Sole Purpose Test

The core purposes fit into the following categories:

• Provide benefit on or after the member’s retirement from any business,

trade, profession, vocation, calling or occupation or employment in
which the member was engaged;
• Provide benefit on or after the member attains age 65;
• Provide benefit on the earlier of (1) the member’s retirement or (2) the
member attaining age 65;
• Provide benefit on or after the member’s death if: (1) the death
occurred before the member’s retirement, or reach age 65, and (2) the
benefits are given to the member’s legal personal representative, to
any or all of the member’s dependants or to both;

The ancillary purposes fit into the following categories:

• Provide benefit on or after the termination of the member’s employment

with an employer who had, or any of whose associates had, at any
time contributed to the fund in relation to the member;
• Provide benefit on or after the member’s cessation of work due to ill
health;
• the provision of benefits for the member who is in financial hardship;
• the provision of benefits upon the member taking long service leave;
• the provision of benefits on compassionate grounds; and,
• the provision of other such benefits as approved by the regulator;

Borrowings

As a general rule, borrowings by superannuation funds are prohibited with the exception
of the following:

• The borrowing is to enable the trustees to make benefit payments to members as

required by law or the trust deed, or to make payments of the superannuation
surcharge, which the trustees would not be able to make unless they borrowed
funds;
• The period of borrowing does not exceed 90 days; and
• In the event of borrowing funds, the total amount borrowed cannot exceed 10% of
the value of the assets of the fund.
Borrowings are made to investment transactions and when the transaction was entered
into, the trustees were not aware that they could not cover the settlement of the
transactions. the borrowings cannot exceed 10% of the fund’s assets and the borrowing
period must not exceed 7 days.
In-House Asset Rules

An in-house asset is:

• A loan to, or an investment in, a related party of the fund;

• An investment in a related trust of the fund; or
• An asset that is subject to a lease or lease arrangement with a related party of
the fund.

Excluded:

• A life policy from a life insurance company;

• A deposit with a financial institution such as banks etc.;
• An arm’s length investment in a pooled superannuation trust;
• A public sector fund’s investment in government securities;
• Any other asset specifically excluded by the Regulator;
• If the superannuation fund is a self-managed superannuation fund or a small
APRA fund, real property that is subject to a lease between the trustee and a
related party of the fund, provided the property is business real property;
• An investment held in a widely-held unit trust; or
• Property owned by the superannuation fund and a related party as tenants in
common, specifically excluding property that is subject to a lease arrangement
between the trustee and the related party.

2000/01 and thereafter – the market value of in-house assets cannot exceed 5%.

What do you think are the advantages and disadvantages of account based
pensions?

Some advantages are:

• Flexible as anything between the minimum and unlimited maximum
amount can be drawn down each year.
• They are accessible at any time.
• Clients between 55 and 60 can take advantage of both the tax-free
deductible amount and the 15% offset on the taxable portion.
• Clients over 60 – all income tax free
• Compliments other income streams very well.
• Can be rolled back into superannuation at any time provided the client
satisfies requirements.
• Can invest in an array of different investments not just restricted to fixed
interest.
• Earnings whilst in the fund are tax free.

Some of the disadvantages are:

• Can only be purchased with superannuation monies
• Sometimes clients are forced to draw down too much income which they
don’t need although new percentage factors (and Government temporary
drawdown relief) have reduced the minimum amount

List categories of income which are exempt from the income test.
• Certain compensation and insurance payments
• Private health insurance rebate
• Payments exempted under international agreements
• Interest paid on exempt funeral investments (funeral bonds)
• Rental income from the principal home while individual is living in aged
care residence (in some circumstances)
• Returns from superannuation investments held by person under Age
Pension age
• Some lump sum payments (one-off gifts, windfall gains etc)
• Home equity conversions
• Certain amounts arising from alterations of income stream contracts
• Refunding of excess imputation credits for listed securities

List assets which are not counted towards the assets test.

• Principal home and land of up to two hectares or five acres around the
house used for private purposes
A person's principal home may be a:
• caravan or boat;
• granny flat or self-contained accommodation as part of another
person's home;
• retirement village

• 50% exemption of the value of assets test exempt income streams

purchased prior to 20 Sep 2007;
• a life interest, reversionary, remainder and contingent interest (not
created by the client, their partner or on death of the partner);
• the value of any right or interest in a sale/lease-back home
• any interest in an estate before the estate is finalised
• any medal or decoration for valour not held for investment or hobby
purposes;
• aids for disabled people;
 • any assets in superannuation and roll-over funds if the person is under
Age Pension age or DVA Service Pension age
• the value of a prepaid funeral, or cemetery plot for the client or their
spouse;
• certain funeral investments/bonds bought with $5,000 or less, and any
return on such investments (each member of a couple may invest up to
$5,000 in an exempt funeral investment); and
• gifted amounts of less than $10,000 per financial year or $30,000 per
rolling five year period.
• the proceeds from the sale of a previous home, which are to be used
to buy/build another home within 12 months. Only the amount that is
intended for the purchase of a new residence is exempt. The entire
proceeds from the sale are still subject to deeming under the income test
if the proceeds are kept as a financial asset, and the client will still be
assessed as a homeowner during this 12-month period;

The basic eligibility requirements for all four of the small business
concessions are as follows:
• the maximum net asset value test is satisfied;
• the CGT asset satisfies the active asset test; and
• if the CGT asset disposed of is a share in a company or an interest in a
trust, the significant individual test must be met and
• the individual claiming the concession must be a CGT concession
stakeholder.

Unsplittable superannuation interests include:

• Superannuation accounts with less than $5,000.

• Payments to the member spouse on compassionate grounds or financial
hardship;
• Certain temporary incapacity pension payments for not more than 2 years
(ie salary continuance payments);
• Death benefit payments to a child under age 18, or if over 18, where the
payment would assist with their education or if they have special needs.

Provide five advantages and disadvantages of self managed superannuation funds.

Advantages
Control
Tax benefits/franking credits
Cost effectiveness
Estate Planning opportunities
Ability to use assets of the fund to purchase business real property and lease back to
members
Flexibility in funding retirement

Disadvantages
Costs if not sufficient money in fund (fixed costs)
Residency issues
Responsibility of trustees
Limited to 4 members
Trustees cannot be “disqualified”

What factors should be considered before establishing a self managed superannuation

fund?

 Who are to be the members/trustees

 Whether they are eligible to be trustees
 Desire for control over investment of fund assets
 Amount of funds in the SMSF – is it cost effective?
 Are members/trustees prepared for the extra work and responsibility of running own
fund
 Will it pass the residency test
 Fixed costs each year – do a cost comparison with current fund
 Are there assets which can be transferred “in specie” into the fund

When constructing an investment strategy what four points should the trustees bear in
mind?

 Risk/return
 Diversification of investments
 Liquidity and cash flow requirements
 Ability to discharge liabilities

What contributions to a complying superannuation fund is tax deductible for an

employee?

No contributions deductible to an employee – have to qualify as substantially self

employed (meet 10% rule) and then be able to claim tax deduction as self employed
person up to $25,000 pa (unless over 50 before 2011/12)
Income protection insurance policy premiums are deductible to the fund where certain
criteria are met.

Following expenses may be tax deductible:

• actuarial costs (except where they relate to producing exempt (e.g. pension)
income)
• accountancy fees
• annual return levies
• audit fees
• trustee fees (although an SMSF is not permitted to pay trustee fees to the
trustee of the fund)
• trustee indemnity insurance premiums
• costs of complying with legislation (excluding capital costs)
• costs associated with the calculation and payment of benefits
• investment adviser fees and costs in providing pre-retirement services to
members
• subscriptions to professional bodies (e.g. ASFA)
• APRA/ATO lodgement fees, and
• other administrative costs.

If the expenses incurred also produces taxable as well as exempt (tax free) income, the
deductibility of expenses is generally apportioned.

Other expenses that may be tax deductible to the fund include:

 certain superannuation and fund administration services

 the payment of death or disability insurance premiums
 payments under the anti-detriment provisions
 any in-built borrowing costs of instalment warrants.

Following expenses are non-tax deductible to the fund:

 Costs associated with establishing a trust/trust deed.

 Costs associated with executing a new deed for an existing fund.
 Costs associated with amending a trust deed to enlarge or significantly alter the
scope of the trust's activities.

However, the costs incurred by trustees in amending the trust deed may be tax
deductible if the amendments are necessitated by changes in Government regulations
and are made to ensure the fund's day-to-day operations meet regulatory requirements.