If you have a self-managed super fund (SMSF), then you need to meet the sole purpose test to be eligible for the tax concessions that are normally available to super funds. The sole purpose test aims to ensure that SMSFs are maintained for the purpose of providing benefits to members upon retirement or for beneficiaries if a member dies before retirement.
The sole purpose test is not a formal process that trustees have to go through, but more of a standard rule of thumb they should follow when making decisions relating to their fund and investments. If the sole purpose test is contravened, the fund will lose its concessional tax treatment and be subject to the highest tax rate. Members could also be disqualified as a trustee and face civil and criminal penalties such as fines or imprisonment.
If you or anyone else get some sort of financial, pre-retirement benefit when making investment decisions and arrangements other than increasing the return of your fund, then it is likely that your fund does not meet the sole purpose test. The test is divided into core and ancillary purposes, where regulated funds must be maintained for at least one core purpose and can add one or more ancillary purposes but cannot be run only for ancillary purposes.
The core purposes are paying benefits to:
- Members on or after retirement from gainful employment.
- Members when they have reached a prescribed age.
- Dependents if the member dies.
The ancillary purposes are:
- Termination of a member’s employment where the employee made contributions to the fund on behalf of the member.
- Cessation of employment due to physical or mental health reasons.
- Death of the member after retirement where the benefits are paid to the member’s dependants or legal representative.
- Death of the member after attaining a prescribed age where the benefits are paid to the member’s dependants or legal representative.
- Other ancillary purposes approved in writing by the regulator (ATO or the Australian Prudential Regulation Authority).
Retirement isn’t necessarily a permanent thing as even the best-laid plans can collapse when circumstances change. The Australian Bureau of Statistics (ABS) has found the most common reasons retirees return to employment are financial necessity and boredom. But what does this mean when you have already dipped into your superannuation funds?
Individuals are able to access their super once they have reached their preservation age and retired, ceased an employment arrangement after age 60, or turned 65. Depending on your circumstances, there are rules regarding how you can return to work after retirement.
For those who genuinely retired with no intention of ever returning to work but found that circumstances required them to, you can return provided that you work on a casual basis up to 10 hours per week. By meeting this requirement, you can still access your super whilst working, however, additional contributions made to your account after you met the definition of retirement will be preserved until you meet another condition of release.
In the event you access your super after an employment arrangement comes to an end once reaching age 60, you are able to work in a new position as soon as you like, provided the first arrangement ended. Subsequent contributions made after your employment arrangement came to an end will be inaccessible, however, you will have access to the benefits that became available as a result of your first employment arrangement coming to an end.
When you turn 65, you don’t have to be retired or satisfy any special conditions to get full access to your super savings. This means you can continue working or return to work if you have previously retired, provided you complete the work test requirements before going back. If you return to work and earn more than $450 a month, your employer will be required to make superannuation contributions at the current rate of 9.5% until you reach age 75 where you can still work but receive no further super contributions, either voluntary or from your employer.
As returning to work and continuing to receive super is circumstantial, individuals considering their options should consult their accountant or financial advisor for information specific to their situation.
The event-based reporting (EBR) framework for self-managed super funds (SMSFs) commenced on 1 July 2018. This system allows the ATO to administer the transfer balance cap. Reporting under the EBR framework commences when your first member begins a retirement phase income stream. The transfer balance account report (TBAR) is then used to report certain events and is separate from the SMSF annual return.
An SMSF must report events that affect a member’s transfer balance, these should include details of:
- Pre-existing income streams being received on 30 June 2017 that;
– continued to be paid to them on or after 1 July 2017.
– were in retirement phase on or after 1 July 2017.
- New retirement phase and death benefit income streams including value and type.
- Limited recourse borrowing arrangement (LRBA) payments, including the value and date of each relevant payment, if entered into on or after 1 July 2017.
- Compliance with a commutation authority issued by the ATO.
- Personal injury contributions.
- Commutations of retirement phase income streams that occur on or after 1 July 2017.
Events that an SMSF do not need to report include:
- Pension payments made on or after 1 July 2017.
- Investment earnings and losses that occurred on or after 1 July 2017.
- When an income stream ceases because the interest has been exhausted.
- The death of a member.
All SMSFs must report events that affect their members’ transfer balances. If no event occurs, there is nothing to report.
Timeframes for reporting are determined by the total superannuation balances of an SMSF’s members. In the events affecting members’ transfer balances, reports must be made within 28 days after the end of the quarter in which the event occurs. Unless a member has exceeded their cap and the fund needs to report an event sooner, the first due date for the lodgment of TBARs is 28 October.
How to reduce the hassle of missing your employee’s super payment.
The Super Guarantee Charge (SGC)
The SGC may apply to employers who do not pay the minimum super guarantee (SG) to their employee’s designated superannuation fund by the required date. The non-tax-deductible charge includes the SG shortfall amounts with interest and a $20 administration fee for each employee. You will need to lodge your SGC statement within a couple of months of the respective quarter. While employers are able to apply for an extension to lodge and pay the SGC, the nominal interest will still accumulate until the extension is lodged. From this point, the general interest charge will apply until the SGC is paid off.
What you can do to reduce your SGC
The nominal interest and SGC shortfall can be offset or carried forward by late contributions against the SGC in certain conditions. This excludes the administration fees, certain types of interest and other penalties. The late contribution is also not tax-deductible, nor is it able to be used as a prepayment for current or future contributions. However, you are able to carry it forward if the payment is for the same employee and is for a quarter within 12 months after the payment date. It is advised to consult with our office to work with your unique situation.
The bigger picture
Struggling to pay your employees’ super is a sign of financial insecurity for your business. While an employee’s PAYG Withholding tax and super may not be due for a while, not having the funds for them at each payday is a debt that will only accrue. You may have to consider your business’ strategy and operations or consult us if you feel it is only the symptom of a bigger issue.
The ATO has issued a warning to the public regarding illegal early release of super schemes, which are subject to severe penalties.
There are strict rules around when you can access your super so your current decisions do not jeopardise your quality of life in retirement. The ATO has reminded the public you may only access your super early if you have experienced severe financial hardship or you have reached the preservation age and have stopped working.
How these schemes work
The promoters of these schemes:
Encourage you to transfer or rollover your super from your existing super fund to an SMSF to access your super before you are legally entitled to
Target people under financial pressure or those who do not understand super laws
Claim you can access your super and put the money towards anything you want which is not true
Charge high fees and commissions, presenting the risk of losing some or all of your super to them
May request your identification documents which can result in identity theft
Penalties apply to promoters and individuals who illegally access their super early. If you illegally obtain your super early, it is included in your assessable income even if you return the super to the fund later. If you are an SMSF trustee, you may be fined up to $420,000 and liable for jail terms of up to five years. Civil and criminal penalties apply to promoters.
Superannuation is more critical than it has ever been. If having an ageing population has taught us anything, it is how managing money now can have substantial ramifications for your retirement plan.
Merge your super
Every super account you have comes with a set of fees. It is worth your while chasing down inactive accounts and putting all your super into the one account to reduce fees and maximise the investment benefits.
If you can budget putting more of your salary away into a super account every month, you can reap multiple rewards. First, you can use the extra super payments to offset your pre-tax payments up to the current concessional contribution cap of $25,000 per year and after-tax contributions of $100,000. You can also build up your super while you can afford to.
Your investment strategy should depend on the amount of risk you are willing to take. This will vary on where you are in your career. A growth investment option, which is high risk, might suit you if you are in the early stages of your career development. However, as your income stabilises to your goal amount, it might be wise to change super funds to a lower risk option that will protect your growing retirement nest egg.
The Government has introduced new measures to allow SMSF members to access their super for their first home or make contributions to their super from the sale of downsizing their home. SMSFs should be aware of the following:
From 1 July 2018, SMSF members who are 65 or over and exchange a contract of sale of their main residence may be eligible to make a down sizer contribution of up to $300,000 into their super without affecting their total super balance or contributions cap for the year.
This contribution will count towards the transfer balance cap and be taken into account for determining eligibility for the age pension.
SMSF members do not have to purchase another home to access this measure. However, the contribution can only be made once; it cannot be used for the sale of a second main residence.
The First Home Super Saver Scheme
SMSF members looking to get into the property market can now use some help from their SMSF under the First Home Super Saver Scheme.
As of 1 July 2018, SMSF members over 18 years of age can apply to release their voluntary concessional and non-concessional contributions made from 1 July 2017, along with associate earnings to purchase their first home.
Voluntary contributions made since 1 July 2017 of up to a maximum of $15,000 from any one financial year or a total of $30,000 across all years can be applied for.
The ATO is warning self-managed super fund (SMSF) trustees about the risks of some emerging retirement planning arrangements.
Retirees or SMSF trustees who are involved in any illegal arrangement, even by accident, may face severe penalties, risk losing their retirement savings, and potentially, their rights as a trustee to manage their own fund.
The Tax Office has released additional information through their Super Scheme Smart Program to help educate retirees and trustees of these complex tax avoidance schemes and arrangements.
Super Scheme Smart provides case studies and information packs to ensure taxpayers are informed about illegal arrangements including what warning signs to look for and where to go for help.
Many of the arrangements are cleverly designed to look legitimate, give a taxpayer a minimal or zero amount of tax or tax refund or concession, aim to give a present day tax benefit and involve a fair amount of paper shuffling.
Some arrangements may be structured in a way which appears to satisfy certain regulatory rules, however, these arrangements are often ‘too good to be true’ and are in fact illegal.
Among the ATO’s previous concerns about dividend stripping arrangements and contrived arrangements involving diversion of personal services income to an SMSF, there are some new arrangements on the Tax Office’s radar, including:
- Artificial arrangements involving SMSFs and related-party property development ventures.
- Arrangements where an individual or related entity grants a legal life interest over a commercial property to an SMSF. This results in the rental income from the property being diverted to the SMSF and taxed at lower rates whilst the individual taxation or related entity retains legal ownership of the property.
- Arrangements where individuals (including SMSF members) deliberately exceed their non-concessional contributions cap to manipulate the taxable component and non-taxable component of their fund balance upon refund of the excess.
If you are concerned about your involvement with such arrangements, you can contact the Tax Office early to work towards a resolution.