CRYPTOCURRENCY IN THE ATO SPOTLIGHT
The ATO has specified that gains from cryptocurrency are an area of focus again this year. For SMSFs however, managing cryptocurrency is not simply an issue of recognising transactions correctly, it is also about ensuring fund
SMSF Trustees need to ensure that any investment in cryptocurrency is in line with the investment strategy of the fund, the trust deed allows for it at the time the investment is made, and it is an appropriate investment. In particular, the sole purpose test in the Superannuation Industry (Supervision) Act 1993 requires that the fund is maintained for the sole purpose of providing retirement benefits to its members, or to their dependants if a member dies before retirement. Trustees need to ensure that the risks associated with these currencies are in the best interests of the fund. A minute documenting the decision to invest in the cryptocurrency would be beneficial.
For tax purposes, gains and losses in the fund are generally treated in the same way as other assets in the fund. That is, capital gains tax may apply to any gains made on the sale of the currency.
If your fund invests in cryptocurrency, there are a few practical issues. Your SMSF auditor needs to confirm the ownership, existence, and value of the cryptocurrency. As a result, the digital wallet for the currency should be in the name of the fund or the trustee. If the investment can only be recorded in the name of an individual it is up to the trustees to verify that the investment is kept separate from personal assets. Also, you need to be able to trace transactions to identify trades, the value of the trade, and the time and date they occurred.
SMSF COMPLIANCE STATUS REMOVED IF ANNUAL RETURNS LATE
If your SMSF’s annual return is more than two weeks overdue and you have not requested a deferral, the ATO will move your fund’s status on Super Fund Lookup from ‘Complying’ to ‘Regulation details removed’. The result is that your fund may not be able to accept contributions from employers or rollovers from APRA regulated funds.
NON-ARM’S LENGTH INCOME EXPENDITURE
Where expenses incurred by the fund are not at arm’s length and below market rates, any income derived by the relevant asset could be deemed to be non-arm’s length income and taxed at the top marginal tax rate. For example, where services were provided to your SMSF property by a company related to a fund member at reduced rates, all the income derived from the property would be taxed at the top marginal rate.
The question of whether the non-arm’s length income rules apply depends on the capacity in which the trustee undertakes those activities. Essentially, if you or a related entity are providing services to your superannuation fund in a capacity other than as trustee, and you (or the related entity) currently provide that service to the public, an arm’s length fee should be charged for this service. Failure to do so could result in non-arm’s length income applying to the income derived from the applicable asset the expense relates to.
If you are uncertain, please contact us and we can work with you to ensure your fund is not at risk.
VALUING SMSF ASSETS
SMSFs are required to value their assets at market value. Depending on the situation, a market valuation may be undertaken by a:
- Registered valuer
- Professional valuation service provider
- Member of a recognised professional valuation body, or
- A person without formal valuation qualifications but who has specific experience or knowledge in a particular area.
For real property, the valuation may be undertaken by anyone as long it is based on objective and supportable data. A valuation undertaken by a property valuation service provider, including online services or a real estate agent is acceptable.
However, where the value of the asset represents a significant proportion of the fund’s value or where the nature of the asset indicates that the valuation is likely to be complex, you should consider the use of a qualified independent valuer.
In general, real estate does not necessarily need a formal valuation each year by a licensed valuer unless there is a significant event that occurs during the year which may affect the previous valuation. A significant event could be one that directly involves the property itself, the fund on a general level such as one of the fund’s members going into pension mode, or if the asset represents a significant portion of the fund’s value.
CONTRIBUTIONS MUST BE RECEIVED BY 30 JUNE
To claim a tax deduction for super contributions (as an employer or as an individual), the payment needs to be received by the fund no later than 30 June. Merely incurring a liability is not enough.
If you are making a personal superannuation contribution that you want to claim as a tax deduction, you need to write to your fund in their approved form and advise them of the amount you intend to claim as a deduction. The superannuation fund then needs to acknowledge your notice of intent and agree to the amount you intend to claim as a deduction. This will normally be in the form of a notice or certificate from the fund to confirm the tax deductibility of the contribution.
REVIEW AND RECTIFY ANY OUTSTANDING COMPLIANCE ISSUES
If your auditor has highlighted any breaches or issues in previous year fund audits, you should review and rectify these issues by 30 June. The penalty for illegal access to the SMSF’s funds without meeting a condition of release is $12,600 per trustee.
The ATO have a number of powers to address non-compliance:
- Education directions – require the trustee/director to complete an ATO approved education course within a specific timeframe. An administrative penalty of $2,100 applies for non-compliance.
- Rectification directions – requiring the SMSF’s trustee/director to take specific action to rectify the contravention within a specific timeframe.
- Administrative penalties – penalties from $1,110 to $13,320 apply to specific breaches. Each individual trustee is liable for the penalty and directors of a corporate trustee are jointly and severally liable. The penalties are payable by the trustee/ director and not refunded by the SMSF.
- Informal arrangements to rectify minor breaches.
- Enforceable undertakings.
- Disqualification of a trustee.
- Allowing the SMSF to wind up.
- Notice of non-compliance.
- Freezing an SMSF’s assets.
- Civil and criminal penalties where the fund:
- Breaches the sole purpose test
- Lends to members of the fund.
- Breaches the borrowing rules.
- Breaches the in-house asset rules.
- Enters into prohibited avoidance schemes.
- Fails to notify the regulator of significant adverse events.
- Breaches the arm’s length rules for an investment.
- Promotes an illegal early release scheme.
These powers also enable the ATO to look back to any breaches from previous years that were unresolved at 30 June 2021.
REVIEW THE FUND’S INVESTMENT STRATEGY
Trustees are required to ‘regularly review’ the fund’s investment strategy. We recommend that trustees review the strategy and document the review at least annually or when the circumstances of the fund change.
Where an SMSF has entered into a borrowing arrangement to acquire an asset, trustees should seek advice to structure insurance cover either inside or outside the SMSF to assist in meeting the on-going obligations of the debt
repayments. The fund’s ability to meet the on-going debt repayments can be severely jeopardised where one member of the fund dies, as the fund may have needed to utilise contributions that were being made for that member to meet the repayments. Such a scenario could result in the fund having to sell the property.
REVIEW INSURANCE INSIDE YOUR SMSF
SMSF trustees need to consider the need for insurance cover for the fund members when formulating and reviewing the fund’s investment strategy.
Superannuation funds are only able to offer or take out new insurance cover where the definitions are consistent with the death, terminal illness, permanent incapacity and temporary incapacity conditions of release under the Superannuation Industry Supervision Act.
It’s important that you review insurance inside your SMSF not just for compliance with the law but also effectiveness. An important issue to consider is how any insurance inside your fund should be structured; that is, from where the premiums are paid from the fund and what account any policy proceeds will be paid to inside the fund.
Correctly structuring insurance inside your fund can be complex. We recommend that SMSF Trustees seek the advice of their financial adviser to achieve the most tax effective outcomes for insurance proceeds, especially on the death of a member. Chris Love is available to assist you with any questions you might have or to help you correctly structure your insurances. You can reach him/her on [email protected] or (02) 9541 1744.
If you are having trouble paying your tax liability, please let us know as soon as possible so we can negotiate a deferral or payment plan with the ATO on your behalf.
CONTRIBUTIONS YOU DIDN’T KNOW YOU MADE
A contribution to a fund can be more than just a deposit of money into the bank account of a superannuation fund. It could include:
- In-specie asset transfers
- Paying fund expenses
- Increasing the value of a fund asset
- Forgiving a fund’s debt
- Meeting a fund liability
- Rendering services to the fund at less than market value
- Guarantor arrangements
- Some Discretionary Trust distributions
Trustees can often be surprised by what is considered to be a contribution, for example:
- In-specie transfer – If an asset is transferred or acquired from a related party for less than fair market value, the difference may be treated as a contribution.
- Capital improvements – Capital improvements to existing fund assets for no consideration or less than arm’s length consideration may be treated as a contribution.
- Debt forgiveness – A contribution is made if a loan, entered into by the fund is forgiven by the lender (related party). The contribution is made when the deed of release is executed that then relieves the fund from the obligation of repaying the debt.
- Guarantor arrangements – A contribution occurs if a guarantor to a debt of the fund (trustees in their own right) satisfies a loan obligation of the fund and then forgoes the right of redemption against the fund (trustees) itself.
The material and contents provided in this article are informative in nature only. It is not intended to be advice and you should not act specifically on the basis of this information alone. If expert assistance is required, professional advice should be obtained.