduces new rules specifically for SMSFs on:
– acquiring assets from related parties, subject to certain exceptions
– disposing of assets to related parties
– Prohibition on schemes which avoid the operation of these rules; and
– Administrative and civil penalties for contraventions
Section 66 will apply to APRA regulated funds,
with new s66A & s66B applying for SMSFs

6. Related Party acquisitions
• Section 66A, SIS Act outlines the listed exceptions for acquisitions
from related parties to include:
– Listed securities I thought off-
market transfers
– Business Real Property were to be banned
– Mergers between regulated super funds from 1 July 2013?
– In-house assets
– Money
– Determination by the Regulator
– Breakdown of relationships
Section 66 will apply to APRA regulated
funds, with new s66A applying for SMSFs

7. Related Party disposals
• Section 66B, SIS Act outlines the listed exceptions for disposals to
related parties to include:
– Listed securities
– Assets disposed for at market value, as determined by a qualified independent
valuer
– Collectables and personal use assets
– Money Civil penalties
Administrative
– Determination by the Regulator penalties Subsections 66A(2),
– Breakdown of relationships 66B(2) and 66C(1) are
Contraventions under civil penalty provisions.
s66A(2) or s66B(2) Regulator can seek
civil penalties up to
liable for administrative
2,000 penalty units
penalty of 60 units ($340,000), and
($10,200) imprisonment up to 5
years

8. On-market crossing
• Broker can perform an on-market crossing because they have a
buyer (SMSF) and seller (individual) who wish to trade at the same
price.
• On-market crossing takes place as follows:
– Broker places an order at the crossing-price i.e. price they wish to cross at, then
– Checks that a crossing market exists. If not, they must create one. A crossing
market is one where the priority buy price is one price step or less from the
priority sell price.
– The broker then places a crossing order. The crossing order immediately results
in a trade where the broker sells to themselves.

9. Government reform to the SMSF Supervisory levy
Arrears supervisory levy
Current year supervisory levy
$321 $259*
Supervisory levy
includes the $191 $389 Supervisory levy will
Supervisory levy includes the calculated on cost of
$200 payable for the 2013
financial year along with $259 payable for the 2015 sector regulation.
Supervisory levy financial year along with $129 Proposed amended
$130 which represents
payable for the which represents 50% of the legislation to allow for
50% of the 2014 levy
2012 financial year 2014 levy (rounding down) a levy of up to $300
(rounding up)
2012 2013 2014 2015 2016
• Likely to be adjustments to manage entries and exits from the SMSF system
• From 1 July 2013, funds which have wound (in 2012-13) will not have to pay the supervisory
levy for the year of income which follows that of the final return. The supervisory levy payment
for the subsequent year will need to be adjusted to $0.

10. Changing Face of SMSF
ATO GUIDANCE
STARTING AND STOPPING AN INCOME STREAM

11. Starting and stopping a pension (SMSF)
• ATO released guidance document on 23rd January 2013
• Applies to income streams commenced since 1 July 2007
• In response to issues raised within TR 2011/D3
– Failing to meet pension rules and payment standards
• Draft regulations also issued regarding continuation of a fund‟s tax
exemption until death benefit is paid to beneficiaries
• Awaiting finalisation of TR 2011/D3
– ATO Public Rulings Program, TBA (13 February 2013)

12. Starting and stopping a pension (SMSF)
Honest mistake in
Minimum pension of $18,000 timing of final
$1,500 pension
payment to
member
2012 2013
1 2 3 4 5 6 7 8 9 10 11 12
Will the SMSF be able to claim a tax deduction for ECPI?

13. Where a trustee fails to meet minimum pension?
• ATO guidance consistent Commissioner‟s views in TR 2011/D3
states that income stream will have been taken to have ceased at
the start of the income year.
• Amounts taken during the year will be super lump sums for income
tax and SIS Regulation purposes
– Even case where member remains entitled to receive a payment from the fund
under the governing rules or general trust law concepts
• No entitlement to ECPI tax deduction for the income year
• New pension would be established in following income year
However…

14. Exercise of Commissioner’s GPA
Commissioner‟s powers of general administration (GPA) may allow a
fund to claim ECPI where all of the following conditions are met:
Trustee failed to pay minimum because of an honest mistake resulting in a small
1 underpayment of the minimum or matters outside the control of the trustee and
2 Entitlement to ECPI would have continued but for failing to take minimum payment amount and
Upon becoming aware of shortfall, trustee makes catch-up payment as soon as practicable
3 in following income year; or treats a payment made in current year as being paid in prior year and
Had trustee made catch-up payment in prior income year, minimum pension standards
4 would have been met and
5 Trustee treats catch-up payment, for all other purposes as being made in the prior year

15. Exercise of Commissioner’s GPA
• Where all previous conditions have been satisfied:
– The pension is taken to have continued and a new pension is not commenced in
the following year. The proportioning rule does not need to be applied again to
determine the tax free and taxable components.
– The trustee of the fund can continue to claim an income tax exemption for
earnings on assets supporting that pension, notwithstanding the fund's failure to
meet its obligations under the super law.
– Any payments made to the member during that income year are treated as super
income stream benefit payments (i.e. pension payments) and not super lump
sums.

16. Considerations for GPA to be exercised
Question ATO response
What is a small underpayment? One that does not exceed 1/12th of the
minimum pension payment in the relevant
income year
What is ‘as soon as practicable’? Within 28 days of becoming „aware‟ of the
underpayment where underpayment
occurred due to trustee error or matter was
outside the trustee‟s control
When to self-assess and when to
apply to the Commissioner for GPA?

17. Self-assessing the GPA
The ATO will allow the trustee to self-assess and apply the GPA
concession if all of the following apply:
• failure to meet the minimum pension requirements was an honest
mistake or was outside the control of the trustees
• the underpayment is only small (that is, does not exceed one-twelfth
of the minimum annual pension payment)
• all of the other GPA conditions have been met
• the trustee has not previously been granted the Commissioner's
concession for failing to meet the minimum requirements.
All other cases the trustee will be required to write to
the Commissioner for him to consider exercising his
GPA based on failing to meet the minimum pension

18. ATO examples: self-assess GPA concession
Example GPA concession would apply Outcome
Trustee does not meet • Payments were due to honest • Pension does not cease
minimum pension due to administrative error because of pension shortfall
transposition error which • Amount of underpayment was • Trustee continues to claim tax
results in small small exemption for earnings on
underpayment • Catch-up payment made as soon assets supporting the pension
as practicable in following income
year
Trustee incorrectly • Payments were due to honest • Pension does not cease
calculates the minimum administrative error because of pension shortfall
pension - July 2013 • Amount of underpayment was • Trustee continues to claim tax
payment based on 25% small exemption for earnings on
reduced minimum (rather • Catch-up payment made as soon assets supporting the pension
than prescribed minimum as practicable in following income
amount) year

19. Not meeting conditions to self-assess
The fund will be treated as not having paid a pension for income tax
purposes from the start of the income year and therefore not be entitled
to claim ECPI in that year if the trustee either:
• has not met all of the conditions as set out to self-assess and apply
the GPA concession; or
• has previously, either through self-assessment or at the
Commissioner's discretion, been granted a concession for not
meeting the minimum pension payment standards under the GPA
concession.
Payments are to be treated as The following year a new pension
lump sums for tax purposes will need to commence

20. ATO examples:
Example Consideration Outcome
Trustee is overseas and does • Amount is not a small underpayment as • Pension ceases at start of year
not make annual minimum it exceeds 1/12th of the minimum • All payments are super lump sums,
payment until following income pension not pension amounts
year • Trustees would need to demonstrate • Fund cannot claim tax exemption for
matters outside of their control affected earnings as assets no longer
ability to meet the minimum supporting a pension
requirement
Trustee makes a payment by • Action was not beyond the trustee‟s • Pension ceases at start of year
cheque that is subsequently control (should have had sufficient • All payments are super lump sums,
dishonoured funds) not pension amounts
• Fund cannot claim tax exemption for
earnings as assets no longer
supporting a pension
Financial institution error • Trustee will need to demonstrate that all • Commissioner may consider using
reasonable steps has been taken to GPA
ensure payment would be processed
before 30 June. Circumstances outside
their control prevented this from
occurring.

21. Starting and stopping a pension (SMSF)
As amount does not
exceed 1/12th of Trustee should
minimum pension, record pension
trustee can self-assess shortfall liability
Minimum pension of $18,000 GPA to provide fund tax and minute the
exemption decision
2012 2013
1 2 3 4 5 6 7 8 9 10 11 12
Pension payment must be made in „form and effect‟ (cannot accrue
payments to simply meet the minimum)

22. Changing Face of SMSF
NTLG SUPER TECHNICAL SUB-GROUP

23. House and land packages using LRBAs
Issue & background
Is it an essential feature of example 10 that there are only two payments - a deposit and a settlement
payment?
Consider a proposed identical arrangement, except that a number of additional loan drawdowns are
made to meet payments required under the contractual agreement.
Industry view
Key issues in whether the requirements of s67A of the SIS Act are met in example 10 are:
• The asset being acquired is, at all times, the land and completed house;
• The lender‟s security is, at all times, limited to the land and completed house; and
• Draw-downs for the deposit and settlement are permitted
Section 67A is silent on the number of loan draw-downs permitted to acquire the asset.

24. House and land packages using LRBAs
ATO initial response
It is not an essential feature that only two payments – a deposit and settlement payment are required to
comply with example 10. Where there are more than two payments required under the contract, those
payments may be funded under a single LRBA, provided the terms and conditions of the LRBA allow
the fund trustee to make multiple draw-downs for that purpose.
This is different to where construction of a house occurs or continues after title to the land transfers to
the holding trust at settlement. In this case, the acquired asset under the arrangement (vacant land)
will have been improved to create a different asset.

25. LRBA: Draw-downs for repairs
Issue
Where LRBA established post 6 July 2010, would further loan drawings to make repairs to that asset in
the following scenarios fall within s67A of the SIS Act?
Scenario 1 Scenario 2 Scenario 3 Scenario 4
• Terms of the original loan • Terms of the original loan and • Terms of the original loan • Terms of the original loan are
specifically provide for redraws borrowing trust documentation specifically provide for redraws silent on additional borrowings
or additional borrowings under are silent on additional or additional borrowings under • Trustee is able to refinance
the one loan arrangement; and drawings; the one loan arrangement with a new lender who will not
• Additional borrowings are • Bank is happy to provide that • Trustee is able to negotiate only replace the original
made under those terms facility several years after the more favourable terms by borrowings but will also allow
establishment of the approaching a different lender. further borrowings for repairs
arrangement. • Existing loan remains in place,
with new loan for repairs.
• New loan for the repairs is
unsecured.

26. LRBA: Draw-downs for repairs
Scenario 1 Industry view ATO response
• Terms of the original loan • Consistent with s67A • Yes as indicated at
specifically provide for requirements, hence paragraph 28 within
redraws or additional borrowing for repairs is SMSFR 2012/1
borrowings under the allowed • Each additional
one loan arrangement; borrowing is allowable as
and expressly provided for
• Additional borrowings
are made under those
terms

27. LRBA: Draw-downs for repairs
Scenario 2 Industry view ATO response
• Terms of the original loan and • Does not specifically permit • Not allowed as the additional
borrowing trust documentation additional borrowings for borrowings were not provided
are silent on additional repairs for under the terms of the LRBA
drawings; • Essential requirements of s67A entered into
• Bank is happy to provide that are still met • Does not constitute a
facility several years after the • Various parties would need to borrowing of money under an
establishment of the agree to changes to terms and arrangement under which
arrangement. conditions , but does not result money is or applied for the
in new arrangement acquisition of a SAA, including
maintaining or repairing the
acquirable asset

28. LRBA: Draw-downs for repairs
Scenario 3 Industry view ATO response
• Terms of the original loan • Involves second lender and • Not allowed, additional
specifically provide for redraws or therefore necessarily result in new borrowings were not provided for
additional borrowings under the loan agreement with another under the terms of the LRBA
one loan arrangement party entered into and does not satisfy
• Trustee is able to negotiate more • However, argue that does not s67A(1)(a) for same reasons as #2
favourable terms by approaching a necessarily result in a new • s67A(1)(d) would not be satisfied
different lender. arrangement – multiple loans with the new unsecured loan as
• Existing loan remains in place, with could be considered to form part the lender’s rights or any other
new loan for repairs. of a ‘single’ overall arrangement party must be limited to the rights
• New loan for the repairs is • June 2012 NTLG minutes of the acquired asset
unsecured. confirmed multiple lenders
allowed

29. LRBA: Draw-downs for repairs
Scenario 4 Industry view ATO response
• Terms of the original loan are silent • Falls within requirements of s67A • Allowed, provided that the amount of
on additional borrowings the new borrowing is no more than
• Trustee is able to refinance with a the sum of:
new lender who will not only replace • Amount needed to repay the
the original borrowings but will also existing borrowing; and
allow further borrowings for repairs • Expenses incurred in connection
with new borrowing; and
• Expenses incurred in maintaining
or repairing (not improving) the
acquirable asset; and
• Amount of new borrowing to those
thing and only those things

30. LRBAs: Taxpayer Alert, TA 2012/7
• ATO clarified statement (NTLG meeting, December 2012) made in
TA 2012/7 concerning whether the holding trustee must be entity
that enters into the contract to acquire the property using an LRBA
• ATO considers that it is not essential that the purchase contract be
entered into by the trustee of the trust which is to hold the single
acquirable asset under the LRBA
• Where acquirable asset is not purchased by holding trustee, the
property can still be transferred directly from the vendor to the
holding trust on settlement.
– E.g. exercising an “… and/or nominee” clause
Ref: (8). Other Business, NTLG minutes, December 2012

31. Allocation of insurance proceeds to members
Within Premiums deducted
Policy held Member B
over life of from member B
Investment
member A strategy
segregated pool
(segregated)
Question:
SMSF Where the insurance
LRBA proceeds are promptly
credited to Peter‟s
account, would they be
treated in the same
way as an allocation of
investment income and
Greg Peter not deemed to be an
allocation from a
reserve?

32. Allocation of insurance proceeds to members
Question 1 Industry view ATO response
• Could the trustee of a fund hold a • Where a trustee employs different • SIS does not prevent a policy of
policy of insurance over the life of investment strategies for each insurance over the life of one
one member of the fund (Member member of the fund and member (Member A) of an SMSF
A) but for the policy to be included segregates assets for each being included in an investment
in an investment strategy adopted member, the trustee will generally strategy adopted for another
for another member (Member B) be required to account for each member (Member B) of the SMSF
and held in a segregated asset pool separately and to allocate any and held in a segregated asset
pool for Member B? investment income received to the pool for Member B.
relevant pool to which it relates • Trustees should ensure that such a
• a life insurance policy held in a strategy is consistent with the
particular asset pool should be terms of the trust deed and the
treated no differently and any investment strategy formulated by
proceeds received should be able the trustees.
to be/required to be allocated to
the asset pool to which it relates
as investment income not a
reserve allocation

33. Allocation of insurance proceeds to members
Question 2 Industry view ATO response
• Assuming all the premiums in • Where a trustee employs different •Where the SMSF trustee has
respect of the policy over Member investment strategies for each determined that all the premiums
A's life were deducted from the member of the fund and for a life insurance policy over a
segregated asset pool held for segregates assets for each particular member's life (Member
Member B, could any insurance member, the trustee will generally A's life) are to be charged against
proceeds received by the trustee be required to account for each another member's benefits
in respect of the death of Member pool separately and to allocate any (Member B's benefits) in the fund, it
A be allocated exclusively to the investment income received to the would appear consistent with the
segregated asset pool held for relevant pool to which it relates 'fair and reasonable' principles
Member B and be included in the • a life insurance policy held in a included in SIS regulations 5.02 and
calculation of member B's benefit particular asset pool should be 5.03 that the full amount of any
in the fund? treated no differently and any proceeds received under the
proceeds received should be able insurance policy be credited to
to be/required to be allocated to Member B's account (or
the asset pool to which it relates entitlement) provided that crediting
as investment income not a is also within the terms of the trust
reserve allocation deed.

34. Allocation of insurance proceeds to members
Question 3 Industry view ATO response
• Can the ATO confirm that • The proceeds would be • Use of the term ‘reserve’ for
where the insurance allocated to member sub-regulation 295.25.01(4)
proceeds are then promptly accounts and be accounted of ITAR 1997 is broad to
credited to Member B's for in the same manner as protect integrity of the caps
account that they would be investment income the • However, in circumstances
treated the same as the allocation of the proceeds where crediting investment
allocation of investment should not constitute the income from other sources
income and not be deemed allocation from a reserve. would not result in an
to be an allocation from a allocation from a reserve for
reserve? the purposes of the excess
contributions tax provisions,
the same result in relation to
crediting insurance proceeds
would be expected.

35. Private ruling: Anti-detriment claim
• Authorisation No. 1012388830533
• APRA Regulated Fund previously paid out death benefits to
members without a claim for tax saving amount under s295-485 of
ITAA 1997
• Actuary calculated augmented amount to pay to eligible members in
the 2012-13 financial year
• Tax saving amount intended to be claimed by super fund in the
2012-13 financial year
• Private ruling seeks clarity whether the tax saving amount can
be considered as a final death benefit payment?

36. Private ruling: Anti-detriment claim
• Trustee argued that tax saving amount should have been paid in
accordance with 295-485, ITAA 1997
• Additional payment is made in accordance with SISR 6.21(2)(a)
where benefits paid in the event of the death of a member, it can be
cashed as either:
– A single lump sum; or
– An interim lump sum and a final lump sum
• ATO ruling confirms that whilst a death benefit can be paid in two
lump sums, in order for tax saving amount to be paid, each lump
sum must include the tax saving amount
Member‟s benefits must be cashed ‘as soon
as practicable’ under SISR 6.21(1)

37. No. Module
A RG146 Knowledge Refresher
B Adviser Skills
1 Introducing Super & SMSFs
2 Establishing an SMSF
3 Introducing Estate Planning
4 SMSF contributions
5 SMSF investment rules
6 SMSF investment strategies
7 SMSF taxation
8 Paying SMSF benefits
9 Tax effective SMSF benefit and estate planning
strategies

38. Register your
interest and
view the sample
module
www.smsf101.com.au

39. Next webinar
Actuarial requirements within a SMSF
• Guest presenter, Andy O‟Meagher, Act2
• SMSF Academy Members – free
• Non-members: $99 (incl. GST)
Tuesday, 26 March 2013
11am AEDST

40. Questions
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