At the start of the 2020 compliance season, it’s time to have a look at the 2020 SMSF annual return, what changes have been made and specific areas of the return that warrant extra attention. Self-managed superannuation funds (SMSFs) are a single tax entity and consequently are required to lodge an annual tax return and pay tax. Whilst focus is mainly on compliance with the Superannuation Industry (Supervision) Act and Regulations (SIS), the tax rules are equally as important to understand and comply with. As the return includes both regulatory and tax compliance sections, it cannot be lodged until after an approved SMSF auditor has conducted an audit of the fund and issued their audit report.
Changes to the 2020 SMSF annual return
The following changes have been made to the 2020 SMSF annual return, when compared to the previous 2019 return.
A new label, J7 “Property Count” has been added to Section H, Assets and Liabilities, question 15b. It is part of the Limited Recourse Borrowing Arrangements (LRBA) labels, J1, J2, J3, J4, J5, J6 & J7. Label J7 will report the number of real properties held by an SMSF under an LRBA. The property count only relates to real property, held under an LRBA and consequently only includes properties with a value reported at labels J1, J2 & J3.
Anti-Detriment/Death Benefit Increase label removed
The anti-detriment deduction was removed with effect from 1 July 2017. There was a 2 year transitional period that applied in respect of a member who died prior to 1 July 2017 and the increased death benefit payment was made by 30 June 2019. Consequently, from 1 July 2019 this deduction can no longer be claimed and therefore the return label has been removed.
Change to auditor qualification question
From the 2020 return, reporting whether issue(s) have been rectified or not now applies to Part B qualifications only – question 6 of the return. Further, where the audit report was qualified on the basis of opening balances (in situations where an auditor takes over the audit of an SMSF and it’s not the SMSF’s first income year), the option ‘No’ can be selected in respect of responding to whether Part A of the Audit Report has been qualified.
Reporting member benefit payment under COVID-19 temporary early access measure
Whilst there has been no change to the return, where a member was paid a benefit under the COVID-19 temporary early access to superannuation measure in 2019-20, the amount of the benefit payment will be reported for the relevant member in the Member Section of the 2020 SMSF annual return at label R1. The code to use for the benefit payment is ‘F’ as this temporary benefit payment measure falls under the category of approved compassionate payment.
Other return matters
Here are other return matters to be aware of when completing the 2020 SMSF annual return.
SMSFs with an LRBA
For SMSFs with a LRBA, they may be required to report in the Member Section of the 2020 SMSF annual return an amount at label Y ‘Outstanding limited recourse borrowing arrangement amount’. An amount reported at this label for a member will be included in the calculation of their ‘total superannuation balance’ as at 30 June 2020.
Amounts are only required to be reported at this label for a member, where:
1. The SMSF entered into the LRBA on or after 1 July 2018
(a) The lender is an associate of the fund; OR
(b) The member has met a condition of release with a nil cashing restriction.
Where an amount is required to be reported, the amount to include at label Y is the amount of the outstanding loan balance, at 30 June 2020, that is attributable to the member. For further information on calculating the attributable amount of the loan click here or search QC 20439 on the ATO’s website.
Complying SMSF with Non-Arm’s Length Income
Where a complying SMSF has income that is treated as NALI, it will be included in the non-arm’s length component of the SMSF’s taxable income and subject to tax at the top marginal tax rate, being 45% for 2020. The other component of an SMSF’s taxable income is the low tax component, which is taxed concessionally at 15%.
When reporting a complying SMSF’s NALI you must reduce the amount of NALI by attributable deductible expenses and report the net amount at the relevant labels, U1, U2, U3 in Section B: Income of the return. Deductible expenses that are attributable to NALI are no to be reported in Section C: Deductions and non-deductible expenses. Only expenses attributable to the low tax component of the SMSF’s taxable income are reported in Section C.
Effect of residency on the complying status of an SMSF
Where an SMSF fails to satisfy the definition of an ‘Australian superannuation fund’, it’s status will change from complying to non-complying. For further information on the meaning of ‘Australian superannuation fund’ please refer to TR 2008/9 or search QC 23312 on the ATO’s website. Also, note the COVID-19 relief provided by the ATO in relation to SMSF trustees that get stranded overseas – click here for further information.
Where the SMSF’s status does change from complying to non-complying, the fund’s taxable income will be subject to tax at the top marginal tax rate, 45% for 2020. Further, when completing the 2020 SMSF annual return, label T ‘Assessable income due to changed tax status of fund’ must be completed. The amount to be included at this label is effectively the combined opening balance for all members, for the year of income that the SMSF became non-complying, less the amount of total member balances that represents the tax-free amount. For example, an SMSF failed the residency test in 2019-20, the combined total of member balances at 1 July 2019 was $1,000,000, including a total tax-free amount of $200,000. Consequently, the amount to include at label T is $800,000 and this amount, together with other fund assessable income, less deductible expenses, will be subject to tax at the top marginal tax rate, 45% for 2019-20.
Reporting member balances
Section F is used to report transactions on a member’s account in 2019-20 (Section G is used for former members). Where a member has multiple accounts, these are combined for the purpose of reporting the transactions in Section F.
The transactions reported in the ‘Member Information’ section of the return is used to calculate a member’s Total Superannuation Balance (TSB). Further, these figures reported are based on the SMSF’s financial statements and the member statements. The total of member balances will equal the net assets of the SMSF (where the SMSF has no reserves).
An SMSF’s financial statements must comply with SIS regulation 8.02B which requires assets to be disclosed in the financial statements at ‘market value’. However, for TSB purposes, the relevant amount is what the SMSF member could voluntarily withdraw as at the particular date, generally 30 June. A difference that arises, between the member’s account value in the SMSF financial statements and the member’s withdrawal value, is selling costs. When a member requests a withdrawal of their full benefits, this will likely involve the selling of assets which will also likely incur selling costs, ultimately reducing the amount the member receives. Consequently, it is not uncommon for the member’s withdrawal value at 30 June to be less than the balance reported in the SMSF financial statements. As we know, when determining ’market value’ for the purpose of financial statements, an estimate of selling costs cannot be taken into consideration.
One of the other costs incurred when a fund asset is sold is capital gains tax, which can reduce the ultimate amount paid to the member. The process of adjusting asset values to ‘market value’ will give rise to unrealised gains and losses, generally reported in the operating statement. To match the potential Capital Gains Tax (CGT) that would arise on disposal of the asset at the stated market value, consideration can be given to bringing to account a Deferred Tax Liability (DTL), where the ‘market value’ of the asset is greater than cost (allowing for any CGT discount applicable), commonly referred to as adopting tax effect accounting. This provision represents the estimated amount of CGT that would have been payable had the asset been disposed of for the stated 30 June ‘market value’. By bringing to account a DTL (adopting tax effect accounting), one benefit is that the members are being provided with a more accurate indication of their withdrawal benefits. The SMSF’s summary of significant accounting policy notes, in the financial statements, would need to reflect the adoption of tax effect accounting.
Further, as the DTL is a liability account (an amount owing by the fund), it will decrease the net assets of the SMSF and as a consequence, decrease member balances. This means a lower member balance that will be reported in the member information section in the SMSF annual return.
The combined value of an SMSF member’s accounts held in the SMSF will be reported at items S1, S2 and S3 in the member information section of the return. These will be used by the ATO to calculate a member’s TSB. Where the member’s withdrawal amount would be less than the value per the financial statements, for example, due to asset disposal costs that cannot be brought to account in the SMSF financial statements, this can be reported at X1 and X2, in the same section (X1 and X2 will then substitute for S1 and S2, respectively). If tax effect accounting is adopted, then the effect of the related capital gains tax on the unrealised gain (the PDIT disclosed in the financial statements), will be taken into account as part of the member’s balance per the financial statements. Consequently, you do not have to complete X1 and X2, unless you wish to advise a lower amount, due to other asset selling/disposal costs.
Claiming Exempt Current Pension Income (ECPI)
For the 2019-20 income year there is no change to the approach for calculating an SMSF’s claim for ECPI. Proposed changes previously announced to reduced red tape associated with a fund claiming ECPI, which were to come into effect on 1 July 2020, have now been deferred until 1 July 2021.
Please refer to the TechHub fact sheets and information papers for further information on how to determine an SMSF’s claim for ECPI. Reference sources in the TechHub include:
- Does an SMSF require an actuarial certificate?
- SMSF expense deductibility
- Tax losses in an SMSF what you need to know
- Technical guide to deductibility of expenses in an SMSF
CGT Relief – deferred notional gain from 2016-17
Where an SMSF applied the CGT relief rules in 2016-17 using the proportionate (unsegregated) method, there was likely a resulting assessable notional capital gain. The SMSF trustee could make an election to defer the notional capital gain to be assessable in the income year that the respective asset or tax parcel is sold. Consequently, when preparing the financial statements and return for each income year, for any assets sold by the SMSF, check to ascertain if those assets were held prior to 1 July 2017 and if so, whether CGT relief was applied to the asset and if there is an associated deferred notional capital gain from 2016-17 that is required to be disclosed as assessable. Note, where a deferred notional capital gain is to be reported as assessable, due to the relevant asset or tax parcel being disposed/sold, the amount of the deferred notional capital gain cannot be reduced by a claim for exempt current pension income.
Further, for accountants and administrators who take on an existing SMSF as a new client, they will need to include as part of their check list, a step to review and ascertain if the SMSF has any deferred notional capital gains from 2016-17.
COVID-19 rent relief
Where an SMSF landlord has provided rent relief to a tenant, there are accounting and return decisions to be made. These issues have been addressed in the previously presented webinar ‘Implications of COVID-19 on SMSF property investments’ and associated FAQ. Please refer to these two resources in the TechHub.
The ‘Trustee Declaration’ in the 2020 SMSF annual return includes the words ‘I have received a copy of the audit report and are aware of any matters raised therein’. This implies that the trustee(s) has in fact sighted the Audit Report issued in respect of the 2020 financial statements. As the annual audit does not require an audit opinion on the annual return, it would be prudent to ensure that trustees do not sign the Trustee Declaration in the annual return until the auditor has issued their Audit Report and it has been provided to the trustee(s) for review.
Amongst the many challenges that COVID-19 has presented, obtaining trustee signatures on annual financial statements and returns has been just one. The ATO has provided options for trustee signature on their website and can be accessed by clicking here or searching QC 62150 on their website. Amongst the options are:
- Scanning documents and emailing or uploading to SMSF trustees for printing, signing, scanning and emailing back or uploading via a secure portal;
- Utilisation of secure digital secure applications;
- By posting documents to SMSF trustees for their signature and return by mail.
Importantly, signature requirements will not be met if SMSF trustees merely acknowledge the financial statements by email or over the phone.