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SMSF’s and non-arm’s length income

Self-managed super funds and related parties must transact on arm’s length terms. This ensures that both parties are acting in their own self-interest and will not succumb to any pressure from the other party. The true market value of an asset should always be reflected in the purchase and sale price of assets.

Members need to be aware of any income that can be classified as non-arm’s length to avoid being taxed at the highest marginal rate.

A potential non-arm’s length hazard is a limited recourse borrowing arrangement (LRBA). Under an LRBA, a member can borrow money to purchase an asset and receive the beneficial interest, but the legal ownership of an asset is held on trust by a related party for the SMSF member.

Problems arise when the alleged loan is not at commercial rates. For example, the ATO found two members of a self-managed super fund had a loan with zero interest. Consequently, the income acquired by the SMSF member as a beneficiary of the holding trust was considered to be non-arm’s length and they were subject to 45 per cent tax.

Posted on 29 June '15 by , under Super.

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Transition to retirement

The transition to retirement (TTR) strategy allows you to access some of your super while you continue to work.

You are able to use the TTR strategy if you are aged 55 to 60. You can use it to supplement your income if you reduce your work hours or boost your super and save on tax while you keep working full time.

  • Starting a TTR pension: To start your TTR pension, transfer some of your super to an account-based pension. You have to keep some money in your super account so that you can continue to receive your employer's compulsory contributions as well as any voluntary contributions you may be making.
  • Government benefits and TTR: The benefits you or your partner receive might be impacted if you choose to opt for this strategy. How and what exactly will change might become clearer upon discussing this with a Financial Information Service (FIS) officer.
  • Life insurance and TTR: In some cases, the life insurance cover you have with your super may stop or reduce if you start a TTR pension – check this before making any decisions or changes.

TTR can help ease your mind as you transition into retirement but it can be a bit complex. Before you choose whether you want to use TTR to reduce work hours or save on tax, or even if you want to use TTR altogether, you should figure out how this will impact all aspects of your finances.

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