TH9 Solving the common issues and
contraventions in SMSF audit
Shirley Schaefer FCA
Partner ‐ Superannuation
BDO Advisory (SA) Pty Ltd & BDO Audit (SA) Pty Ltd
a life policy issued by a life insurance company a deposit with an ADI an investment in a pooled superannuation trust, where a trustee of the fund and the trustee of the pooled superannuation trust acted at arm's length in relation to the making of that investment an asset which the Regulator, by written notice given to a trustee of the fund, determines is not an in‐house asset of the fund an asset which the Regulator, by legislative instrument, determines is not an in‐house asset real property subject to a lease, or to a lease arrangement enforceable by legal proceedings, between a trustee of the fund and a related party of the fund, if, throughout the term of the lease or lease arrangement, the property is business real property of the fund an investment in a widely held unit trust property owned by the superannuation fund and a related party as tenants in common, other than property subject to a lease or lease arrangement between a trustee of the fund and a related party an asset included in a class of assets specified in the regulations. The most common exceptions (or exclusions) from the in‐house‐asset rules and limits are: the lease of business real property to a related party; investment in a related trust or company, where that company or trust is un‐geared and its main asset is business real property4; investments in related entities that existed prior to 11 August 1999 and only became in‐house‐assets because of the change of definition of related party at that time; and investments acquired under the “transitional rules” to the in‐house‐asset tests. As a large part of the exceptions to the in‐house‐asset rules revolve around the concept of business real property it is important to understand what constitutes business real property. Firstly, the property must be real property; i.e. freehold or leasehold interest in land. Secondly the property must be used wholly and exclusively for business purposes (or used in someone’s business). The ATO has issued guidance on what constitutes business real property. This can be found in SMSFR 2009/1 “business real property for the purposes of SISA”. The ruling provides a significant number of examples as to the ATO’s interpretation of the definition of business real property, covering primary production and vacant land, holiday rental property, hotel or bed & breakfast operations, business operated from the member’s home and letting and sub‐letting of property. The ruling can be a useful tool in understanding the ATO’s view on their interpretation of the definition of business real property. Due to the change in SIS legislation that became effective from 11 August 1999, the legislators included ‘transitional rules’ that could be applied for investments/assets acquired for the 10 years to 30 June 2009. This was implemented to allow SMSFs to change their investment arrangements, particularly in relation to investments in related entities. The
Monies contributed to a superannuation fund are required under SISA to be preserved (retained in the superannuation system) until the members are able to access those benefits in accordance with SISA/SISR. There are three categories of superannuation benefits as defined by the SISR: Preserved (retained in the superannuation system until condition of release is met). Restricted non‐preserved (are not preserved but cannot be released until a condition is met). Preserved benefits accrued before 1/7/99 in an employer‐sponsored fund are restricted while the member is an employee of the employer. Upon terminating employment, the benefits become unrestricted and can be paid out if a condition of release has been met. Unrestricted non‐preserved (have already met a condition of release and can be paid out). Preserved benefits cannot be accessed until a condition of release, as prescribed by SISA/SISR, is met6. The following are the prescribed conditions of release: achieving age 65 years; retirement (post preservation age); ceasing work after age 60 years; death; terminal medical condition (as certified by two medical practitioners); permanent disability (as certified by two medical practitioners); temporary disability; permanent departure from Australia; compassionate grounds; severe financial hardship; commencement of a Transition to Retirement Income Stream; and superannuation benefits < $200. With changes to the taxation of benefits from 1 July 2007 it is important to remember that turning 60 years of age is not of itself a condition of release. Benefits cannot generally be accessed until a member has reached their preservation age. The following table outlines a members’ preservation age, which depends on their date of birth: Date of Birth Preservation Age Pre 1 July 1960 55 years 1 July 1960 – 30 June 1961 56 years 1 July 1961 – 30 June 1962 57 years 1 July 1962 – 30 June 1963 58 years