2022 - Page 3 of 3 - Practical Systems Super

Transferring Super to your spouse or partner

Feb 8,2022 Comments Off

There are a few ways to transfer super to your spouse or partner, but you need to understand the correct way to do so and the risks of doing so. Furthermore, knowing the benefits of doing so can help you determine whether you should be doing it all.

Transferring super to your husband, wife or partner is possible, but not as simple as transferring it from one account to another. Specific rules need to be followed so that an effective transfer can take place.

There are three ways of transferring your superannuation to your spouse:

Contribution Splitting
Spouse Contributions
Withdrawal & Recontribution

Your ability to implement either of these will depend on your age, employment status, super balances and type of contributions.

What is Contribution Splitting and How Does it Work?

Contribution splitting allows you to split up to 85% of the concessional contributions made into your super account over to your spouse’s superannuation account.

A concessional contribution includes employer SG contributions, salary sacrifice contributions and personal concessional contributions.

A spouse under age 67 is permitted to receive spouse split contributions. A spouse aged between 67 and under 70 can only receive spouse contributions if they meet the superannuation work test.

Even though spouse split contributions end up in your spouse’s super account, they will not count towards your spouse’s contribution caps; the original contribution will simply count towards your concessional contribution cap.

Benefits of Spouse Splitting Contributions

Some benefits of spouse splitting include:

If the recipient spouse is older, they may be eligible to access their super earlier.
Spouse splitting contributions can help equalise super balances and/or help the contributing spouse remain under certain caps such as the $1.7M transfer balance cap, the $300,000 work test cap, or the $500,000 concessional carry-forward cap.

Disadvantages of Spouse Splitting Contributions

Some disadvantages of spouse splitting include:

If the recipient spouse is younger it may take longer before the contributions can be accessed.
Your spouse will become the beneficial owner of the split contributions, which may be difficult to recoup in the event of a marriage or relationship breakdown.

What Are Spouse Contributions and How Do They Work?

While spouse contributions are not a transfer of super from one spouse to another, they do provide benefits and are somewhat in the same realm of what we’re discussing, so I thought I would include them for completeness.

Spouse contributions are non-concessional contributions made from your personal bank account into your spouse’s superannuation account.

You can contribute as much as you like into your spouse’s super account up to their available non-concessional contribution cap for the year.

However, if you are making a spouse contribution purely for the benefit of receiving a spouse contribution tax offset, then the maximum you would contribute is $3,000 each year.

Benefits of Spouse Contributions

A spouse contribution provides the contributor with a tax offset of 18%, up to a maximum of $540. The maximum tax offset is available if the recipient spouse has an income below $37,000 for the year. A partial tax offset is available if the recipient spouse earns up to $40,000 for the year.

Disadvantages of Spouse Contributions

The only real disadvantage of a spouse contribution is that you will be contributing personal funds into superannuation, which will not be accessible until the recipient spouse is eligible to access their super.

What is Withdrawal & Recontribution and How Does it Work?

A withdrawal and recontribution strategy is only available if you are eligible to access your super. Furthermore, it is usually only beneficial if you are able to access your super tax free.

To perform a withdrawal and recontribution strategy with the intention of transferring money to your spouse’s super account, you could withdraw some or all of your super in the form of a lump sum or income stream, if eligible. Then, once the withdrawal has been received in your personal bank account, your spouse could contribute it into their super account as a concessional or non-concessional contribution.

Importantly, you want to be certain of any tax consequences that may be incurred in withdrawing your super. Also, you and your spouse will need to understand any limitations of them contributing into their account, such as contribution caps and age limits for superannuation contributions.

Benefits of a Withdrawal & Recontribution to Spouse’s Super

Some benefits of withdrawal and recontribution include:

Contributing to a younger spouse’s super account can equalise account balances, which can be beneficial for long-term retirement planning and protection against potential future changes in legislation targeting higher account balances.
Contributing to a younger spouse’s super account can reduce assessable income and assets for Centrelink purposes, if the older spouse is above Age Pension age and the younger spouse is not.
Withdrawing from your higher account balance to a spouse’s lower account balance can help you remain under certain caps such as the $1.7M transfer balance cap, the $300,000 work test cap, or the $500,000 concessional carry-forward cap.

Disadvantages of a Withdrawal & Recontribution

Some disadvantages of withdrawing and contributing into a spouse’s account include:

It may prolong the length of time before being able to access funds if the recipient spouse is younger.
It may cause assets and deemed income to be assessed sooner for Centrelink purposes if the recipient spouse is older.
Withdrawing large amounts and contributing them could have capital gains tax (CGT) implications, incur transaction costs and be impacted by time out of the market.
Your spouse will become the beneficial owner of the recontributed contributions, which may be difficult to recoup in the event of a marriage or relationship breakdown.

Can I Gift Super To My Spouse?

You are unable to gift your superannuation to your spouse. However, if you are eligible to access your super, you can withdraw some super into your personal bank account and then gift it to your spouse.

Written by Chris Strano
superguy.com.au

Common SMSF trustee mistakes that will trigger ATO action

Jan 28,2022 Comments Off

The Australian Taxation Office takes a dim view of non-compliance – penalties range from fines to freezing the fund’s assets.

While most self-managed super fund trustees don’t need to be reminded of the importance of complying with superannuation regulations, it’s worth looking at typical SMSF trustee contraventions and the penalties they attract.

The Australian Taxation Office takes a dim view of non-compliance: penalties range from an education directive to fines or, in more serious cases, to disqualification, imposition of civil or criminal penalties, the withdrawal of a fund’s compliance status, or freezing its assets.

No one pretends the regulatory system is simple. If it were, every inquiry into superannuation wouldn’t call for its overhaul to reduce complexity. But even with this degree of complexity, the latest annual ATO SMSF statistical overview to June 30, 2020 shows there were only about 2 per cent of SMSFs with reported breaches, a figure in line with the historical average.

Recurring areas of non-compliance

That said, given there are about 600,000 SMSFs, 2 per cent is still too high. The ATO overview highlights there are recurring areas of non-compliance where trustees – and their advisers – need to take greater care. Heading the list are breaches relating to in-house assets, separation of assets and loans or financial assistance to a member or relative.

A breach of the in-house asset rules commonly occurs when an SMSF invests in a related entity or leases an asset that is not a business premises to a related entity. Although an SMSF can hold in-house assets, the value of in-house assets cannot exceed 5 per cent of the market value of the fund’s total assets.

Breaches of the in-house asset rules and the rules around providing loans and financial assistance to members or relatives can result in an administrative penalty of up to 60 penalty units. Each penalty unit is worth $222 so the maximum administrative penalty that can be applied is $13,320 (note the value of a penalty unit is indexed over time).

That’s the strict letter of the law. But the ATO has the discretion to reduce a penalty depending wholly or partially on each case’s circumstances. Whether the regulator chooses to do so depends on several factors:

The compliance history of the trustee or director of a corporate trustee
Whether rectification has occurred, or the trustee is in the process of rectifying before being notified of a breach by the ATO

Whether a trustee made a voluntary disclosure before any ATO contact and

Whether there were circumstances beyond the trustee’s control that caused the contravention, affected their ability to comply with their regulatory obligations, or affected their capacity to rectify any contraventions.

For trustees who overstep the regulatory mark, it’s worth appreciating what the penalties could be. At the bottom end of the scale, the ATO can direct trustees to do an education course to improve their understanding of the regulatory obligations and reduce the risk of greater penalties in the future. Failure to comply with an education direction will incur an administrative penalty of five units.

Also at the lower end of the penalty scale are enforceable undertakings and rectification directions. With the former, trustees undertake to rectify a regulatory contravention. The ATO has the option to either accept or refuse this undertaking. It should include a commitment not to make the same mistake again, to outline the action being taken to rectify the problem and the timeframe in which it will be done.

The ATO requires trustees to take steps to rectify a contravention in a set time and then show proof of compliance.

With a rectification direction, the ATO requires trustees to take steps to rectify a contravention in a set time and then show proof of compliance. It also involves putting in place administrative arrangements to ensure there are no more similar contraventions. Failure to comply with an ATO direction can result in a trustee or director being disqualified or a fund’s complying status being removed, potentially resulting in a significant tax penalty.

Regarding administrative penalties, these cannot be paid or reimbursed from the assets of the fund, and directors of corporate trustees are jointly and severally liable. Individual trustees are each liable for the penalty and, as mentioned, the ATO does have the discretion to remit a penalty depending on a case’s circumstances.

Enforceable undertakings, rectification directions and administrative penalties comprise the bulk of the ATO’s compliance armoury. But it has other options. It can disqualify an individual from acting as a trustee or director of a corporate trustee if they contravene the SIS Act. In taking this action, the regulator considers the seriousness of the contravention, how often it has happened and how likely it is this behaviour will continue.

The ATO can also apply through the courts for civil or criminal penalties to be imposed where trustees have contravened provisions such as the sole purpose test, member loans, inhouse asset rules, arm’s-length rules for an investment and the promotion of illegal early release schemes. Other options are for the ATO to wind up an SMSF and roll over any remaining benefits to a fund regulated by the Australian Prudential Regulation Authority, to issue a notice of non-compliance (which can entail significant tax penalties) or freeze an SMSF’s assets.

Superannuation rules are complex and subject to constant change. To keep your SMSF on track, and avoid unwanted ATO attention, seek advice from a licensed professional who is an SMSF specialist.

Written by John Maroney, CEO, SMSF Association

What’s ahead for SMSF trustees in 2022

Jan 13,2022 Comments Off

An election year means super reforms could be scrapped with more changes on the cards if there is a change in government.

Election years are always fraught with potential superannuation changes, but in 2022 this looks set to be magnified by important super changes that were stalled in Parliament. There is still a possibility Parliament might pass the relevant bills early next year, but with few parliamentary sitting days before the election likely to be called, no one is holding their breath.

The sector was eagerly awaiting the passing of legislation – titled the Treasury Laws Amendment (Enhancing superannuation outcomes for Australians and helping Australian businesses invest) Bill 2021 – which, among other changes, provides greater flexibility for older Australians to contribute to superannuation.

Announced in the 2021 federal budget, these changes were set to start from July 1, 2022. They include removing the work test for non-concessional super contributions for those aged 67 to 74 (meaning they will no longer have to meet the work test when making non-concessional contributions) and, subject to meeting the eligibility requirements, extending the bring-forward non-concessional contribution rules for this same age group.

The government also wants to lower the age for downsizer contributions from 65 to 60 from July 1, 2022. For SMSF members nearing retirement, it will allow them to make a one-off, post-tax contribution of up to $300,000 per person (or $600,000 per couple) on the sale of a family home they have occupied continuously for a decade.

These reforms were not exclusive to the SMSF sector. But undoubtedly that is where they will have the biggest impact.

But for now, it’s all up in the air – and not only for these big reforms. There are some lesser known SMSF changes also announced in the 2021 budget that have not even been introduced into Parliament.

Included are the changes to the SMSF residency rules and a two-year amnesty for legacy pensions. The former will allow SMSF members to continue to contribute to their SMSF while temporarily overseas. Under the current rules, contributions are prohibited unless a complex active member test is satisfied.

The changes to legacy pensions are designed to simplify the retirement system by allowing super fund members in older complex pension products to move to more flexible, contemporary income streams.

No guarantees on timing

What compounds the uncertainty for SMSFs is that even if the legislation is introduced into Parliament before the election is called, it will lapse if it is not passed before the poll is called. It will then need to be re-introduced into the new Parliament or possibly scrapped if there is a change in government.

Even with a re-elected Coalition government there are no guarantees where these reforms will be in the legislative queue.

If Labor wins, changes in superannuation policy are almost inevitable. A tightening of the contribution caps and a lowering of the Division 293 income threshold for taxing super contributions might be on the cards if Labor’s previous super policy is anything to go by. The abolition of new limited recourse borrowing arrangements (LRBAs), now totalling $59 billion at June 30, 2021, is another possibility.

Irrespective of which party wins the election, there will be a new requirement for company directors, including all existing directors of an SMSF corporate trustee, to obtain a director ID by November 30, 2022, and new compulsory electronic data transmission rules to contend with for SMSFs rolling over funds to and from other funds.

That’s all on the regulatory front. It’s anyone’s guess what will happen with investment markets in 2022, with each new COVID-19 variant having the potential to unnerve markets. Although equity markets, in particular, recovered strongly in 2020 after the initial crash, past performance is never any guarantee of what will happen tomorrow. Volatility looks set to be the name of the game in 2022.

With so much uncertainty on the horizon, it has never been more important to seek advice from an SMSF specialist adviser. Whether you are contemplating setting up an SMSF, or you already have a DIY fund, an SMSF specialist adviser who is licensed to provide professional advice can provide valuable and timely information about the changes and their potential impact on your retirement planning strategies.

Amid all this uncertainty, one thing looks certain: the SMSF sector will continue growing strongly, with the number of funds expected to surge past 600,000 for the first time and the number of SMSF investors expected to surpass 1.13 million.

SMSFs are not an appropriate or preferred retirement savings vehicle for everyone, but it seems the more unpredictable super becomes, the greater the appeal for individuals to manage their own retirement savings and retirement income strategies.