ASG News - Tax / View / Clue

HAPPY NEW YEAR!!!

Single Touch Payroll pilot and tax offset proposed

 

The Government is looking to cut red tape for employers by simplifying tax and superannuation reporting obligations through its initiative called Single Touch Payroll (STP). “Employers currently manually report Pay As You Go (PAYG) withholdings to the ATO,” the Assistant Treasurer Kelly O’Dwyer said. “Under the new STP this information will be automatically reported to the ATO through Standard Business Reporting (SBR) software.”

The ATO will be conducting a pilot in the first half of 2017 focusing on small businesses. From 1 July 2017, all businesses will be able to commence STP reporting, with the option to make voluntary payments. In addition, the ATO will transition employers with 20 or more employees to STP. From 1 July 2018, employers with 20 or more employees will be required to use STP enabled software for reporting to the ATO. The Government will make a decision on timing for rolling out STP reporting for employers with less than 20 employees after the pilot is completed.

To assist small businesses with a turnover of less than $2 million, the Government will offer a $100 non-refundable tax offset for SBR-enabled software. This offset is proposed to apply from 1 July 2017 and for software purchases or subscriptions made in the 2017–2018 financial year only.
 
TIP: Although there are benefits to streamline reporting, some commentators have highlighted cash flow concerns relating to making more frequent payments. Real time pay day reporting also gives the ATO an earlier intervention signal to contact struggling businesses. If you have any questions, please contact our office. 

 

GST simplified accounting methods for small food retailers


Simplified GST accounting methods are available for small food retailers if they meet certain eligibility conditions. Many small food retailers buy and sell products that are taxable as well as products that are GST-free. Accurately identifying and recording GST-free sales separately from those that are taxable can be difficult, which makes accounting for GST complicated. However, there are five simplified GST accounting methods to choose from to help businesses meet their GST obligations. These include the Business norms method, Stock purchases method, Snapshot method, Sales percentage method, and the Purchases Snapshot method.
 
TIP: Business needs change and it may be prudent to take a look at whether there are advantages with adopting a SAM. Do you need help deciding which method would be best for your small food business? Please contact the office for assistance or further information.

 

Government's Innovation Agenda contains tax incentives

 

The Government is looking to support innovation and its recently released Innovation Agenda proposes a suite of new tax and business incentive measures. A key proposal is to provide concessional tax treatment to encourage early stage investors to support innovative start-ups. Under the proposal, investors will receive a 20% non-refundable tax offset based on the amount of their investment (capped at $200,000 per investor, per year), as well as a 10-year capital gains tax exemption for investments held for three years. The Government has advised that the scheme is expected to commence during 2016 as soon as supporting legislative amendments are passed into law.
 
TIP: The incentive is proposed to be available for investments in companies that: undertake an eligible business (scope to be determined); that were incorporated during the last three income years; aren’t listed on any stock exchange; and have expenditure and income of less than $1 million and $200,000 in the previous income year, respectively
 

ATO data matching real property transactions 

 

The ATO has issued a notice announcing that it will be acquiring details of real property transactions for the period 20 September 1985 to 30 June 2017 from various state revenue offices and tenancy boards. In relation to rental properties, the ATO is seeking details of rent paid and contact details of landlords. In relation to property transfers, the ATO is seeking details of the transfers, including details of the transferors and transferees and any state land tax and/or stamp duty concessions sought. 
The information will be matched to the ATO's data holdings. The ATO said an objective of the data matching program is to ensure taxpayers are correctly meeting their taxation obligations. The ATO expects that around 31 million records for each year will be obtained. Based on current data holdings, the ATO said records relating to approximately 11.3 million individuals are expected to be matched. 
 
TIP: The data matching program goes all the way back to the start of the capital gains tax (CGT) regime in September 1985. Some commentators suggest this could be the ATO looking for CGT revenue on previously undeclared capital gains or incorrectly claimed CGT concessions. Note also that the ATO intends to carry on its data matching program from 2017. It will no longer announce details of its program as law changes will make it mandatory by then for revenue authorities and other entities to report real property transactions to the ATO.

 

Tax treatment of earnout rights on business sale

 

A Bill has been introduced in Parliament that proposes to amend the tax law to change the capital gains tax treatment of the sale and purchase of businesses involving certain earnout rights (ie rights to future payments linked to the performance of an asset or assets after sale). As a result of these amendments, capital gains and losses arising in respect of look-through earnout rights will be disregarded. Instead, payments received or paid under the earnout arrangements will affect the capital proceeds and cost base of the underlying asset or assets to which the earnout arrangement relates.

Clarifying the CGT treatment of earnout rights has been a long time coming – it was first announced on 12 May 2010 as part of the 2010–2011 Budget. The amendments contained in the Bill are proposed to apply from 24 April 2015. However, note there will be protections for taxpayers who have undertaken other actions in reasonable anticipation of announcements made about the amendments in the 2010–2011 Budget.
 
TIP: The ATO has released details of its administrative treatment pending the formal enactment of the legislation. Please contact our office for further information.
 

Are your super saving goals on track?

 

The new calendar year is a good time to conduct a superannuation health check and set some new goals to help boost superannuation savings. Although there have been no seismic shifts in the superannuation landscape of late, it may be prudent to reacquaint yourself with the rules. The following are some considerations.

•    Make extra contributions – the general concessional contributions cap is $30,000 for 2015–2016. For people aged 50 and over, there is a higher concessional contributions cap of $35,000 for 2015–2016.  

•    Check super savings – it is a good habit to check your super balance regularly. You may also want to protect your super from identity crime. For example, you may want to change passwords for accounts that can be viewed online.

•    Look for small lost super accounts – the threshold below which small lost super accounts will be required to be transferred to the ATO has increased to $4,000 (from December 2015). 

•    Consolidate multiple super fund accounts – you may want to consider consolidating multiple super fund accounts. This may help avoid paying multiple fees, reduce paper work, and make it easier to keep track of your super.

•    Salary sacrifice super – you may want to ask your employer about salary sacrificing super, or you may want to consider          
      reviewing existing arrangements with your employer.
 
TIP: Professional advice should be obtained before implementing a new retirement saving strategy. Please contact our office to discuss your circumstances.
 

Alert - Collectables and personal use assets in an SMSF

(Article by William Fettes & Bryce Figot, DBA Lawyers)

All newly acquired investments by SMSF trustees in collectables and personal use assets since 1 July 2011 have been subject to strict rules under reg. 13.18AA of the Superannuation Industry (Supervision) Regulations 1994 (Cth) (‘SISR’). However, SMSF trustees should be aware that the grandfathering relief in relation to such investments that were held prior to 1 July 2011 will come to an end on 1 July 2016. 

This article provides an overview of the rules concerning collectables and personal use assets. 
 
Therefore, to avoid potential penalties, SMSF trustees with grandfathered investments in collectables and personal use assets will need to consider the current rules carefully and take appropriate action before 1 July 2016 to ensure their investments are compliant. 

This article provides an overview of the rules concerning collectables and personal use assets. 
 
The origin of the rules

The current rules in relation to collectables and personal use assets arose in response to the 2010 Super System Review (also known as the Cooper Review). The Cooper Review expressed concern that there was an unacceptable risk that investments by SMSF trustees in collectables and personal use assets may be made for present day benefits rather than for the purposes of retirement. Accordingly, the final report recommended a total prohibition on SMSF trustees making such investments. 
 
However, the federal government rejected the recommended blanket ban and instead sought to allay these concerns by legislating certain restrictions which are contained in reg 13.18AA of the SISR which commenced 1 July 2011.
 
Collectables and personal use assets

Regulation 13.18AA covers artwork, jewellery, antiques, artefacts, coins, medallions or bank notes, postage stamps or first day covers, rare folios, manuscripts or books, memorabilia, wine or spirits, motor vehicles, recreational boats, and memberships of sporting or social clubs.
 
As matter of passing curiosity, we note that collectables and personal use assets include antique firearms but not modern firearms. Moreover, we note that it applies to spirits and wine, but not to beer or pre-mixed drinks. 
 
No leases to related parties

Sub-regulations (2) and (3) of reg 13.18AA require that SMSF trustees must not lease collectables and personal use assets to a related party of the SMSF, or enter into lease arrangements in respect of these assets with related parties. A lease arrangement is a broad concept covering any agreement, arrangement or understanding in the nature of a lease.
 
No use by related parties

SMSF trustees must not allow collectables and personal use assets to be used by a related party of the SMSF.
 
Storage in private residence of related parties

Sub-regulation (3) of reg. 13.18AA prohibits SMSF trustees from storing collectables and personal use assets in the private residence of related parties.

The drafting of this provision raises the question of whether it may be possible to store collectables or personal use assets in the offices of related parties where those offices are not a private residence. For example, might an SMSF trustee be allowed to store artwork in the business premises of a related party? 

The ATO has published material on their website which clarifies the position:
 
You can store (but not display) collectables and personal use assets in premises owned by a related party provided it is not their private residence. They can't be displayed because this means they are being used by the related party. For example, if your SMSF invests in artwork it can't be hung in the business premises of a related party where it is visible to clients and employees.
Remember to keep a record of the reasons for deciding on where to store the assets.

 

Though this is not binding on the ATO, as the regulator of SMSFs, it is consistent with the legal construction of the regulations and the ATO seems relatively likely to follow the views expressed in such public materials.
 
SMSF trustees must also make and keep written records of the reasoning behind any storage decisions. There is no specific timeframe as to when the written records must be made; however, the record must be kept for at least 10 years after the decision.
 
Insurance

The rules stipulate that SMSF trustees must insure collectables and personal use assets in the name of the SMSF within seven days of acquiring such items, excluding memberships of sporting or social clubs.
 
More specifically, reg. 13.18AA(5) provides:

Each trustee of a regulated superannuation fund that is a self managed superannuation fund commits an offence if:

(a)  the fund owns a section 62A item, other than a membership of a sporting or social club; and
(b)  it is more than 7 days since the fund acquired the item; and
(c)  the item is not insured in the name of the fund.
 
The reference to ‘owns’ is an interesting aspect of the drafting of sub-reg (5). It must be noted that most of the compliance requirements in reg 13.18AA are drafted using the language ‘holds an investment involving’ rather than ‘owns’ [emphasis added]. 
 
This difference in language raises the question of whether the requirement for taking out insurance in the fund's name would still apply in relation to investments in collectables and personal use assets which are held through an interposed entity. For example, could an SMSF trustee invest in artwork as a unitholder in a div 13.3A non-geared unit trust without the insurance requirement applying? If so, this would allow for more flexible insurance arrangements, such as having artwork insured as part of an overall gallery policy. 
 
Realisation of assets and related party transfers

Collectables and personal use assets must be realised for a market price determined by a qualified independent valuer if a related party receives an interest in the asset because of the realisation.

More specifically, reg. 13.18AA (7) provides:

A trustee of a regulated superannuation fund that is a self managed superannuation fund commits an offence if: 

(a)  the trustee realises an investment held by the fund involving a section 62A item; and 
(b)  a related party of the fund receives an interest in the item because of the realisation; and 
(c)  the realisation was not at a market price determined by a qualified independent valuer. 
 
Though the ATO has long maintained that qualified independent valuers are desirable, it is notable that this is the first time that there has been an actual legislative requirement to utilise a qualified independent valuer.

Moreover, given the legislation is framed in terms of the SMSF trustee being the entity which ‘realises’ the collectable or a personal use asset, this raises the question of exactly what kind of dealings are covered.  

Neither ‘realises’ or ‘realisation’ are defined in the SISR. Therefore, in the absence of an express definition, we note that words should take their ordinary meaning. Relevantly, Macquarie Dictionary defines realise as follows:
 

4. to covert into cash or money: to realise securities.
5. to obtain as a profit or income for oneself by trade, labour or investment
6. to bring as proceeds, as from a sale: the goods realised $1000         

8. to convert property or goods into cash or money.
… 

Furthermore, the explanatory statement which introduced the provisions in reg 13.18AA uses the language ‘disposes of’. This would tend to suggest that disposal of the asset is required for the purposes of the regulations.
 
Though the above points are not entirely dispositive, it is arguable that a transfer of an asset directly to a member by way of in specie lump sum would not be caught by reg 13.18AA(7) and thus independent valuation would not be required. Naturally, however, this is a novel and untested construction and therefore the most prudent course of action may be to obtain a qualified independent valuation in any event. 
 
The end of grandfathering

As noted above, the rules in reg 13.18AA did not immediately apply to existing investments in collectables and personal use assets when the requirements commenced on 1 July 2011. This is because reg 13.18AA(9) provides that sub-regs (2)¬–(7) do not apply to investments in collectables and personal use assets that were held by the fund on 30 June 2011. However, the rules will apply to such ‘older’ assets from 1 July 2016 because reg 13.18AA(9) ceases to be enforced as of 1 July 2016 (refer to reg 13.18AA(10)). 
 
Thus, SMSFs with grandfathered collectables and personal use assets must conform with reg 13.18AA by July 2016. For example, if artwork was stored at a member’s private residence, was not insured, or was leased to a member, the artwork must be leased to a third party at arm’s length terms and insured, or otherwise disposed of by 1 July 2016.
 
Penalties for contraventions

The prescribed penalty for contravention of any of the above rules is 10 penalty units (ie, $1,800 currently) for each SMSF trustee. This is another timely reminder of the advantages of using a corporate trustee over individual trustees. 

Where contraventions involve a collection of items, the potential for a penalty multiplier to apply to the facts should also be considered. Case law, such as Olesen v Eddy [2011] FCA 13 [32], Vivian v Fitzgeralds [2007] FCA 1602 [33] and Australian Prudential Regulation Authority v Derstepanian (2005) 60 ATR 518 [31] suggests that a multiplier approach is unlikely, however, no guarantee can be given about this and SMSF trustees should be very careful to ensure they comply with the rules.
 
Conclusion

SMSF trustees who have previously enjoyed grandfathered protection in relation to their investments in collectables and personal use assets held prior to 1 July 2011 will need to take appropriate action to ensure they meet the strict requirements of the SISR prior to 1 July 2016.

knp would like to thank William Fettes & Bryce Figot for allowing us to publish this article.

As part of our “Go Green” paperless initiative, knp will be implementing a new procedure by sending invoices & statements via email. 
 
In the near future you will be asked if you prefer this option and if so, to indicate your preferred email address.

Important: Clients should not act solely on the basis of the material contained in Cents & Sensibility. Items herein are general comments only and do not constitute or convey advice per se. Also changes in legislation may occur quickly. We therefore recommend that our formal advice be sought before acting in any of the areas. Cents & Sensibility is issued as a helpful guide to clients and for their private information. Therefore it should be regarded as confidential and not be made available to any person without our prior approval.
 
 
Please contact us if you wish to discuss how the points raised in this edition specifically affect you.
 
Yours faithfully,
 

The ASG Team

Single Touch Payroll pilot and tax offset proposed

 

The Government is looking to cut red tape for employers by simplifying tax and superannuation reporting obligations through its initiative called Single Touch Payroll (STP). “Employers currently manually report Pay As You Go (PAYG) withholdings to the ATO,” the Assistant Treasurer Kelly O’Dwyer said. “Under the new STP this information will be automatically reported to the ATO through Standard Business Reporting (SBR) software.”

The ATO will be conducting a pilot in the first half of 2017 focusing on small businesses. From 1 July 2017, all businesses will be able to commence STP reporting, with the option to make voluntary payments. In addition, the ATO will transition employers with 20 or more employees to STP. From 1 July 2018, employers with 20 or more employees will be required to use STP enabled software for reporting to the ATO. The Government will make a decision on timing for rolling out STP reporting for employers with less than 20 employees after the pilot is completed.

To assist small businesses with a turnover of less than $2 million, the Government will offer a $100 non-refundable tax offset for SBR-enabled software. This offset is proposed to apply from 1 July 2017 and for software purchases or subscriptions made in the 2017–2018 financial year only.
 
TIP: Although there are benefits to streamline reporting, some commentators have highlighted cash flow concerns relating to making more frequent payments. Real time pay day reporting also gives the ATO an earlier intervention signal to contact struggling businesses. If you have any questions, please contact our office. 

 

GST simplified accounting methods for small food retailers


Simplified GST accounting methods are available for small food retailers if they meet certain eligibility conditions. Many small food retailers buy and sell products that are taxable as well as products that are GST-free. Accurately identifying and recording GST-free sales separately from those that are taxable can be difficult, which makes accounting for GST complicated. However, there are five simplified GST accounting methods to choose from to help businesses meet their GST obligations. These include the Business norms method, Stock purchases method, Snapshot method, Sales percentage method, and the Purchases Snapshot method.
 
TIP: Business needs change and it may be prudent to take a look at whether there are advantages with adopting a SAM. Do you need help deciding which method would be best for your small food business? Please contact the office for assistance or further information.

 

Government's Innovation Agenda contains tax incentives

 

The Government is looking to support innovation and its recently released Innovation Agenda proposes a suite of new tax and business incentive measures. A key proposal is to provide concessional tax treatment to encourage early stage investors to support innovative start-ups. Under the proposal, investors will receive a 20% non-refundable tax offset based on the amount of their investment (capped at $200,000 per investor, per year), as well as a 10-year capital gains tax exemption for investments held for three years. The Government has advised that the scheme is expected to commence during 2016 as soon as supporting legislative amendments are passed into law.
 
TIP: The incentive is proposed to be available for investments in companies that: undertake an eligible business (scope to be determined); that were incorporated during the last three income years; aren’t listed on any stock exchange; and have expenditure and income of less than $1 million and $200,000 in the previous income year, respectively
 

ATO data matching real property transactions 

 

The ATO has issued a notice announcing that it will be acquiring details of real property transactions for the period 20 September 1985 to 30 June 2017 from various state revenue offices and tenancy boards. In relation to rental properties, the ATO is seeking details of rent paid and contact details of landlords. In relation to property transfers, the ATO is seeking details of the transfers, including details of the transferors and transferees and any state land tax and/or stamp duty concessions sought. 
The information will be matched to the ATO's data holdings. The ATO said an objective of the data matching program is to ensure taxpayers are correctly meeting their taxation obligations. The ATO expects that around 31 million records for each year will be obtained. Based on current data holdings, the ATO said records relating to approximately 11.3 million individuals are expected to be matched. 
 
TIP: The data matching program goes all the way back to the start of the capital gains tax (CGT) regime in September 1985. Some commentators suggest this could be the ATO looking for CGT revenue on previously undeclared capital gains or incorrectly claimed CGT concessions. Note also that the ATO intends to carry on its data matching program from 2017. It will no longer announce details of its program as law changes will make it mandatory by then for revenue authorities and other entities to report real property transactions to the ATO.

 

Tax treatment of earnout rights on business sale

 

A Bill has been introduced in Parliament that proposes to amend the tax law to change the capital gains tax treatment of the sale and purchase of businesses involving certain earnout rights (ie rights to future payments linked to the performance of an asset or assets after sale). As a result of these amendments, capital gains and losses arising in respect of look-through earnout rights will be disregarded. Instead, payments received or paid under the earnout arrangements will affect the capital proceeds and cost base of the underlying asset or assets to which the earnout arrangement relates.

Clarifying the CGT treatment of earnout rights has been a long time coming – it was first announced on 12 May 2010 as part of the 2010–2011 Budget. The amendments contained in the Bill are proposed to apply from 24 April 2015. However, note there will be protections for taxpayers who have undertaken other actions in reasonable anticipation of announcements made about the amendments in the 2010–2011 Budget.
 
TIP: The ATO has released details of its administrative treatment pending the formal enactment of the legislation. Please contact our office for further information.
 

Are your super saving goals on track?

 

The new calendar year is a good time to conduct a superannuation health check and set some new goals to help boost superannuation savings. Although there have been no seismic shifts in the superannuation landscape of late, it may be prudent to reacquaint yourself with the rules. The following are some considerations.

•    Make extra contributions – the general concessional contributions cap is $30,000 for 2015–2016. For people aged 50 and over, there is a higher concessional contributions cap of $35,000 for 2015–2016.  

•    Check super savings – it is a good habit to check your super balance regularly. You may also want to protect your super from identity crime. For example, you may want to change passwords for accounts that can be viewed online.

•    Look for small lost super accounts – the threshold below which small lost super accounts will be required to be transferred to the ATO has increased to $4,000 (from December 2015). 

•    Consolidate multiple super fund accounts – you may want to consider consolidating multiple super fund accounts. This may help avoid paying multiple fees, reduce paper work, and make it easier to keep track of your super.

•    Salary sacrifice super – you may want to ask your employer about salary sacrificing super, or you may want to consider          
      reviewing existing arrangements with your employer.
 
TIP: Professional advice should be obtained before implementing a new retirement saving strategy. Please contact our office to discuss your circumstances.
 

Alert - Collectables and personal use assets in an SMSF

(Article by William Fettes & Bryce Figot, DBA Lawyers)

All newly acquired investments by SMSF trustees in collectables and personal use assets since 1 July 2011 have been subject to strict rules under reg. 13.18AA of the Superannuation Industry (Supervision) Regulations 1994 (Cth) (‘SISR’). However, SMSF trustees should be aware that the grandfathering relief in relation to such investments that were held prior to 1 July 2011 will come to an end on 1 July 2016. 

This article provides an overview of the rules concerning collectables and personal use assets. 
 
Therefore, to avoid potential penalties, SMSF trustees with grandfathered investments in collectables and personal use assets will need to consider the current rules carefully and take appropriate action before 1 July 2016 to ensure their investments are compliant. 

This article provides an overview of the rules concerning collectables and personal use assets. 
 
The origin of the rules

The current rules in relation to collectables and personal use assets arose in response to the 2010 Super System Review (also known as the Cooper Review). The Cooper Review expressed concern that there was an unacceptable risk that investments by SMSF trustees in collectables and personal use assets may be made for present day benefits rather than for the purposes of retirement. Accordingly, the final report recommended a total prohibition on SMSF trustees making such investments. 
 
However, the federal government rejected the recommended blanket ban and instead sought to allay these concerns by legislating certain restrictions which are contained in reg 13.18AA of the SISR which commenced 1 July 2011.
 
Collectables and personal use assets

Regulation 13.18AA covers artwork, jewellery, antiques, artefacts, coins, medallions or bank notes, postage stamps or first day covers, rare folios, manuscripts or books, memorabilia, wine or spirits, motor vehicles, recreational boats, and memberships of sporting or social clubs.
 
As matter of passing curiosity, we note that collectables and personal use assets include antique firearms but not modern firearms. Moreover, we note that it applies to spirits and wine, but not to beer or pre-mixed drinks. 
 
No leases to related parties

Sub-regulations (2) and (3) of reg 13.18AA require that SMSF trustees must not lease collectables and personal use assets to a related party of the SMSF, or enter into lease arrangements in respect of these assets with related parties. A lease arrangement is a broad concept covering any agreement, arrangement or understanding in the nature of a lease.
 
No use by related parties

SMSF trustees must not allow collectables and personal use assets to be used by a related party of the SMSF.
 
Storage in private residence of related parties

Sub-regulation (3) of reg. 13.18AA prohibits SMSF trustees from storing collectables and personal use assets in the private residence of related parties.

The drafting of this provision raises the question of whether it may be possible to store collectables or personal use assets in the offices of related parties where those offices are not a private residence. For example, might an SMSF trustee be allowed to store artwork in the business premises of a related party? 

The ATO has published material on their website which clarifies the position:
 
You can store (but not display) collectables and personal use assets in premises owned by a related party provided it is not their private residence. They can't be displayed because this means they are being used by the related party. For example, if your SMSF invests in artwork it can't be hung in the business premises of a related party where it is visible to clients and employees.
Remember to keep a record of the reasons for deciding on where to store the assets.

 

Though this is not binding on the ATO, as the regulator of SMSFs, it is consistent with the legal construction of the regulations and the ATO seems relatively likely to follow the views expressed in such public materials.
 
SMSF trustees must also make and keep written records of the reasoning behind any storage decisions. There is no specific timeframe as to when the written records must be made; however, the record must be kept for at least 10 years after the decision.
 
Insurance

The rules stipulate that SMSF trustees must insure collectables and personal use assets in the name of the SMSF within seven days of acquiring such items, excluding memberships of sporting or social clubs.
 
More specifically, reg. 13.18AA(5) provides:

Each trustee of a regulated superannuation fund that is a self managed superannuation fund commits an offence if:

(a)  the fund owns a section 62A item, other than a membership of a sporting or social club; and
(b)  it is more than 7 days since the fund acquired the item; and
(c)  the item is not insured in the name of the fund.
 
The reference to ‘owns’ is an interesting aspect of the drafting of sub-reg (5). It must be noted that most of the compliance requirements in reg 13.18AA are drafted using the language ‘holds an investment involving’ rather than ‘owns’ [emphasis added]. 
 
This difference in language raises the question of whether the requirement for taking out insurance in the fund's name would still apply in relation to investments in collectables and personal use assets which are held through an interposed entity. For example, could an SMSF trustee invest in artwork as a unitholder in a div 13.3A non-geared unit trust without the insurance requirement applying? If so, this would allow for more flexible insurance arrangements, such as having artwork insured as part of an overall gallery policy. 
 
Realisation of assets and related party transfers

Collectables and personal use assets must be realised for a market price determined by a qualified independent valuer if a related party receives an interest in the asset because of the realisation.

More specifically, reg. 13.18AA (7) provides:

A trustee of a regulated superannuation fund that is a self managed superannuation fund commits an offence if: 

(a)  the trustee realises an investment held by the fund involving a section 62A item; and 
(b)  a related party of the fund receives an interest in the item because of the realisation; and 
(c)  the realisation was not at a market price determined by a qualified independent valuer. 
 
Though the ATO has long maintained that qualified independent valuers are desirable, it is notable that this is the first time that there has been an actual legislative requirement to utilise a qualified independent valuer.

Moreover, given the legislation is framed in terms of the SMSF trustee being the entity which ‘realises’ the collectable or a personal use asset, this raises the question of exactly what kind of dealings are covered.  

Neither ‘realises’ or ‘realisation’ are defined in the SISR. Therefore, in the absence of an express definition, we note that words should take their ordinary meaning. Relevantly, Macquarie Dictionary defines realise as follows:
 

4. to covert into cash or money: to realise securities.
5. to obtain as a profit or income for oneself by trade, labour or investment
6. to bring as proceeds, as from a sale: the goods realised $1000         

8. to convert property or goods into cash or money.
… 

Furthermore, the explanatory statement which introduced the provisions in reg 13.18AA uses the language ‘disposes of’. This would tend to suggest that disposal of the asset is required for the purposes of the regulations.
 
Though the above points are not entirely dispositive, it is arguable that a transfer of an asset directly to a member by way of in specie lump sum would not be caught by reg 13.18AA(7) and thus independent valuation would not be required. Naturally, however, this is a novel and untested construction and therefore the most prudent course of action may be to obtain a qualified independent valuation in any event. 
 
The end of grandfathering

As noted above, the rules in reg 13.18AA did not immediately apply to existing investments in collectables and personal use assets when the requirements commenced on 1 July 2011. This is because reg 13.18AA(9) provides that sub-regs (2)¬–(7) do not apply to investments in collectables and personal use assets that were held by the fund on 30 June 2011. However, the rules will apply to such ‘older’ assets from 1 July 2016 because reg 13.18AA(9) ceases to be enforced as of 1 July 2016 (refer to reg 13.18AA(10)). 
 
Thus, SMSFs with grandfathered collectables and personal use assets must conform with reg 13.18AA by July 2016. For example, if artwork was stored at a member’s private residence, was not insured, or was leased to a member, the artwork must be leased to a third party at arm’s length terms and insured, or otherwise disposed of by 1 July 2016.
 
Penalties for contraventions

The prescribed penalty for contravention of any of the above rules is 10 penalty units (ie, $1,800 currently) for each SMSF trustee. This is another timely reminder of the advantages of using a corporate trustee over individual trustees. 

Where contraventions involve a collection of items, the potential for a penalty multiplier to apply to the facts should also be considered. Case law, such as Olesen v Eddy [2011] FCA 13 [32], Vivian v Fitzgeralds [2007] FCA 1602 [33] and Australian Prudential Regulation Authority v Derstepanian (2005) 60 ATR 518 [31] suggests that a multiplier approach is unlikely, however, no guarantee can be given about this and SMSF trustees should be very careful to ensure they comply with the rules.
 
Conclusion

SMSF trustees who have previously enjoyed grandfathered protection in relation to their investments in collectables and personal use assets held prior to 1 July 2011 will need to take appropriate action to ensure they meet the strict requirements of the SISR prior to 1 July 2016.

knp would like to thank William Fettes & Bryce Figot for allowing us to publish this article.

 

 

As part of our “Go Green” paperless initiative, knp will be implementing a new procedure by sending invoices & statements via email. 
 
In the near future you will be asked if you prefer this option and if so, to indicate your preferred email address.

 

 

Important: Clients should not act solely on the basis of the material contained in Cents & Sensibility. Items herein are general comments only and do not constitute or convey advice per se. Also changes in legislation may occur quickly. We therefore recommend that our formal advice be sought before acting in any of the areas. Cents & Sensibility is issued as a helpful guide to clients and for their private information. Therefore it should be regarded as confidential and not be made available to any person without our prior approval.
 
 
Please contact us if you wish to discuss how the points raised in this edition specifically affect you.
 
Yours faithfully,
 

The ASG Team

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