Stephen Miller outlines some of the key issues to consider when recommending your SMSF clients change fund administrators.
Your clients may want to change self-managed superannuation fund (SMSF) administrators for a number of reasons.
Examples could include to access superior services (such as more comprehensive and timely reporting) and to receive better value for money.
But despite the potential benefits, various issues may arise that need to be considered. There may also be some unintended tax and other consequences if you are not aware of these issues.
Capital gains tax
A capital gains tax (CGT) event will not be triggered simply because fund administration is transferred. However, if at the same time, an amendment or replacement of the fund trust deed is contemplated, then CGT could be payable.
In principal, if there are sufficient changes to certain characteristics of the fund, then a ‘resettlement’ may occur, which could trigger a CGT or other tax liability.
When determining whether a resettlement has taken place, the Australian Taxation Office looks at whether any significant changes have been made to the trust deed, the fund assets and/or the fund membership.
Fund assets
Most administrators have a list of approved assets they are willing to administer. Before changing, it’s important to:
- Check whether the new provider is able to administer all the fund’s current assets and any assets the fund may want to be able to acquire;
- Understand the trustee and administrator responsibilities when it comes to dealing with direct assets (including valuations and paying expenses); and
- Consider the costs that will be payable for administering direct assets such as direct property (including whether the fee is a flat dollar amount or based on a percentage of the asset value).
Reporting responsibilities
Another significant issue to consider is who will be responsible for completing the fund’s financial statements, tax return, audit and (where applicable) actuarial certificates for the current year.
In most cases, these will be completed or arranged by the new administrator. To do this, the new administrator will require the financial statements, reports and returns for the previous year — including the cost base history of each parcel of assets in the fund at that time.
The new administrator will also need information on the current year activities including, among other things, the fund’s income and expenses, as well as any asset disposals and acquisitions.
Some administrators allow clients to nominate an auditor. If so, the auditor’s contact details will need to be provided so the accounts can be sent to them.
Pensions
If the fund has started a pension, it may be vital the new administrator has the ability to continue that pension, rather than force a commutation and repurchase.
While it’s administratively simpler to commute and repurchase the pension, this could have adverse financial consequences.
For example, if commuted voluntarily, complying pensions purchased before 20 September, 2004 will generally lose the 100 per cent Assets Test Exemption (ATE), while those purchased before 20 September, 2007 will no longer be eligible for a 50 per cent ATE.
Also, if a defined benefit pension is commuted:
- It’s no longer possible to commence a new one;
- Any amount above the commutation value must be transferred to a fund reserve; and
- If the trustees allocate the reserve to fund members, it may count towards the member’s concessional contribution cap for that year.
Duty
Some administrators require the legal ownership of certain assets (such as interests in managed funds, property trusts, other unlisted unit trusts or shares as well as listed securities) to be transferred to a nominated custodian.
Where this occurs, duty will not be payable on listed securities. However, you should find out whether duty is payable on unlisted marketable securities.
For example, duty is payable at a ‘nominal rate’ of $10 per asset per transfer for unlisted marketable securities registered in New South Wales. In this context, nominal means the duty is set at a fixed amount (or rate), which is unrelated to the value of the asset.
Where ownership of the asset doesn’t need to be transferred to a custodian (eg, direct property), no duty is payable.
Note: NSW has proposed to abolish duty on unlisted marketable securities from 1 July, 2012.
Support
While changing administrators can enable SMSF clients to access superior services and/or receive better value for money, it can be a complex and time-consuming process.
It’s therefore crucial to select an administrator with the resources to make the transfer as smooth as possible.
When selecting a new administrator, you should find out whether the provider is able to:
- Assist with analysing the potential impact the transfer could have on the fund members (including any changes in the tax position and the costs that will be incurred);
- Help with completing the transfer documentation; and
- Liaise with the previous administrator (or other service providers) to obtain any necessary information.
Stephen Miller is a senior technical consultant with MLC/ThreeSixty Technical Services.
