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TAX ALERT: SUPERANNUATION UPDATE – DECEMBER 2012

Introduction

Regulation of the superannuation sector has undergone many changes recently, and even more changes are expected in the near future.  With this in mind, we consider it important to review some recent new developments which will impact trustees of self-managed superannuation funds (SMSFs).

This update is intended as an "alert" to remind SMSF trustees of their evolving responsibilities under our ever changing and increasingly complex superannuation laws.


Changes to the rules for the valuation of SMSF assets

One of the new regulations finalised in recent months requires SMSF trustees to report fund assets at market value when preparing year-end reports for the 2012-13 financial year and later.

Prior to the introduction of the regulation, SMSFs were able to choose either historical cost or market valuation as a method to value their assets when preparing financial statements.

For many years, most accountants have considered it best practice to value the assets of a SMSF at market value when preparing accounts.  However, for accounts prepared for the 2012-13 financial year and later, it will now be mandatory.

Valuation guidelines

Although many accountants have been reporting market values for some time, it is worth reviewing what the ATO considers to be an appropriate valuation.

It is worth noting that different requirements may exist depending on the purpose of the valuation.  In fact a different methodology may be required for different purposes and different assets.  For example, the use of an independent, qualified valuer will be required for collectables and personal use assets when they are transferred to a related party, but will not necessarily be required for other assets or for other purposes.

Who can do the valuation?

For year-end reporting purposes, the ATO has stated that in most cases, the valuation can be performed by anyone - as long as the valuation is based on objective and supportable data.

However, the ATO has recommended a qualified independent valuer be used if an asset represents a significant portion of the SMSFs value or the nature of the assets would mean that the valuation would be complex or difficult (ie. rare or unique assets).

How often do we need to undertake a valuation?

The value of assets should be given consideration annually, however this may not require a revaluation each year.

Assets such as cash and listed securities that are simple to value would be required to be valued at the end of every year.  Other assets such as real estate may not need to be revalued each year, although a significant event occurring during the year may require a new valuation to be undertaken at year-end.

Any immediate action required?

The new valuation requirements will only be required for year-end accounts for this financial year and onwards, ie. years ending 30 June 2013.  Significant penalties may be imposed if this requirement is not complied with.

To be prudent, we must recommend that SMSF trustees start to consider whether independent valuations are required for substantial (in value), rare and 'difficult to value' assets.  Also we urge trustees to provide sufficient time to make the necessary arrangements to obtain any external valuations - this is not something to leave to the last minute.

If you have any concerns about any assets of your SMSF, or if you have acquired any assets which you think may need valuations for the 2012-13 financial year, we recommend you contact your Lowe Lippmann adviser and discuss it with them.


Insurance and investment strategy considerations

From 1 July 2012, the Investment Strategy for a SMSF will require the SMSF trustee to "consider" whether insurance, such as life and total and permanent disability (TPD) insurance, should be held for members.

The important point is that the trustees need only show evidence that insurance has been considered, as there is no fixed requirement to provide a default level of insurance, which is recommended for non SMSFs.

During the Cooper Review it was noted that less than 13% of SMSFs have insurance.  However, it also noted that SMSF members were more likely to hold appropriate levels of insurance than people who were not members of SMSFs, either within their SMSF or outside superannuation.

In addition to the consideration of insurance cover the investment strategy operating standard has also been revised to require the trustee of the fund to "review regularly" the fund's investment strategy.

Trustees can substantiate their consideration of insurance by documenting decisions in the fund's Investment Strategy or minutes of trustee meetings. Consideration to holding insurance is required to be given when:

  • The Investment Strategy is initially formulated and implemented; and
  • When the Investment Strategy is regularly reviewed.

We encourage SMSF trustees to consider the current level of insurance cover for members and if their circumstances have changed during the year, ask yourself if their level of insurance cover needs to be updated?  If you have any questions or concerns, please speak to your Lowe Lippmann adviser. 


SMSF levy reforms

On Monday 22 October, the Federal Government released its Mid-Year Economic and Fiscal Outlook (MYEFO) update, otherwise known as the Mid-Year Budget, which contained some new announcements in relation to superannuation.

The levy imposed on SMSFs will be reformed, by ensuring the levy is collected from SMSFs in a more timely way, and increasing the levy to ensure the Tax Office's costs of regulating the sector are fully recovered.

Payment of the SMSF levy will be brought forward such that it is levied and collected in the same income year.  This will ensure consistency with APRA regulated funds, which pay the Superannuation Supervisory Levy in the same financial year it is levied.  The change in the timing of the collection of the SMSF levy will be phased in over the two years 2013/14 and 2014/15.

In addition, the SMSF levy will be increased from $191 to $259 pa from 2013/14.


Deceased estates

Also announced in the MYEFO update was that from 1 July 2012, the Government will amend the law to allow the tax exemption for earnings on assets supporting superannuation income streams to continue following the death of a fund member in the pension phase until the deceased member's benefits have been paid out of the fund.

This proposed continuation of the exempt current pension income provisions beyond the death of a member will be subject to the existing requirement for the benefits of a deceased member to be paid out of the fund as soon as practicable following the member's death.

 

Please do not hesitate to contact your Lowe Lippmann advisor if you wish to discuss any of these matters further.