1. Sardines in a can – all your super questions answered GRAEME COLLEY Director Technical & Professional Standards SPAA

2. Agenda Main issues Contributions FOFA ATO Interpretations 2014 Social Security Budget Changes Tax (financial) adviser services SuperStream

3. Financial System Inquiry

4. FSI Interim Report - Superannuation Little evidence of fee competition Scope for greater efficiencies in superannuation Is vertical integration of wealth management and superannuation leading to higher fees? Is short-termism a problem? Is portability affecting liquidity requirements to detriment of investment strategies?

5. FSI Interim Report - Superannuation “If allowed to continue, growth in direct leverage by superannuation funds, although embryonic, may create vulnerabilities for the superannuation and financial systems.” Leverage magnifies risk Unleveraged superannuation funds mitigated losses during the GFC Poor financial advice and SMSF LRBAs Policy option: Restore the general prohibition on direct leverage of superannuation funds on a prospective basis.

6. FSI Interim Report - Financial Advice Lift standards of financial advice Raise minimum education and competency standards for personal advice Specialist competencies – i.e. SMSF competency National exam Enhanced register of advisors (including employee advisors) Greater ASIC powers to ban advisors How can advice be delivered in a low-cost method? Technology Risks?

7. GOVERNMENT PENSION REVIEW Government Review of Retirement Income Products Review will look at: The regulatory barriers restricting the availability of relevant and appropriate retirement income stream products; The minimum payment requirement for account-based pensions; and Facilitating deferred lifetime annuities by extending concessional taxation treatment

8. Contributions

9. Contributions: Non-concessional contribution cap NCC is 6 x the concessional contribution cap Increased to $180,000 Three year bring forward rule to increase to $540,000 $540,000 only available if triggered on or after 1 July 2014.

10. Contributions: Excess NCC Refunding Excess NCCs made after 1 July 2013 can be withdrawn from superannuation fund Requires any “associated earnings” to be withdrawn and taxed at taxpayers marginal rate If the taxpayer chooses to leave the excess NCC in their fund, then they will be taxed on these contributions at the top marginal tax rate (49%).

11. ATO Interpretations

12. TD 2014/10 – dividend washing Income tax: can section 177EA of the Income Tax Assessment Act 1936 apply to a 'dividend washing scheme' arrangement of the type described in this Taxation Determination? Dividend washing scheme: allow a taxpayer to benefit from two franking credits from one economic interest Part VIA can apply to dividend washing schemes Commissioner can deny franking credits from washing scheme Applies to income years before and after TD issued Partners with legislative change that banned dividend washing from 1 July 2013.

13. TD 2013/D7 – segregated asset ruling Withdrawn due to industry criticism Separate TD for bank accounts Waiting on a separate ruling to deal with remaining segregated asset issues An asset cannot be partly invested, held or dealt with partly for more than one purpose. A segregated asset with a MV exceeding the account balance supporting the pension, will not have income exempted from that asset under s 295-385 Sole purpose to discharge pension liability

14. TD 2014/7 – segregated bank accounts Income tax: in what circumstances is a bank account of a complying superannuation fund a segregated current pension asset under section 295-385 of the Income Tax Assessment Act 1997? Bank account solely used to satisfy pension liabilities Allows use of “sub-accounts” both actual and notional Notional sub-account - proper accounting records are maintained by non- bank parties Requires apportionment of outgoings and receipts between sub accounts Mistake in allocating contribution can be corrected in reasonable time

15. TR 2013/D7 – apportionment of expenses Income tax: apportionment of expenses incurred by a superannuation entity only partly in gaining its assessable income Replaces TR 93/17 apportionment sections Apportionment required between expenses related to assessable income and NANE income Expenses divided into “distinct and severable” and “indifferent” expenses Applies from 1 July 2014

16. TR 2013/D7 – apportionment of expenses Distinct and severable expenses If an expense has distinct and severable parts that can be related to assessable or non-assessable income, then the deduction should be apportioned accordingly. One part of expense linked to accumulation part of fund, other to pension part. Indifferent expense ATO: “it is not possible to prescribe or sanction any single or standard method for apportioning indifferent expenses” Use income ratio method: Expense x Assessable Income / Total Income Assessable income includes all contributions and roll-over amounts

17. Non arms length income and LRBAs LRBA with an zero interest loan Commissioner ruled that the income derived from the arrangement was non- arm’s length income in terms of section 295-550 ITAA 1997 and would be taxed at 45% in the fund. Ruling contrasted to three previous PBRs which considered income derived by the fund would not be NALI, a Part IVA arrangement, or, the loan treated as a contribution. Industry calling for a consistent approach ATO reviewing it position on the PBR and LRBAs.

18. Non arms length income and LRBAs Can it catch zero interest loans that are legitimate and not schemes to avoid NALI rules? Need to look at entire loan feature to determine whether non-commercial More guidance from ATO? Why is income derived by the holding trust NALI? PBR is at the extreme end of arrangements with zero interest loans.

19. ATO LRBA In House Asset Legislative Instrument LRBA holding trust is a related trust of SMSF. Investment in related trust is an IHA. IHA exception in subsection 71(8) of the SIS Act Related trust for LRBA purpose is not an IHA Underlying asset would not be an IHA if held directly by SMSF Technically only applies when the borrowing is in place Legislative instrument extends IHA exception to time before borrowing is made and time after borrowing is paid off. Section 71(8) would apply The only property of the related trust will be the asset referred to in paragraph 71(8)(c) That asset would not be an in-house asset of the fund if directly held by the SMSF. Cannot be held indefinitely in the holding trust one borrowing is paid off.

20. Your Questions Using reserves to a client’s advantage Using Powers of Attorney – do they work if constitution is silent on LPR standing in for director Recommendations in conflict of trust deed Borrowing arrangements – tips and traps Estate planning issues and use of powers of attorney on the loss of the capacity of a member Consequences of a trustee leaving the country Business real property and multiple unrelated members Segregated pension asset method and isolation of investments in pension phase Breaches of trustee duty in new funds

21. Main Breaches Table 1: Proportion in the number and dollar value of total contraventions reported in ACRs per contravention category, for ACRs to 30 June 2013. Contravention Category% Number% $ value Loans21.3%14.8% In-house assets18.7%28.3% Administrative11.3%1.8% Separation of assets12.8%26.0% Operating standards8.1%6.2% Borrowings7.9%6.9% Sole purpose7.9%5.4% Investments at arm’s length7.6%7.5% Other2.9%1.0% Acquisitions of assets from related parties1.4%2.2% Total100.0%

22. Disclaimer © Graeme Colley, SPAA 2014 This presentation is for general information only. Every effort has been made to ensure that it is accurate, however it is not intended to be a complete description of the matters described. The presentation has been prepared without taking into account any personal objectives, financial situation or needs. It does not contain and is not to be taken as containing any securities advice or securities recommendation. Furthermore, it is not intended that it be relied on by recipients for the purpose of making investment decisions and is not a replacement of the requirement for individual research or professional tax advice. This presentation was accompanied by an oral presentation, and is not a complete record of the discussion held. No part of this presentation should be used elsewhere without prior consent from the author.