2020 - Page 4 of 5 - Practical Systems Super

SMSFs and rent relief due to COVID-19

Apr 14,2020 Comments Off

SMSFs that own property are facing the prospect of tenants falling behind in their rent payments and their other obligations under the lease due to the economic stress arising from COVID-19.

Australian states and territories will put a six-month moratorium on evictions for both residential and commercial tenants during the coronavirus pandemic, Prime Minister Scott Morrison announced on 29 March 2020. “Now there is a lot more work to be done here and my message to tenants, particularly commercial tenants and commercial landlords is a very straight forward one: we need you to sit down, talk to each other and work this out,” he said.

At the time of this article, the states and territories are still to provide detail on any arrangements that are proposed to assist landlords and tenants.

The ATO have provided a non-binding practical approach of broadly not applying resources to this issue for FY2020 and FY2021. However, this announcement, while positive, should not be relied on given the considerable downside risks.

From a legal perspective, if these matters are not carefully managed and documented, SMSFs and their trustees/directors could potentially face the risk of significant penalties under the Superannuation Industry (Supervision) Act 1993 (Cth) (‘SISA’) and the Superannuation Industry (Supervision) Regulations 1994 (Cth) (‘SISR’).

This article examines the position of an SMSF leasing business real property to an arm’s length tenant and to a related party tenant and provides recommendations for those that wish to ensure they minimise downside risk and can position themselves with sound legal backing.

SMSF and arm’s length tenants

If the tenant has no direct or indirect relationship with the SMSF trustee (who is the landlord), then the SMSF trustee may be in a position to grant rent relief without contravening the SISA. Under this scenario, the parties probably would be dealing at arm’s length and, as outlined below, there may be various factors supporting a rent reduction in whole or in part as being in the best interests of fund members. For example, the following reasons could support rent relief:

The tenant may have a better chance of successfully trading out of its current predicament; especially as many other landlords are being requested to grant relief due to the economic stress arising from COVID-19.
The tenant may also be in a position to continue to cover holding costs such as council rates, land tax, regular maintenance of equipment and insurance subject to any applicable law (eg, the Retail Leases Act 2003 (Vic) may preclude a landlord from recovering land tax). Note that a property that has been vacant for some time may not be covered by insurance and having a tenant occupy premises, by itself, can be a significant advantage to a landlord who’s otherwise at risk without insurance.
There may be further risks of having a vacant property such as break-ins and fires and other damage arising while a property remains vacant and not maintained.
There may also be little prospect of obtaining another tenant in the near future until the economy recovers after COVID-19 which some predict may take years.

The states and territories arrangements may provide some detail on what changes, if any, are required to be made to a lease agreement as the states and territories have the power to override any lease agreement with a direction or order when a state of emergency is declared. Subject to further developments, a lawyer should be consulted in relation to the terms and conditions in each lease agreement as some may include a ‘force majeure’ clause that allows a party to suspend or terminate the performance of its obligations if certain events occur such as an act of god. Note that since a lease confers a form proprietary interest in relation to the land, the usual contractual law rules such as ‘frustration’ of a contract may not necessarily apply. This area of law is being well researched and commented on by many property law experts.

SMSF and related party tenants

If the tenant is a related party of the SMSF trustee, it is very easy to contravene the SISA provisions and extreme care is required when handling these situations.

Where an SMSF wants to grant any concession under a lease to a related party tenant, they should, after taking appropriate accounting and legal advice, be careful to follow the appropriate steps and gather relevant evidence.

Some of the key issues that an SMSF dealing with a related party tenant will need to deal with include:

The sole purpose test –– s 62 of SISA. Is the SMSF trustee merely reacting to assist a related party rather than acting in accordance with what an arm’s length landlord would do? As noted above, an arm’s length landlord may decide to grant a concession to an unrelated tenant where that is in the landlord’s best interests.
The in-house asset test –– pt 8 of SISA. Non-payment of rent is likely to give rise to a loan by the SMSF to the related party and if that loan exceeds 5%, then an in-house asset contravention may arise. Note also that the terms of the lease may apply a penalty interest rate to the amount owed.
The prohibition against lending or providing financial assistance to a member or relative –– s 65 of SISA. If the SMSF is leasing to a member or relative of an SMSF, then there is a potential contravention of s 65 if the arrangement is not on arm’s length commercial terms.
The arm’s length test –– s 109 of SISA. Broadly, all investments and transactions involving an SMSF must be made and maintained –– on an ongoing basis –– on an arm’s length terms.

As you can appreciate from the above, an SMSF trustee will need to demonstrate that granting any concession is consistent with what arm’s length parties would agree to do and is in the best interests of the fund and its members.

They should also examine all available options and obtain advice from an experienced real estate agent with regard to the prevailing market conditions for that particular lease in that location and determine whether another tenant can be obtained and when, etc.

Additionally, the SMSF trustee should gather any evidence that supports the course of action proposed to be taken, and make sure to consider other alternatives assuming the tenant was an arm’s length tenant (rather than a related party tenant) in those particular circumstances.

A detailed review of the lease documentation should be undertaken as soon as practicable and advice taken on what variations may be needed to be made to the lease to reflect any concession that may be granted. Naturally, any variation to the lease agreement should be prepared by an experienced and qualified lawyer.

Note that even though the SMSF trustee may gather evidence that the outcome of the concession granted to a related party tenant under the lease reflects arm’s length terms, that may not necessarily protect them from contraventions of the SISA occurring if, for instance, there is a loan or financial assistance that invokes ss 65 or 109 of SISA.

ATO practical approach

The ATO’s website (at QC 61775) on 27 March 2020 was updated to state under the heading ‘Temporarily reducing rent’:

Question: My SMSF owns real property and wants to give my tenant – who is a related party – a reduction in rent because of the financial impacts of the COVID-19. Charging a related party a price that is less than market value is usually a contravention. Given the impacts of the COVID-19, will the ATO take action if I do this?

Answer: Some landlords are giving their tenants a reduction in or waiver of rent because of the financial impacts of the COVID-19 and we understand that you may wish to do so as well. Our compliance approach for the 2019–20 and 2020–21 financial years is that we will not take action where an SMSF gives a tenant – who is also a related party – a temporary rent reduction during this period.

Broadly, the ATO will not actively seek out cases where an SMSF gives a related party tenant a temporary rent reduction during the remainder of FY2020 or FY2021. However, the usual position for such practical approaches previously issued by the ATO is that if the ATO do come across contraventions from other sources, eg, via its usual data detections, reviews or auditor contravention reports (‘ACR’), the ATO will usually apply the legislation in the normal manner. While the ATO should be congratulated on the practical approach reflected above, SMSF trustees should not rely on this non-binding guidance given the substantial downside consequences, especially given these situations may be legitimately resolved with appropriate action as outlined below.

We do understand however that some SMSF trustees and/or businesses may not have the time or resources to obtain proper advice with regard to related party tenants, and may choose to simply rely on the ATO practical approach at their own risk. However, given the consequences, landlords should take every measure available to them to place themselves in as sound position as possible to minimise future risk.

Furthermore, the ATO website does not provide any express relief for an SMSF that owns property via an interposed unit trust, such as a non-geared unit trust (‘NGUT’). Once a contravention of one of the criteria relating to a NGUT is triggered under reg 13.22D of SISR, the trust is ‘forever’ tainted and the SMSF must dispose of its units in that unit trust to comply with the SISR. In particular, if the lease is not legally enforceable or if rent owing by a related party tenant accrues and constitutes a loan under the lease, the unit trust will cease to comply with the criteria in div 13.3A of SISR.

SMSFs with LRBAs –– further implications

If an SMSF has borrowed money under a limited recourse borrowing arrangement (‘LRBA’) to finance the acquisition of a property (whether residential or business real property) a range of other implications may arise including:

Similar issues to the potential SISA contraventions raised above also may apply if a related party lender does not act at arm’s length in relation to collecting all moneys owing under the LRBA as an arm’s length lender would apply to a third-party lender. However, a related party lender would typically not consider taking any such action against the SMSF trustee given they are related. Again, appropriate arm’s length evidence must be gathered and accounting and legal advice obtained to position against the significant penalties that may otherwise be applied.
If there is a related party lender, unless the ‘safe harbour’ terms and conditions of the borrowing are consistent with the ATO’s criteria in PCG 2016/5, that are continuously complied with (eg, regular monthly principal and interest repayments), the ATO have advised they will typically consider applying non-arm’s length income (‘NALI’). The following is a helpful extract from this PCG:

The trustees will need to be able to otherwise demonstrate that the arrangement was entered into and maintained on terms consistent with an arm’s length dealing. One example of how a trustee may demonstrate this is by maintaining evidence that shows their particular arrangement is established and maintained on terms that replicate the terms of a commercial loan that is available in the same circumstances.

Indeed, if the tenant reduces or stops paying rent, the SMSF’s ability to make repayments under the LRBA can easily fall into arrears and into default (with the default interest rate –– typically at least 2% higher than normal) under the loan agreement giving rise to a range of further ramifications. If the related party lender provides any relief to the SMSF trustee that is not benchmarked to arm’s length terms (that can be justified in these difficult times), based on recent ATO materials (including LCR 2019/D3) the ATO position is that NALI may then apply to any net income and net capital gain, if any, derived from that property for the entire future period of ownership.

We would be pleased to advise and assist to minimise the potential future risk of NALI being applied.

Possible consequences of contravening SISA

Despite the ATO’s non-binding practical approach outlined above, a range of other contraventions may also occur (or may occur in the near future) in these difficult and stressful economic times if, for example, money is withdrawn without a valid condition of release or existing SMSF assets are used as security for a borrowing by a related party. When added to non-compliance by an SMSF trustee or ‘connected’ unit trust renting property to a related party tenant (eg, a NGUT), then SMSF trustees may be widely exposed to a range of penalties and costly disputation.

There are a range of potential penalties that the ATO may apply unless these matters are appropriately and properly managed, including:

In extreme cases, the fund could be rendered non-complying with 45% tax imposed on the value of its opening account balance in the year it is rendered non-complying.
Contravention of a civil penalty such as s 62, s 65, pt 8 and s 109 can result in a monetary penalty of a maximum amount of $504,000 (ie, 2,400 penalty units x $210).
An administrative penalty, typically of $12,600 per contravention for s 65 and pt 8 and the ATO’s stated policy is to ‘automatically’ impose an administrative penalty for each and every occasion. An SMSF trustee can seek remission of any penalty; the success of which depends on whether the ATO considers any remission is appropriate in the circumstances.

This type of situation highlights the need for making sure SMSF trustees act in compliance with the law and do not make rash or hasty decisions that they may later regret, especially if the actions were designed to assist a related party without any evidence documenting that the actions were consistent with an arm’s length dealing and/or without following and taking the appropriate steps to implement a lease variation.

This is where a written opinion from an SMSF lawyer, which is subject to legal professional privilege, outlining the law in view of the particular facts is a prudent first step to take in this journey. A written opinion that is supported with the right evidence and that is implemented correctly can save on costs that may otherwise arise from needing to respond to the likely auditor or ATO queries and any ACR that may be lodged, which may give rise to unnecessary inquiries by the ATO.

Sole purpose SMSF corporate trustee

If an SMSF trustee grants a concession to a related party tenant, the administrative penalties on their own can, in these types of circumstances, give rise to hundreds of thousands of dollars as the ATO might argue that each monthly payment of rent not made is subject to an additional penalty.

If the SMSF has say two individual trustees, then the administrative penalties will be double the amount that would be imposed on two directors of an SMSF corporate trustee as each individual trustee is subject to the same amount of administrative penalties. For example, if the SMSF has two members who are individual trustees, then the typical $12,600 for a single administrative penalty is double, ie, $25,200. If the SMSF had a corporate trustee with the two members as directors of the corporate trustee, the administrative penalty is $12,600.

Naturally, we strongly recommend that each SMSF has a sole purpose SMSF corporate trustee to minimise legal risk given the current economic conditions. Many SMSFs still have individual trustees who remain personally liable for a fund’s liabilities and the administrative penalty system is a big incentive to move to a corporate trustee in these testing times.

Our recommendation that an SMSF have a sole purpose corporate trustee is also very important in these difficult economic times given that many ‘trading’ companies that also double up as an SMSF trustee, may be facing insolvency with the appointment of an administrator, liquidator, receiver or some other form of external management which could soon ‘take over’ control of that company and make the management the SMSF assets very difficult until that company’s external controller is convinced that the SMSF assets are not capable of being applied towards the creditors. This ‘fight’ alone may prove difficult and costly.

Conclusions

Naturally, the above matters should be taken very seriously and it is important that SMSF trustees obtain sound expert accounting, financial, valuation, legal and other advice to prevent hasty actions that are designed to preserve a related party tenant’s cash flow to assist their business from backfiring.

Written by Daniel Butler and Bryce Figot, DBA Lawyers

COVID-19 and early access to super

Apr 8,2020 Comments Off

People financially affected by the coronavirus pandemic can access some of their super, but what will it cost long-term?

Who is eligible to access super early?

In response to the disruption to the job market caused by COVID-19, the government has eased the rules around early access to super.

Several new groups of people are now eligible to access their super early:

unemployed people
those eligible to receive JobSeeker payment, Youth Allowance for job seekers, Parenting Payment, Special Benefit or Farm Household Allowance
those who’ve been made redundant or had their working hours reduced by 20%, or sole traders whose business has been suspended or faced a reduction of 20% or more since 1 January 2020.

However, just because you can access your superannuation doesn’t mean you should.

We’ll help you weigh the pros and cons before deciding to dip into the funds meant to provide for your future and long-term financial security.

What are the risks of accessing your super early?

Taking out money before retirement means losing the benefit of compound interest over a number of years. Depending on how old you are, withdrawing money now could see you miss out on more than double that amount by the time you retire.

With this in mind, Super Consumers Australia director Xavier O’Halloran says you should weigh all of your options before dipping into your retirement savings.

“There are a number of financial assistance options to help people through these tough times. Super will be the right option for some, but you should be looking at what else is available and possible cuts to discretionary spending before raiding the cookie jar.”

Although making a withdrawal now and/or next year will eat into your retirement savings, don’t forget that you may also be eligible to receive a pension.

The Moneysmart retirement calculator lets you enter in your details (including any breaks from the workforce) to see how much you would get in retirement from your super and/or the pension.

How will early access affect my savings?

An important point to consider is that the amount you withdraw from your super will no longer be invested. This means you may miss any eventual recovery in the market.

Super Consumers Australia modelling found that, for a 30-year-old, the impact of withdrawing $20,000 would be $49,823 by retirement age.

People with lower super balances will be more impacted by early withdrawal of the allowable amount, as it will be a larger proportion of their savings.

Super Consumers Australia has previously highlighted that women generally retire with lower super balances. The median superannuation balances for people approaching retirement age (60–64 years) was 26% higher for men ($154,453) compared to women ($122,848). Women also have greater needs in retirement due to a longer life expectancy.

Taking your super out early may mean you miss out on the market recovery

Experts like to say that ‘time in the market’ beats ‘timing the market’. This means that simply staying invested in the share market over the long term has historically produced higher returns than attempting to move in and out of the market to capitalise on fluctuations.

Analysis from finance publisher Firstlinks illustrates this point. It found that if you were invested in the S&P 500 (a US stock market index) between the start of 1999 and the end of 2018, the return was 5.6%.

But if you weren’t invested for the best 10 days during that 20-year stretch, your returns fall substantially – to 2%.

And if you missed the best 20 days, your returns would actually be negative.

This shows that missing out on being invested when the market surges, which can happen without notice over a very short period of time, can be very costly indeed.

Trying to ‘time’ the market or pick the right point to put your money back in is extremely difficult. Most experts can’t consistently beat the market with timing or investment picking.

In the event that you do access your super early, you can make extra contributions to your super once back in secure work, in order to catch up. But you may not be in a position to start making those extra contributions before the recovery begins.

Many people are finding themselves in a financial situation they have never experienced before; if considering early access to your superannuation it is important to get independent advice about all of your options.

Source: Super Consumers Australia & CHOICE

How is your SMSF performing?

Apr 2,2020 Comments Off

With over 600,000 funds and an average balance of around $1.2 Million, Self-Managed Superannuation Funds (SMSFs) make up for a significant portion of total superannuation assets in Australia.

One of the main reasons that SMSFs are a popular choice for Australians in their retirement planning, is that individuals feel they have control over their retirement savings. However, with this decision making power comes responsibility. Some SMSF trustees manage all of the fund investments while others use an investment adviser to provide this service. Many also use a combination of both approaches – for example, they may attend to direct property themselves and use an investment adviser to look after the equities portion of the portfolio.

While some Trustees would have a very good knowledge of the investment returns and costs of their fund, many are left to interpret their statutory annual reports for this. These reports are often directed at compliance experts and it can be difficult for Trustees to fully understand how their investments are tracking relative to other indicators such as industry funds or investment benchmarks.

Calculating your SMSF performance

The idea of analysing the statutory report and extracting the performance information may seem daunting but can be quite simple. It’s just a matter of applying a formula to the relevant set of numbers.

Here’s how a Trustee could calculate the investment performance by using the Fund’s annual Operating Statement and Balance Sheet reports.

From the Operating Statement:

A. Calculate Gross investment income – be sure to leave out member contributions and any amounts rolled into the fund

B. Calculate investment related expenses – leave out member withdrawals, life insurance premiums and general administration expenses such as audit & accountancy fees

C. Net investment return (before tax) = A – B

D. Calculate the income tax expense (or refund) that relates to the net investment income – exclude the tax (15%) applicable to any concessional contributions

E. Investment return after tax = C – D

From the Balance Sheet:

F. Calculate average assets for the year – this will usually be the opening and closing net assets divided by 2 but a more sophisticated approach would be to use say a monthly weighted average of net assets to recognize significantly contributions/withdrawals during the year

The after-tax return % = E divided by F x 100

The practical application of this relatively simple process can be illustrated in the following example

Applying the formula to the above example, the components are:

A (investment income) = $20,000 + $15,000 +$30,000 = $65,000

B (investment expenses) = $10,000

C (net investment return) = $65,000 – $10,000 = $55,000

D (tax related to investment return) = $4,225 credit ($7,500 relates to concessional contributions less $4,225 = $3,275)

E (investment return after tax) = $55,000 + $4,225 (tax credit) = $59,225

F (average assets) = ($1,186,725 + $990,000) / 2 = $1,088,363

E (investment return after tax) = ($59,225 / $1,088,363) x 100 = 5.44%

Another important ratio that trustees may be interested in, is administration expenses as a percentage of average assets. Using the above sample data this would be calculated as:

Administration expenses = $2,500 divided by average assets $1,088,363 x 100 = 23 %

Having calculated these ratios, the obvious question is; “how do these compare to other superannuation funds or alternatives?”. There are several “benchmarks” that a fund could choose to look at for comparison purposes. The Australian Taxation Office does provide some data, but this is limited and tends to be quite dated by the time it is released.

Some other possible benchmarks might include:

All Ordinaries Accumulation Index: this provides the return from a theoretical basket of investments representing the All Ordinaries Index on the Australian Share Market including growth in value and dividends (grossed up by franking credits). It is, therefore, a useful benchmark for portfolios of listed Australian Shares. As an example, this index rose by 11.03% for the year ended 30^th June 2019.
Indices relating to specific investment sectors such as property, fixed interest, etc.
Returns from the large Industry Funds: these are published and available for various member-selected investment mix options. As an example, the return for the “balanced fund” option of Australian Super for the year ended 30^th June 2019 was 8.67%
Returns compiled by investment research firms such as Chant West or MSCI
Returns achieved by various index funds and Exchange Traded Funds

When comparing SMSF returns and costs to benchmarks and other alternatives it is important to take account of unique and particular issues that may affect the data in the different sectors. Some examples of these issues include:

SMSFs would rarely revalue direct property investments every year
An SMSF fully in pension mode with a significant share portfolio paying franked dividends would be expected to have a higher after-tax return than if the same fund was in accumulated phase.
Some administration cost of industry or retail funds may be “hidden” in net investment returns.

To get a quick comparison of the administration cost structure for your SMSF, complete the form below and a Practical Systems Super representative will be in touch.

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.

BOB LOCKE – CHARTERED ACCOUNTANT & SMSF SPECIALIST

Mr 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.

Minimum super withdrawal reduced by 50% for retirement phase pensions

Mar 24,2020 Comments Off

IMPORTANT: Minimum super withdrawal reduced by 50% for retirement phase pensions

In response to the COVID-19 pandemic, the Federal Government recently announced that the minimum superannuation drawdown rate would be halved for the 2019/20 and 2020/21 financial years. This measure is designed to benefit retirees by reducing the potential need to sell investment assets into a depressed market to fund their minimum drawdown requirements. See the following table for details:

Age	Default minimum drawdown rates (%)	Reduced rates by 50 per cent for the 2019-20 and 2020-21 income years (%)
Under 65	4	2
65-74	5	2.5
75-79	6	3
80-84	7	3.5
85-89	9	4.5
90-94	11	5.5
95 or more	14	7

Please note that if you have already drawn more than your reduced minimum for this financial year, you are unable to return the excess amount.

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.

Transition to retirement pensions – are they still effective?

Mar 3,2020 Comments Off

As people age, the everyday grind of full-time work can become increasingly tiresome. At the same time, many still enjoy the interest and challenges of the workplace. One way to help with this “work-life balance” at this stage of life is a Transition to Retirement (TTR) strategy.

Transition to retirement strategy explained

If you have reached your preservation age, (between age 55 and age 60 depending on your date of birth) this strategy allows you to reduce working hours and at the same time, commence a special type of pension withdrawal arrangement from your superannuation fund.

This means your take-home pay does not have to be reduced (and potentially increased) but allows more time away from work to experience other aspects of life whilst you’re still active and healthy.

Sometimes these arrangements are coupled with a “re-contribution strategy” where concessional contributions into the fund are maximised using a combination of pension withdrawals and tax savings to cover any shortfall in disposable income.

The table below outlines the preservation age applying to an individual:

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

Transition to retirement strategy options

Cut your hours, not income

This strategy focuses on using income from your transition to retirement pension so you can reduce your work hours, enjoy the same level of after-tax income and still maintain your lifestyle. The downside? Your super savings may decrease earlier than expected.

2. Ramp up your super

Choosing this option means you can continue to work full time, make additional super contributions via salary sacrifice and draw an income from your TTR pension to help fund your living expenses.

Remember that your salary sacrifice super contributions are taxed at 15% provided your concessional contributions fall within the applicable super contribution caps, while an additional 15% tax may be applicable for higher-income earners.

While still working full time, the 15% tax rate may potentially be lower than your marginal tax rate had you received this money as salary – this can help to reduce your tax bill and give your retirement savings a boost.

In a nutshell, this transition to retirement strategy allows you to contribute more to super than you draw as an income stream, while keeping your after-tax income the same.

Transition to retirement strategy – is it still relevant?

In the past, one of the significant advantages of a so-called “Transition to Retirement Income Stream” (TRIS) was that the income and capital gains derived in the superannuation fund from assets supporting the TRIS were exempt from tax in the fund.

This concession was removed with the raft of changes that applied to all superannuation funds from 1^st July 2017. Note that the receipt of a TRIS by a member over the age of 59 is exempt from income tax and partially exempt for members between preservation age and 59. This aspect has not changed.

A question often asked is, “are transition to retirement strategies still relevant?”. The answer is clearly yes but it also depends on individual circumstances!

The following table summarises Peter’s position regarding annual net salary and annual net increase in his superannuation in three different scenarios.

(a) Current position working full time

(b) Reducing to 3 days a week and not altering existing superannuation arrangements

(c) Reducing to 3 days a week, paying additional concessional super contributions (to max $25,000) and using a transition to retirement strategy to fund these changes and ensure net disposable income remains unchanged..

We can see in (a) that Peter’s current disposable income is $97,903 pa and his annual super balance increase would be expected to be $53,805 – an overall total of $151,708. If he reduces to 3 days per week as in scenario (b), his disposable income reduces by around 35% to $64,553 and his combined total reduces by $37,822 and this would be the effective “cost” (in the first year) of reducing work hours from full time to 3 days per week. On the other hand, scenario (c) illustrates that if Peter implemented a TRIS and withdrew $44,498 from his superannuation to cover the reduction in income and maximize concessional contributions, he could maintain his current disposable income and reduce the overall “cost” from $37,822 to $34,553.

The above example illustrates how a Transition to Retirement Strategy can be used to maintain disposable income where work hours are significantly reduced. Other strategies can revolve around objectives such as paying down debt as a member is approaching retirement, equalizing superannuation balances between partners, reducing the relative taxable component of the total superannuation balance and others.

The clear takeout from the above is that although the after-tax effectiveness of a Transition to Retirement Strategy has been reduced by the changes applying from 1/7/2017, there are still potential financial benefits. These benefits are of course, in addition to other non-financial benefits that can flow from such strategies.

Things to consider

Keep in mind there are some technical issues around Transition to Retirement Strategies that should be fully considered in the light of the personal circumstances of the individual including:

Member age: Not everyone can access a TTR pension – it is only accessible when you reach preservation age, which for most is the age of 60.
Withdrawal cap: The amount that you withdraw each year is capped at 10% of the balance of the pension. This means you may need to top up this account through contributions in the years prior so that you have smooth cash flow.
Total superannuation balance: Accessing a TTR pension can mean that you exhaust your retirement savings earlier. Your savings may need to last for up to 30 years and withdrawing these funds early may have a significant impact in later years. Plan carefully and calculate the funds available to you today and how this may impact your retirement savings.
Income level: A TTR pension is not a ‘set and forget’ strategy. An annual review of your plan should be done so that income streams and contributions can be fine-tuned to fit your situation.

Lastly, not all super funds offer TTR pensions, so speak to an adviser and seek appropriate personal advice before making any decisions.

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.

SMSFs continuing to diversify

Feb 21,2020 Comments Off

It’s time to call a spade a shovel.

When the two latest controversies surrounding Self-Managed Super Funds (SMSFs) – single-asset funds (typically property) and the release of an Australian Securities and Investments Commission fact sheet with a focus on risks and red flags – got a public airing, it gave critics the ammunition they needed to disparage this popular form of superannuation.

However, what was quietly overlooked was the release of the 2019 Vanguard/Investment Trends SMSF Report that painted a far different – and healthier – picture of SMSFs.

Although the report showed the pace of SMSF establishments was slowing, there remains keen interest in SMSFs among large super fund members.

More significantly, those setting up SMSFs are doing so at a younger age – a sign that people are taking their retirements more seriously in an era where many will live well into their 90s. It remains essential that they receive specialist SMSF advice and that an SMSF is suitable for them.

The SMSF sector represented about $747 billion in retirement savings as at March, 2019, compared with $1.8 trillion invested with APRA-regulated super funds.

The total number of SMSFs grew to almost 600,000, with an average balance of $1.2 million.

Perhaps the most positive sign drawn from the report was that investing patterns have changed.

Considering the volatile geo-political climate and strong concerns about the health of the Australian economy, it’s not surprising that more than one in three investors adopted a more defensive strategy.

Holdings of cash – even at today’s miserly interest rates – were the major beneficiary.

However, there was no rush to exit growth assets. After peaking in 2013 at 45 per cent, investment in direct shares – mostly Australian equities – has slowly declined.

Direct equities investments in 2019 stood at about 35 per cent.

Significantly, too, and despite recent scaremongering about the dangers of SMSFs piling into direct property, investors’ allocations to this asset class has risen from just 11 per cent in 2017 to 13 per cent in 2019. In 2008, it stood as high as 22 per cent. So much for the argument of SMSFs overheating the residential property market.

The other significant trend to emerge in the report is a growing appetite for overseas assets, the lack thereof in the past often being a point of criticism of SMSFs.

It’s still not excessive, at 11 per cent, but the evidence shows they are set to grow, with the report estimating they will hit 16 per cent of all SMSF assets by 2020.

That SMSFs have been wary about putting their toes in overseas markets is hardly surprising. Their liking for Australian equities, cash, term deposits and property reflects a preference for assets they understand.

However, the diversification message is clearly being heard, and SMSFs are seeking exposure via a variety of investment vehicles, with Exchange Traded Funds (ETFs), managed funds and Australian shares with overseas revenue heading the list. It’s a mix that reflects a more conservative mindset.

In the aftermath of the Global Financial Crisis, some in the industry believed SMSFs would be a major casualty, with volatile times requiring specialist input that only large APRA-regulated super funds with professional investment managers could deliver.

The reality is quite the opposite. SMSFs, often with advice from specialists, have flourished.

Written by John Maroney, CEO, SMSF Association

The do’s and don’ts of property investing for SMSFs

Feb 21,2020 Comments Off

Self Managed Super Fund trustees are no different to many other Australians – they relish the opportunity to invest in direct property.

Australian Taxation Office figures show property comprises about 13 per cent of SMSF assets of about $750 billion – third on the list of investments behind Australian equities and cash and fixed deposits.

Investment is split between commercial and residential direct property, with the former comprising about 9 per cent and the latter 4 per cent.

The heavier weighting in commercial property in SMSF portfolios should not be a surprise.

For many small-to-medium-size businesses (SMEs), the opportunity to transfer their business premises into their SMSF and then lease them back at the market rate has two attractions – the fund has an asset that, in all likelihood, will appreciate in value, and it removes any risk from the “landlord-tenant” relationship.

For other SMSFs owning direct property, the benefits are rental income and a lower capital gains tax rate when the property is sold.

The rental income adds to a super balance and it comes with an added bonus of incurring only a 15 per cent tax rate (or zero tax for members in the pension phase). And, like any rental property, expenses are tax-deductible.

The cream on the cake comes if a property is held for more than 12 months before sale, with just two-thirds of any capital gain taxed at 15 per cent (nil tax for those in the pension phase).

However, SMSF trustees must be fully aware of some specific rules about owning and renting property in their fund, with the ATO taking a dim view of those who breach them.

In particular, there are restrictions on how you or a related party can buy and use the property. For example, the law prohibits an SMSF acquiring residential property from any related party to the fund (such as fund members or their relatives).

Investment issues

It is important to note that commercial property is exempt from this ruling, provided the ATO is satisfied it falls within the definition of business real property. A commercial office, factory or productive farm land are prime examples.

It is not just about the regulations; there are investment issues involved.

Acquiring a property can result in an SMSF’s investment portfolio lacking diversification.

Although there are no golden rules about portfolio diversification, both the Australian Securities and Investments Commission and the ATO have raised concerns about SMSFs having the bulk of their investments in a single asset, notably retail housing.

The regulators’ concerns are magnified if an SMSF has used a limited-recourse borrowing arrangement (LRBA) to acquire the property.

Trustees also have to ensure the acquisition of direct property falls within the guidelines outlined in the SMSF’s investment strategy – a legal document. It will detail how much exposure the fund should have to the property market, the form that exposure should take, and whether it is appropriate in the circumstances for the fund’s members.

The investment strategy document is not something that can be allowed to gather dust at the bottom of a drawer.

All investments must fall within the guidelines devised by trustees and set out in the strategy.

One of the duties of an SMSF auditor is to ensure there is an investment strategy in place and the trustees adhere to it.

One final cautionary note relates to property’s lack of liquidity. Unlike shares, selling a property takes time so if there is an unforeseen circumstance, such as the early death of a member or a divorce, it can cause complications.

None of these warning signs is reason not to buy direct property – whether it be commercial or residential. The long-term returns can justify the investment.

However, seek specialist advice before acquiring this asset class, especially if it involves debt (LRBA) or will comprise the bulk of a portfolio.

Written by John Maroney, CEO, SMSF Association

ATO investigating errors in SMS alert service

Feb 14,2020 Comments Off

The ATO is investigating system errors in its newly launched text message alert service for SMSF trustees which were mistakenly triggering alerts for trustees upon lodgement of their 2019 annual return.

The errors, which have been flagged by a number of SMSF industry professionals this week, are being investigated “as a priority” by the ATO, with a fix to be deployed shortly, a spokesperson for the regulator told SMSF Adviser.

“This matter came to our attention late yesterday and we took steps to stop new SMSF alerts going out and identified the reason for the incorrect alerts,” the spokesperson said.

“The SMS alert is intended to advise SMSF fund trustees [when] we believe there has been changes to some client account details. It should be noted that there is no impact on SMSF account balances or fund details.”

According to reports from SMSF practitioners, the errors appeared to stem from lodgement of SMSF annual returns, which triggered a change in the SMSF’s electronic service address (ESA) that then generated a mistaken alert to the affected trustees.

“The ATO is now issuing alerts directly to trustees via email and/or text messages when any changes are made within their SMSF. Unfortunately, one of those communications may involve an error in the ATO’s own database concerning a change of ESA,” SMSF Alliance principal David Busoli said in an email to clients on Wednesday.

“If your clients receive such a notification, you should first check to see if it is correct as, in the short term, it is likely that it’s not.”

Vincents director of SMSF advisory Brett Griffiths also identified the issue, which was generating mistaken alerts for SMSF clients whose annual returns were lodged through Class, in a LinkedIn post this week.

“Trustees of SMSFs administered on Class may start to receive notices, thereby adding extra time constraints on tax agents answering questions of trustees due to an ATO error,” Mr Griffiths said.

The ATO said upon discovering the issue, it had stopped the SMS alert service incorrectly triggering to impacted funds.

“We will provide an update as soon as the fix has been deployed. SMSF trustees can be assured that any alerts received are being correctly triggered,” the ATO spokesperson said.

Source: SMSF Adviser

ATO cuts six-member fund work

Jan 29,2020 Comments Off

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

Jan 29,2020 Comments Off

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.