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Changes In Super Legislation (Effective from 1^st July 2007)

A key aspect of the audit of SMSF's is the timing of when to address the major changes in legislation that become effective on 1 July 2007. For the majority of SMSF's, their audit deadline follows the pattern of tax lodgement deadlines associated with their tax agents. This can be 11 months after the balance date. Whilst the rules do not impact the statements trustees make about the year ended 30 June 2007, the auditor signing an audit report much later must consider ASA 560 Subsequent Events.

The audit report has 2 parts - an opinion on financial statements, and an opinion on compliance.

ASA 560 may be thumbed a little more this year than it has been, because of the movements in market values after balance date. Two major market corrections or adjustments have occurred in Australia, and investment market values may be materially different at date of signing the audit report to those of 30 June 2007. Most auditors are comfortable with the concept of Type I and Type II adjustments in subsequent events reporting, and would check that the trustees have appropriate disclosures in the notes to the accounts.

However, those principles for subsequent events apply equally to the other part of the audit report, on SIS compliance. When issuing an opinion, the auditor has a duty to consider whether there have been SIS breaches up to the date of the audit report. Given the substantial shift in rules and much activity that has occurred in the field, an auditor would be unwise to not look at what members had done in respect of for example, contributions and investments, and any payment of benefits, after balance date. A key assessment of the auditor would be whether the trustees have become familiar with the rules or are at risk of operating outside them.

Therefore the rules that will affect audit programs and procedures next year have some relevance to the current year's audits.   

1.1   Contributions

Key features of the contributions regime are:

1.1.1 Deductible / concessional - contributions

In the main these are contributions that have been included in the fund's assessable income in the past, and are deductible to the contributors. They are assessable to the fund at 15%. They are:

• Full deductibility for both employers and those who qualify for deductions for personal contributions.
• A cap of $50,000 per year on concessional contributions for all ages with a five year transitional cap of $100,000 per year for people aged 50 and over.
• Individuals will be subject to tax on contributions in excess of these caps at an additional 31.5%.

 1.1.2 Other assessable (taxable) contributions

• Contribution made on behalf of someone else but no deduction is allowed to the contributor and not excluded from being assessable contributions.
• Included in the $50,000 on concessional contributions ($100,000 transitional cap for people aged 50 and over) and contributions in excess are taxed as above.      

1.1.3 Non-concessional contributions and amounts (including undeducted contributions)

Non-concessional contributions refer to undeducted contributions or after-tax contributions. In the main, they are contributions made by or for an individual in a given financial year which are not included in the assessable income of a superannuation provider.

The following types of contributions are also included:

• excess concessional contributions after 1 July 2007;
• employer contributions in excess of a individual's ABL made in the period 10 May 2006 to 30 June 2007;
• contributions exceeding the member's Capital Gains Tax cap;

• personal contributions for which no income tax deduction is claimed;
• contributions made to a fund which is constitutionally protected;
• contributions included in the assessable income of the fund but not allowed as deductible by the Australian Taxation Office;
• transfers from foreign superannuation funds (excluding amounts included in the fund's assessable income)
• for persons under the age of 18 years, contributions not made by or on behalf of the person's employer; and
• contributions made by the member's spouse.

Non-concessional contributions do not include:

• excess concessional contributions after 1 July 2007;
• contributions made prior to 10 May 2006;
• certain personal injury payment contributions;
• contributions to a constitutionally protected fund which are not included in the contributions segment of the superannuation in interest in the fund;
• rollovers or transfers between complying superannuation funds (excluding transfers from foreign superannuation funds);
• proceeds of disposal of certain small business assets within the capital gains tax cap;
• contributions paid out as a superannuation benefit in the same year in which they were contributed as an untaxed element; and
• amounts included under the contributor's concessional contributions cap due to Div. 295-D.

Features of the new regime are:

• A cap on non-concessional contributions of $150,000 a year from 1 July 2007.
• Other non-concessional contributions and amounts include contributions that exceed the concessional contributions cap.
• Contributions totalling up to $450,000 in one year are allowed by bringing forward future entitlements to two years' worth of contributions.
• A transitional cap of $1million non-concessional contributions made between 10 May 2006 and 30 June 2007.
• Individuals will be subject to tax on contributions in excess of the non-concessional cap at 46.5%.
• Exemptions are provided for certain contributions made from amounts from the sale of qualifying small business assets and settlements resulting from personal injuries.       

1.1.4 Personal contributions

From 1 July 2007, contributions to a superannuation fund can be deducted under certain conditions. Although there is no limit on the amount of contribution or deduction, an excess contribution tax may be payable if the relevant cap amount is exceeded.

Personal contributions are deductible if the following conditions are met:

• the fund is a complying superannuation fund (CSF);
• the fund is not a CSF but, at the time of contribution, the employer reasonably believed that the fund was a CSF or had obtained written confirmation from the fund that it was a resident regulated superannuation fund and it had not been directed not to accept employer contributions;
• if the work activities of the contributor result in the contributor being treated as an employee for the purposes of Superannuation Guarantee (SG), those work activities must constitute less than 10% of the total of the contributor's assessable income and reportable fringe benefits for the income year;
• the income of a contributor who is aged less than 18 years at the end of the income year must have derived from carrying on a business or from employment-related activities;
• where the contributor has turned 75 years, the contribution was made by the 28^th day of the next month
• the contributor must notify the fund trustee in writing of the intention to claim the deduction. Notification must be given by the date when the contributor lodges the income tax return for the relevant year or by the end of the financial year following the year in which the contribution was made, whichever is earlier, and must be acknowledged by the fund trustee;
• the deduction cannot exceed the amount stated in the notification; and
• the deduction must for the same income year as the contributions.

1.1.5 Early release of excess contributions

The $1million transitional contribution cap was highly publicised and attracted some monies from fund members without sufficient planning. Issues include what qualifies as a contribution — so with other elements to add to the hastily found spare million, an excess contribution tax. The government provided a window to request a release of excess contributions made up to 6 December 2007, which closed on 30 June 2007 (Request for transitional release authority form).

• The forms had to be received by the ATO accompanies by confirmation from the fund that the non-concessional contribution was received by the fund in the relevant period.           

1.2 Member benefits

1.2.1 Reasonable benefit limits

From 1 July 2007, reasonable benefit limits (RBLs) will be abolished, relieving super funds from complex reporting requirements.

Superannuation benefits paid up until 30 June 2007 are still required to be reported for RBL purposes. The final reporting date for funds that are up to date with their reporting obligations should be 14 July 2007.         

1.2.2 New taxation of death benefit payments from SMSFs

This is a summary of the tax treatment of superannuation death benefit payments made by a SMSF after 1 July 2007 under the new legislation.

1.2.3 Dependent payments¹               

• Superannuation death benefits will be able to be paid as a pension to a dependent if the member dies before commencing a pension and will be taxed in the same way as a reversionary pension.
• Superannuation death benefits will be able to be paid as a pension to a dependent child, although when the child turns 25 the balance in the fund will have to be paid as a lump sum (tax free) unless the child was permanently disabled.

1.2.4 Non-dependent payments²                                              

¹The tax free component is always tax free.
²The tax free component is always tax free.
³From 1 July 2007, pensions will not be able to revert to non-dependants; rather, superannuation death benefit payments to non-dependants will have to be made as a lump sum.

1.2.5 Amount of life insurance cover

With the abolition of Reasonable Benefit Limits effective 1st July 2007, no restrictions apply on how much life insurance cover can be held through a superannuation fund. Generally it is tax-effective and cost-effective to buy life insurance through super as the money used to pay the premiums comes from pre-tax monies. Life insurance benefits received directly by an estate pass to any beneficiary without tax in the fund or the estate.

1.2.6 Inheritance and dependents tax

By contrast, after 1 July, the tax-free component on inherited superannuation is based on a percentage rather than on a “dollar” amount, ie with the same $3 million balance when you die, the proportion that your adult children can claim tax-free is no longer based on the concessional amount which you contribute. Instead, the tax-free proportion is based on the percentage which your contribution represented at the time when you started to draw down a pension.

1.3   Instalment warrants

In an attempt to adjust a previously controversial situation regarding fund investments in instalment warrants, the government passed legislation late in 2007 permitting these investments. The nature of the product has the equivalent feature of borrowing funds, because it allows leveraged purchase of an underling, traditionally a share.

However, the legislation allowed instalment warrants for the purchase of all types of assets to be an acceptable investment for a super fund, and various promoters are offering products that are based on them. The new government has announced a review and may close this option with a narrower definition of acceptable warrants.

Source: SMSF Audit - Implementing the changes February 2008 By David Sauer NIA.

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