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SMSF landlords reminded of allowable claims

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SMSF trustees can claim tax on repairs to rental investment homes held within a fund provided such repairs are not classified as improvements, the ATO has stated as part of its end-of-financial-year guidance.

The regulator has pointed to its current guidance online to highlight the difference between repair, maintenance and capital expenditure in regards to a rental property and the associated tax deductions that can be made.

The guidance noted a repair was when something that is worn out, damaged or broken as a result of renting out the property is replaced, while maintenance is preventing or fixing the deterioration of an item that occurred while renting out the property. Capital expenditure is renovating or replacing an entire structure or adding a new structure to the property.

Breaking this down further, the ATO highlighted its top 10 tips to avoid taxation mistakes in relation to rental properties in the run-up to the end of the financial year.

“Ongoing repairs that relate directly to wear and tear or other damage that happened as a result of you renting out the property can be claimed in full in the same year you incurred the expense,” it stated.

For example, repairing a hot water system or part of a damaged roof can be deducted from tax immediately.

“Initial repairs for damage that existed when the property was purchased, such as replacing broken light fittings and repairing damaged floorboards, are not immediately deductible, but a deduction may be claimed over a number of years as a capital works deduction,” the ATO said.

“These costs are also used to work out your capital gain or capital loss when you sell the property.”

It added that replacing an entire structure, such as a damaged roof, or renovating a bathroom are classified as improvements and cannot be deducted immediately.

“As a general rule, you can claim a capital works deduction at 2.5 per cent of the construction cost for 40 years from the date the construction was completed,” it said.

It also warned SMSFs to obtain clear evidence regarding income and expenses in order to claim entitlements.

“Capital gains tax may apply when you sell your rental property, so keep records over the period you own the property and for five years from the date you sell the property,” it said.

Source: smsmagazine.com.au

Planning your exit: A guide to SMSF succession planning — Part 2

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This article is part of a series of articles on SMSF succession planning. In Part 2 of the series we examine the tax considerations that arise in relation to paying superannuation death benefits comprising a taxable component.

We also consider the options and pitfalls associated with planning to make a timely payment of benefits to a member who may not have long to live. 

Tax considerations on death 

The tax profile of death benefits is, of course, a relevant consideration in succession planning. 

Where a death benefit is paid to a tax dependant (ie, a death benefit dependant under s 302-195 of Income Tax Assessment Act 1997 (Cth) (ITAA 1997), the dependant generally receives the benefit tax free regardless of any taxable component that forms part of that payment.

A tax dependant means any of the following: 

  • the deceased person’s spouse or former spouse;
  • the deceased person’s child, aged less than 18 at the time of death;
  • any person with whom the person has an interdependency relationship; or
  • any other person who was a dependant of the deceased person just before he or she died.*

* NB — this limb of the definition imports the common law meaning of dependant, which is accepted to include financial dependency.

Accordingly, adult independent children do not generally qualify as death benefit dependants. Thus, the taxable component of any death benefit payment they receive (usually when there is no surviving spouse) will be subject to a ‘death tax’ — typically 15% plus the 2% Medicare levy. Only the tax free component is tax free.

When you consider that the average SMSF holds over $1 million in assets, the tax exposure of benefit payments made to adult independent children is likely to be significant.

Summarising the tax applicable on a lump sum payment of death benefits

The table below summarises the position in relation to payment death benefit lump sums:

 

Tax free component

Taxable component (element taxed in the fund)

Taxable component (element untaxed* in the fund)

Tax dependant  

Not included in recipient’s assessable income 

Not included in recipient’s assessable income 

Not included in recipient’s assessable income 

Non-tax dependant

Not included in recipient’s assessable income 

Included in recipient’s assessable income but the recipient is entitled to tax offset that ensures that the rate of income tax does not exceed 15% 

Included in recipient’s assessable income but the recipient is entitled to tax offset that ensures that the rate of income tax does not exceed 30% 

 

The above rates do not include the Medicare levy, currently 2%.

* Generally, there is no element untaxed in an SMSF. The one exception is where insurance is involved. Section 307-290 of the ITAA 1997 can operate to make a superannuation death benefit that is paid as a lump sum partly consist of the element untaxed, if the fund has previously claimed deductions for insurance premiums in respect of members, eg, life insurance. However, the element untaxed from an SMSF has no practical effect if it is received by a tax dependant or if the deceased attained age 65 or over prior to their death.

Planning for an exit 

Given the impact of the above effective death tax on death benefits paid to adult independent children, one option that some members consider is planning to withdraw their super benefits before they die. Naturally, we never know the ‘hour nor the minute’ of when death may strike. However, statistics suggest that the vast majority of people have some warning before they pass away.

Under the current tax rules, provided the member is over age 60 and has met a full condition of release (eg, based on retirement or attaining age 65), this allows their benefits to be withdrawn from the superannuation environment tax free. Given super is concessionally taxed, money invested outside super is generally not as tax efficient.

However, relying on this withdraw before you die approach is not always a straightforward exercise as the member and SMSF trustee may need time to:

  • pay required pro-rated minimum payments in respect of any pensions that are in place that will be commuted as part of a withdrawal;
  • commute one or more pensions prior to paying any lump sums;
  • sell off fund assets to obtain liquidity (eg, in relation to pension payments); or
  • transfer assets in specie (ie, as part of a pension commutation or a lump sum payment from accumulation phase benefits).

Thus, hoping for a quick exit in the future can be subject to a number of hurdles given that we cannot predict the hour or minute of our death.

Importantly, such an exit plan based on there being ample time to withdraw a super benefit is vulnerable due to the numerous hurdles that could result in such a strategy easily failing. For example, if the member loses mental capacity to make a decision, or otherwise is physically incapacitated due to rapidly deteriorating health, achieving a timely exit may not be possible in the time available.

Some suggest that appointing an attorney under an enduring power of attorney (EPoA) can be used to overcome these issues, however, this proposed solution is not so simple as we shall see. 

The risks associated with relying on attorneys under an EPoA and why the SMSF trustee is placed to implement an exit plan

Some seek to rely on a spouse or close family member, trusted friend or adviser to withdraw their benefit pursuant to an EPoA at the appropriate time.

However, relying on an EPoA in this situation involves a number of risks including:  

  • The legislation governing EPoAs differs between each state and territory and only the Tasmanian power of attorney legislation contains express language empowering an attorney to deal with a person’s superannuation interest(s). Therefore, it is recommended that any EPoA documentation contain express authority to deal with superannuation.
  • Without an SMSF deed expressly authorising an attorney under an EPoA to act for a member, the EPoA might not be effective, eg, in relation to the attorney exercising a member’s rights and entitlements under an SMSF deed as an SMSF is a form of trust and an EPoA does not authorise an attorney under a trust as the trust deed is the relevant document that governs the rights and obligations under the trust.
  • An attorney withdrawing a member’s benefit may not be acting in the donor/principal’s best interests if others (including the attorney) are attempting to benefit from the withdrawal. Indeed, the situation might give rise to a conflict unless the EPoA contains appropriate wording authorising an attorney to act (ie, on the basis of it being permitted conflict). 

Additionally, it is important to note that there is a difference between an attorney seeking to exercise membership rights and entitlements under an SMSF deed, and valid legal decisions being implemented at the trustee-level.

For instance, even if there is complete confidence in the attorney being authorised to deal with membership rights and entitlements (and assuming there is no conflict), there is still the question of properly implementing a timely payment at the trustee-level. 

As noted above, there are various steps that must generally be implemented by the SMSF trustee as part of an exit strategy, such as: 

  • payment of a lump sum from an accumulation interest; 
  • payment of the member’s required minimum pension payments in cash; 
  • commutation (in part or in full) of a pension interest and payment of the commuted amount outside of the superannuation environment (ie, as a lump sum); and
  • where assets are being transferred in specie, signing applicable transfer forms and updating legal registers, etc, in relation to ownership changes. 

Timely and legally effective decision-making by the trustee

Though it is readily accepted that having an EPoA is critical for SMSF succession planning, robust exit planning should also ideally focus on timely and legally effective decision-making at the trustee-level. 

After all, it is the trustee who holds legal title to the fund’s assets, and it is the trustee who must uphold and comply with the terms of the trust deed and comply with the payment standards in relation to voluntary cashing of benefits under the Superannuation Industry (Supervision) Regulations 1994 (Cth). An attorney who is not a trustee/director cannot generally control this process.

Thus, a robust exit plan generally requires putting in place appropriate succession planning arrangements which ensure that the SMSF trustee (generally this should be a special purpose company) is always in a position to make timely and legally effective decisions at the appropriate time. For instance, a sound succession plan should always include a clear path for the member’s attorney under an EPoA to become a director of the SMSF trustee in place of a member who cannot act or who has lost mental capacity. Naturally, the successor director provisions in DBA Lawyers’ company constitution provides a sound solution for this issue.

Of course, this kind of planning is not just relevant for making a timely payment of benefit as part of an exit strategy. It is also critical to helping ensure that a fund continues to meet the definition of an SMSF in s 17A of the Superannuation Industry (Supervision) Act 1993 (Cth) where a member can no longer act as a trustee/director (eg, due to being incapacitated). 

Conclusions

In Part 1 of this series of articles, we focused some of the key ingredients for successful SMSF succession planning, including how to plan for control of a fund in the context of death and loss of mental capacity.

In Part 2 of this series we examined the tax considerations associated with payment of superannuation death benefits, and some of options and pitfalls associated with planning to make a timely payment of benefits to a member who may not have long to live.

As you will appreciate, there is no easy ‘one size fits all solution’ for SMSF succession. However, the intention of this series is to inform the reader of some general considerations that should be taken into account as part of formulating a robust SMSF succession plan. Expert advice should be obtained if there is any doubt. 

By William Fettes , Senior Associate and Daniel Butler, Director, DBA Lawyers

Planning your exit: a guide to SMSF succession planning — Part 1

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What is SMSF succession planning?

Succession planning is a critically important aspect of successfully operating an SMSF, though it is often overlooked. Every SMSF member should develop a personal succession plan to ensure there is appropriate planning in place to govern succession to the control of the fund and other succession arrangements appropriate for their individual circumstances. 

SMSF succession planning broadly aims to accomplish the following outcomes:

  • that the right people receive the intended share of SMSF money and assets; and 
  • that the right people have control of the SMSF to ensure that superannuation benefits are paid as intended.

An optimal SMSF succession plan should achieve these goals in a timely fashion, with minimal uncertainty and in the most tax efficient manner possible. However, it should also be recognised that trade-offs may need to be considered, as it would usually be considered preferable that the ‘right’ people receive a benefit and pay tax, rather than the ‘wrong’ people receive a benefit in a more tax efficient manner. Accordingly, there is no easy ‘one size fits all solution’ for SMSF succession. However, a well thought out SMSF succession plan should ideally address the following matters:

  • determine the person(s) or corporate entity who will occupy the office of trustee upon loss of capacity or death;
  • in relation to a corporate trustee, determine who the directors of the SMSF trustee company will be (ie, who will have control of the company) upon loss of capacity or death of each director/member;
  • ensure that the SMSF can continue to meet the definition of an SMSF under s 17A of the Superannuation Industry (Supervision) Act 1993 (Cth) (SISA);
  • determine what each member’s wishes are for their superannuation benefits; 
  • determine to what extent each member’s wishes should be ‘locked in’ through the use of an automatically reversionary pension and/or a binding death benefit nomination (BDBN); and
  • determine the tax profile of anticipated benefits payments. 

Many people have no succession plan in place for their SMSF which may result in considerable uncertainty arising in the future with respect to the control of the fund and the ultimate fate of their member benefits. 

Succession on loss of capacity — the role of an enduring power of attorney (EPoA)

With the passage of time, there is a significant risk that some SMSF members may lose capacity to administer their own affairs. In the absence of prior planning, this could result in major uncertainty and risk arising in relation to control of the SMSF. Having an EPoA in place can help overcome this problem, as an EPoA appointment is ‘enduring’, enabling a trusted person (ie, the member’s attorney under an EPoA) to continue to run the SMSF as their legal personal representative (LPR) in the event of loss of capacity. 

It is strongly recommended that every SMSF member implement an EPoA as a part of their personal SMSF succession plan. It would not be an exaggeration to say that being a member of an SMSF without an EPoA is courting with disaster. 

Naturally, given the important responsibilities of the position, the member must trust their nominated attorney to do the right thing by them. Only a trusted person should be nominated, and insofar as the member retains capacity, the EPoA should be subject to ongoing review to ensure its ongoing appropriateness. Consideration should also be given as to whether scope of the appointment should be general in nature (ie, a general financial power) or limited to the SMSF or to the trustee of the SMSF. For example, if the member wishes to preclude their attorney from exercising certain rights in relation to, say, their member entitlements or confirming, making or revoking their BDBN, this should be expressly covered in their EPoA.

It should be noted that, by itself, an EPoA is not a mechanism by which an attorney can actually step into the role of trustee or director of a corporate trustee. An EPoA merely permits the member’s attorney to occupy the office of trustee or director of the corporate trustee to help ensure the SMSF can continue to operate in a fashion consistent with the member’s wishes. This is because a member’s attorney appointed under an EPoA is expressly recognised as satisfying the criteria relating to the trustee-member rules in s 17A of the SISA. However, the attorney must still be appointed in the first place. The appointment mechanism which facilitates the LPR to step into the role of SMSF trustee or director of the corporate trustee is contained in the SMSF deed and the company’s constitution. For example, in the context of a corporate trustee, in the absence of other appointment provisions in the constitution, generally the shareholders must exercise their voting rights to appoint a director. 

Succession on death — the role of the executor as LPR

The death of a member is another case where succession to control of an SMSF should be carefully considered. 

Section 17A(3) of the SISA provides an exception to the trustee–member rules where a member has died. The exception in s 17A(3) provides that a fund does not fail to satisfy the basic conditions of the trustee–member rules by reason only that:

  1. A member of the fund has died and the [LPR] of the member is a trustee of the fund or a director of a body corporate that is the trustee of the fund, in place of the member, during the period:

    1. beginning when the member of the fund died; and

    2. ending when death benefits commence to be payable in respect of the member of the fund.

This exception permits an LPR of a deceased member (eg, an executor of a deceased person’s estate) to be an individual trustee or a director of a corporate trustee in place of a deceased member until the member’s death benefits commence to be payable.

However, it is important to understand that this provision does not require or create this state of affairs. For example, for s 17A(3) to apply, an LPR must actually be appointed as either: 

  • A director of the corporate trustee of the fund pursuant to the constitution of the company; or 

  • An individual trustee of the fund pursuant to the governing rules of the fund. 

The operation of the provision in this way has been confirmed in numerous cases, particularly in Ioppolo v Conti [2013] WASC 389, Ioppolo v Conti [2015] WASCA 45 and implicitly in Wooster v Morris [2013] VSC 594. 

These cases underscore the fact that a deceased person’s LPR (ie, their executor) does not automatically step into the role of an SMSF trustee or director upon a member’s death. Broadly, it depends on the provisions of the SMSF deed (most SMSF deeds do not have a mechanism for this to occur) and whether there are other appropriate legal documents in place to ensure this can occur.

The role of the Corporations Act 2001 (Cth) in respect of corporate trustees

Section 201F of the Corporations Act 2001 (Cth) empowers the personal representatives of a sole director and sole shareholder in a private company to appoint new directors for the company on the death or loss of mental capacity of the principal (ie, the sole director/shareholder). 

Thus, if an SMSF was a sole member who is also the sole director/shareholder of the corporate trustee, s 201F can assist in relation to the member’s LPR exercising powers to take control of the SMSF trustee after their death (or loss of legal capacity).

However, it is important to understand the limitation of this provision. For instance, s 201F cannot assist where an SMSF member has died and SMSF trustee company has more than one director or shareholder, or where the shareholder is a person other than the sole director who has died. 

Accordingly, relying on s 201F is not a sound strategy in many cases. 

Successor directors 

By ensuring that the company constitution of the SMSF trustee contains successor director provisions, it is possible to plan for succession to the role of a director in a variety of circumstances without the limitations of:

  • Appointing a new director via the usual rules in the corporate trustee’s constitution (eg, by majority shareholder vote); or

  • The limited flexibility in s 201F of the Corporations Act 2001 (Cth).

Making a successor director nomination allows a director (ie, the principal director making a nomination in accordance with an appropriately drafted constitution prepared by DBA Lawyers) to nominate a person to automatically step into the shoes of the principal’s directorship role immediately upon loss of capacity, death or another specified event occurring. 

The successor director strategy is designed to work in conjunction with a member’s overall estate and succession plan to enable an attorney appointed under an EPoA or an executor of a deceased member’s will to be automatically appointed as a director without any further steps involved. 

Naturally, a successor director strategy relies on the right paperwork being in place, including the right constitution and related successor director nomination form. 

Written By William Fettes, senior associate and Daniel Butler, director, DBA Lawyers

Transferring Super to your spouse or partner

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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

Five things to ask and do before tapping into your SMSF

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During our working life, the focus is on building a superannuation nest egg for retirement.

That can seem a long way down the track until that time suddenly arrives. Planning for retirement and transitioning your self-managed super fund into retirement phase can be daunting, but it doesn’t have to be. It is about getting the right advice, information and knowing how to switch gears from accumulation to retirement.

Have I retired?

To fully access your super, you must first meet a condition of release, such as retirement or turning age 65. Whether you have retired or not will depend on your age.

First you need to have reached your preservation age. This is the age you can first access your super, subject to some other conditions. Your preservation age depends on when you were born.

For those born between July 1, 1963 and June 30, 1964, your preservation age is 59. If you are aged under 60, you also need to have ceased all employment with no intention of returning to work. For those aged 60 to 64, you only need to have ceased employment. A change of job, or cessation of one job if you have more than one, would be sufficient to meet this test.

You will need to notify your super fund, including your SMSF trustee, in writing that you have met the retirement condition of release.

It is possible to access your super as a pension once you have reached your preservation age even if you haven’t retired. This is referred to as “transition to retirement income stream”. However, this stream doesn’t enjoy the same tax concessions as an account-based retirement pension.

Do I have enough?

There is no magic figure on how much you will need in super to retire. It will depend on a range of factors — personal budgets, lifestyle, goals such as holidays or a new car, and investments you may have outside of super. Today, more people are approaching retirement with a mortgage, so this will need to be factored into any retirement planning strategies.

Your adviser can help you undertake a review of your budgets and cashflow needs, looking at how this will impact your super balance over time. How long your super will last is important to understand as how much you take today will impact on how much you have tomorrow.

Reviewing investment strategy

As you shift from accumulation and into retirement, your goals, objectives, and risk profile will change. Also, does your SMSF have enough liquid assets, cash and cash flow to meet its costs and pay your super pension each year?

Before switching your investments, you need to consider any tax implications. Investments with capital gains sold while in accumulation will be taxable in the fund at a maximum rate of 15 per cent, or 10 per cent where the investment has been held for longer than 12 months.

Fund income, including capital gains while the SMSF is paying retirement pensions, may be wholly or partially exempt from tax. How these concessions apply will depend on several factors. If there are members in the fund still in the accumulation phase and others in the pension phase, specialist tax advice should be sought to ensure your fund is structured appropriately.

Paying retirement benefits

Before doing anything, it is important that your SMSF trust deed is reviewed and, if need be, updated. Your deed will set out how your benefits can be paid to you.

The amount you can use to commence a retirement phase pension is limited by your transfer balance cap. If you have not had a retirement phase pension before, your transfer balance cap will be $1.7 million.

You will need to work out how much of your super balance will be used to start a pension. Pension documentation including member applications, trustee minutes and a product disclosure statement will be needed. You adviser will be able to assist you.

Contrary to popular belief, amounts that exceed your transfer balance cap can remain in the super system in an accumulation account. As you have met a condition of release, you will be able to withdraw amounts as lump sums, in addition to your pension payments. However, unlike pension balances, investment income derived on amounts retained in an accumulation account is not exempt from tax.

Review estate planning

One step that is often overlooked is the need to review your estate planning. This needs to be considered before starting your pension. If you wish to make your pension reversionary, that is a pension that automatically reverts to your spouse on your death, you need to include these instructions in your pension documents.

Similarly, a review of any binding death benefit nominations is needed to ensure that they are still fit for purpose.

It is a good idea to start planning for your retirement before the big day arrives. Seeking specialist advice and having a clear plan means you can focus on enjoying your retirement.

Written by Tracey Scotchbrook, SMSF Association

Timing opportunities to utilise shares as contributions for SMSFs

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SMSFs may be able to utilise planning opportunities for shares through the in-specie contribution process and create a better tax environment for the fund position, according to a wealth adviser.

In a recent update, Creation Wealth director Andrew Zbik said that while the market volatility and uncertainty during the past year and a half of COVID-19 have many share investors understandably rattled.

However, this may present a smart opportunity for investors nearing retirement in the next five years.

“The benefits of this strategy are that you can continue to hold your shares and move the ownership of that holding into the superannuation environment which has a lower tax rate compared to many investors’ marginal tax rate,” Mr Zbik said.

“Plus, if the shares are being transferred at a price lower than what you paid for them there will be no capital gains tax payable.”

Most superannuants are able to draw an account-based pension from their superannuation fund tax free. However, Mr Zbik said the SMSFs needs to consider that making an in-specie transfer of shares from your own name to your superannuation fund is a capital gains event. This means that if you are transferring the shares at a higher value than what you purchased them you may need to pay capital gains tax.

“If you are transferring the shares at a loss, it means you will retain that loss on your tax return which can be used to offset future capital gains,” he noted.

“So, for some, it may be an opportune time to contribute these shares to your superannuation fund to allow future gains to be made in a concessional tax environment that is superannuation.”

Furthermore, funds must choose a date that the transfer is to take place, properly report the true value of the share on that day as your sale/purchase price and the share registry must be notified of this transfer within 28 days, according to Mr Zbik.

Transferring shares into superannuation will also most likely count towards your non-concessional contribution cap which is currently $110,000 for this financial year or $330,000 if you bring forward three years of contributions and you are aged under 67.

“Ultimately, one would only use this strategy if they anticipate to continue holding these shares for the long-term,” Mr Zbik explained.

“Most members of SMSFs will be able to use this strategy. Some retail superannuation funds will accept shares as an in-specie contribution. Unfortunately, most industry funds are not able to receive in-specie contributions of shares yet, but several are investigating this as an option in the future.”

Source: SMSF Adviser

Can an SMSF own employee shares?

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Employers are turning to alternative methods of rewarding employees as wage freezes become commonplace during the pandemic. With record-low wages growth of 1.4 per cent over the last year, companies are offering employee share schemes (ESS) as an incentive where they struggle to pay high salaries.

The question is: can an SMSF own employee shares?

Essentially, a member can transfer an asset owned personally into an SMSF through an in-specie contribution. The limiting factors include the exceptions outlined in section 66 SIS – acquisition of assets from a related party, the contribution caps and non-arm’s length income (NALI).

Acquisition of assets from a related party

In general, the transfer of share or options from an employee participating in an ESS is an acquisition of assets from a related party. The reason is that the employee is typically a related party to the fund.

The fund must acquire the assets at market value, either in a listed security or in a related entity, with the maximum investment as a percentage of total fund assets shown below:

Asset Type

Max SMSF Investment

Listed Security

100%

Unrelated Shares/Units

0%

Related Shares/Units

5%

To be clear, an SMSF cannot acquire ESS shares in an unrelated private company and is limited to a maximum investment of 5 per cent of the total value of fund assets in a related party entity ESS under the in-house asset limits.

Regardless of the discount or method applied to price the ESS for the employees, the acquisition price from the SMSF’s point of view is the market value when the shares are transferred into the fund.

While it is easy to determine the market value of shares listed on the ASX, the market value of shares in a related, unlisted entity is complex and requires more documentation.

Suppose the shares or options are transferred in for no consideration or less than market value? Where the member takes up the difference as a contribution, the shares are acquired at market value, and section 66 SIS will be satisfied.

Contribution caps

The ATO expects SMSF trustees to know which types of contributions breach the super laws. Returning a contribution is only allowed where the trustee cannot accept the amount under SIS or where the return is authorised by the principles of restitution for mistake — not where the member has exceeded their caps or simply changed their mind.

By way of example, a member is 45 years of age and received $25,000 in employer contributions during the year. She is offered an ESS from her employer, a publicly listed company, with a total market value of $35,000. However, her total superannuation balance (TSB) is above $1.6 million as of 30 June the previous year.

As a result, the member cannot make any more contributions because the concessional cap has been reached, and the non-concessional contributions cap is nil.

In this case, however, the member makes the $35,000 non-concessional in-specie contribution to the fund of the ESS on 2 June 2020.

However, it is not until 12 months later, during the audit, that the trustee is made aware that the member breached its contribution limits.

The ATO’s position is straightforward. A reasonable trustee, acting with the level of care, skill and diligence required of a trustee of a complying fund, would have checked the fund’s affairs.

Because the member is also a trustee, the fund effectively becomes aware of whether it can accept the contribution or not when it happened.

There is a strict process to follow as excess contributions cannot be refunded immediately. Technically, this is illegal early access: the member must wait for the ATO to issue an excess contributions determination notice before returning the extra amount.

Ownership of ESS

Some ESS include terms and conditions such that only the employee can own the shares. Others have the requirement that the employer must approve any transfer of the shares to an associate, related party or entity.

Under these circumstances, it may be difficult for the fund to own the shares beneficially.

Depending on the details of the offer, the fund may not be able to legally hold the shares, a potential breach of r4.09A SIS.

Remember, too, that an asset is generally considered a contribution when the SMSF gets legal ownership of the asset.

NALI

There may be other circumstances that contribute to the transfer of the ESS into the fund not being on an arm’s length basis.

The offer could include more favourable terms such as an interest-free loan from the employer to purchase the shares or receiving a higher dividend instead of market remuneration.

The SIS rules state that where parties are not dealing at arm’s length and the terms are more favourable to the SMSF, there will be no breach of s109 SIS. 

However, the NALI provisions then apply, which remove the fund’s tax concessions where the SMSF and other parties are not dealing at arm’s length in relation to a scheme.  

Where income is deemed to be NALI, all of the income generated from that asset will be taxed at the top marginal tax rate of 47 per cent, even if the member is in the pension phase.   

Conclusion

There is a lot to consider when a member transfers ESS into an SMSF by way of an in-specie contribution. The trustee must ensure the transaction meets the requirements of s66 SIS by assessing the facts and circumstances of each situation.

The federal government has recently made ESS more attractive by removing the cessation of employment as a taxing point in the May 2021 budget. While the proposal is awaiting royal assent, this advantageous change may see more ESS transferred into SMSFs by members.

SMSF professionals need to pay close attention to the finer details of the ESS offer to ensure any in-specie contributions are in line with SIS, which will then allow an SMSF to own employee shares.

Shelley Banton, head of education, ASF Audits
Source: SMSF Adviser 

SMSF scams are on the rise: Here’s how to fight back

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The growing prominence of SMSFs has made them a ripe target for scammers.

More and more Australians are opting to forge their own future with a self-managed super fund.

According to the Australian Taxation Office, self-managed super funds (SMSFs) have continued to grow in value and popularity in recent years. Their latest numbers indicate that there are 593,000 SMSFs in Australia, accounting for approximately $733 billion in total assets.

“SMSFs had assets of over $1.3 million each on average in 2018–19, up by 5 per cent from the previous year and up by 22 per cent over five years,” the ATO said.

One report by IBISWorld suggested that SMSF assets made up almost a quarter — 24.7 per cent — of total super assets as of March 2020.

However, with that popularity has come new hazards for investors.

ASIC issued a fresh warning for SMSF scams back in May, recommending that investors undertake independent enquiries to ensure that the scheme is legitimate if they are contacted by a person or company encouraging them to open an SMSF and move funds.

“Investing in financial products always involves some level of risk, but it is also important to check that investment opportunities are legitimate before investing,” they said.

Speaking to sister title nestegg, Marisa Broome, the chair of the Financial Planning Association, reiterated the classic phrase: if it looks too good to be true, it probably isn’t.

“In a record-low interest rate and post-COVID environment, investors need to remain vigilant and not be tempted by supposedly attractive but questionable offers,” she said.

Ms Broome cautioned that while self-managed superannuation funds can be “a key strategic structural option” for many investors, they are “not for everyone”. 

“They are complex, need active involvement by the members, and can be costly — both in actual fees and lost investment earnings if not managed well,” she said.

In her experience as a financial planner, Ms Broome said she has seen many examples of poor investments where investors are encouraged to set up costly structures within their SMSF to borrow funds. 

These funds are then used to buy property “that is often overpriced, poorly located and possibly may result in a large commission being paid to the ‘introducer’ that is not disclosed to the client”.

Ms Broome said that while ASIC does put out alerts on investment scams, “many of these schemes do fly under the radar”.

“Some may even technically meet all the requirements of the law, but what they are actually selling is an investment that will never provide the promised returns,” she said.

“Seeking advice from a qualified financial planner will help in many areas, including to help you differentiate between a scam and a legitimate offer.”

Source: SMSF Adviser

Balancing discretion and direction approaches for death benefits

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With the increasing number of court cases involving death benefits in SMSFs, greater care should be placed in evaluating discretion or direction approaches when it comes to death benefits.

With increasing disputes and legal battles around money and SMSFs, particularly among siblings when their parents have passed, numerous court cases could be potentially avoided with better planning, and the focus also weighs in the ideal approach to reduce the risk of client estate planning errors.

In a recent TopDocs technical webinar, TopDocs head of training Michael Harken said, as time has gone by, advisers preferences have moved constantly between trustees having discretion or direction when it comes to how death benefits are going to be applied.

Mr Harken noted that, in prior years, the thinking was that with the BDBNs lapsing after three years, there might not be so much value in putting them in place and it may be better to maintain discretion with the trustee at the time.

“However, the issue with discretion has sort of popped up a little bit more favourably of recent times since the introduction of the transfer balance cap on 1 July 2017,” he said.

“The reason for that is it provides flexibility to determine based on the circumstances applicable at the time whether the benefits should be or can be paid as a pension, and if they can, how much can be paid and whether other money should pass to individuals as a lump sum, or to the estate and then possibly to go into super proceeds trust or a testamentary trust.

“Those decisions where there’s a discretionary aspect can be made at the time based on the circumstances.

“Whereas if we go back to the direction approach, it’s all going to depend because the quality of the documentation is going to have a bit of a bearing on whether the direction was good or bad, effective or not, and a lot of the cases fall into those areas.”

Mr Harken said that advisers should consider that, basically, all of the estate planning documentation and including wills must complement each other because, if they don’t, there are higher chances to enter into conflict situations that bring about legal action.

“If they are complementary, it goes a long way to removing any potential conflict,” he noted.

“When it comes to conflict, advisers need to note that the conflict can come from the competing interests that are looking for some money from the deceased benefits, and there are issues that arise from that and particularly in relation to where there is discretion.

“But meanwhile, even where there’s direction, the trustee may not act impartially, they may decide to pay themselves and that provides a significant conflict, and effectively, some of the cases have shown us that trustees should not act in a conflict position.”

Even where the deed might provide some authority to the trustee to look after themselves as a first call, Mr Harken noted it may only mitigate the risk and not fully absolve the trustee from looking after themselves.

SMSFs in blended family situations are also very often at risk and it is also because there is no one-size-fits-all approach.

“The competing interests are also generally going to be dissatisfied potential beneficiaries, and they can be an accident waiting to happen,” he said.

“In particular, we note that trustees are subject to very strict duties. These duties include the duty to properly inform themselves.

“Further, trustees must take great care to ensure they exercise discretion in good faith, upon real and genuine consideration, and for the purposes for which the discretion was conferred.

“As advisers, we don’t know what the intentions of the deceased were and that’s where that planning is essential and it can at a larger extent at least cut off any sort of uncertain claims in the future.”

Source: SMSF Adviser

End-of-financial-year essentials for SMSF trustees

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As the end of the financial year approaches, it is a good time for trustees to do an annual check-up on their Self-Managed Super Fund.

Here are five key issues to be aware of in the 2020-21 tax year.

Contributions

Non-concessional (after-tax) contributions are limited to $100,000 (or a maximum of $300,000 if you satisfy the non-concessional contributions bring-forward rule) and concessional (before-tax) contributions are limited to $25,000. These limits will be indexed on July 1 and increase to $110,000 for non-concessional contributions ($330,000 under bring-forward rule) and $27,500 for concessional contributions.

The non-concessional contributions bring-forward thresholds do not increase if you have already triggered a bring-forward period that has not ended by June 30.

To make sure you do not accidentally trigger the bring-forward arrangement, you need to consider all your non-concessional contributions made to all your superannuation funds. Unreleased excess concessional contributions also count towards the non-concessional contributions cap.

Before June 30, it is important to review contribution strategies to ensure you have contributed what you intended to, and ensure you are below the contribution caps.

In the 2020-21 financial year you may also be eligible, subject to your Total Super Balance (TSB), to make larger concessional contributions – if you have any unused concessional contribution cap space from the 2018-19 or later financial years.

Where you have made personal contributions and intend to claim a tax deduction in 2020-21, it is important that you check all employer contributions and salary sacrificed amounts to super to make sure you do not breach the annual concessional contributions cap.

Investment strategy

It is important to understand that an SMSF’s investment objectives and strategy are not set in stone.

Trustees should regularly review the investments of the fund, investment risk, likely returns, liquidity, insurance and cash flow requirements as well as the diversification of investments.

Before any investment decision is made, you should examine the impact it would likely have on the overall portfolio, to ensure you are investing in line with your investment strategy.

Minimum pension payments

To help manage the economic impact of the coronavirus pandemic, for the 2019-20, 2020-21 and 2021-22 tax years, the federal government has reduced the minimum drawdown requirements by half for account-based pensions and market-linked pensions. There is still time to consider and, if required, amend your pension payments for 2020-21.

Where you have continued to receive regular pension payments, it is likely you may have received more than the required minimum amount. Unless you meet contribution eligibility rules, these funds cannot be returned.

Where you have restructured your pension withdrawal amounts, it is important to ensure that you do not underpay the minimum pension payment required. Where this requirement is not met, a SMSF may be subject to 15 per cent tax on pension investments, instead of them being tax free.

Valuing assets

SMSF trustees are required to value the fund’s assets at market value on June 30 each year when preparing the fund’s financial accounts.

Ensuring that member benefits are shown at market value is important when calculating each member’s TSB. This number is used to determine what, if any, non-concessional contributions can be made without exceeding your non-concessional contributions cap, and when determining your eligibility to make catch-up concessional contributions and receive government co-contributions.

If you are starting a pension, it is important to value your pension balance correctly to ensure you do not begin a pension with a balance exceeding the Transfer Balance Cap. For the 2020-21 income year, this cap is $1.6 million and will increase to $1.7 million on July 1, in line with indexation.

Lodgement obligations

All SMSF trustees are expected to work with their tax agent or accountant to ensure that they meet all their lodgement requirements on time.

While the current economic conditions due to COVID-19 may make keeping up to date with your trustee obligations a challenge, access to the ATO’s early engagement and voluntary disclosure service is available to assist you to get your affairs in order.

Missing your annual return lodgement due date could result in the status of your SMSF changing on the ATO’s Super Fund Lookup, which could restrict your SMSF from receiving super guarantee payments, as well as some rollovers.

Written by John Maroney, CEO, SMSF Association

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