News Archives - Page 3 of 9 - Practical Systems Super

Covenant pointless for SMSFs?

Aug 13,2021 Comments Off

The imposition of a retirement income strategy on SMSFs under a new covenant will not create any benefit to funds members, but rather generate further costs undermining the intent of the strategy, a legal firm has warned.

Townsend Business and Corporate Lawyers said the federal government’s proposal for every superannuation fund to have a retirement income strategy under the Retirement Income Covenant would be unsuitable for SMSFs, which were only likely to pay it lip service.

The legal firm made the claim in a submission to Treasury in response to a position paper released by Superannuation, Financial Services and the Digital Economy Minister Jane Hume.

The paper stated the covenant will impose a duty for super fund trustees to develop and document a strategy to assist retirement or near retirement age members to maximise their retirement income, manage risks to the sustainability and stability of their retirement income and to provide flexibility in accessing super savings during their retirement.

In claiming the covenant and strategy would not generate any practical benefit to SMSF members, the law firm pointed out limited retirement income options were available to an SMSF.

“The only retirement income stream product which can be issued by SMSFs are account-based pensions,” it said.

“The only means of increasing retirement income is to dial up the pace of capital consumption or the adoption of investment strategies involving greater investment returns at the cost of higher increased investment risk.

“There is no scope for augmenting pension capital by the trustee issuing some form of pooled income stream product – as the membership base of SMSFs is too small for pooled products.”

It added that because pooled retirement income products were unavailable to SMSFs, they operated in a different way to non-SMSFs in ensuring retirement income was sustainable over the long term.

“Longevity risk can only be managed by moderating the pension drawdown rate; investment risk can only be moderated by a weighting towards defensive assets as against growth assets; and selection risk can only be moderated by having a cash component sufficient to support one or two years’ pension payments,” it said.

“The member could purchase, from a third party, a lifetime income stream. However, this is a decision best left to the individual member and their willingness to accept the significant capital cost of such guarantees.

“Finally, it should be noted that the current regulatory design features of account-based pensions are at cross purposes with the sustainability and stability goal set out in the paper and, also, the retirement consumption pattern noted in the Retirement Income Review.

“The age-related and increasing minimum drawdown requirement undermines management of the longevity risk and the requirement to make pension payments in cash rather than in specie asset transfers increases both investment and selection risks.”

It said given these limitations with SMSFs, and the small size of the membership of most funds, there was no scale within the funds for the expense of implementing a strategy on each member’s retirement savings.

“Compliance with the RI (Retirement Income) Covenant will be formalistic at best and the regulator will be required to challenge the performance of the RI Covenant, which will be beyond the regulator’s resources and skills,” it added

Source: smsmagazine.com.au

SMSF Association urges rethink on NALE

Aug 6,2021 Comments Off

The SMSF Association is urging the Federal Government and the Federal Treasury to review the non-arm’s length expenditure (NALE) rules following an ATO ruling handed down last week.

Peter Burgess, Association Deputy CEO/Director of Policy & Education, addressing the organisation’s Technical Summit, says the ATO ruling is the outcome of changes made to the non-arm’s length income (NALI) rules back in 2019, which, “in our considered opinion, could have punitive consequences that we doubt are intended.”

“Today’s ruling confirms the ATO’s draft position that NALE can have a sufficient nexus to all the ordinary and/or statutory income derived by the fund.

“This means situations could arise where an SMSF, which does not incur a general expense on arm’s length terms, would have all its income taxed as non-arm’s length income (NALI) – regardless, it would seem, of the monetary value of the service provided.

“Even though the ruling makes it clear the ATO does not consider the general expenditure issue to be a significant compliance risk that would warrant a particular focus, we urge the Government to review these provisions to avoid any undue concern or confusion.”

Mr Burgess acknowledges the underlying policy rationale of the NALE rules is to ensure all SMSF transactions occur on arm’s length terms.

“Although we accept the underlying policy intent, the penalty imposed on SMSF trustees who may not see the harm in entering arrangements with related parties on favourable terms to their SMSF, can be very significant and grossly disproportionate.”

On a positive note, the ruling does provide several examples of situations where the trustee provides a service to their own fund for no charge that does not result in NALE.

“The ruling provides some wriggle room for SMSF members to provide services to their own SMSF using their own business skills and experience and they don’t need to charge their fund for that service.

“For example, a financial planner who has an SMSF can use their skills and knowledge in formulating an investment strategy for their fund and this service can be provided to their fund without charge.

“Even if they use their business assets in a minor or infrequent way, it will still not be classified as a service they need to charge their SMSF for.

“But the ruling does draw the line at services that can only be provided if the SMSF member holds a particular licence or qualification, or the service is covered by an insurance policy relating to their business”,

“In these instances, the SMSF member is required to charge their fund an arm’s length fee for the service provided, or risk some or all of the fund’s income being taxed as NALI,” Burgess says.

Source: SMSF Association

Trustees more open to advice

Jul 16,2021 Comments Off

The latest sector research has shown the economic instability resulting from the COVID-19 pandemic has seen a shift in attitudes toward financial advice, with SMSF trustees now more open to receiving this type of guidance.

The “Vanguard/Investment Trends 2021 SMSF Investor Report” indicated this change in sentiment toward financial advice had mainly come from SMSF trustees defined as validators – individuals who would like a second opinion to affirm their decisions.

To this end, the study showed 56 per cent of this cohort was now open to receiving financial advice as opposed to 49 per cent expressing this opinion in 2020 and 47 per cent doing the same in 2019.

However, despite an increased interest in seeking financial advice, the report revealed the number of SMSFs using a financial planner fell from 185,000 in 2020 to 160,000 in 2021. Further, funds not currently using a qualified financial planner increased from 220,000 in 2020 to 245,000 in 2021.

SMSFs not engaging the services of a financial adviser nevertheless did identify some specific areas they would like to receive advice on.

“What really comes out strongly are SMSF pension strategies (100,000 funds) …inheritance and estate planning (75,000 funds) and contribution strategies (75,000 funds),” Investment Trends head of research Irene Guiamatsia said during a presentation of the report today.

This finding reflects the renewed priority given to these issues, with around 65,000, 58,000 and 48,000 funds respectively nominating these areas associated with advice gaps in 2020.

“Opportunities remain for advisers to demonstrate the value they can offer SMSFs, especially in areas such as SMSF pension and contribution strategies, as well as estate planning, where there exists an advice gap,” Vanguard Australia head of corporate affairs Robin Bowerman said.

The report was compiled from the results of an online survey conducted between March and April that garnered responses from 2523 trustees.

Source: smsmagazine.com.au

ATO offers interim six-member solution

Jul 2,2021 Comments Off

The ATO has announced an interim solution for the creation of six-member SMSFs as it finalises the necessary changes to the Australian Business Register (ABR) that will allow funds to register more than four members.

The SMSF Association noted the solution being offered by the ATO was due to the Treasury Laws Amendment (Self Managed Superannuation Funds) Bill 2020 only receiving royal assent on 22 June, days before the end of the financial year and when the change took effect from 1 July 2021, despite the draft legislation being introduced into parliament in September 2020.

Updated information added to the ATO’s website in relation to registering an SMSF recommended fund registrations be postponed until the ABR was updated due to potential delays in registering funds or additional members.

Where that was not possible, to begin the process of including additional members, the regulator advised that an SMSF with up to four members should be registered using the existing process.

Afterwards, trustees can then lodge the new members’ details via the Change of Details for superannuation entities form (NAT3036), which is accessible through the ATO’s website.

The SMSF Association stated once this form was processed, the ATO would update its system to allow members to request rollovers into their new SMSF, and when the ABR functions matched the requirements of the new law, an SMSF’s details would be updated on the register and there will be no further action required from trustees.

“With approximately 93 per cent of SMSFs having either one or two members, we remain of the view that these changes are unlikely to affect many SMSFs. However, for the minority that cannot wait any longer, one last administrative hurdle remains,” the association said.

Source: smsmagazine.com.au

NCC bring-forward date confirmed

Jun 25,2021 Comments Off

The Treasury has confirmed how the new bring-forward rules will apply for people aged 65 and 66 on or after 1 July 2020.

Last week, the Treasury Laws Amendment (More Flexible Superannuation) Bill 2020 passed through Parliament and achieved royal assent. The bring-forward measures will amend the Income Tax Assessment Act 1997 to enable individuals aged 65 and 66 to make up to three years of non-concessional superannuation contributions under the bring-forward rule.

In a recent update, the SMSF Association said it received confirmation from the Treasury that the More Flexible Super Bill extends the bring-forward arrangements to people aged 65 and 66 for non-concessional contributions (NCC) made on or after 1 July 2020.

“In this regard, an individual aged 66 who makes a $300,000 NCC today under the bring-forward rule would not breach the NCC cap (subject to their TSB and assuming no other NCC contributions have been made in 2020–21),” the SMSF Association said in a LinkedIn update.

“We were pleased to provide this update to SMSF Association members yesterday afternoon, a prompt response based upon member queries about when this measure will commence.”

A recent technical update by Colonial First State also noted that for most clients, there is no urgency to make additional non-concessional contributions before the end of 2020–21, as they can make additional non-concessional contributions in future years.

However, there are some situations, such as when the client turns 67 in 2020–21, when it may be advantageous to make additional contributions prior to the end of 2020–21, as it is the last year they can trigger the bring-forward rule.

Previously, members under age 65 at any time in a financial year may effectively bring forward up to two years’ worth of non-concessional cap for that income year, allowing them to contribute a greater amount up to $300,000 without exceeding their non-concessional cap.

Under the new rules, members can trigger a bring-forward period from 2020–21 onwards if they are under age 67 (previously age 65) on 1 July at the start of the relevant financial year.

These changes also complement previous actions by the government to improve flexibility of the retirement system that allowed people aged 65 and 66 to make contributions without meeting the work test.

Source: SMSF Adviser

Bring-forward measures and 6-member SMSF bill passes Parliament

Jun 18,2021 Comments Off

The measures to extend the bring-forward age up to 67 and the bill to increase the number of members allowed in an SMSF have passed both houses of Parliament.

On Thursday, both the Treasury Laws Amendment (Self-Managed Superannuation Funds) Bill 2020 and the Treasury Laws Amendment (More Flexible Superannuation) Bill 2020 passed through the House of Representatives and the Senate.

The bring-forward measures will amend the Income Tax Assessment Act 1997 to enable individuals aged 65 and 66 to make up to three years of non-concessional superannuation contributions under the bring-forward rule.

This is known as the “bring-forward rule”. The number of years that may be brought forward into the current financial year is determined by the member’s total superannuation balance at 30 June 2019.

This bill would amend sub-section 292-85(3)(c) of the Income Tax Assessment Act 1997 to allow the bring-forward rule to be used by members under age 67 at any time in a financial year. This amendment would be effective from 1 July 2020 onwards.

This initiative is implemented through three changes where the age at which the work test starts to apply for voluntary concessional and non-concessional superannuation contributions is increased from 65 to 67, the cut-off age for spouse contributions is increased from 70 to 75 and enabling individuals aged 65 and 66 to make up to three years of non-concessional superannuation contributions under the bring-forward rule.

Upon passing the bill, the government had also agreed to two One Nation amendments.

Amendments made by Pauline Hanson’s One Nation party included the removal of excess concessional contributions charge from 1 July 2021 and no deductions for recontributions of amounts withdrawn under COVID-19 early release, where recontribution is made from 1 July 2021 to 30 June 2030.

The removal of excess concessional contributions charge removes the application of an excess concessional contribution charge that applies to any additional tax liabilities that arise due to a member exceeding their concessional contributions in a year, according to Colonial FirstTech.

Meanwhile the re-contribution of COVID 19 early release amounts, would allow a member that released amounts from superannuation under the COVID 19 early release rules to recontribute those amounts without counting towards the non-concessional cap. The amendment also confirmed they cannot be claimed as a tax deduction.

CPA Australia external affairs manager Jane Rennie said allowing members to re-contribute COVID-released super savings will help restore their long-term financial security and mean they are less dependent on government support in retirement.

Another proposed amendment would also increase the cap at which a 15 per cent concessional tax rate applies to superannuation contributions by $5,000 to $32,500 for people aged 67. The cap then increases by $5,000 a year each year until a person turns 71, however this proposal was rejected by the government.

Meanwhile, the six-member bill amends the SIS Act, Corporations Act, ITAA 1997 and SUMLMA to increase the maximum number of allowable members in SMSFs from four to six. This bill also amends provisions that relate to SMSFs and small APRA funds.

These amendments ensure continued alignment with the increased maximum number of members for SMSFs.

The Government said increasing the allowable size of these funds increases choice and flexibility for members. SMSFs are often used by families as a vehicle for controlling their own superannuation savings and investment strategies.

For families with more than four members, currently the only real options are to create two SMSFs (which would incur extra costs) or place their superannuation in a large fund. This change will help large families to include all their family members in their SMSF.

The SMSF Association in its Twitter update that whilst it doesn’t expect this change will lead to a significant increase in the number of SMSFs being established, it will provide greater investment flexibility, choice and lower fees for those in a position to utilise it.

The expansion of members creates different strategic considerations that can be both positive and negative for SMSFs, and preparation will be needed to see if the changes will be a good fit for the SMSF, according to technical specialists.

The amendments apply from the start of the first quarter that commences after the act receives royal assent.

Source: SMSF Adviser

Pension drawdown rate to remain halved for next year

Jun 4,2021 Comments Off

The minimum pension drawdown rate will remain halved for another 12 months after the federal government announced an extension of the COVID-19 relief measure that was due to finish at the end of the month.

A joint announcement on 29 May from Prime Minister Scott Morrison and Superannuation, Financial Services and the Digital Economy Minister Jane Hume stated the extension would apply to 30 June 2022.

“As part of the response to the coronavirus pandemic, the government responded immediately and reduced the superannuation minimum drawdown rates by 50 per cent for the 2019/20 and 2020/21 income years, ending on 30 June 2021,” the announcement said.

“Today’s announcement extends that reduction to the 2021/22 income year and continues to make life easier for our retirees by giving them more flexibility and choice in their retirement.

“For many retirees, the significant losses in financial markets as a result of the COVID-19 crisis are still having a negative effect on the account balance of their superannuation pension.”

The 50 per cent reduction in the minimum pension drawdown rate, from 5 per cent to 2.5 per cent, was first announced by the government in March 2020 as part of a wider set of COVID-19 relief measures that also included early access to superannuation and a reduction in deeming rates.

The early access to superannuation measure ended on 31 December 2020 and no further announcements have been made regarding deeming rates.

Earlier this year, the SMSF Association said it expected the rate to return to pre-COVID-19 levels.

At that time, association deputy chief executive and policy and education director Peter Burgess noted the rate may still return to 5 per cent following a scheduled review by the Australian government actuary and a finding in the Retirement Income Review that retirees were not drawing down on their retirement savings.

Source: smsmagazine.com.au

SMSF statistics highlight post-COVID recovery

May 26,2021 Comments Off

The ATO’s newly released March 2021 quarterly statistical report has revealed the total number of SMSFs will soon hit 600,000, with consistent growth seen across establishments and assets as the industry heads into a post-COVID recovery economy.

The ATO has released the March 2021 self-managed superannuation fund (SMSF) quarterly statistical report revealing the latest statistics on the SMSF sector.

The report shows that there are now approximately 597,396 SMSFs and an estimated 1,120,936 members. These figures point to overall growth in total fund numbers, which have increased on average by around 2 per cent each year over the last five years.

The March 2021 quarter saw more than 6000 new SMSF establishments showing continued growth compared to previous quarters whilst windups have also hit record lows with around 240 recorded. Fifty-three per cent of SMSF members are male and 47 per cent are female whilst 86 per cent of all SMSF members are 45 years or older.

Total estimated SMSF assets increased 3 per cent over the quarter, from $763 billion in the December 2020 quarter to $787 billion in the March 2021 quarter.

The top asset types held by SMSFs (by value) continue to be listed shares (26 per cent of total estimated SMSF assets) and cash and term deposits (19 per cent).

Asset allocations in LRBAS saw its biggest continued increase of around 7 per cent ever since its numbers stagnated during the December 2019-September 2020 period.

Non-residential and residential property also saw higher growth in asset allocations compared to December 2020 numbers.

Overseas assets have also seen an increase across the spectrum of shares, property and managed investments. Meanwhile, cryptocurrency assets continued to see a decline compared to the December 2020 quarter and haven’t seen an increase ever since June 2019.

In the new establishments recorded in the quarter, around 56 per cent of new SMSF members are male and around 44 per cent are female. Individuals aged 35-44 make up the majority of most of the establishments accounting for both male and female.

Meanwhile taxable income ranges of the members of SMSFs which were established during the March 2021 quarter show incomes around $100,000 to $150,000 to be the most common for members accounting around 18.5 per cent.

NSW, Victoria and Queensland continue to remain the top three areas for new funds established.

This comes as new data was also released by the Australian Prudential Regulation Authority showing total superannuation assets increased 3.1 per cent for the quarter and 13.9 per cent over the 12 months to March 2021 to hit a record high of $3.1 trillion.

Total contributions into the system remained broadly steady at $121.2 billion for the 12 months to March 2021, increasing 0.8 per cent compared to the previous year.

Total benefit payments were $18.3 billion for the March 2021 quarter following the conclusion of the Government’s temporary COVID‑19 early release of superannuation measure.

A more detailed overview of the ATO statistical report can be found here.

Source: SMSF Adviser

ATO embarks on new SMSF research survey

May 20,2021 Comments Off

The ATO has embarked on a new survey for SMSFs aiming to further gain a better understanding of the SMSF audience and market.

The new self-managed super funds (SMSF) audience market research survey launched by the ATO aims to target SMSF trustees and advisers to gain a better understanding of the SMSF audience through a profiling and segmentation research study.

Conducted with researchers Whereto Research, the research includes undertaking an online survey, interviews with SMSF trustees and advisers along with further group discussions with SMSF trustees and advisers.

With over 1 million Australians having made the decision to take control over their superannuation and set up an SMSF, SMSF Association technical manager Mary Simmons said the Australian government has recognised the need to find out more about this population.

“To better understand what motivates and influences SMSF trustees, the government has embarked on a new survey, using information from the ATO to randomly select existing SMSF trustees to participate,” Ms Simmons said in the recent SMSFA update.

“The survey is being conducted by an external research provider, Whereto Research, and some of your clients may have already received an invitation to participate.

“Having discussed the survey with the ATO, the SMSF Association can confirm that the survey is legitimate and that trustees should not be concerned.”

Ms Simmons said the motive behind the survey is to get a better understanding of the SMSF community to assist the ATO to develop targeted communication strategies to ensure key messages reach their audience.

“The confidential survey provides the ATO with important information about the SMSF sector and the questions asked are designed to gauge trustees’ understanding of SMSFs and some of the rules and get insight into trustees’ choice of information sources used to manage SMSFs,” Ms Simmons said.

“The ATO also wants to determine trustees’ preferred communication channels to keep abreast of changes and understand who trustees primarily rely on to support them with ongoing investment decisions, advice needs as well as reporting and compliance obligations.”

If advisers have clients that have been invited to take part in the survey, Ms Simmons noted that participation in the survey is completely voluntary and the information collected remains anonymous.

“The survey will take your clients approximately 15 minutes to complete and participants can nominate to partake in subsequent feedback sessions (optional),” she said.

More information on the survey can be found here.

Source: SMSF Adviser

Federal Budget 2021: Necessary super changes welcomed

May 12,2021 Comments Off

Superannuation measures in this year’s federal budget have been welcomed as being not too intrusive, but introducing necessary changes that were considered overdue by the sector.

The changes, announced by Treasurer Josh Frydenberg last night, include an extension of the downsizer contribution scheme, the removal of the work test for people aged 67 to 74, an amnesty to allow people to exit legacy pensions and relaxing residency requirements for SMSFs.

SMSF Association chief executive John Maroney said the measures were welcome after “a few quiet budgets for the SMSF sector” and reflected changes sought by the industry body.

“In our 2021 federal budget submission, we advocated for reforms to the residency rules for SMSFs and for an amnesty period to allow SMSF members stuck in legacy pensions to convert to more conventional-style pension products, and we are pleased both measures are included in this year’s budget,” Maroney said.

“Regarding residency rules, we argued in our submission that the existing two-year safe harbour exemption under the central management and control test is too short in the context of modern work arrangements, where executives and other staff are often expected to commit to an overseas placement for more than two years, and that this period should be increased to five years,” he said, adding the extension was in the budget alongside the removal of the active member test.

Financial Planning Association (FPA) chief executive Dante De Gori also welcomed the non-disruptive nature of the measures and supported the work test, downsizer contributions and legacy pension changes.

“The FPA welcomes the government’s decision to introduce flexibility, but not substantial changes to superannuation. Superannuation should not be constantly tinkered with, a position the FPA has consistently held,” De Gori said.

Financial Services Council (FSC) chief executive Sally Loane said the government’s commitment to addressing legacy products, also an area of FSC advocacy, was pleasing, but the move could create other issues for pension holders.

“The ability to move out of legacy pension products, many of which are outdated and expensive, is a welcome move. However, the tax and social security settings will be the key factor [for] consumers and their financial advisers in determining whether to take up the scheme,” Loane said.

Other changes introduced as part of the budget included abolishing the $450 a month earnings threshold for the payment of the superannuation guarantee (SG), which was noted by the SMSF Association, FPA and FSC as a benefit to low-income earners.

Association of Superannuation Funds of Australia chief executive Dr Martin Fahy said this change and the government’s implicit commitment to increasing the SG rate to 12 per cent were important steps in providing adequate retirement savings, particularly for women and younger Australians.

“Australia’s superannuation system enables Australians to retire with dignity. With the legislated increase of the superannuation guarantee to 12 per cent, and a maturing superannuation system, we expect to see a greater proportion of retirees relying less on the age pension and more on their retirement savings,” Fahy said.

He said the removal of the $450 threshold will be beneficial to low-income and casual employees, many of whom are women, and would give them an entitlement that others already had as a right.

The Actuaries Institute also welcomed the removal of the $450 a month threshold, but was critical of the government for not defining the role of superannuation.

“The government has not leveraged the Retirement Income Review to make more impactful changes to the retirement incomes system, such as measures to help non-homeowners (renters) in retirement, in particular some of the most at risk of poverty in retirement – single female renters,” Actuaries Institute president Jefferson Gibbs said.

“The system also still lacks an overall objective for superannuation and its role in supporting retirement incomes.

“The institute urges the government to provide clarity on the purpose of superannuation to enable more substantive reforms to be sensibly made to improve the system.”

Source: smsmagazine.com.au

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Category News

Covenant pointless for SMSFs?

SMSF Association urges rethink on NALE

Trustees more open to advice

ATO offers interim six-member solution

NCC bring-forward date confirmed

Bring-forward measures and 6-member SMSF bill passes Parliament

Pension drawdown rate to remain halved for next year

SMSF statistics highlight post-COVID recovery

ATO embarks on new SMSF research survey

Federal Budget 2021: Necessary super changes welcomed