Following the recent bushfires, there are a number of issues which may be relevant to those SMSFs who have been affected by the fires. These issues include:
- lodgement deferrals for SMSFs affected by the bushfires
- repairs to or rebuilding of properties owned by SMSFs
- donations from SMSFs to bushfire relief funds, and
- early release of super benefits for members affected by the bushfires.
The ATO has announced it will automatically defer the due date for lodgement and payment of income tax returns, activity statements and FBT returns until 28 May 2020 for all taxpayers in postcodes identified as affected by the bushfires. Neither you nor your tax agent needs to apply for this deferral. In the case of SMSFs, the deferral also applies if a member or trustee is in an affected postcode, even if the fund is not. The affected postcodes are listed on the ATO website here.
Repairs or rebuilding of properties owned by SMSFs
Unfortunately we have witnessed the loss of many properties in the fires. In the case of properties owned by an SMSF, trustees should take care not to fall foul of the rules relating to non-arm’s length income or the acquisition of assets from related parties. Also, the specific rules which govern limited recourse borrowing arrangements (LRBA) must be observed if the property is the subject of an LRBA.
The non-arm’s length dealings rules can apply to both income and expenses. On the income side, if a property has been rented out to a related party and the property is damaged so its usefulness is reduced, it would be unreasonable for the SMSF to continue to charge the full rent until the property is repaired. On the expenses side the SMSF should pay an arm’s length price for the services involved in repairing its properties, even if a trustee or trustee director chooses to do this work themselves. The consequences of breaching the non-arm’s length income rules can be severe. Potentially, all the future income arising from the property, including any capital gain on its eventual sale, might be taxed at the top marginal tax rate of 45%.
Where a trustee or trustee director decides to undertake repair work themselves, any materials used in undertaking repairs should be sourced from third party suppliers and not provided by the trustee. Provision of the materials by the trustee would constitute an acquisition by the SMSF of an asset from a related party, which is prohibited in most cases.
If the property is the subject of an LRBA, it is important that the repaired or rebuilt property retains its essential character, so that the property does not become a different asset after the reconstruction. For example, if a three bedroom house was destroyed by fire and replaced by a four bedroom house, this major change will probably breach the LRBA rules. The ATO has released a detailed ruling SMSFR 2012/1 which provides examples illustrating the difference between restoring a property to its original state and changing tis basic character, in the context of the LRBA rules. We would be pleased to give further guidance on this issue if desired.
Donations from SMSFs to bushfire relief funds
People may wish to make donations from their SMSF to assist people who were affected by the bushfires, it is necessary to remember that SMSFs exist to provide retirement benefits for their members, and any withdrawal from an SMSF must be strictly in accordance with the preservation and benefit release rules.
SMSFs have no power to make charitable donations as such. Before an amount is withdrawn to make a donation, it is necessary that the member concerned satisfy a condition of release, take the funds from the SMSF as a super benefit, and then the member is free to use the money as a donation if they wish.
The most common conditions of release are:
- attaining the age of 65
- ceasing an employment situation between the ages of 60 and 65
- retirement without intending to return to work after attaining preservation age and under 60.
Another potential condition of release is commencing a transition to retirement pension after preservation age and before age 65. This is not appropriate for a one-off donation, but could be useful if an income stream is desired.