Superannuation Funds Exposed!
People who Self-Manage their Superannuation Fund can now be stung with a giant 45% tax rate if they receive goods and services from related parties below market value or for free!
Historically, the Australian Taxation Office (ATO) has focused on SMSF acquisitions made above market value. However, the ATO’s recently released Law Companion Ruling (LCR) 2021/2 focuses on SMSF acquisitions made below market value or for free. The Ruling provides examples of accountants, financial planners, real estate agents and plumbers providing services to their SMSFs. This will apply to income derived from 1 July 2018 regardless of whether the relevant arrangement was entered into prior to 1 July 2018. Generally, where trustees are appropriately qualified, licensed and perform services in the ordinary course of their business for their SMSF at below market value, the SMSF income relating to the services are taxed at 45% rather than the concessional 15% rate. For example, property management services provided by a trustee for their SMSF at a discount may result in the rental income of the fund being taxed at 45%.
Furthermore, transactions such as below market value transfers of property to a fund may cause more issues than you would like. In this circumstance, all rental income and future capital gains relating to the property will be taxed at 45%. General fund expenses (such as accounting services) provided below market value will result in all of an SMSF’s income being taxed at 45% – a significant tax impact that may not be worth the expense…
In light of this, from 1 July 2022, the ATO will look at whether a reasonable attempt has been made to determine an arm’s length expenditure for general expenses, rather than whether the expenses are in fact arm’s length expenses. A grey area remains for trustees due to the provisions contained within the Superannuation Industry (Supervision) Act 1993 preventing trustees from being remunerated whilst acting in their capacity as trustee. The question remains, is work performed outside normal business hours, work performed as a trustee or not?
In summary, LCG 2021/2 is likely to result in punitive tax consequences for SMSF’s that fail to ensure that services provided to SMSFs by trustees in their professional capacity are completed at an arm’s length value. Should you consider that your SMSF will be affected or wish to discuss how the interpretation of LCR 2021/2 will impact you, please contact our office immediately.
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