COLUMNIST ARTICLES

SMSF: Non-arm’s length income – expenditure incurred under a non-arm’s length arrangement will attract higher taxes

ACCOUNTANT

By Warren Strybosch

Have you ever owned a property in your SMSF and sold it to yourself for less than market value? Are you an accountant preparing the SMSF returns and financials and not charging the SMSF accounting fees associated with doing the work? Have you lent money to your SMSF and the SMSF is paying the interest at less than commercial rates? If so, the income produced by the SMSF may be taxed at the highest marginal tax rate.

The ATO Law Companion Ruling LCR/2021/2 clarifies how the amendments to section 295-550 of the Income Tax Assessment Act 1997 (ITAA 1997) operates in a scheme where the parties do not deal with each other at arm’s length and the trustee of a complying superannuation entity incurs non-arm’s length expenditure (or where expenditure is not incurred) in gaining or producing ordinary or statutory income. The amendments apply in relation to income derived in the 2018–19 income year and later income years, regardless of whether the scheme was entered into before 1 July 2018. In other words, it relates to goods or services you received, paid-for, incurred, for which you paid less or received for less than market value. If you did, then some or all of the income with in your SMSF might be taxed at the highest marginal tax rate and not the low tax component rate of 15%.

Example 1 – Non-arm’s length expenditure was incurred to acquire an asset

market value of $800,000. During the income year, he sells the commercial property to himself acting as trustee of his self-managed superannuation fund (SMSF) for $200,000. The SMSF leases the property to a third party. For the purposes of subsection 295-550(1), the scheme involves the SMSF acquiring the commercial property from Armin for an amount that is less than its market value. There is a sufficient nexus between the non-arm’s length expenditure incurred in acquiring that property and the rental income the SMSF derives from leasing the property for the rental income to be NALI. Further, there will be a sufficient nexus between the non-arm’s length expenditure and any capital gain derived on the disposal of the property for the capital gain to be NALI.

Example 2 – Non-arm’s length expenditure incurred has a nexus to all income of the fund

For the 2020–21 income year, Mikasa as trustee of her SMSF engages an accounting firm, where she is a partner, to provide accounting services for the SMSF. The accounting services include services other than those relating to complying with, or managing, the SMSF’s income tax affairs and obligations. The accounting firm does not charge the SMSF for those services as a result of non-arm’s length dealings between the parties (and not as part of any discount policy referred to in paragraph 51 of this Ruling). For the purposes of subsection 295-550(1), the scheme involves the SMSF acquiring the accounting services under a non-arm’s length arrangement. The non-arm’s length expenditure (being the nil amount incurred for the services) has a sufficient nexus with all of the ordinary and statutory income derived by the SMSF for the 2020–21 income year. As such, all of the SMSF’s income for the 2020–21 income year is NALI.

Subsection 295-550(1) would cease to apply if the arrangement changes for the 2021–22 income year so that the SMSF incurs expenditure for the accounting services provided by the accounting firm of an amount that would have been expected to be incurred where the parties were acting at arm’s length. In this situation, none of the SMSF’s income for the 2021–22 income year is NALI.

Example 3 – Purchase financed through a limited recourse borrowing arrangement on non-arm’s length terms

During the 2018–19 income year, Kellie (as trustee of her SMSF) entered into a non-commercial LRBA with herself in her individual capacity to purchase a commercial property valued at $2 million. Her SMSF borrowed 100% of the purchase price and the terms of the loan included interest being charged at a rate of 1.5% per annum and repayments only being made on an annual basis over a 25-year period. Kellie’s SMSF received a commercial rate of rent from the property of $12,000 per month.

If Kellie’s SMSF had entered into an LRBA on arm’s length terms, it would be expected that repayments of principal and interest would have occurred on a monthly basis and interest would be charged on the LRBA at a commercial rate. The loan to market value ratio would have also not exceeded commercial levels. For the purposes of subsection 295-550(1), the scheme involves the SMSF entering into the LRBA with Kellie, complying with the terms of the LRBA, purchasing the commercial property,

and deriving the rental income. The terms of the LRBA constitute a non-arm’s length dealing between the SMSF and Kellie, which resulted in the SMSF incurring expenditure in gaining or producing rental income that was less than would otherwise be expected if those parties were dealing with each other at arm’s length in relation to the scheme.

The rental income derived from the commercial property by the SMSF for all income years is therefore NALI, regardless of whether the LRBA is subsequently refinanced on arm’s length terms. The non-arm’s length expenditure incurred under the LRBA will also result in any capital gain that might arise from a subsequent CGT event happening in relation to the property (such as disposal of the property) being NALI. This will be the case regardless of whether the LRBA is subsequently refinanced on arm’s length terms.

[Source: https://www.ato.gov.au/law/ view/pdf/pbr/lcr2021-002.pdf]

It is crucial for trustees to make sure that all transactions are always performed at arm’s length. If you believe that a transaction might not have been dealt with at arm’s length, we would strongly suggest you speak to your accountant before the end of this financial year to see if there is a way to rewind the transaction and record it correctly and the appropriate paperwork is in place substantiating the matter accordingly.

At Find Accountant, we provide SMSF tax advice. Our senior accountant is also an award-winning financial advisor. If you require SMSF advice or are considering whether or not to wind up your SMSF, then speak to Warren Strybosch at Find Accountant Pty Ltd.

Warren Strybosch

You can call them on 1300 88 38 30 or email info@findaccountant.com.au www.findaccountant.com.au

WARREN STRYBOSCH

Find Group

The founder of the Find Group of companies draws on his diverse background, which ranges form teaching, to serving in the army, to taxation and accounting, to coach and help clients live their best financial lives. A multi-award winner, Warren’s innovative approach in business means he was a champion of virtual financial advice long before the pandemic. Warren established the Find Foundation, which owns and operates across Victoria.

TOP 50 MOST INFLUENTIAL FINANCIAL ADVISER IN AUSTRALIA

The financial advisers featured in this guide are a diverse group: some specialise in responsible investment advice, some provide financial advise to specific professions, and some focus on addressing market gaps, mwith several finding themselves on the list for the very first time. But they all have one thing in common: they all wield influence that can create the blueprint for the future of financial advice in Australia. Not all of them are faniliar names but just because they are not making a lot of noise doesn't mean they are not making waves. Meet our Power 50.

Inflation on the rise - prepare for interest rate rises

By Warren Strybosch

In February the RBA indicated it could see an inflation rate up 3 ¼ % in mid 2022, though Westpac forecast an inflation rate of 5% in their 14th March forecast. With inflation on the rise, the market is now expecting interest rates to start moving also.

If you have a mortgage or investment loan, it might be time to consider speaking with a mortgage broker about a fixed rate loan. We would encourage you to speak the mortgage broker supporting this community paper – you can find their details on page 2 under columnist or at the end of their article.

Fuel tax cut to ease inflation: Treasurer

Maeve Bannister (Australian Associated Press)

Josh Frydenberg has tried to soothe concerns that spending in his fourth budget will inflame already heated inflation and bring forward an interest rate rise earlier than would otherwise be the case.

While the treasurer’s pre-election budget cut deficits by about $100 billion out to 2025/26, it also spends tens of billions of dollars, including $8.6 billion in cost-ofliving measures for households.

This includes a halving in the 44.2 cents a litre fuel excise for six months.

“The reason why we took this step is because cost of living pressures are real, fuel prices are particularly high,” Mr Frydenberg told the National Press Club at the traditional post-budget lunch in Parliament House.

He said Treasury estimates a cut in the fuel excise will reduce inflation by 0.25 per cent.

Financial markets see the risk of an interest rate hike by the Reserve Bank of Australia as early as June, with economists expecting inflation to accelerate to at least five per cent compared with an already high rate of 3.5 per cent.

“This budget delivers further fiscal stimulus near term and, at the margin, it adds to the pressure for the RBA to begin policy normalisation sooner rather than later with emergency cash rate settings looking increasingly inappropriate,” RBC Capital Markets chief economist Su-Lin Ong said. The markets are pricing in a cash rate of around 0.3 per cent by June, compared with the current record low of 0.1 per cent. “It will be interesting to see how the Reserve Bank responds to this budget next Tuesday, when it meets to consider interest rates,” CPA Australia’s Jane Rennie said. The budget also provides an additional tax break for low and middle income earners and a one-off payment to pensioners and the unemployed.

Committee for Economic Development of Australia chief economist Jarrod Ball said the short-term quick fixes would be welcomed by many. “But … with growing inflationary pressures and interest rate rises on the horizon, cost-of-living pressures will not dissipate any time soon and these measures do not provide a long-term solution,” he said. Labor will wave through the initiatives, at a time when real wages are going backwards.

“There is a role for cost of living relief in the budget,” shadow treasurer Jim Chalmers told ABC radio.

“What’s missing from the budget is a plan beyond May. This government is temperamentally incapable of seeing beyond the May election.”Still, Standard & Poor’s said the improvement in the budget bottom line has been faster than previously anticipated, underpinning Australia’s AAA rating and stable outlook.

“The outcome would have been stronger had the government not announced additional spending in the budget to ease cost-of-living pressures,” S&P said.

Australia remains one of a small group of 11 countries to be rated AAA by S&P, a level it has held since 2003.

Moody’s Investors Service and Fitch Ratings rank Australia similarly.

Moody’s vice-president Martin Petch said the budget improvement reflected the flexibility of the Australian economy and the effectiveness of its macroeconomic policy response to the coronavirus pandemic.

“This, and unexpected strength in commodity prices, have driven a solid economic recovery and lift in government revenues,” he said.

But Fitch director for sovereign ratings Jeremy Zook said while the medium-term fiscal outlook has improved, the path for budget consolidation is highly reliant on forecasts of an improved economic outlook and revenue performance.

“It does leave fiscal metrics and debt stabilisation vulnerable to a potential underperformance in economic growth, especially as the budget does not expect a return to fiscal balance in the next 10 years,” he said.

FREE Access to Company Information - ASIC Fees to be Removed

By Warren Strybosch

One of the announcements in the 2022 Budget is that ASIC fees are to be removed as part of the Commonwealth’s deregulation agenda.

From September 2023, it is anticipated that businesses will be able to access company information and pay less ASIC fees when the new business registery service goes live via the via the

Australian Business Registry Services

(ABRS) online digital platform. The following fees may be removed or reduced: • Company search fees; • Company annual review late fees; and • Lodgement fees.

With the introduction of the Director ID, it looks like the Commonwealth also wants to make certain director and company information is more accessible. It is not yet clear as to exactly what information will be made available to the general public, but it is likely it will include information on company ownership, directorships, office addresses and financial results.

The registry fee reforms are anticipated to save Australians and their businesses $64.9 million in fees over 3 years from 2023-24. The changes are part of the much broader Modernising Business Registers program to make interactions with government simpler and quicker, improve the currency and accuracy of registry information and promote transparency.

Australian Entities and the EU General Data Protection Regulation. Should I Have Cover?

GENERAL INSURANCE

By Craig Anderson

Are you running an entity incorporated in Australia and dealing with clients on line who are in the EU, or clients in Australia who have EU citizenship? If you are, and you mishandle their data, you may have simultaneously breached Australian and European Regulations.

To be clear, this article is not intended to offer legal advice, but to highlight you may need to examine a potential area of risk in your business further. You might find the link below useful, but in the meantime, you may be wondering where insurance fits into this conversation.

https://www.oaic.gov.au/privacy/ guidance-and-advice/australianentities-and-the-eu-general-dataprotection-regulation

Put simply, one of the greatest underestimated risks to any business is the theft, or hijacking, of client data; thanks to a malware attack or hacking incident.

Once this occurs, the business will likely have to self-report to the Office of the

Australian Information Commissioner

(OAIC), and let all of their customers know about the breach and the potential impact to those affected. At that point, it may be found that the General Data Protection Regulations (GDPR) rules have been breached as well, and fines may apply. A website which has a survey or chat function which uses cookies may also breach GDPR rules depending how the data is used or stored, and where it is used, and by whom. See link below for self-reporting of data breaches in Australia.

https://www.oaic.gov.au/privacy/ notifiable-data-breaches/report-a-databreach

Cyber Insurance can cover Crisis Management Costs, Notification and

Breach Response Expenses, Defence

Costs, Fines and Penalties (where insurable under the law), Multimedia Liability, Loss of Business Income and potentially Cyber Extortion Money in some circumstances. A cyber-consultant risk. Given the frequency and severity of cyber events, a cyber-policy is a must for businesses, and can be an effective last line of defence against massive cyber related financial losses.

For a health check of your business insurance, contact Small Business Insurance Brokers via email at sales@ smallbusinessinsurancebrokers.com.au, or call 0418 300 096

Any advice in this article has been prepared without taking into account your objectives, financial situation or needs. Because of that, before acting on the above advice, you should consider its appropriateness (having regard to your objectives, needs and financial situation).

Craig Anderson

GENERAL INSURANCE Small Business Insurance Brokers www. heightsafetyinsurancebrokers.com.au 0418 300 096

COVID Grants – Now Approvedas Tax-free Income

By Warren Strybosch

The following COVID grants have been granted status as non-assessable non-exempt income (NANE) (basically tax-free income):

2022 Small Business Support Program (NSW); Commercial Landlord Hardship Grant (NSW); NSW Accommodation Support Grant (NSW); NSW Festival Relaunch Package (NSW); NSW Performing Arts Relaunch Package (NSW); 2021 COVID-19 Business Support Grants (Qld); COVID-19 Additional Business Support Grant (SA); COVID-19 Business Hardship Grant (SA); COVID-19 Business Support Grant - July 2021 (SA); COVID-19 Tourism and Hospitality Support Grant (SA); COVID-19 Business Support Grant (ACT).