More Scrutiny On Super Fund Trustees

The Age

Friday January 25, 2008

Max Newnham

THE Australian Taxation Office is increasing its scrutiny of trustees of self-managed super funds. In addition to the increased audit activities, the ATO will also require certain breaches of the regulations to be reported to it, no matter how minor they are.

Trustees of self-managed super funds are not the only ones to make mistakes.

A recent example of this was a person who, having turned 60 in July, requested a lump-sum payment of $50,000 from her professionally managed superannuation fund. The staff at the trustee company took account only of the new rule making payments to members 60 or more tax free, and processed the request and paid out the money.

What the trustee company failed to consider was the requirement for people under 65 to satisfy a condition of release before a lump-sum withdrawal can be made. As the member was still employed full-time, , no condition of release was met and the lump-sum payment should not have been made.

It took some time for the trustee's staff to be convinced that they had made a mistake. In the end, it was decided to backdate a transition to retirement pension that allowed lump-sum payments. If this same mistake had been made by the trustee of a self-managed super fund, it would have had to be reported to the ATO, and tax would have been payable by the member.

Q. I am thinking of buying a property in a self-managed super fund but am worried about the workload.

A. As long as trustees remember that a super fund is meant to provide retirement benefits, and is not a source of personal funds, the duties should not be too difficult. The administration can be made easier by making sure all the fund's financial transactions go through a bank or cash management account. In addition, all applicable documentation should be retained. With the help of your accountant, looking after the tax and the fund should not be too difficult.

Q. My self-managed super fund has purchased a house as part of its investment strategy. If the super fund sells this asset, is it liable for capital gains tax?

A. Super funds in accumulation phase pay tax on normal income and contributions at 15%. Where an investment is held for longer than 12 months, capital gains tax is paid at 10% of the profit. If the super fund began to pay a pension before the house being sold, no tax would be payable.

Q. Before the end of last financial year I confirmed with the Tax Office the tax deductibility of my wife making a self-employed super contribution. She had sacrificed some of her salary as a super contribution and packaged more of her salary as fringe benefits. That meant she met the less than 10% rule. The claim has now been rejected by the Tax Office. Are they correct in doing this?

A. Unfortunately the test to determine whether someone is self-employed includes income paid as salary, wages and fringe benefits. It would appear that, in your wife's case, the total for the amount shown as salary on her PAYG summary, and the amount shown as fringe benefits paid, exceeded the 10% limit.

The area of fringe benefits is complicated. The amount shown on a PAYG summary is not necessarily the cash benefit received. Instead, the cash benefit is grossed up to reflect the effect of GST and how much pre-tax income must be earned at the top tax rate to receive the same benefit after tax.

Questions can be sent to max@taxbiz.com.au

© 2008 The Age

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