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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I’m reluctant to write this, as it will be out of date by the time I get to the end.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.

 

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