Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 351

How an SMSF member can access cash under COVID-19 rules

What a shattering few weeks for Australia and for the world.

I’m reluctant to write this, as it will be out of date by the time I get to the end. The superannuation team at the ATO must be exhausted. Every day, they issue more announcements, policy decisions and information.

For context, as I write this it’s the week beginning 30 March, and it’s now apparent that these are the early days of the coronavirus crisis. I write from home, in the guest room that has been converted to an office. I’m lucky, as our business at Heffron SMSF is well set up for remote work. My home office is exactly the same as my desk at work with three screens and the online phone system that we converted to last year. It’s been a relatively seamless transition from office to home.

We are all becoming familiar with this ‘new normal’, to adopt an overly-used phrase. Yesterday, I was on a phone hook-up where the ATO provides an update to industry and fields questions on superannuation related matters. One participant had forgotten to mute their phone, so all we could hear was kids yelling in the background.

But we are the lucky ones so far and not in ‘That Queue’ yet, so no complaints from me, and we’ll all get better at it.

The new announcements

As SMSF administrators and educators, we are fielding calls from fearful accountants, advisers and SMSF trustees looking for clarification and solutions. Over the last two weeks, a range of announcements affecting the SMSF space include:

If nothing else, we will all be much more tech savvy when we emerge from this mess.

Here are some war stories from us in SMSF land:

The business owners

The jeweller

Terry (not his real name) has closed the doors of his jewellery shop for the first time in 50 years. He has laid off all staff and shut up shop. He’s in his early 50s – too young commence a Transition-to-Retirement Income Stream from his super - and estimates that he needs around $200,000 to service debt and push through the next six months (this conversation took place before any Government relief announcements).

Terry has some gold that he has collected through the years that he doesn’t want to sell to a third party at this stage and asks if his SMSF can buy it from him.

Unfortunately, the answer for Terry is no. SMSFs are generally prohibited, with some exceptions, from buying assets from related parties to the fund. However, there are exceptions to this general rule, so we talked about those:

  • Listed securities and units in managed funds can be sold to an SMSF by a member or related party, as long as the fund buys them at market value. Terry personally holds some listed shares that he could sell on market, but he didn’t want to as he felt they were companies that would improve when the economy starts recovering. The SMSF can buy the shares from Terry and participate in the market upswing when it eventually happens which benefits him when he retires, and he will have use of the cash.
  • Business real property – Terry’s business owns the shop premises that holds the jewellery shop. He doesn’t want to sell it as he hopes to reopen one day, and of course now is not the time to sell commercial property. SMSFs are permitted to buy Business Real Property from related parties, so we talked about the options of the SMSF buying some or all of the premises. This is a complex area and proper advice should be obtained before going down this path.
  • Investment in or a loan to the company: an investment in, or a loan to, a related party of a fund is called an ‘in-house asset’. Funds can acquire and hold in-house assets, but the value allowed is strictly limited to less than 5% of the total assets of the fund. We talked about the possibility of the fund lending an amount to Terry’s business to keep it going. Again, this is fraught with conditions and compliance hoops, so proper advice needs to be obtained before going ahead.

Overarching all these ideas, are the strict superannuation laws. Importantly – and this is what may prevent many SMSFs from going ahead with these strategies - whatever Terry’s fund decides to do, it must be for the ‘sole purpose’ of providing benefits for the members in retirement. Any other benefits to the transaction (ie extracting cash for Terry) must be incidental.

For example, if the SMSF buys listed shares from Terry, care needs to be taken that the companies it buys have good prospects for growth or income in the future. The sole purpose test question cannot be compromised.

The tenant

Client question: My SMSF owns real property and wants to give my tenant – being my business – a reduction in rent because of the financial impact of COVID-19. Charging a related party a price that is less than market value is usually a contravention. Given the impacts of COVID-19, will the ATO take action if I do this?

The ATO has advised it will not take action on SMSFs giving a tenant a temporary rent reduction for 2019/2020 or 2020/2021. This gives some flexibility to SMSF trustees and business owners.

However, SMSF trustees must not take that as carte blanch to reduce rent in any circumstances. The fund auditors will still want to see the commerciality of the decision to reduce (or defer or forgive) rent and that the reasons are genuinely:

  • a direct consequence of the adverse economic effects of COVID-19
  • necessary, and
  • temporary.

The self-funded retirees

The halving of the minimum pension drawdown rate was welcome relief for the self-funded retiree cohort. We are getting tricky questions from retirees hoping to sneak money back into their fund:

Q: If I withdrew more than the minimum pension prior to this measure, can I put the excess back?

No – not unless you are eligible to contribute it and then it comes under all the usual contribution rules and caps.

Q: Can I treat previous pension payments that are now over the new minimum as a loan to members so they can repay it into the fund?

No – SMSFs are prohibited from lending to members or providing financial assistance so there would be a breach of the superannuation law.

Q: I’ve already received my minimum pension as calculated under these new rules. Can I stop the pension?

Yes, that you can do. If you have already received your minimum this financial year (calculated as 50% x the usual percentage factor x account balance on 1 July) you can instruct your super fund to stop paying it.

There are more questions on SMSFs with related-party loans, investment strategy issues, transfer balance caps, but no room to put them all down today. 

It’s a bewildering time for the world, that’s for sure. Most Australians have never before experienced this rate of change to lifestyles, livelihoods and potentially health. As all the pollies keep saying “we are all in this together” which as cliched as it is, is important to remember when many of us will be feeling so disconnected and isolated. All I keep thinking is thank goodness the January fires are out. Imagine if that was still going on with this on top of it.

Keep on swimming, peeps.

 

Alex Denham is a Senior SMSF Specialist at Heffron SMSF Advisers. This article is general information and does not consider the circumstances of any individual.

 

banner

Most viewed in recent weeks

Is it better to rent or own a home under the age pension?

With 62% of Australians aged 65 and over relying at least partially on the age pension, are they better off owning their home or renting? There is an extra pension asset allowance for those not owning a home.

Too many retirees miss out on this valuable super fund benefit

With 700 Australians retiring every day, retirement income solutions are more important than ever. Why do millions of retirees eligible for a more tax-efficient pension account hold money in accumulation?

Reece Birtles on selecting stocks for income in retirement

Equity investing comes with volatility that makes many retirees uncomfortable. A focus on income which is less volatile than share prices, and quality companies delivering robust earnings, offers more reassurance.

Is the fossil fuel narrative simply too convenient?

A fund manager argues it is immoral to deny poor countries access to relatively cheap energy from fossil fuels. Wealthy countries must recognise the transition is a multi-decade challenge and continue to invest.

Superannuation: a 30+ year journey but now stop fiddling

Few people have been closer to superannuation policy over the years than Noel Whittaker, especially when he established his eponymous financial planning business. He takes us on a quick guided tour.

Anton in 2006 v 2022, it's deja vu (all over again)

What was bothering markets in 2006? Try the end of cheap money, bond yields rising, high energy prices and record high commodity prices feeding inflation. Who says these are 'unprecedented' times? It's 2006 v 2022.

Latest Updates

Retirement

How to enjoy your retirement

Amid thousands of comments, tips include developing interests to keep occupied, planning in advance to have enough money, stay connected with friends and the community ... should you defer retirement or just do it?

Retirement

Results from our retirement experiences survey

Retirement is a good experience if you plan for it and manage your time, but freedom from money worries is key. Many retirees enjoy managing their money but SMSFs are not for everyone. Each retirement is different.

Interviews

Why short-termism is both a travesty and an opportunity

On any given day, whether the stockmarket rises or falls is a coin toss, but stay invested for 10 years and the odds are excellent. It's at times of market selloffs that opportunities present for long-term investors.

Investment strategies

Fear is good if you are not part of the herd

If you feel fear when the market loses its head, you become part of the herd. Develop habits to embrace the fear. Identify the cause, decide if you need to take action and own the result without looking back. 

No excuses: Plan now for recession

The signs of a coming recession are building, especially in the US. In personal and business decisions, it's time to be more conservative and engage in risk management until some of the uncertainty is resolved. 

Strategy

The fall of Volt Bank removes another bank competitor

The startup banks were supposed to challenge the lazy, oligopolistic major banks, but 86 400, Xinja and now Volt have gone. Why did Volt disappear so quickly when it had gained deposit support and name recognition?

Strategy

Three main challenges to online ads and ‘surveillance capitalism’

Surveillance capitalism refers to the collection and use of consumer data to further profits. Will a renewed focus on privacy change the online-ad business model, or is it too entrenched?

Sponsors

Alliances

© 2022 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. Any general advice or ‘regulated financial advice’ under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.

Website Development by Master Publisher.