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Archive January 29, 2020

ATO cuts six-member fund work

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The ATO has signalled it will not be preparing for the introduction of six-member SMSFs or the three-year audit cycle after it dropped them from its roadmap for changes within the superannuation sector.

In an update to its website released earlier this month, the regulator stated that in regards to an increase in members from four to six for SMSFs and small Australian Prudential Regulation Authority (APRA) funds, it would “remove this outcome as the legislation has not been reintroduced following the federal election”.

The increase in SMSF members was introduced as part of the 2018 budget, but was removed from legislation in April 2019 to ensure the bill passed through parliament.

The ATO used the same phrasing to describe its work on the SMSF three-year audit cycle, noting it took the action on both matters from 11 November 2019, a year after they were first added to the roadmap.

The updated list of changes being undertaken by the ATO also includes rolling changes to its SuperStream rollover service, and amendments to total superannuation balance (TSB) calculations that will include the value of an outstanding limited recourse borrowing arrangement (LRBA) in an individual’s TSB.

In the area of SuperStream rollovers, the ATO indicated it was currently deploying and testing an SMSF verification service for APRA funds to obtain verified SMSF details prior to making rollovers via SuperStream, as well as an SMSF member verification service that allows funds to match member details to ATO information to assist in rollovers.

The deployment phase, which includes engagement with the superannuation sector, is due to run from November 2019 to December 2020 ahead of the onboarding process in January 2021 and industry compliance with the SuperStream standard by the end of March 2021.

The roadmap also indicated the ATO’s work in relation to TSB calculations related to the value of an outstanding LRBA will move from the build phase to the testing phase with the superannuation sector at the end of February 2020.

The ATO noted the deployment of the TSB calculations had taken place from July 2019 after the amendments enabling the calculations received royal assent in October, but with a retrospective date of effect of 1 July 2018, making the 30 June 2019 TSB the first TSB to be affected by this change.

Source: smsmagazine.com.au

Inflation figures confirm TBC won’t be indexed in 2020

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SMSF practitioners can breathe a sigh of relief following the release of official inflation figures for the December 2019 quarter, which did not reach the threshold required to necessitate indexation of the transfer balance cap on 1 July this year.

The Australian Bureau of Statistics’ CPI figure for December, released on Wednesday, revealed the index had reached 116.2 in the final quarter of 2019, which, while slightly higher than expected, was 0.7 point below the required level for TBC indexation.

The new data means indexation of the TBC, which will require each super fund member to calculate their own TBC level between $1.6 million and $1.7 million, will now happen on 1 July 2021.

Commenting on the news, AET senior technical services manager Julie Steed said the delay to indexation would provide welcome relief to SMSF professionals already struggling with administrative issues around the existing TBC system.

“Many practitioners are still experiencing difficulties dealing with TBC issues — indexation will add a significant additional layer of complexity, so we have another year to help advisers and clients understand the mechanics of the cap before it gets even harder,” Ms Steed said.

The potential indexation of the TBC on 1 July 2020 had been a cause for concern among the industry, as it would require the calculation of a personal TBC for each fund member based on the level of assets they had previously had in their transfer balance account.

“An individual who already had a TBC account and had equalled or exceeded the $1.6 million TBC at any stage won’t be entitled to indexation and their personal TBC will remain at $1.6 million,” ATO deputy commissioner James O’Halloran said when explaining the new system in August last year.

“For everyone else, we’ll identify the highest ever balance in their transfer balance account and use this to calculate the proportional increase in their TBC and apply the new personal TBC to their affairs going forward.”

Commenting on the changes earlier this month, Accurium head of technical services Melanie Dunn told SMSF Adviser it was still useful for practitioners to start thinking about potential changes to their client’s TBC if indexation did not occur until July 2021.

“A client’s estimated transfer balance cap versus their current cap can be taken into account when setting pension strategies for the coming year, as it could impact decisions around pension commencements and commutations,” Ms Dunn said.

Source: SMSF Adviser

What expenses can an SMSF deduct?

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Self-managed super fund (SMSF) expenses can be tax deductible provided that they comply with Australian taxation legislation.

It’s important to understand that SMSFs should only pay expenses that are:

  • Allowed for under superannuation legislation and the SMSF’s trust deed
  • Consistent with implementing the SMSF’s investment strategy

What are the general principles to follow?

Some SMSF expenses are tax deductible and some are not. It depends on whether the expenses relate to the fund gaining taxable income or not.

Expenses are tax-deductible if they relate to the fund gaining taxable (i.e. assessible) income. Superannuation funds (including SMSFs) are taxed on member contributions and their investment earnings. These contributions and earnings are taxed at the concessional super rate of 15% in Australia, up to certain contributions limits.

SMSF expenses are not tax deductible if they are capital expenses, such as the cost or purchasing fund assets.

Does it matter whether the SMSF members are in the accumulation or retirement phases?

Yes. SMSF expenses are not tax-deductible if they relate to the gaining of any non-taxable (i.e. non-assessable) income. Non-taxable SMSF income includes earnings form assets held to support member retirement phase income streams.

If an SMSF has members that are in both the accumulation and retirement phases, its expenses must be split appropriately between its taxable and non-taxable income. SMSFs in this situation should hire the services of an actuary to determine their non-taxable income. Only the expense amount that is apportioned to taxable income is tax-deductible.

No expense-splitting is necessary for any costs associated with collecting and processing fund member contributions or on the insurance premiums paid on behalf of members. However, splitting is necessary for most other types of SMSF expenses.

What SMSF expenses are tax deductible?

SMSF tax-deductible expenses can be grouped into the following categories:

  • Operating expenses
  • Investment-related expenses
  • Tax-related expenses
  • Insurance premiums
  • Statutory fees and levies
  • Legal expenses
  • Collectables and artwork expenses

We’ll now look at each of these categories in more detail.

Operating expenses

Operating expenses include:

  • Fund management and administration fees that trustees incur in carrying out their obligations. For example, collecting and processing member contributions.
  • Audit fees. SMSF trustees are legally obliged to appoint an approved SMSF auditor to examine their fund’s operations each year to ensure its compliance with super legislation.

Investment-related expenses

Investment-related expenses include:

  • Fees paid to fund investment advisers, provided that these fees are directly related to an investment that earns assessable income for the SMSF. Financial advice fees that do not meet this requirement include any of the following situations:
    • General financial advice
    • Financial plan preparation
    • Initial or upfront adviser fees
    • Ongoing advice fees for accumulated super in the fund
    • Advice for non-assessible pension income.
  • Bank fees.
  • Rental property expenses if the fund holds one or more investment properties in its portfolio of assets.
  • Brokerage fees (e.g. for share investments).
  • Interest on any SMSF funds borrowed for investment under a limited recourse borrowing arrangement.
  • Depreciation on investment assets (such as the plant and equipment in a commercial property owned by the fund).
  • Claiming subscriptions and attending seminars.

Tax-related expenses

Any expense associated with preparing and lodging an SMSF’s financial statements and annual return to the Australian Taxation Office (ATO) is tax deductible. In addition, funds can deduct any actuarial costs that they incur to determine the amount of tax-exempt income for any of their members.

Insurance premiums

Insurance premiums that SMSFs pay on behalf of their members are tax deductible. SMSFs are legally entitled to take out the following types of insurance for their members:

  • Life
  • Income protection
  • Total and permanent disablement
  • Terminal illness

Other types of insurance (such as trauma or health insurance) can’t be taken out by SMSFs on behalf of their members.

Statutory fees and levies

SMSFs must pay an annual ATO supervisory levy and this amount is tax deductible.

In addition, SMSFs that have a corporate trustee structure must also pay an initial Australian Securities and Investments Commission (ASIC) registration fee, as well as ongoing annual fees. All of these ASIC fees are also tax deductible.

Legal expenses

Some SMSF legal expenses are deductible, including costs associated with:

  • Amending the fund’s trust deed so that it remains compliant with any changes to super legislation.
  • Ensuring the fund’s compliance with its tax obligations.

Collectables and artwork expenses

Storage and insurance costs for any collectables and artwork that are owned by an SMSF are tax deductible. The insurance for these assets must be in the name of the fund and it must be taken out within seven days of them being acquired.

What is the process for claiming these expenses and deductions?

Tax-deductible SMSF expenses can generally be claimed in the year that they are paid. The only exception are any depreciation claims, which are “non-cash” expenses that are claimed over the estimated life of their associated assets.

All SMSF tax-deductible expenses should be claimed in the annual ATO return so that the appropriate tax debt or refund each year can be determined. Fund trustees should ensure that:

  • All tax-deductible expenses (excluding depreciation) are paid directly from their fund’s bank account.
  • All receipts and invoices are in their fund’s name.
  • They retain all their receipts and invoices for at least five years after their annual returns have been submitted to the ATO.

What expenses can’t you claim?

SMSF expenses that you can’t claim (and which you might expect that you can) include:

  • Any expenses associated with non-taxable income.
  • Travel expenses relating to residential investment property.
  • Legal expenses, such as those involved with preparing an SMSF’s initial trust deed (or significantly amending it a later date).
  • Any other costs associated with establishing the fund, as these are regarded as capital expenses.

In addition, if the trustees of the fund incur any administrative penalties from the ATO for non-compliance, these expenses cannot legally be paid by the fund. The trustees also cannot legally be reimbursed by the fund for the payment of these penalties. Administrative penalties are therefore not paid by SMSFs and accordingly are not tax deductible.

The bottom line

SMSF expenses that relate specifically to the fund’s taxable income are tax deductible. Some SMSFs have both taxable and non-taxable income. In this situation, fund expenses must be split between these two types of income, and the amount apportioned to non-taxable income is not tax deductible.

Source: superguide.com.au

Early access to your super when the going gets tough

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With the prolonged drought and bushfires affecting many farmers and rural businesses across the country, questions are often raised about accessing existing superannuation to ease their financial stress.

When going through difficult times, it may be frustrating that you aren’t able to access your superannuation account, especially when you need it the most. If you are experiencing severe financial hardship or have a medical disability you just can’t afford, you may have the right to apply to have some of your superannuation released before you retire.

Eligibility for early release of benefits

Superannuation is meant to be a long-term investment to provide benefits in retirement (or death benefits). To qualify for all the tax and associated benefits, a superannuation fund must have this as its “sole purpose”.

Once a person reaches the age of 65 (or dies), access to their superannuation is unrestricted. Prior to that time, one may be able to access the money before retirement if the person meets an alternative “condition of release,” often in dire situations such as a total and permanent disability or terminal illness.

However, the superannuation legislation also recognises that there can be other legitimate situations where the release of monies before the intended time may be appropriate, these include:

  • Compassionate grounds – to cover items such as; medical expenses, home modifications to cater for disability, housing loan payments to prevent foreclosure and funeral expenses of dependents
  • Severe financial hardship – for amounts up to $10,000 in any year
  • Transition to retirement – provided the person has reached their “preservation age”

Applying due to severe financial hardship

If you’ve spoken to a financial adviser/counsellor and are confident that early access to superannuation is the right course of action, you can apply for early release based on severe financial hardship. The rules for accessing super on the grounds of financial hardship are quite specific, limited in their application and are often misunderstood.

You are eligible for access under financial hardship if you:

  • Are unable to meet reasonable and immediate living expenses such as mortgage payments, rent arrears, medical expenses etc.
  • Are receiving an income support payment
  • Have been receiving income support payments for at least 26 weeks in a row

A super withdrawal due to severe financial hardship is paid and taxed as a super lump sum. If the condition is met, you will be limited to withdrawing a maximum of $10,000 within a 12-month period.

The eligibility rules are different if you’re over “preservation age” and haven’t retired. You must:

  • have reached your preservation age plus 39 weeks
  • not be gainfully employed
  • have received the income support payments for at least 39 weeks since reaching preservation age

How to apply

Applications for release of superannuation on compassionate grounds must be made to the Australian Taxation Office. Applicants need to provide appropriate documentary evidence to prove the intended use of the funds and demonstrate that the expenses could not be met from alternative sources. Importantly, the relevant expenses must not have already been paid. If approved, the Taxation Office will issue an authority to the fund concerned for a release of the funds.

Applications based on severe financial hardship are made to the trustee of the fund concerned. The general requirement is that the applicant must have been on some form of government support payment for a minimum of 26 weeks and can demonstrate financial hardship. In the case of self- managed superannuation funds, the trust deed of the fund should be checked to ensure that it allows for such payments.

Example – financial hardship:

Fred and Lucy are farmers in their early fifties whose financial situation has been severely impacted by the continuing drought. Their cash reserves have been exhausted by continuing feed bills for their remaining livestock. They have been receiving Farm Household Allowance for the past nine months and are struggling to pay for basic living expenses including food and school expenses for the children. They have a self-managed superannuation fund with balances of $350,000 each.

Fred and Lucy could apply to the trustee on the basis of severe financial hardship for the release of up to $10,000 each. This would need to be properly documented and their position verified with appropriate evidence.

Note that as Fred and Lucy are under their “preservation age”, any financial hardship payments would be treated as taxable lump sums – the final amount of tax applicable will vary depending on the taxable/tax-free components of their balances and their other taxable income – it could range from 0% to 22%.

Transition to retirement

Transition to retirement strategies can provide a legitimate means of accessing superannuation benefits before normal retirement. The important qualifier here is that the person must have reached their preservation age which will range from 55 to 60 depending on the year of birth. The following table illustrates this:

Date of Birth Preservation age
Before 1/7/1960
55
1/7/1960 to 30/6/1961
56
1/7/1961 to 30/6/1962
57
1/7/1962 to 30/6/1963
58
1/7/1963 to 30/6/1964
59
After 30/6/1964
60

Example – transition to retirement strategy

John and Noelene are cattle graziers who have planned well for recurring drought conditions. In good years they have invested in additional superannuation contributions to their self-managed fund and both have accumulated Farm Management Deposits. The current severe drought conditions have placed considerable strain on the family budget. They are keen to maintain their breeding stock and plan to progressively draw down the FMDs to fund fodder and supplements. This will ensure that when the drought breaks, they will be well placed to quickly rebuild and generate solid cashflows. In the meantime, they estimate they will require up to $100,000 per annum to assist with living expenses and pay the fees for their twin boys who are in their final two of years at boarding school.

John is 60 and has $1 million in superannuation and Noelene is 54 and has $700,000 in her superannuation account. After taking appropriate advice, John decides to commence a transition to retirement pension with the full balance of his accumulation account. He will be required to withdraw the minimum amount of 4% ($40,000) and can draw up to the maximum of 10% per annum – that will allow for the withdrawal of up to $100,000 per annum. Note that Noelene could not follow this strategy as she has not yet reached her preservation age and therefore has not satisfied a condition of release. As John has turned 60, the receipt of the pension amounts from the fund will be tax-free in his hands.

Once the drought breaks and normal cashflows return, they plan to commute the transition to retirement pension back to accumulation phase and top-up contributions as their financial position improves

Risks of accessing your super early

While accessing your superannuation may seem like an easy solution when going through a financial crisis, it is important to consider all the associated risks and consequences. Individual circumstances vary and these can include:

  1. Tax may apply to withdrawals

If you are below preservation age, you may be required to pay tax on any money you get from your superannuation. The tax varies depending on your circumstances and the taxable/tax free components of your superannuation balance.

  1. Fees & charges

You may need to pay your super fund a fee to have your super released early.

  1. Reduced retirement benefits

Early withdrawals can have compounding effects on the future balance of your superannuation with consequential impacts on your retirement plans.

  1. Impacts on other government benefits

Changes to your income due to superannuation benefits received may affect your eligibility for other benefits such as Family Tax Benefit, childcare allowance, etc.

  1. Watch out for scams

In recent years there have been a number of so-called “early access” schemes that have been promoted to facilitate the illegal early release of monies from superannuation accounts. Appropriately, the regulators have acted promptly against these schemes and there are severe penalties for promoters and trustees who engage in this unlawful conduct.

The information provided in this article is general in nature and does not consider your circumstances, needs, objectives or financial situation. This information does not constitute financial or taxation advice. Before acting on any information in this article, you should consider its appropriateness concerning your personal situation and seek advice from an appropriately qualified and licensed professional.

BOB LOCKE – CHARTERED ACCOUNTANT & SMSF SPECIALIST

Bob Locke has been an accountant and taxation expert for 35 years. His company, Practical Systems Super, provides an all-in-one SMSF solution with a full administrative service, SMSF management software, and independent, licensed advice, tailoring their package to meet the individual needs of trustees and SMSF professionals.

To find out more about Practical Systems Super, visit www.pssuper.com.au, or call 1800 951 855.

The information provided in this article is general in nature and does not take into account your personal circumstances, needs, objectives or financial situation. This information does not constitute financial or taxation advice. Before acting on any information in this article, you should consider its appropriateness in relation to your personal situation and seek advice from an appropriately qualified and licensed professional.

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Retirement income worry: Who worries and why?

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Most older Australians – 53% – worry they’ll run out of money in retirement, research by National Seniors Australia has found.

The survey also found that women are more worried about outliving their savings, 59% compared to 47% of men.

The research report from National Seniors – titled Retirement income worry: Who worries and why? – suggests several reasons for these differeing levels of concern, including the longer life expectancy of women, along with gender inequality in earnings and expected roles, such as caring. The demographics of the survey sample may also be a factor, with partnered men most represented in the sample, followed by unpartnered women.

National Seniors notes that women are more likely to be relying on the age pension, and to have less than $500,000 in retirement savings – below the ASFA ‘comfortable’ retirement standard.

Having superannuation to draw upon reduced worry, with 39% of people receiving income from super being ‘unconcerned’ compared to 27% of those not receiving any money from super, the survey found. This latter group was also the most likely to worry frequency – 23%.

Analysis found that the “gender effect” on the risk of worrying was “strong” – a 47% increase – but less than the effect of not yet being retired – 68% increase – having under $500,000 in savings – 65% increase – or having the age pension as the main source of income – a 53% increase the in risk of worrying.

“Australia has one of the best pension systems in the world, yet Australian retirees are still showing high levels of worry that they will outlive their savings,” said National Seniors CEO, Professor John McCallum.

“This shows a need for better advice and education to help older Australians manage their savings so they can have the confidence to spend their money and enjoy retirement.” 

Jeremy Cooper, Challenger’s Chairman of Retirement Income and formerly Chair of the Super System Review, noted that while women live three years longer than men, on average, the “super system doesn’t cater for this difference in longevity”.

“What this and other National Seniors research clearly highlights is that people treat the age pension and their own savings differently. They fear running out of their own money, even though the safety net of the age pension will be there for them. This sends a strong signal that people worry about being solely reliant on the age pension. It’s therefore important that super funds explore ways of providing more lifetime income to their members.”

The report concludes that “an obvious way to relieve the worry of those in retirement is to stabilise the system which has been under constant change or threat of change for over a decade”.

The research was based on a survey of 3,584 Australians aged over 50.

Source: Sole Purpose Test

What type of dishonesty disqualifies a person from having an SMSF?

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This article examines the nature of disqualification and what convictions can preclude a person from forever being an SMSF trustee/director. Given the serious consequences of disqualification, it is important to consider the circumstances in which a person may have been automatically, and even unknowingly, disqualified.

SMSF members should also consider that their children, as a child who gets caught out with a petty conviction, may subsequently discover that they can no longer be or become a member of their parents’ SMSF. This might seriously impact the family’s succession plans.

What is a ‘dishonest’ offence?

A person can be disqualified if they are convicted of an offence involving dishonesty. This is regardless of whether the conviction was in Australia or anywhere overseas. There is also no time limit that applies — a conviction in one’s youth even if they are under 18 years of age can forever preclude that person from becoming an SMSF member.

Unfortunately, there is no clear guidance on what convictions constitute “dishonesty”, and indeed, “dishonest conduct” is not defined in the legislation. However, the ATO has provided several broad examples of such convictions, including fraud, theft and illegal activities or dealings. Notably, disqualification can occur for convictions occurring at any time, including convictions that were not recorded by the court for reasons of the person’s age or due to the conviction no longer being publicly available.

While dishonesty may be apparent or obvious in many cases, there is often some grey areas where the specific intent and severity of certain acts may not readily constitute dishonesty and require expert advice to determine whether there is an issue.

For example, is a teenager who is convicted of fare evasion on public transport forever precluded from being a member of their family’s SMSF?

If we refer to the Explanatory Memorandum to the legislation, there is guidance including an example of a minor (under 18 years) shoplifting 20 years ago charged with an offence involving dishonesty that would disqualify them as an SMSF trustee/director.

This raises an interesting dilemma in terms of comparative culpability, as arguably a violent assault or even murder could be done without dishonest intent, and therefore would not result in disqualification.

Should the legislation be designed to apply this strictly? Are there any exceptions to being disqualified?

Generally, a person convicted of an offence involving dishonest conduct is a disqualified person for life. However, there is one important exception in cases which do not involve “serious dishonest conduct”.

Serious dishonest conduct is an offence where the penalty imposed can involve a term of imprisonment for more than two years or a fine of more than 120 penalty units. This equates to a monetary penalty of $25,200 (a penalty unit is $210 on 1 July 2019 and this amount is indexed each 1 July).

In a case where the dishonest conduct was not deemed “serious” (i.e. it involves less than two years’ imprisonment or less than 120 penalty units), an application can be made to the ATO seeking a waiver of the disqualified person status. Such an application must be made within 14 days of the conviction, unless good reason for the delay is provided to the ATO’s satisfaction. (See, for example, Mourched v FCT [2014] AATA 223 where the ATO refused to grant an extension of time beyond the 14-day deadline.)

Consequences of disqualification

If someone continues to act as an SMSF trustee when they are disqualified, they will be committing an offence with significant criminal and civil penalties. Furthermore, it is an offence for an SMSF trustee/director to become disqualified and fail to notify the ATO immediately.

It is also important to note that a person’s legal personal representative (e.g. an attorney acting under an enduring power of attorney) is also precluded from being a replacement trustee/director in place of a member who is a disqualified person, which generally forces a disqualified person to forever cease to be an SMSF member within a six-month period of their conviction. This is based on the usual six-month grace period that an SMSF has to restructure to comply with the trustee-member rules in s 17A of the Superannuation Industry (Supervision) Act 1993 (Cth) before ceasing to be an SMSF. That is, a member who is convicted of an offence involving dishonesty must cease immediately from being an SMSF trustee/director, but the SMSF will not contravene s 17A until after a six-month period.

Are there any other options?

Where an SMSF has a member who is a disqualified person who cannot obtain a waiver, the following options are available:

  • The first is to roll over the disqualified person’s account balance to a large (Australian Prudential Regulation Authority, i.e. APRA) super fund; for example, an industry or retail super fund.
  • The second is to convert the SMSF into a small APRA fund by appointing an APRA-approved trustee (which is more correctly known as a Responsible Superannuation Entity Licensee, i.e. RSE Licensee).
  • The third, where the disqualified person has retired, attained age 65 or satisfied another condition of release with a nil cashing restriction, is for the disqualified person to withdraw all their benefits from the SMSF. Careful consideration should be given prior to withdrawing money from the super system, as the contribution rules are now very limited.

Note that any corrective action must generally occur within six months of disqualification.

Conclusions

SMSF trustees, advisers and especially SMSF auditors should continually monitor the eligibility of members to ensure they have not been disqualified. Naturally, clients are not always forthcoming about prior offences and previous indiscretions, and therefore, it is particularly important for advisers to actively consider the issue of disqualification. Advisers should include appropriate checks in their procedures to ensure no disqualified person is admitted or remains for more than six months in an SMSF. Finally, advisers should check to see if any of the SMSF member’s children may be disqualified and fine-tune their estate and succession plans accordingly.

Daniel Butler, director, DBA Lawyers

SMSF-specific education crucial

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Advisers wishing to provide SMSF advice should be required to complete an SMSF-specific qualification, the SMSF Association (SMSFA) has said.

In its budget submission for 2020/21, the SMSFA called out the Financial Adviser Standards and Ethics Authority (FASEA) for failing to recognise specific SMSF education as part of its training requirements for advisers looking to provide SMSF advice.

“It is unfortunate new advisers are able to reach the required FASEA threshold to give financial advice and be able to give SMSF advice without specific SMSF knowledge being part of the required learning outcomes,” the association stated.

“This is problematic given that SMSFs are a specialised retirement savings vehicle and are distinctly different to large superannuation funds.”

FASEA’s current “broad, high-level” approach did not provide advisers with the necessary insight to give advice on complicated SMSF matters, it added.

“This is especially pertinent when SMSF trustees, due to the self-directed nature and complexity of SMSFs, are susceptible to poor financial advice with potentially significant detrimental outcomes to individuals,” it said.

“Complex SMSF limited recourse borrowing arrangements, business real properties and related-party transaction issues are not discussed in any material detail in the current education standards for advisers, but involve significant strategic and compliance issues for SMSF trustees.”

It pointed out that in addition to increasing advisers’ knowledge in terms of complex SMSF legislation, raising the bar for the qualification of SMSF advisers would have the knock-on effect of promoting higher standards among new advisers interested in providing SMSF advice.

“There will be many situations where financial advisers who are licensed to give advice may not have many SMSFs in their portfolio of clients,” it noted.

“An SMSF education licensing requirement to provide SMSF advice in this situation will either force the adviser to complete requirements to advise their SMSF clients or force SMSF members to seek licensed advisers whom deal with SMSFs and the specialist issues involved on a regular basis.”

Source: smsmagazine.com.au

3 common SMSF errors and how to avoid them

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There are three major errors being made by many Australians invested in the self-managed super fund space, according to investment adviser, Chris Brycki.

Speaking recently on a podcast, Stockspot founder and CEO Chris Brycki explained why simple investment solutions generally provide better results for SMSF investors.

Mr Brycki said that for the average person, “as much as the financial industry likes to sell the idea of trying to beat the market and trying to pick stocks and time when markets are going to go up or down, the reality is that for most people, it’s not possible”.

Not only for amateurs, but for professionals as well.

The investment expert said this has been the case for “30 to 40 years at least now”.

In Mr Brycki’s opinion, people shouldn’t be focused on those market factors when it comes to investing.

Instead, he said “they should be focusing on actually reducing their unforced errors or their mistakes”.

Those errors include “not diversifying enough, paying too much in fees and making too many decisions”.

Relating these errors back to the SMSF space, Mr Brycki provided three key considerations that SMSF participants need to be aware of to prevent them from making similar mistakes.

Diversification

The expert began by stating that “SMSFs historically haven’t been very well diversified”.

Looking at the data, he said “what you can see is that self-managed super funds in Australia have a huge overweight position in Australian shares relative to global shares, and that’s really been a disadvantage to their returns and their diversification”.

In addition, Mr Brycki highlighted that “they also have a big overweight position in cash”.

While conceding cash “ultimately did help some SMSFs weather the storm of the financial crisis”, he considers cash as missing several of the characteristics that are very valuable within bonds.

“Most SMSFs don’t have any high-grade corporate bonds or government bonds, which can really act as a cushion when markets fall and a much better and more effective cushion than cash,” he said.

Costs

Mr Brycki also paid attention to the large amount of data supporting the notion that SMSFs pay too much in fees.

“By paying too much, it actually reduces net returns,” he commented.

His view, is that one of the reasons people are paying too much “is because they are overcomplicating things”.

“They’re under the false belief that by adding more complexity and more different types of investments into their portfolio, they’re going to achieve a better return or a better result.”

“The truth is: that’s not the case,” he said.

Mr Brycki countered the notion by stating that investors are probably going to be better off “by actually having fewer investments and making fewer decisions and reducing their costs”.

Decision-making

Despite the overemphasis on decision making potentially leading to an increase in errors, Mr Brycki did highlight the importance of good decision making in an SMSF.

“One of the responsibilities of setting up an SMSF is being able to fight the temptations to make lots of different decisions,” he noted.

“I know as an investment manager, and I know from a lot of the friends that I have seen invest over the years, that the temptation to make lots of decisions and to chase hot things is very high when you’re managing your investments,” Mr Brycki continued.

“You really need the discipline not to do that.”

He recommends outsourcing such a responsibility “to someone that can help keep you honest and keep you on track with your own strategy”.

“Much like when you see a personal trainer — ultimately, all of those exercises you could do on your own,” he said.

“You could go to the gym, you could go for a run, but a personal trainer keeps you accountable and keeps you on track.”

Even for people that do set up in a self-managed super fund, Mr Brycki said he believes “there is some value in having that personal trainer there to keep your strategy on track, to stop you from making mistakes when markets have gone up or gone down and you’re tempted to change something”.

“Ultimately, that’s going to lead to better results at your retirement.”

Source: SMSF Adviser

SMSFA calls for phase-out of limited licensing

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The SMSF Association has called for the phasing out of the limited licensing system for accountants, saying it forces SMSF clients to pay fees that are significantly out of proportion to the complexity of advice being provided.

SMSFA chief executive John Maroney said the association had called to scrap limited licensing in its 2020 budget submission, as the system was preventing SMSF trustees from getting basic SMSF advice at a reasonable cost.

“If an SMSF trustee wants to seek advice regarding the establishment of a pension from their accountant, unlicensed accountants are unable to provide this simple advice,” Mr Maroney said.

“Licensed advisers can provide this simple advice, but it involves costly documentation disproportionate to the advice sought.”

He added that the SMSFA would be pushing for reform in the advice space that “reduces complexity, improves efficiency and drives harmonisation to better enable the provision of affordable, accessible and quality advice to business[es] and consumers”.

The association’s submission suggests the abolishment of limited licensing in favour of “a new consumer-centric framework that raises advice standards and rectifies the advice gap to allow appropriately qualified SMSF advisers to provide low-cost, simple advice”.

“The desired policy outcomes from introducing limited licensing have not been achieved,” the SMSFA’s submission said.

“Individuals have unmet needs, advisers face high regulatory costs and accountants are strangled by regulation. What we’re proposing is a new consumer-centric advice framework, with improved SMSF advice a critical element of this project.”

In addition, the association’s submission called for advisers to be given access to their clients’ tax information on the ATO’s online services.

“Currently, only registered tax agents (typically accountants) are able to access [the ATO’s] portal to get total superannuation balance and transfer balance cap information that is crucial for SMSF advice,” the SMSFA said.

“Ironically, these individuals are generally not able to provide SMSF advice as they are not licensed with ASIC. Incongruously, those licensed advisers who can provide SMSF advice (such as financial advisers) have no reasonable way of sourcing ATO portal information directly from the ATO as they are not, generally, the member’s personal tax agent.

“The move to open data and increased access to the ATO portal is an essential step for the $750 billion SMSF industry and the only means by which the sector can institute commercially viable operational surveillance to the standard the ATO rightly requires, and we encourage the government to make this an ATO priority project.”

Source: SMSF Adviser

 

Catch-up concessional contributions

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It’s been a long time coming but members are finally able to use the catch-up concessional contribution rules for the first time this year (2019–20).

The new rules represent a shift away from the government’s previous “use it or lose it” approach to super contributions and provide members with an important opportunity to make additional contributions in later years, when they may be better able to afford it.

However, the new rules also potentially make salary sacrifice and personal deductible contribution advice more complicated, as advisers need to determine both a member’s eligibility to use these concessions as well as the value of the member’s effective concessional cap in a year.

Catch-up concessional contribution recap

Under the catch-up concessional contribution rules, a member is able to carry forward and contribute any unused concessional contribution cap amounts that accrued in the previous five years (commencing from 1 July 2018) where their total superannuation balance (TSB) at the end of the previous financial year is below $500,000.

For example, taking into account the existing concessional cap of $25,000, the new rules allow an eligible member that had $10,000 of concessional contributions in 2018–19 and a total super balance under $500,000 on 30 June 2019, to make total concessional contributions this year of up to $40,000 ($15,000 + $25,000).

As time goes on, the catch-up rules could allow members to make quite high levels of concessional contributions over one year as members will have access to both the standard concessional cap in that year plus any unused cap amounts from the previous five financial years.

For example, taking things to the extreme, the new rules could allow an eligible member to make total concessional contributions of up to $157,5001 in the 2023–24 financial year, assuming they had no concessional contributions in any of the preceding five financial years. Alternatively, someone earning a salary of $70,000 in 2019–20 and only receiving employer SG contributions would accumulate an unused cap amount over the next two years of $36,5002, allowing total concessional contributions of $64,003 in 2021–22.

Once a member starts to use some of their unused concessional cap amounts, the rules operate on a first-in, first-out basis. For example, assume a member had the following unused cap amounts for the following years:

  • 2018–19 – $15,000
  • 2019–20 – $13,000
  • 2020–21 – $5,000

If the member then exceeded the standard annual concessional cap in 2022–23 by $20,000, the unused concessional cap for 2018–19 would be reduced to nil and the unused cap amount for 2019–20 would be reduced to $8,000. 

Finally, it is important to note that a member will only be able to carry forward any unused concessional cap amounts for a maximum of five years. For example, a member’s unused concessional cap amount for 2018–19 must be used by the end of 2023-24.

Unused concessional contribution amounts continue to accrue where TSB is over $500,000

It is important to note that while the $500,000 TSB eligibility requirement restricts a member’s ability to make catch-up concessional contributions in a year, it does not prevent the client from accruing unused concessional cap amounts in that year.

For example, if a member had a TSB of $501,000 on 30 June 2019, the member would be ineligible to contribute any unused concessional cap amounts that accrued in the 2018–19 year in the 2019–20 year. However, if their TSB declined due to negative investment returns or lump sum withdrawals during 2019–20, and was below $500,000 on 30 June 2020, the member could contribute the unused concessional cap amounts that accrued in 2018–19 and 2019–20 during the 2020–21 year.

Practical catch-up contribution advice issues

Before recommending catch-up concessional contributions, advisers need to confirm a range of issues, including:

  1. Value of member’s TSB as at 30 June at the end of the previous financial year;
  2. Value of member’s unused concessional cap amounts for the previous five financial years (commencing from 2018–19); and
  3. Amount of additional catch-up concessional contributions a member can make in a year, taking into account any other concessional contributions, such as employer SG contributions, that will be made during the year.

1. Total superannuation balance

To determine whether a member is eligible to make catch-up concessional contributions, advisers need to confirm that the member’s total superannuation balance (TSB) is below $500,000 at the end of the previous financial year.

Advisers can determine the value of a member’s TSB by making their own investigations or by getting the client to confirm their TSB value with the ATO — potentially via the myGov website. However, advisers should exercise caution relying on any ATO TSB data and should confirm the data is up to date and accurate and includes all amounts that are included in the calculation of TSB.

For example, the value of a member’s interests in an SMSF will not be reported to the ATO until the fund lodges its SMSF annual return. Depending on an SMSF’s circumstances, this may not be until May the following year. Therefore, SMSF members with a TSB that is likely to be close to the $500,000 threshold may need to wait until the values of the member balances have been confirmed.

2.  Value of unused concessional contributions cap amounts

Advisers will need to calculate the value of a member’s unused concessional cap amounts for previous years (commencing 1 July 2018) by making their own investigations, as at the time of writing the ATO does not report this figure. However, the ATO has announced it intends to start reporting unused concessional contributions cap amounts via myGov by the end of 2019.

However, once again, advisers will need to exercise caution relying on ATO unused concessional cap data and should make reasonable inquiries to confirm it is accurate and up to date. In the interim, or as an alternative, advisers should consider contacting the member’s super fund to obtain concessional contribution details for the previous financial years.

In this case, advisers should take care to contact all funds that may have received concessional contributions for the member during the relevant catch-up period. For example, some members could have received contributions to various funds over a number of years due to:

  • the member having chosen to roll over to a different fund during the catch-up period and redirecting their employer contributions to the new fund;
  • the member having changed jobs during the catch-up period and their new employer contributing their SG contributions to the employer’s default fund;
  • the member having multiple jobs and each employer contributing to a different fund;
  • the member’s employer contributing SG and salary sacrifice amounts to different funds.

Advisers should also take care to confirm the status of any personal contributions made by the member in the previous year. For example, a fund may be showing a contribution as a personal non-concessional contribution; however, if the member subsequently gave the fund a deduction notice for the contribution, maybe on the advice of their accountant, the contribution would change status from a non-concessional contribution to a concessional contribution.

In addition, an adviser should exercise caution to confirm whether the amount of any deduction claimed on a personal contribution is likely to change. For example, a member that has already made a contribution and lodged a deduction notice may be able to vary the notice down to reduce the amount they claimed as a deduction — maybe because they did not earn as much income as they expected. Alternatively, if a member wishes to increase the amount of the deduction claimed, they could lodge another deduction notice specifying the additional amount they wish to claim. 

Where a member has not made any personal deductible contributions during the catch-up period, an adviser could also calculate a member’s unused concessional cap by checking the employer contribution details for the member via their myGov account. While myGov does not report unused concessional cap amounts, it does report employer contribution details for 2018–19, which could allow an adviser to calculate a member’s unused cap amount for that year (and later years). While the ATO has announced it intends to start reporting members’ personal deductible contribution information via myGov, this is not expected until sometime in 2020. Therefore, these amounts would need to be factored in separately.

Another alternative could be to check any payslips for superannuation contribution details. Once again, an adviser would need to check the member had not made any personal deductible contributions and had not changed jobs or had multiple jobs during the relevant bring-forward period.

Finally, as part of calculating the member’s unused cap amount, an adviser will also need to identify any amounts of unused concessional cap that the member may have already used and deduct those amounts from the relevant year. See catch-up concessional contribution recap above for more details. 

3. Calculate contribution amount

Once an adviser has confirmed the value of a member’s unused cap amounts, the next step is to determine the member’s effective concessional cap in a year, taking into account the value of any other concessional contributions made during the same year.

For example, if an eligible member had unused concessional cap amounts in 2018–19 of $5,000, their effective concessional cap in 2019–20 would be $30,000. However, if the member will have employer contributions of $21,000 this year, their cap space will only be $9,000.

Therefore, it will be important to take into account the level of a member’s employer contributions that will be made during a year, including any additional contributions due to salary sacrifice arrangements or bonus payments, when determining the additional contributions a member can make during a year.

Advice strategy opportunities

As previously discussed, the catch-up concessional contribution rules provide members with the flexibility to make additional concessional contributions via either a salary sacrifice arrangement or by making personal deductible contributions in a later year when they may be better able to afford it.

For example, the new rules allow members who have spent time out of the workforce caring for an elderly family member or on maternity leave to make additional concessional contributions to catch up for those contributions they missed out on. Alternatively, the catch-up contribution rules could allow members on average incomes that have only been receiving employer SG amounts to make extra contributions to fully utilise their concessional cap. However, in many cases, the ability to make additional contributions will be entirely dependent on the member’s level of income and their ability to afford extra contributions.

In this case, members wanting to make extra contributions could consider alternative strategies, such as: 

• selling assets to fund personal deductible contributions or transferring listed shares or managed funds into an SMSF as an in-specie personal deductible contribution;

• contributing some or all of an annual bonus as a personal deductible contribution;

• contributing all or part of a windfall, such as an inheritance, as a personal deductible contribution; or

• from preservation age, entering into a salary sacrifice arrangement and replacing the lost income with a transition to retirement pension. 

Disposal or transfer of assets

Where a member wants to transfer the capital value of assets into super, they could either sell the assets and contribute the proceeds or transfer the assets into an SMSF or super wrap as an in-specie contribution.

In either case, the disposal or transfer will trigger a CGT event and could result in the member realising a large capital gain. However, a member could potentially make a personal deductible contribution to offset some or all of the capital gain. In this case, the deductible contribution amount could be increased if they are eligible to utilise the catch-up contribution rules and have unused cap amounts available.

For example, assume a member earning $70,000 and receiving 9.5 per cent employer SG, sold an asset in 2020–21 realising a net (discounted) capital gain of $35,000. In this case, assuming the member was eligible to make catch-up concessional contributions and had an unused cap amount in 2019–20 of $18,350, they would have an effective concessional cap in 2020–21 of $43,350. Taking into account the 9.5 per cent employer SG contribution, this would allow the member to make a personal deductible contribution of up to $36,500 to fully offset the amount of the capital gain and still remain within their concessional cap. 

As a result, by contributing $35,000 of the sale proceeds as a personal deductible contribution, the member will have achieved their objective of boosting their super while also saving $6,800 in tax being the difference between the tax payable on the capital gain of $12,050 and 15 per cent contributions tax of $5,250.

Alternatively, where an eligible member receives an end-of-year bonus, they could achieve a similar result by using the catch-up concessional contributions rules to make a personal deductible contribution equivalent to the pre-tax value of the bonus amount. However, in this case it will be important to factor in any SG payable on the bonus (also taking into account the SG maximum contribution base for the relevant quarter where relied on by the employer) as well as the member’s salary as this could effectively reduce the amount of remaining cap they have available.

Member receiving a windfall

Members receiving a windfall, such as an inheritance, could potentially use the catch-up concessional contribution rules to fully utilise any amounts of unused concessional cap they have available. Also taking into account the deduction available, this could allow them to reduce their tax and further maximise their contributions to super. 

For example, an eligible member with $10,000 of unused concessional cap from 2018–19 would have an effective concessional cap in 2019–20 of $35,000. Assuming the member received a small $10,000 inheritance and were already salary sacrificing up to the concessional cap, they could use that amount to make a $10,000 personal deductible contribution — which would result in $1,500 tax payable and net contributions of $8,500.

However, assuming the member was on the 37 per cent tax rate, this would also potentially qualify the member for a tax reduction or refund of $3,700. Assuming the member then contributed that amount to super as a non-concessional contribution, the member would have net contributions of $12,200. 

Member has reached preservation age

Members reaching preservation age could also utilise their unused concessional cap by entering into a prospective salary sacrifice arrangement to fully utilise their unused concessional cap over one or more years and then commence a transition to retirement (TTR) pension to replace some or all of their lost income.

While the reduction in the benefit of the salary sacrifice TTR strategy since 1 July 2017 is well understood, it is important to appreciate that this has been due to the combined impact of both: 

  • the removal of the tax-free status of earnings on assets supporting TTR income streams, and
  • the reduction of the concessional cap for members over age 50 from $35,000 to $25,000.

Therefore, the ability of eligible members to use the catch-up concessional contribution rules to salary sacrifice unused cap amounts that have accrued over the previous five years (from 1 July 2018) could see eligible members get an increased benefit from implementing the strategy.

For example, a 60-year-old member on a $100,000 salary with a total super balance of $450,000 on 30 June 2021 would likely accumulate approximately $633,169 in super by age 65, assuming they just continued to receive employer SG contributions over that period.

Alternatively, if they entered into a standard TTR strategy and salary sacrificed up to the standard concessional cap each year and commenced a TTR pension to replace their lost income, they would instead have total super savings of $651,817 by age 65.

However, if the member had $50,000 of unused concessional cap from the previous three years, they could salary sacrifice up $67,500 in the first year to have total concessional contributions of $77,500. In this case, the member would then have an income shortfall of $44,450, which they could replace by commencing a TTR income stream with their super savings of $450,000. After year one, the member would need to reduce their salary sacrifice arrangement to align with the standard concessional cap and roll part of the TTR pension back to accumulation phase to reduce the pension payments. However, by doing so, the member would have total super savings of $662,781 by age 65. 

The outcomes are summarised here:

Strategy 1 – employer SG contributions only

Total super balance: $633,169

Strategy 2 – salary sacrifice up to standard concessional cap to age 65 with TTR pension payments to replace lost income

Total super balance: $651,817

Benefit over strategy 1: $18,648

Strategy 3 – salary sacrifice up to effective concessional cap in year 1 then up to standard concessional cap to age 65 with TTR pension payments to replace lost income

Total super balance: $662,781

Benefit over strategy 1: $29,612

Therefore, the TTR salary sacrifice strategy could be used to allow members to fully utilise any unused cap amounts that accrued in the previous five years to maximise their final retirement balance.

Conclusion

The catch-up concessional cap rules may provide eligible members with additional flexibility to top up their superannuation. However, the rules are complicated, and advisers providing advice in this area will need to exercise caution to ensure they capture all relevant amounts so they can correctly calculate a member’s unused concessional cap amounts for previous years, and therefore a member’s effective concessional cap. 

Craig Day, executive manager, Colonial First State

Source: SMSF Adviser

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