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Replace your SMSF trustee if he is crazy
Issue: 398 - Tuesday, 17 January 2012
In this Issue
- Replace your SMSF trustee if he is crazy
- Caution - dividends not always dividends
1. Replace your SMSF trustee if he is crazy
Question: Last week you mentioned that you can get a special type of Power of Attorney and Deed of Control to replace the trustee of your Self Managed Super Fund. Is this a cover-all protection for the SMSF for absentee or “naughty” trustees? What if the trustees want to go touring around the world, become bankrupt, are convicted of a criminal offence, go crazy or simply can’t be bothered with doing the job of a trustee anymore?
Answer: If you are going overseas for long periods (or you do not want to be a trustee anymore) then Civic Legal has a fixed price of $2,200 to:
1. set up the Special Enduring Power of Attorney with the required restrictions and extra express powers to comply with SISA.
2. update the Self Managed Superannuation Fund deed to allow the Special EPA to replace the human trustee or corporate trustee. Then change the trustee or directors as required for the deed. (You change the director yourself if there is a corporate trustee at www.lawcentral.com.au.)
3. Deed of Control and Management between the Complying Manager, old Trustee and member.
4. Deed of Indemnity to protect the incoming Complying Manager.
Just email me:
1. Self Managed Super Fund Deed and all variations (if any);
2. Latest financials;
3. Letter of advice setting out the full details of the current members, trustees and the new Complying Manager;
4. Our Retainer: http://www.civiclegal.com.au/Publications/InstructionForms/retainer.pdf
Commonly asked questions:
1. What if there are two individual trustees for the SMSF - does the single EPA replace both trustees?
No, the EPA only replaces the one person. The second trustee, who stays in Australia, keeps their job as trustee. However, if the second trustee is also leaving Australia then they need their own EPA and documentation. The cost is reduced by 50% for the second trustee in the same SMSF.
2. Can two people hold the SMSF EPA? (The laws as to Power of Attorney allow for two donees in most States and Territories.) Under the SIS Regulations, you only have one person. However, one person can hold more than one EPA. The laws as to Power of Attorney are subservient to the SIS Regulations, so do not be concerned too much with the liberal things you can do with an EPA. That is all fettered by the SIS Regulations.
3. Generally, for individual trustee funds with multiple members, each trustee of the fund also needs to be a member of the fund. Does the EPA/s need to be a member/s of the fund?
Strangely, the ATO does not require that the donee (the person holding the POA) be a member.
4. What if I don’t worry about doing this?
If you fail the ‘central management & control test’ then your SMSF loses its status as an Australian superannuation fund. It becomes non-resident. Then the:
a) SMSF’s market value is treated as assessable income; and
b) concessional 15% tax rate is lost - the SMSF’s taxable income rate is up to 45%.
5. What is ‘central management & control’? (CMC)
Platinum Members can read the answer here:
6. Why does CMC have to be in Australia?
Platinum Members can read the answer here:
7. Does the POA continue to work if I go bankrupt?
Sadly no. It works up until you go bankrupt. It works if you become of unsound mind, go overseas or just do not want to be fussed being the trustee anymore. However, it stops working when you go bankrupt: section 120(10) SIS Act. A jail sentence may also stop the POA from working to control your SMSF – it depends on your crime – e.g. if fraud then you will generally lose the POA. If it is failing to pay a parking ticket then generally the POA continues to work to allow another person to be trustee of your SMSF.
- Self Managed Superannuation Fund Deed
- Investment Strategy for Self Managed Super
- SMSF - Deed Update
- Investment Strategy for Self Managed Super 10/11
- SMSF Maverick gives Power of Attorney to Jailbird?
- Special SMSF Power of Attorney
- Get Super tax free to children?
- My super, my money. So how do I get the dosh?
2. Caution - dividends not always dividends
Question: Brett, I read your bulletin issue 393 about company constitutions. After a few rough years at the beginning, my business has been doing well lately and I want to pull some money out as dividends and claim the franking credits. My accountant is saying that there is a bit more to it than that. I tend to zone out whenever my accountant explains it to me. How do the new dividend rules work in practice?
Platinum Member, Ballarat, Vic
Answer: You are in luck. Just before Christmas the ATO released its opinion on the new s 254T Corporations Act 2001 – the ‘balance sheet test’ for payment of dividends.
In Draft Taxation Ruling TR 2011/D8 the ATO gives us insights into how the Commissioner intends to treat payments made by companies to shareholders. It isn’t all good news though. There are clearly identifiable situations where payments to shareholders can be deemed to be a return of capital and subject to CGT and not treated as franked dividends.
Essentially, the new laws changed the prohibitions in s 254T governing how a company can pay a dividend from a ‘profits test’ (i.e. a revenue test) to a 3-part ‘balance sheet test’ (i.e. a capital test). It also changed how the ATO will assess dividends under s 44 Income Tax Assessment Act 1936, the franking of dividends under Pt 3-6 of the Income Tax Assessment Act 1997 – and the circumstances in which a dividend can be paid out of profits.
Our beloved Platinum Members see what our spies within the ATO have to say about the new Draft Ruling here.
What does the new subsection 44(1A) do?
Subsection 44(1A) was inserted into the ITAA 1936 to ensure dividends declared out of funds other than profits would remain assessable to the shareholders as dividends under s 44 ITAA 1936. Subject to the exclusion of amounts debited against an amount standing to the credit of the share capital account that are not dividends for taxation purposes under the definition of dividend in s 6(1) of the ITAA 1936.
However, the ATO says s 44(1A) does mean all dividends are frankable under the imputation provisions in the ITAA 1997. The Draft Ruling says a payment that is a dividend paid or credited in compliance with new s 254T will be an assessable dividend for taxation law purposes as well – as long as it is not debited against an amount standing to the credit of the share capital of the company.
However, the ATO says this is not the basis upon which the ability to frank dividends is determined under Pt 3-6 of the ITAA 1997. Paragraph 202-45(e) of the ITAA 1997 provides that a distribution that is sourced, directly or indirectly, from a company's share capital account is unfrankable.
What is a dividend for tax purposes?
The Draft Ruling says a distribution (even if it is labelled a dividend) paid by a company subject to the Corporations Act to its shareholders that is debited against an amount standing to the credit of the share capital of the company is not a dividend for taxation purposes within the meaning of "dividend" in s 6(1) of the ITAA 1936. It will be a return of share capital taxed as a CGT event, the ATO says:
“In determining whether an amount is debited against an amount standing to the credit of the share capital account of a company, the ATO says the source of the distribution from the company's perspective must be considered to determine the appropriate taxation treatment rather than the character of the receipt in the hands of the shareholder.”
How do you ensure dividends declared are frankable?
Dividends paid in compliance with the new s 254T out of profits are frankable. Even if a company's net assets are of a value less than its share capital or the company has prior year losses.
The ATO considers the presence of accumulated losses and a deficiency of a company's net assets below its share capital do not change the character of an amount of profits ascertained in a company's accounts - or a dividend paid out of such an amount. The ATO says previous case law establishes that prior accumulated losses do not have to be recouped before a dividend can be paid out of current year profits, and it considers that case law is applicable to the new s 254T and Div 202 of the ITAA 1997.
I agree with the ATO on this point. It is entirely possible for the company to make an accounting profit and declare a dividend in the relevant year – even though it may not make a profit for tax purposes given the existence of prior year tax losses.
Where a company has net assets less than its share capital - the ATO says that whether a dividend can be paid out of an unrealised capital profit, and whether it would be a frankable distribution, are questions of fact and law, the answers to which depend on the specific circumstances of the loss of subscribed capital, the nature of the unrealised profit, whether the company's accounts reveal other profits and losses, and the interpretation of s 254T.
The ATO says these are questions of fact and interpretation of s 254T and it doesn’t want to commit to a position in the public ruling.
How do you ensure compliance with the new TR 2011/D8?
- If you don't have a Civic Legal Constitution, seek legal advice regarding your need to update any constitutions. Or, out of caution just update the Constitution at LawCentral. The Company Constitution Replacement Kit includes a new company constitution and the relevant consents, notices, and minutes to adopt the new constitution.
- Consider whether the new rules impact on how the companies in your corporate group prepare reports for the 30 June 2010 Financial Year (and thereafter).
- Consider how the new rules apply to any proposed reductions of capital or planned dividends payments.
- Company Constitution (Add Div 7A)
- Convert to a Single Director Company
- Build a Company
- Company Constitution Replacement
- Div 7A Loan Agreement
- Can Family Trusts still "stream"?
- Unpaid distributions to bucket company - update Trust Deed?
- Dodgy shelf Company - beware
- Spring clean company for end of financial year
