Aaron Dunn, CEO of Smarter SMSF, said while the principles aren\u2019t new, the ATO has formally addressed them and added more detail around how to incorporate establishment costs when setting up a fund.<\/p>\n
Tim Miller, head of technical and education for Smarter SMSF, said the updates not only provide an educational starting point for new trustees considering establishing a self-managed super fund, but also provide clarity for those who have been in the sector for many years.<\/p>\n
\u201cFrom a practical point of view, where you do a lot of fund establishment, a lot of this commentary from the ATO is not new, but it\u2019s probably the first time it\u2019s ever really been directly addressed on the ATO website,\u201d Miller said.<\/p>\n
\u201cThe key question being addressed is, who pays the establishment cost for the fund?\u00a0 Should it be paid before the fund is set up by the individual? Or is it a fund cost? And depending on how you choose to interpret it, ultimately, what the ATO is saying is you can pay this cost personally and subsequently seek reimbursement from the super fund when it\u2019s established, or it can be a capital expense of the fund once it\u2019s actually set up.\u201d<\/p>\n
Dunn said it is a \u201cchicken and egg\u201d conundrum as a lot of times individuals involved in setting up an SMSF don\u2019t want to necessarily be paying for it \u201cout of their hip pocket\u201d.<\/p>\n
\u201cYou want to get the structural costs in setting up the funding, setting up the corporate trustee and so forth, but ordinarily, the individuals involved in this don\u2019t necessarily want to be paying for it out of their hip pocket. They want to be using it as a genuine expense of the fund,\u201d he said.<\/p>\n
\u201cThe ATO has now given some guidance into the mechanics of how you undertake this. It makes reference to the fact that if you personally pay for those costs when you set up, we look to regulation 5.02 that allows for the fund to charge those costs against the superannuation fund.<\/p>\n
\u201cOnce you unpack that, you then go into the meaning of a borrowing of money, or maintaining an existence of borrowing of money and, again, the ATO confirms that where expenses are paid on behalf of the fund, and that reimbursement is immediately sought, this is not considered a borrowing and we\u2019re not getting into any financial assistance issues as well.\u201d<\/p>\n
Dunn continued that an interesting inclusion in the update concerns contributions, with\u00a0 the ATO including some distinction as to whether something will get treated as a contribution based upon whether reimbursement exists.<\/p>\n
Miller explained that if a trustee pays the costs personally, and doesn\u2019t seek reimbursement, the amount is treated as a contribution.<\/p>\n
\u201cIt\u2019s effectively a standalone sentence in the framework of the page that the ATO has updated highlighting that it\u2019s a capital expense of the fund, and as such, it\u2019s not deductible, but if you have paid it yourself, it must be treated as a contribution if you don\u2019t seek reimbursement,\u201d Miller added.<\/p>\n
\u201cWe always had that restriction, or that restrictive nature, because there were such tighter rules around making contributions to funds, and there still are linked total super balances. However, the establishment cost generally is not going to create a problem there.<\/p>\n
\u201cIf there is no reimbursement source, so if the fund hasn\u2019t paid the cost, and you pay them personally, there is effectively no reduction in the capital of the fund. Based on the definition of TR2010 and what is a contribution \u2013 that is a contribution.\u201d<\/p>\n
Dunn said this goes back to the \u201cheart of the view\u201d of the ATO and trust law principles, that to establish a trust there must be assets.<\/p>\n
\u201cIn situations where people are taking the view they don\u2019t actually have a return, you would argue in some respects, that if you haven\u2019t sought reimbursement, then the fund does have an asset, because you are required, according to the ATO, to establish a contribution in this instance against what would be a non-deductible expense in the fund,\u201d he said.<\/p>\n
Miller added that the concept of seeking reimbursement immediately is also contingent on having the money available in the fund to pay that reimbursement.<\/p>\n
\u201cThat\u2019s then subject to potentially a rollover, or, in theory, a further personal contribution, because again, the chicken-and-egg of setting a fund up is that you don\u2019t have your notice of compliance to start with and you\u2019re unlikely to have the first money going into the fund as being an employer contribution, which is often restricted under SuperStream,\u201d he said.<\/p>\n
\u201cWhile we have a great appreciation for SuperStream and that funds should be rolling money to self-managed super funds effectively immediately, we also know the history of the industry, and that money doesn\u2019t always come across immediately to allow for immediate reimbursement.\u201d<\/p>\n
Dunn continued that updated guidance gives clear ways on how to handle the establishment costs of an SMSF.<\/p>\n
\u201cIf you pay for it up front, you need to promptly seek reimbursement. Once the inflows of money come into the fund, it won\u2019t get counted as a contribution. It is a reimbursement, assuming the deed allows for all that to occur, which you would ordinarily think would happen,\u201d he said.<\/p>\n
\u201cBut if you don\u2019t seek that, then there will be a requirement to actually have that amount counted as a contribution, and that also needs to be factored in the context as to whether that contribution may have a deduction claimed against it, maybe against non-concessional cap, and the strategies that you might be employing around contributions for one or more members of the fund as well.\u201d<\/p>\n
\u00a0<\/p>\n
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