Even the most seasoned SMSF Trustees and members realise that they need to be on top of their game over the coming 12 months. If you are running your own SMSF or your better half is doing so, then drag yourself and them along to the SMSF Association’s SMSF & Investor Event. Let the experts guide you.
Full disclosure, I am a board member of the SMSF Association and I do want as many people as possible to come along and boost their knowledge and be prepared for what the budget and possible new future government will throw at us. I have also bargained for a deal for you and if you use the coupon code “SMSFCoach” when registering you will be able to attend for FREE
So what is on the agenda:
Following the Federal Budget and leading up to the end of the financial year, hear from key SMSF and investment experts on crucial factors you as a trustee or your clients if you’re a n SMSF professional,, should be thinking about in regards to your fund/your clients’ funds. The program will feature:
A Special Address on the impact of the removal of franking credit refunds on SMSFs
Your SMSF Update – what’s new in self managed super
End of Financial Year – review your investment portfolio in light of political and investment markets
Peter Hogan our SMSF Education expert will discuss Everything you need to know about starting and receiving pensions – whether you are starting to think about moving into retirement or already earning a pension this session will cover everything you need to know especially as it relates to the Transfer Balance Cap.
And more to be announced soon…
WHERE & WHEN
Date: Tuesday 9 April 2019
Time: 8:15am – 3:30pm (including lunch and morning tea)
Register here using the coupon code ‘SMSFCoach’ for Free
(I confirm that I receive no commissions, fees or incentives for promoting this event and will not receive any of your private information)
SHOUT OUT TO SMSF PROFESSIONALS
If you are a SMSF Accountant, Auditor or Financial Planner then please pass on this opportunity to your clients as we need SMSF Trustees to be more knowledgeable than ever. Understand that ASIC now expects you to be providing education to your clients and you must find cost effective ways of doing this. Why not leverage of your association membership and provide your clients with access to this event or maybe even come along with a group of them.
If you are in Victoria don’t feel left out we will be coming to Melbourne too in June!
Liam Shorte B.Bus SSA™ AFP
Financial Planner & SMSF Specialist Advisor™
Tel: 02 98941844, Mobile: 0413 936 299
PO Box 6002 BHBC, Baulkham Hills NSW 2153
5/15 Terminus St. Castle Hill NSW 2154
Corporate Authorised Representative of Viridian Select Pty Ltd ABN 41 621 447 345, AFSL 51572
This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs. This website provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such.
The ATO has recently redesigned the Division 293 notice to provide information clearly and concisely. This includes providing the full assessment calculation to make it easier for people to understand how their tax has been calculated. This will also make it easier to identify any erroneous assessments due to incorrect reporting of information
Julie Steed, Senior Technical Services Manager of Australian Executor Trustees Part of the IOOF group, has kindly provided a refresher on the Division 293 tax and a review of the newly redesigned ATO notice that can be seen here: Div 293 notice of assessment
Division 293 tax
From 1 July 2017, the income threshold above which individuals pay an additional 15% tax on certain superannuation contributions reduced from $300,000 to $250,000. In December 2018 the ATO began issuing over 90,000 Division 293 notices for the 2017/18 income year. It is estimated that approximately 125,000 individuals will receive a Division 293 notice in the 2025FY.
Importantly, there are no strategies that can be used to reduce an individual’s liability for Division 293 tax. However, understanding the options that are available and how the Division 293 notice process works will assist individuals who receive a notice.
Overview
People with Division 293 income greater than $250,000 will pay 15 per cent additional tax on certain superannuation contributions. The tax is a personal tax rather than a tax deducted from super contributions by a fund. However, individuals may elect to release funds from super to pay the tax (see the Choices section below).
Division 293 income
Division 293 income includes:
taxable income
reportable fringe benefits
total net investment losses.
Ad-hoc income
Individuals who are not generally high income earners may still be liable for Division 293 tax if they receive certain one-off payments during a year. Such payments include eligible termination payments, the taxable component of a superannuation death benefit and capital gains.
However, the taxable component of a super lump sum benefit (other than a death benefit) is not included where:
it is received by individuals from preservation age to age 59
it is up to the current low rate cap of $205,000.
Division 293 contributions
Division 293 contributions include:
employer contributions
personal deductible contributions
contributions for a defined benefit interest (valued by an actuary)
employer contributions (including salary sacrifice) to a constitutionally protected fund.
The additional tax does not apply to:
excess concessional contributions
non-concessional contributions
contributions to certain Government funds for senior personnel, unless they are salary sacrifice contributions
contributions for certain Judges to defined benefit funds.
Calculation of Division 293 tax
Division 293 tax is 15% of the lesser of:
the amount of the Division 293 contributions
the amount of Division 293 income and Division 293 contributions above the $250,000 threshold.
Case study
Ryan has the following Division 293 details:
Division 293 income
$240,000
Division 293 contributions
$20,000
Total
$260,000
Division 293 tax is payable on $10,000, being the lesser of:
$20,000
$260,000 – $250,000 = $10,000
The Division 293 tax amount is 15% x $10,000 = $1,500
Division 293 notice
The ATO issues an Additional tax on concessional contributions (Division 293) notice to individuals which specifies the additional amount of tax that is payable and the due date for payment.
The ATO has recently redesigned the Division 293 notice to provide information clearly and concisely. This includes providing the full assessment calculation to make it easier for people to understand how their tax has been calculated. This will also make it easier to identify any erroneous assessments due to incorrect reporting of information.
The notice will also explain how to avoid interest charges, view statements of accounts online and the process for disagreeing with the assessment.
Choices
When an individual receives a Division 293 assessment they can choose to pay the tax from their personal resources. Alternatively, they can elect to have the amount released from their super fund to pay the tax. The time frame for making the election is 60 days. However, this may be a greater time frame than the date upon which payment of the tax is due.
The election can be made to release the tax amount from any super fund (other than some defined benefit funds). There is no requirement for the release to be made from the fund that received the contributions.
Release authority
If an election to have the amount released from super is made, the ATO will send the super fund a release authority and the fund will make the payment to the ATO. Funds are required to make the payment within 10 business days from the date the release authority is issued by the ATO.
Importantly a fund must not release an amount until they have received the ATO release authority. This requirement is sometimes misunderstood by SMSF trustees.
Conclusion
Understanding the choices available and the process involved in paying Division 293 tax can assist in ensuring that any tax payable is completed in a manner most appropriate to an individual’s circumstances.
Are you looking for an advisor that will keep you up to date and provide guidance and tips like in this blog? Then why not contact me at our Castle Hill or Windsor office in Northwest Sydney to arrange a one on one consultation. Just click the Schedule Now button up on the left to find the appointment options.
Corporate Authorised Representative of Viridian Advisory Pty Ltd ABN 34 605 438 042, AFSL 476223
This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs. This website provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such.
Over this last week I have read so many politically biased responses to Bill Shorten’s proposed strategy to stop the refunds of franking credits that I despaired and I know it is going to be a political football rather than part of comprehensive tax reform. Then I came across a really well explained and positioned argument from Scott Phillips of The Motley Fool fame that takes the politics out of the analysis. I immediately reached out to Scott and asked him could I re-post it for my readers who may be finding the debate confusing or hard to explain to others. So here goes:
Why Bill Shorten is wrong — and right — on dividends
Scott Phillips
What’s that? Bill Shorten has announced a new policy on the refund of franking credits?
I hadn’t noticed.
Okay, that’s not true. I noticed. And, based on feedback on Twitter over the last week, many of you noticed, too.
If Shorten wanted to stir a hornet’s nest, he got just that. Maybe it’s clever politics. Maybe the focus groups told the pollsters this was a smart political strategy.
It sure as heck isn’t good policy, in my view.
Before you fire off an email to either abuse me or suggest I be knighted, let me explain.
I’m going to start with three premises that I think most people can agree on:
The tax system should be fair
You shouldn’t have to pay tax twice on dividend income; and
The tax system, as it stands, is broken.
That last point seems to be Shorten’s main thrust. And it’s a battle cry taken up by many partisans:
“We have a problem, and I have a solution. If you don’t like my solution, you’re saying we don’t have a problem.”
To which I reply:
“We absolutely have a problem. But your solution is a poor one. There are better ways to skin this cat.”
And before we go any further, please leave your political affiliations at the door. This week, on Twitter, I have bagged and praised Labor for different policies. I’ve done the same in the past to the Libs. If you can’t put aside your team jersey and engage in a discussion of ideas, then there’s not much for you in what follows.
But if you’re interested in good policy, read on.
Bill Shorten’s policy, as announced, goes something like this:
“We’re happy for you to reduce your tax using franking credits, but we’re not going to give you a refund.”
There are a few problems with that approach:
First, it implies that if you pay tax, you’re welcome to use the credits to reduce your tax burden to zero.
Second, those credits somehow magically are worthless once you hit zero, meaning that to me they’re worth something, but to a retiree in a 0% tax bracket, they’re worth nothing.
How can franking credits be worth different amounts to different people in different circumstances? Search me… I’m buggered if I know.
And third, and this is what’s stirred up most heat among those who have gone into bat for the policy:
“I pay tax and my taxes shouldn’t go to give a refund/handout to people who already have a lot of money.”
Now, don’t get me wrong. I think the current situation — regarding the ability to pay exactly zero tax on certain income in retirement that might be up to $80,000 — is crackers.
But, Shorten’s policy doesn’t fix that problem. Here’s why:
Consider three people, all of whom have SMSFs in pension phase, and who — according to the current tax rules — pay 0% tax: Banking Betty, Rental Richard and Dividend Davina.
Banking Betty deposits $100,000, and earns $2,000 each year in interest. Betty doesn’t pay any tax.
Rental Richard has a $100,000 property that pays him $2,000 each year in rent. Richard doesn’t pay any tax.
Dividend Davina buys $100,000 worth of shares that earned a profit of $2,000. The company paid tax of $600, so Davina gets $1,400. Davina doesn’t pay any tax.
See the difference here? Because Davina’s investment is in the form of shares in a company, she gets less than the other two. Even though she’s not supposed to pay any tax, the company paid tax, so she gets less.
Under current rules, she’d get the $600 back, delivering on the current government policy of a 0% tax rate, and equalising the return for each of those investors.
Bill Shorten, in effect, is penalising people for owning shares.
Now, let’s address the elephant in the room. Yes, because the company has already paid tax on that $2,000, Davina does officially get a refund. And the optics of that are bad: it looks like somehow the taxpayer is subsidising Davina.
But it’s all a question of cash flows and timing. The ATO just gives Davina back the money the company paid in tax.
And remember, a company is just a legal structure to organise your ownership interest in an asset. Shares in a company aren’t all that different in effect to accounts at a bank. Your bank account is evidence that you have a claim to a share of that bank’s assets, even if you don’t know specifically which notes you deposited.
Imagine a scenario under which Banking Betty’s bank withholds 30% of her interest and sends it to the government as tax. And where Rental Richard’s property manager is obligated to send 30% of his rental income to the ATO.
Both of these investors would have to fill out a tax return and the ATO would send them a refund — because tax was paid on their income, even though the tax rate should have been 0%.
Would Bill Shorten stop Betty and Richard getting their money back?
I doubt it.
But somehow, because Labor has (unfortunately, disingenuously) used extreme examples to make their point, and because they’ve dressed it up as a handout, they’ve mischaracterised the situation.
Somehow Dividend Davina is a fatcat living high on the hog, while Betty and Richard are perfectly entitled to pay no tax.
Essentially, because of the asset class they decide to invest in, our three protagonists are being treated differently.
Sound fair to you?
No, me neither.
Yes, the idea of a ‘refund’ for someone who has paid no tax feels, somehow, deeply wrong. But it’s because tax was paid by the company, on behalf of a shareholder who shouldn’t be paying tax, so the ATO is essentially just righting that wrong.
Still with me? Excellent!
Still fuming that well-off people pay no tax? Me too.
What? Didn’t I just spend 984 words (don’t waste time counting them. I checked) defending those people?
Well, yes. And no.
Here’s where both parties are engaging in a phony war of words. And we’re poorer for it.
Having an essentially uncapped income at a 0% tax rate is madness.
Yes, yes, it’s not technically uncapped, for a host of reasons. So let’s say $80,000 among friends.
You and I pay a decent slug of tax on an $80,000 income. And there’s no reason that a well-off retiree should be able to draw a completely untaxed income of a similar amount, when they likely have a very decent asset base — say a home and a seven-figure superannuation balance.
It’s simply not sustainable, especially as more boomers retire, to have that slice of the economic income pie remain completely untaxed.
But — and this is important — that doesn’t mean we should simply ban franking credit refunds and assume that fixes the problem.
Let’s go back to our alliterative actors, Betty, Richard and Davina.
If Betty was earning $80,000 in interest, should that be untaxed? Should Richard’s $80,000 in rent be untouched by the taxman? Should Davina’s $80,000 in dividends remain completely unscathed?
I don’t think so. But again, it’s not a question of the source of the income; it’s the size.
Under Bill Shorten’s plan, Davina would be worse off, but Betty and Richard laugh all the way to the bank. Does anyone, seriously, think that’s a good basis for a tax plan?
I didn’t think so.
Here’s what I’d do: I’d have a generous tax-free threshold for income from superannuation, maybe $10,000 or so above the pension level. It’s not unreasonable that you’re allowed a little extra, given the sacrifice you made to save for your retirement.
But above that level, I’d implement a progressive tax scale not unlike the one that applies to regular income: The more you earn, the higher your marginal tax rate.
Simple, no?
Fair, yes?
That way, the tax code doesn’t discriminate on the basis of the asset class. There are no free lunches. And the unsustainable tax situation that currently applies to Super is fixed.
So Bill Shorten, and Chris Bowen, it’s time to admit defeat and go back to the drawing board. Feel free to use my template, above.
And Scott Morrison and Malcolm Turnbull, please stop with the emotive and negative language and grandstanding.
Politics should be a battle of ideas, not soundbites The best idea, well explained, should win, regardless of political party or ideological affiliation.
And, ladies and gentlemen of the Parliament, the Australian people will give you bonus points for explaining it clearly and for anything that reduces the complexity of our tax affairs, while ensuring fairness.
Indeed, Turnbull and Morrison’s political forebear, John Howard spoke to the National Press Club in 2014 when he shared the stage with former Labor PM, Bob Hawke. At that event, according to the Sydney Morning Herald , Howard said
“We have sometimes lost the capacity to respect the ability of the Australian people to absorb a detailed argument. They will respond to an argument for change and reform [but] they want two requirements. They want to be satisfied it’s in the national interest, because they have a deep sense of nationalism and patriotism. They also want to be satisfied it’s fundamentally fair.”
I’d like to think that’s still true.
I agree with Bill Shorten’s characterisation of the problem. I disagree completely with his solution.
I imagine I lost the most partisan readers — of both stripes — a few minutes ago. If you’re still reading, thank you for engaging in a discussion of ideas.
I hope I’ve convinced some of you. Of those I haven’t convinced, I hope I’ve at least done a decent job of addressing the issue, without bias, grandstanding or misdirection. Thanks for reading.
At the very least, I hope I’ve productively added to the conversation. It’s the least each of us can do.
I hope this guidance has been helpful and please take the time to comment. Feedback always appreciated. Please reblog, retweet, like on Facebook etc to make sure we get the news out there. As always please contact me if you want to look at your own options. We have offices in Castle Hill and Windsor but can meet clients anywhere in Sydney or via Skype. Just click the Schedule Now button up on the left to find the appointment options.
Liam Shorte B.Bus SSA™ AFP
Financial Planner & SMSF Specialist Advisor™
Tel: 02 98941844, Mobile: 0413 936 299
PO Box 6002 BHBC, Baulkham Hills NSW 2153
5/15 Terminus St. Castle Hill NSW 2154
Corporate Authorised Representative of Viridian Select Pty Ltd ABN 41 621 447 345, AFSL 51572
This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs. This website provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such.
1 July 2017 was a major date when it comes to SMSF changes and accurate valuations are key to compliance with many of the changes. Unsure of what the valuation guidelines are for your self-managed superannuation fund (SMSF)? I have compiled a guide on what you need to know about asset valuation as SMSFs are now required to use market value reporting for all their financial accounts and statements. For Financial Year 2019, getting the value right is more important than ever, especially with the impact of the new super changes. Getting it wrong may impact on the fund’s compliance and whether you can make non-concessional contributions or commence a pension.
What is the market value of an asset?
“Market value” means the amount that a willing buyer of the asset could reasonably be expected to pay to acquire the asset from a willing seller if the following assumptions were made:
• the buyer and the seller dealt with each other at arm’s length in relation to the sale
• the sale occurred after proper marketing of the asset, and
• the buyer and the seller acted knowledgeably and prudentially in relation to the sale.
How do I go about determining market value?
For assets such as cash, term deposits, widely-held managed funds, ETFs and listed securities, these can be valued easily each year and should be valued at the end of each financial year. It is typically easy for trustees to value shares, managed funds and other listed investments because they can obtain daily valuations online. Here are a few links that may be helpful for historic share prices or for companies that have been delisted from the exchange.
DeListed carries historical share prices for many listed and delisted companies at this website, including prices for the former names of such companies. The prices go back as far as 1986 in some cases and include to mid-year 2009.
SMSFs with real estate, exotic assets or investments in private companies or trusts will require additional work from auditors. from an appropriately qualified person, such as an independent registered valuer or real estate agent.
The following guide provides an outline of what is required to help in valuing fund investments where market values are not readily available.
Real estate / Property valuations
Property needs to be valued at market value every year at 30 June, but the ATO does not require SMSF trustees to undertake an external valuation for all assets each year but is recommended at least every 3 years. For instance, assets such as real property may not need an annual valuation unless a significant event (i.e. natural disaster, market volatility, macroeconomic events or changes to the character of the asset) occurred that has created the need to review the most recent valuation.. Valuation of real estate can be undertaken by anyone, including the trustee(s), if suitably qualified, as long as it is based on objective and supportable data.
The following would generally be considered adequate audit evidence:
Real estate agent valuation (appraisal letter which they back up with comparable sales or listed properties)
Formal valuation from a qualified and independent valuer (compulsory if for commercial properties leased to related parties)
Valuation from trustees (with evidence of market valuation such as recent sales or online valuations). We recommend at least a comparison with values of 4-6 comparable properties if doing it yourself.
The latest cost-effective option is valuations from online real estate services like RPData can be used so ask your Administrator if they have access to this service.
Is the rent at commercial terms?
The fund’s auditor may also request evidence to show the rental income received by the fund is paid on commercial terms, such as
Annual Rental Income & Expenses Schedule from your real estate management agent covering the lease of the property during the year. Some charge $30-$50 for this but if you say it is offered free on your other properties you can squeeze them!
Rental appraisal by an independent real estate agent (for related party transactions)
Supporting evidence such as For Rent listing or tenants notice to end contract and an explanation from the trustees if no rental income was received during the year
Units in unlisted trusts or shares in unlisted companies
It can sometimes be tricky to obtain reliable audit evidence to support the value of unlisted investments. The company or trust may not be required to value their assets at market value and trustees must consider the value of the assets held by the entity. For example, where the trust or company holds property, any value should be based on the guidelines for real estate outlined above. Sometimes the other owners (individuals. companies or family trusts) in the trust do not require the same degree of scrutiny and can refuse to incur the extra costs to to suit the SMSF requirements. You will need to work around this issue with your fund sometimes picking up the expense.
Another consideration is that unlisted entities may not be required to get their financial statements independently audited, which make them less reliable from an audit perspective.
The following would generally be considered adequate audit evidence:
Audited financial statements of the entity
A share/unit price based on recent sales or purchases of the shares or units
Financial statements of the entity, with evidence that the underlying asset is valued at market value recently.
Independent valuation of the underlying assets of the entity
Loans to related and non-related parties
Firstly your fund is not meant to lend money to a fund member or relative of the member under any circumstances. Read here for more detail. Is your SMSF lending money to someone?
When your fund makes a loan to another entity or individual not related to a member then the loan agreement will specify the terms and conditions of the loan, including payment terms, interest on the loan and whether the loan it is secured or unsecured.
The market value of a loan is determined by its recoverability which could be:
Evidence of repayment of the loan (if applicable)
Details on the financial position of the borrower confirming their ability to repay (e.g. net asset position, sources of cash)
Details and value of security held as collateral for the loan (if applicable)
Collectables and personal use assets
In the case of collectables and personal use assets, the valuer should be a current member of a relevant professional body or trade association such as the Australian Antique and Art Dealers Association, the Auctioneers and Valuers Association of Australia and the National Council of Jewellery Valuers. Collectable and personal use assets cover items such as artwork, memorabilia, collectable coins and bank notes, wine and vintage cars. Metals such as gold and silver are only considered collectable items if their value exceeds the value of the metal based on its weight.
Bullion
If a trustee holds bullion at a storage facility or at the mint the documentation provided by these places will act as proof of the holding to the auditor.
If trustees choose to store their bullion at home or their business premises the auditor will require a resolution as at 30 June of each year which confirms the following;
• Inventory listing of the type(s) and quantities of metal held.
• Confirmation the asset is stored securely and not available for personal use by the members.
• Confirmation that the metal(s) are insured for the correct value.
Valuation in this format is less costly than holding in the form of a collectible. The market value can easily be verified to live spot prices which are readily available on a number of Bullion dealers’ websites.
Who needs this information
Your administrator or accountants needs this information to complete the annual accounts. Apart from preparing your annual accounts, you will also need to value assets:
if your fund has investment dealings with, or sells assets to, a related party
if you need to determine the percentage of in-house assets in your fund
on the commencement day of a pension
if your fund transfers a collectable or personal use asset to a related party – in this case the valuation must be done by a qualified independent valuer.
So who’s watching me?
Your fund’s independent auditor (your accountant may hide this person fairly well in the background but you should make yourself know to them and make it a team relationship not an adversary one). It is their responsibility to be making checks as to whether the annual financial statements properly reflect the market value based on objective and supportable evidence. they may request you get further evidence if not satisfied and they can issue a qualified audit opinion. Any qualified opinion will be reported by the auditor to the ATO.
On assessing the auditor’s report if the ATO is not satisfied that the assets are not recorded at market value in the fund’s financial accounts a fine of 10 penalty units (currently $2,100) per trustee can be imposed.
ATO Valuation guidelines for self-managed superannuation funds
The ATO provides guidelines here on their website to assist SMSF trustees when valuing assets for superannuation purposes.
For SMSF members affected by the $1.6m transfer balance cap, an appropriate valuation is also essential for FY 2016/17 to determine whether the member’s pension balance(s) may exceed the cap and for purposes of the CGT cost base reset.
Are you looking for an advisor that will keep you up to date and provide guidance and tips like in this blog? then why now contact me at our Castle Hill or Windsor office in Northwest Sydney to arrange a one on one consultation. Just click the Schedule Now button up on the left to find the appointment options.
Liam Shorte B.Bus SSA™ AFP
Financial Planner & SMSF Specialist Advisor™
Tel: 02 98941844, Mobile: 0413 936 299
PO Box 6002 BHBC, Baulkham Hills NSW 2153
5/15 Terminus St. Castle Hill NSW 2154
Corporate Authorised Representative of Viridian Select Pty Ltd ABN 41 621 447 345, AFSL 51572
This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs. This website provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such.
With all the talk about Total Super Balance caps and where people will invest money going forward if they can’t get it in to superannuation, the spotlight is being shone on “trusts” at present. This has also brought with it the claims of tax avoidance or tax minimisation, so what exactly are trusts and are there differences between Family Trusts, Units Trusts, Discretionary Trusts and Testamentary Trusts to name a few.
Trusts are a common strategy and this article aims to aid a better understanding of how a trust works, the role and obligations of a trustee, the accounting and income tax implications and some of the advantages and pitfalls. Of course, there is no substitute for specialist legal, tax and accounting advice when a specific trust issue arises and the general information in this article needs to be understood within that context.
Introduction
Trusts are a fundamental element in the planning of business, investment and family financial affairs. There are many examples of how trusts figure in everyday transactions:
Cash management trusts and property trusts are used by many people for investment purposes
Joint ventures are frequently conducted via unit trusts
Money held in accounts for children may involve trust arrangements
Superannuation funds are trusts
Many businesses are operated through a trust structure
Executors of deceased estates act as trustees
There are charitable trusts, research trusts and trusts for animal welfare
Solicitors, real estate agents and accountants operate trust accounts
There are trustees in bankruptcy and trustees for debenture holders
Trusts are frequently used in family situations to protect assets and assist in tax planning.
Although trusts are common, they are often poorly understood.
What is a trust?
A frequently held, but erroneous view, is that a trust is a legal entity or person, like a company or an individual. But this is not true and is possibly the most misunderstood aspect of trusts.
A trust is not a separate legal entity. It is essentially a relationship that is recognised and enforced by the courts in the context of their “equitable” jurisdiction. Not all countries recognise the concept of a trust, which is an English invention. While the trust concept can trace its roots back centuries in England, many European countries have no natural concept of a trust, however, as a result of trade with countries which do recognise trusts their legal systems have had to devise ways of recognising them.
The nature of the relationship is critical to an understanding of the trust concept. In English law the common law courts recognised only the legal owner and their property, however, the equity courts were willing to recognise the rights of persons for whose benefit the legal holder may be holding the property.
Put simply, then, a trust is a relationship which exists where A holds property for the benefit of B. A is known as the trustee and is the legal owner of the property which is held on trust for the beneficiary B. The trustee can be an individual, group of individuals or a company. There can be more than one trustee and there can be more than one beneficiary. Where there is only one beneficiary the trustee and beneficiary must be different if the trust is to be valid.
The courts will very strictly enforce the nature of the trustee’s obligations to the beneficiaries so that, while the trustee is the legal owner of the relevant property, the property must be used only for the benefit of the beneficiaries. Trustees have what is known as a fiduciary duty towards beneficiaries and the courts will always enforce this duty rigorously.
The nature of the trustee’s duty is often misunderstood in the context of family trusts where the trustees and beneficiaries are not at arm’s length. For instance, one or more of the parents may be trustees and the children beneficiaries. The children have rights under the trust which can be enforced at law, although it is rare for this to occur.
Types of trusts
In general terms the following types of trusts are most frequently encountered in asset protection and investment contexts:
Fixed trusts
Unit trusts
Discretionary trusts – Family Trusts
Bare trusts
Hybrid trusts
Testamentary trusts
Superannuation trusts
Special Disability Trusts
Charitable Trusts
Trusts for Accommodation – Life Interests and Rights of Residence
A common issue with all trusts is access to income and capital. Depending on the type of trust that is used, a beneficiary may have different rights to income and capital. In a discretionary trust the rights to income and capital are usually completely at the discretion of the trustee who may decide to give one beneficiary capital and another income. This means that the beneficiary of such a trust cannot simply demand payment of income or capital. In a fixed trust the beneficiary may have fixed rights to income, capital or both.
Fixed trusts
In essence these are trusts where the trustee holds the trust assets for the benefit of specific beneficiaries in certain fixed proportions. In such a case the trustee does not have to exercise a discretion since each beneficiary is automatically entitled to his or her fixed share of the capital and income of the trust.
Unit trusts
These are generally fixed trusts where the beneficiaries and their respective interests are identified by their holding “units” much in the same way as shares are issued to shareholders of a company.
The beneficiaries are usually called unitholders. It is common for property, investment trusts (eg managed funds) and joint ventures to be structured as unit trusts. Beneficiaries can transfer their interests in the trust by transferring their units to a buyer.
There are no limits in terms of trust law on the number of units/unitholders, however, for tax purposes the tax treatment can vary depending on the size and activities of the trust.
Discretionary trusts – Family Trusts
These are often called “family trusts” because they are usually associated with tax planning and asset protection for a family group. In a discretionary trust the beneficiaries do not have any fixed interests in the trust income or its property but the trustee has a discretion to decide whether anyone will receive income and/or capital and, if so, how much.
For the purposes of trust law, a trustee of a discretionary trust could theoretically decide not to distribute any income or capital to a beneficiary, however, there are tax reasons why this course of action is usually not taken.
The attraction of a discretionary trust is that the trustee has greater control and flexibility over the disposition of assets and income since the nature of a beneficiary’s interest is that they only have a right to be considered by the trustee in the exercise of his or her discretion.
Bare trusts
A bare trust exists when there is only one trustee, one legally competent beneficiary, no specified obligations and the beneficiary has complete control of the trustee (or “nominee”). A common example of a bare trust is used within a self-managed fund to hold assets under a limited recourse borrowing arrangement.
Hybrid trusts
These are trusts which have both discretionary and fixed characteristics. The fixed entitlements to capital or income are dealt with via “special units” which the trustee has power to issue.
Testamentary trusts
As the name implies, these are trusts which only take effect upon the death of the testator. Normally, the terms of the trust are set out in the testator’s will and are often used when the testator wishes to provide for their children who have yet to reach adulthood or are handicapped.
Superannuation trusts
All superannuation funds in Australia operate as trusts. This includes self-managed superannuation funds.
The deed (or in some cases, specific acts of Parliament) establishes the basis of calculating each member’s entitlement, while the trustee will usually retain discretion concerning such matters as the fund’s investments and the selection of a death benefit beneficiary.
The Federal Government has legislated to establish certain standards that all complying superannuation funds must meet. For instance, the “preservation” conditions, under which a member’s benefit cannot be paid until a certain qualification has been reached (such as reaching age 65), are a notable example.
Special Disability Trusts
Special Disability Trusts allow a person to plan for the future care and accommodation needs of a loved one with a severe disability. Find out more in this Q & A about Special Disability Trusts.
Charitable Trusts
You may wish to provide long term income benefit to a charity by providing tax free income from your estate, rather than giving an immediate gift. This type of trust is effective if large amounts of money are involved and the purpose of the gift suits a long term benefit e.g. scholarships or medical research.
Trusts for Accommodation – Life Interests and Right of Residence
A Life Interest or Right of Residence can be set up to provide for accommodation for your beneficiary. They are often used so that a family member can have the right to live in the family home for as long as they wish. These trusts can be restrictive so it is particularly important to get professional advice in deciding whether such a trust is right for your situation.
Establishing a trust
Although a trust can be established without a written document, it is preferable to have a formal deed known as a declaration of trust or a deed of settlement. The declaration of trust involves an owner of property declaring themselves as trustee of that property for the benefit of the beneficiaries. The deed of settlement involves an owner of property transferring that property to a third person on condition that they hold the property on trust for the beneficiaries.
The person who transfers the property in a settlement is said to “settle” the property on the trustee and is called the “settlor”.
In practical terms, the original amount used to establish the trust is relatively small, often only $10 or so. More substantial assets or amounts of money are transferred or loaned to the trust after it has been established. The reason for this is to minimise stamp duty which is usually payable on the value of the property initially affected by the establishing deed.
The identity of the settlor is critical from a tax point of view and it should not generally be a person who is able to benefit under the trust, nor be a parent of a young beneficiary. Special rules in the tax law can affect such situations.
Also critical to the efficient operation of a trust is the role of the “appointor”. This role allows the named person or entity to appoint (and usually remove) the trustee, and for that reason, they are seen as the real controller of the trust. This role is generally unnecessary for small superannuation funds (those with fewer than five members) since legislation generally ensures that all members have to be trustees.
The trust fund
In principle, the trust fund can include any property at all – from cash to a huge factory, from shares to one contract, from operating a business to a single debt. Trust deeds usually have wide powers of investment, however, some deeds may prohibit certain forms of investment.
The critical point is that whatever the nature of the underlying assets, the trustee must deal with the assets having regard to the best interests of the beneficiaries. Failure to act in the best interests of the beneficiaries would result in a breach of trust which can give rise to an award of damages against the trustee.
A trustee must keep trust assets separate from the trustee’s own assets.
The trustee’s liabilities
A trustee is personally liable for the debts of the trust as the trust assets and liabilities are legally those of the trustee. For this reason if there are significant liabilities that could arise a limited liability (private) company is often used as trustee.
However, the trustee is entitled to use the trust assets to satisfy those liabilities as the trustee has a right of indemnity and a lien over them for this purpose.
This explains why the balance sheet of a corporate trustee will show the trust liabilities on the credit side and the right of indemnity as a company asset on the debit side. In the case of a discretionary trust it is usually thought that the trust liabilities cannot generally be pursued against the beneficiaries’ personal assets, but this may not be the case with a fixed or unit trust.
Powers and duties of a trustee
A trustee must act in the best interests of beneficiaries and must avoid conflicts of interest. The trustee deed will set out in detail what the trustee can invest in, the businesses the trustee can carry on and so on. The trustee must exercise powers in accordance with the deed and this is why deeds tend to be lengthy and complex so that the trustee has maximum flexibility.
Who can be a trustee?
Any legally competent person, including a company, can act as a trustee. Two or more entities can be trustees of the same trust.
A company can act as trustee (provided that its constitution allows it) and can therefore assist with limited liability, perpetual succession (the company does not “die”) and other advantages. The company’s directors control the activities of the trust. Trustees’ decisions should be the subject of formal minutes, especially in the case of important matters such as beneficiaries’ entitlements under a discretionary trust.
Trust legislation
All states and territories of Australia have their own legislation which provides for the basic powers and responsibilities of trustees. This legislation does not apply to complying superannuation funds (since the Federal legislation overrides state legislation in that area), nor will it apply to any other trust to the extent the trust deed is intended to exclude the operation of that legislation. It will usually apply to bare trusts, for example, since there is no trust deed, and it will apply where a trust deed is silent on specific matters which are relevant to the trust – for example, the legislation will prescribe certain investment powers and limits for the trustee if the deed does not exclude them.
Income tax and capital gains tax issues
Because a trust is not a person, its income is not taxed like that of an individual or company unless it is a corporate, public or trading trusts as defined in the Income Tax Assessment Act 1936. In essence the tax treatment of the trust income depends on who is and is not entitled to the income as at midnight on 30 June each year.
If all or part of the trust’s net income for tax purposes is paid or belongs to an ordinary beneficiary, it will be taxed in their hands like any other income. If a beneficiary who is entitled to the net income is under a “legal disability” (such as an infant), the income will be taxed to the trustee at the relevant individual rates.
Income to which no beneficiary is “presently entitled” will generally be taxed at highest marginal tax rate and for this reason it is important to ensure that the relevant decisions are made as soon as possible after 30 June each year and certainly within 2 months of the end of the year. The two month “period of grace” is particularly relevant for trusts which operate businesses as they will not have finalised their accounts by 30 June. In the case of discretionary trusts, if this is done the overall amount of tax can be minimised by allocating income to beneficiaries who pay a relatively low rate of tax.
The concept of “present entitlement” involves the idea that the beneficiary could demand immediate payment of their entitlement.
It is important to note that a company which is a trustee of a trust is not subject to company tax on the trust income it has responsibility for administering.
In relation to capital gains tax (CGT), a trust which holds an asset for at least 12 months is generally eligible for the 50% capital gains tax concession on capital gains that are made. This discount effectively “flows” through to beneficiaries who are individuals. A corporate beneficiary does not get the benefit of the 50% discount. Trusts that are used in a business rather than an investment context may also be entitled to additional tax concessions under the small business CGT concessions.
Since the late 1990s discretionary trusts and small unit trusts have been affected by a number of highly technical measures which affect the treatment of franking credits and tax losses. This is an area where specialist tax advice is essential.
Why a trust and which kind?
Apart from any tax benefits that might be associated with a trust, there are also benefits that can arise from the flexibility that a trust affords in responding to changed circumstances.
A trust can give some protection from creditors and is able to accommodate an employer/employee relationship. In family matters, the flexibility, control and limited liability aspects combined with potential tax savings, make discretionary trusts very popular.
In arm’s length commercial ventures, however, the parties prefer fixed proportions to flexibility and generally opt for a unit trust structure, but the possible loss of limited liability through this structure commonly warrants the use of a corporate entity as unitholder ie a company or a corporate trustee of a discretionary trust.
There are strengths and weaknesses associated with trusts and it is important for clients to understand what they are and how the trust will evolve with changed circumstances.
Trusts which incur losses
One of the most fundamental things to understand about trusts is that losses are “trapped” in the trust. This means that the trust cannot distribute the loss to a beneficiary to use at a personal level. This is an important issue for businesses operated through discretionary or unit trusts.
Establishment procedures
The following procedures apply to a trust established by settlement (the most common form of trust):
Decide on Appointors and back-up Appointors as they are the ultimate controllers of the trust. They appoint and change Trustees.
Settlor determined to establish a trust (should never be anyone who could become a beneficiary)
Select the trustee. If the trustee is a company, form the company.
Settlor makes a gift of money or other property to the trustee and executes the trust deed. (Pin $10 to the front of the register is the most common way of doing this)
Apply for ABN and TFN to allow you open a trust bank account
Establish books of account and statutory records and comply with relevant stamp duty requirements (Hint: Get your Accountant to do this)
Are you looking for an advisor that will keep you up to date and provide guidance and tips like in this blog? then why now contact me at our Castle Hill or Windsor office in Northwest Sydney to arrange a one on one consultation. Just click the Schedule Now button up on the left to find the appointment options.
Liam Shorte B.Bus SSA™ AFP
Financial Planner & SMSF Specialist Advisor™
Tel: 02 98941844, Mobile: 0413 936 299
PO Box 6002 BHBC, Baulkham Hills NSW 2153
5/15 Terminus St. Castle Hill NSW 2154
Corporate Authorised Representative of Viridian Select Pty Ltd ABN 41 621 447 345, AFSL 51572
This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs. This website provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such.
Client Question : My next question is about the threshold income level at which my wife and I will start to pay personal tax in 2017-18. I read “about $28,000” in the paper the other day for my situation (age >65), but my wife does not turn 65 until 2018, so her tax-free level may be different. It would be useful to know these numbers in the case we decide to take some lump sums out of super because of the new limits. We are considering investing some money tax-free in our personal names, free of SMSF red tape.
Personal Tax-free Thresholds
The amount you can earn before you have to pay tax, actually depends on your age.
Under 65
For those people under age 65, the effective tax-free threshold is currently $20,542. How do we calculate this amount? Well, if you look at the ATO’s current Individual income tax rate table, you pay no tax on the first $18,200 you earn in a year.
However, you also get the benefit of the full low income tax offset if you earn below $37,000. That means the tax office will offset up to $445 from the tax you would normally have to pay. So you can earn another couple of thousand dollars before you have to pay tax.
How much can I earn before paying taxes after age 65
For those who have reached age pension age, they can earn even more without paying tax. If you are over 65, you get access to the Seniors and Pensioners Tax Offset (SAPTO). This reduces or eliminates the tax that would normally be liable to pay on some additional income
Using the SAPTO benefit, the amount you can earn each year as a pensioner before having to pay tax, is:
$32,279 for single people,
$28,974 each for members of a couple or $57,948 combined.
The beauty of this benefit is that for clients in SMSF Pension phase any income drawn from a super fund income stream once over 60 is tax-free and non-assessable, meaning it doesn’t count towards the above thresholds.
Based on an earnings rate of 5% this means that a couple could have over $500,000 in each of their names and not pay any tax. But be careful as if you are investing in growth assets then triggering capital gains in the future may mean exceeding these thresholds where as within the SMSF the CGT on pension assets is NIL and 10-15% in accumulation.
Also consider the tax position if you are likely:
to receive an inheritance
large capital gain on an asset he’d outside super
to have one parter live significantly longer (they may end up with large amounts outside the super system)
Are you looking for an advisor that will keep you up to date and provide guidance and tips like in this blog? then why now contact me at our Castle Hill or Windsor office in Northwest Sydney to arrange a one on one consultation. Just click the Schedule Now button up on the left to find the appointment options.
Liam Shorte B.Bus SSA™ AFP
Financial Planner & SMSF Specialist Advisor™
Tel: 02 98941844, Mobile: 0413 936 299
PO Box 6002 BHBC, Baulkham Hills NSW 2153
5/15 Terminus St. Castle Hill NSW 2154
Corporate Authorised Representative of Viridian Select Pty Ltd ABN 41 621 447 345, AFSL 51572
This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs. This website provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such.
Tax free Image courtesy of Stuart Miles /FreeDigitalPhotos.net
I found this excellent article on LinkedIn and and re-blogging it here for your guidance.
By now, many of us would be aware, that from 1 July 2017, earnings generated by Transition to Retirement (TtR) pensions are taxed at accumulation rates. Indeed, we are questioning what to do with an existing TtR pension, whether to roll it back to accumulation or maintain it post 30 June 2017?
Estate planning dynamics of Transition to Retirement (TtR) pensions
Through this post, I hope to share with you an estate planning consideration in situations involving TtR pensions, especially in light of typical TtR range clients (preservation age but less than 65) contributing $540,000 before 1 July 2017.
For some clients, this estate planning benefit of TtR pensions could provide sufficient benefits to maintain TtR pensions or deal with new ones in a specific way.
Hopefully, the example can highlight the role of the proportioning rules in ITAA 1997 307-125 at play and its use in estate planning context.
What about TtR clients contributing $540,000 before 30 June 2017 or $300,000 after 1 July 2017?
Julie (56) has an existing accumulation phase balance of $600,000 (all taxable component). A TtR pension on the existing $600,000 balance wasn’t recommended in the first place because:
i. her cashflow is in surplus, not needing the income from a TtR pension to use the concessional contributions cap of $35,000 (in 2016-17)
ii. given the balance is entirely taxable component, the 4% minimum pension payment were surplus to her needs and cost her more in personal income tax (despite the 15% rebate on the pension payments). The rise in personal income tax was more than the benefit of tax-free earnings of a TtR pension
So that’s just setting the scene around current state of play with Julie’s superannuation savings.
With advice, Julie contributes $540,000 to superannuation before 30 June 2017 under the bring-forward provisions (the concept applies equally to TtR range clients contributing $300,000 post 30 June 2017).
Unfortunately, Julie recently became widowed. She has no other SIS dependents other than adult children. She has nominated her financially independent adult children as her beneficiaries under a binding death benefit nomination.
One initial question is where to contribute the $540,000? Into her existing accumulation fund of $600,000 or a separate accumulation account/fund?
Focusing on public offer funds, there is a chain of thought that perhaps Julie might consider contributing the $540,000 non-concessional contribution into a separate super account to the existing one and immediately soon after starting a TtR pension.
The benefit of contributing to a separate retail fund plan / account:
At the heart of the issue, TtR pensions despite not being classed as retirement phase income streams from a tax perspective (and therefore paying accumulation phase tax rate) are still pensions under SIS standards. It is this classification of it being pension under SIS that allows a favourable proportioning rule compared to accumulation phase.
Earnings in accumulation phase are added to the taxable component whereas earnings in pension phase are recorded in the same proportion of tax components as at commencement.
If a pension is commenced with 100% tax-free component, then this pension during its existence will consist of 100% tax-free component, irrespective of earnings and pension payments.
Had the $540,000 contribution added to existing accumulation balance of $600,000, then any pension commencement soon after, will have tax-free component of 47% (540,000 / 1,140,000)
So if Julie contributes to a separate super fund or a separate super account and starts a TtR pension immediately soon after, her $540,000 TtR pension will start with $540,000 tax-free component. If it grows to $600,000 in a year’s time or two, the balance will still be 100% tax-free component.
To flesh out the benefit of proportioning rules, imagine if she passed away in 8 years time. The $540,000 has grown nicely by $100,000 with the TtR pension balance standing at $640,000 (all tax-free component).
Had she left the funds in accumulation, the $100,000 growth would be recorded against the taxable component.
The benefit to her adult children is to the tune of $17,000.
As can be seen, starting a TtR pension means that adult children benefited by an additional $17,000 and shows the differing mechanics of earnings in accumulation and TtR pensions. The larger the growth, the bigger the death benefit tax saving when comparing funds sitting in accumulation or TtR pension phase.
But the TtR pension does come with a downside doesn’t it? While the pension payments are tax-free as the TtR pension consists entirely of non-concessional contributions and therefore tax-free component, there is leakage of 4%, being the minimum pension payment requirement of the TtR. For some clients, this may be a significant hurdle, not wanting leakage from superannuation, as it is getting much harder to make non-concessional contributions. For others, this could be overcome where non-concessional cap space is available (or refreshed once the bring-forward period expires) in their own name or in a spouse’s account.
Going back to Julie, she may be okay with the 4% leakage as her total superannuation balance is well below $1.6 million for the moment. The 4% minimum pension payments are accumulated in her bank account and contributed when the 3 year bring forward period is refreshed on 1 July 2019. On 1 July 2019, assuming her total superannuation balance is less than $1.4 million, she could easily contribute up to $300,000 non-concessional contributions under the bring-forward provisions at that time.
It is this favourable aspect of the superannuation income stream proportioning rules which could offer estate planning benefits for TtR pensions. I have seen the proportioning rules as they apply to TtR pensions mentioned by some but not by many as the focus has been the loss of exempt status on the earnings. As demonstrated by Julie’s example, for some of our clients, when relevant, the proportioning rule may be something to look out for as we look to add value to our client’s situation.
Other estate planning issues around pensions (including TtRs)
1. What if Julie was retired and over 60? Has an existing standard account based pension of $600,000 (all taxable component) with $540,000 non-concessional contribution earmarked to be in pension phase?
Would you have one pension or two separate pensions?
There is a chain of thought that two separate pensions, keeping the 100% tax-free component one separate, allows more planning options with drawdown and may assist with minimising death benefit tax. If Julie’s requirements are more than the minimum level (4%), then stick to minimum from the one that is 100% tax-free component and draw down as much as needed from the one that has the higher proportion in taxable component.
Two separate pensions can dilute the taxable component at the point of death whereas one loses such planning option involving drawdown where a decision is made to consolidate pensions.
2. What if Julie was partnered?
Naturally, there are many variables but the concept of separate pensions and proportioning continues from an estate planning perspective.
The impact of $1.6 million transfer balance cap upon death for some clients may show the attractiveness of separating pensions where possible for tax component reasoning.
Say Julie had $800,000 in one pension (all taxable component) and $700,000 in another pension (all tax-free component). To illustrate the issue simplistically, if the hubby only has a defined benefit pension using up $900,000 of the transfer balance cap, then having maintained separate pensions has meant that he possibly may look to retain the $700,000 (all tax free component) death benefit pension and cash out the $800,000 pension outside super upon Julie’s death.
This way the $700,000 account based pension (and whatever it grows to in the future) could be paid out tax-free to the beneficiaries down the track.
Had Julie’s pensions been merged at the outset, the proportion of components would have been 53% taxable (800,000 / 1.5 million) and 47% tax-free. Her husband would have inherited those components. Any subsequent death benefit upon the hubby’s death passed onto the adult children would have incurred up to 17% tax on 53% of the death benefit.
The example hopefully shows the power of separate pensions in managing estate planning issues.
3. Going back to Julie. What if she was over 60 and under 65, still working and intending to work for the next 6-7 years? Has no funds to contribute to super but has accumulation phase of $600,000
You could consider having a TtR pension simply for taking 10% of account balance out as a pension payment and re-contributing it back as a non-concessional contribution assuming Julie has non-concessional contribution space available.
To ensure the re-contribution strategy dilutes as much of taxable component, there may be a need for separate pensions though. For example:
1. $600,000 TtR pension on 1 July 2017. 10% pension payment ($60,000) taken out closer to the end of FY
2. $60,000 contributed to a separate accumulation interest before in 17-18 and separate TtR pension commenced with $60,000. At this point, Julie has two pensions. One with $60,000 and the other with say $540,000.
3. Next FY in 18-19, 10% taken from both pensions and the amount contributed to a separate accumulation interest and a TtR pension commenced. The smaller TtR pension balance are consolidated (with all tax-free component) and similar process is repeated Julie turns 65 at which time she could do a cash-out and recontribution if she has non-concessional space, including the application of bring-forward provisions.
Slightly different application to SMSFs
While the concepts regarding proportioning of tax components and multiple pension interests remain the same in SMSFs, the steps taken to plan and organise multiple pension interests is different to public offer funds. In public offer funds, it is typically straightforward to establish a separate superannuation account. In SMSF’s, the planning around such things requires further steps.
Relevant to SMSFs, the ATO’s interpretation is that a SMSF can only have one accumulation interest but is permitted to have multiple pension interests.
Here is the ATO link with detail on this concept of single accumulation interest and multiple pension interest for SMSFs.
Conclusion
No doubt, there are many other things to consider with many variables leading to different considerations.
I hope this guidance has been helpful and please take the time to comment. Feedback always appreciated. Please reblog, retweet, like on Facebook etc to make sure we get the news out there. As always please contact me if you want to look at your own options. We have offices in Castle Hill and Windsor but can meet clients anywhere in Sydney or via Skype. Just click the Schedule Now button up on the left to find the appointment options.
Liam Shorte B.Bus SSA™ AFP
Financial Planner & SMSF Specialist Advisor™
Tel: 02 98941844, Mobile: 0413 936 299
PO Box 6002 BHBC, Baulkham Hills NSW 2153
5/15 Terminus St. Castle Hill NSW 2154
Corporate Authorised Representative of Viridian Select Pty Ltd ABN 41 621 447 345, AFSL 51572
This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs. This website provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such.
The changes to the superannuation system, announced by the Australian Government in the 2016–17 Budget, have now received royal assent and the finer details of how to implement them have been released. While the government claim these changes were designed to improve the sustainability, flexibility and integrity of Australia’s superannuation system, they did not work with industry or the ATO before announcing them and as such it has been a nightmare to try to get your head around what the actual changes are and how strategies need to be implemented to manage them.
As a result we are getting last-minute guidance from the ATO and software providers as well as SMSF, Industry and Retail Super providers. The government have back-flipped on some measures, amended others because of collateral damage and tightened other measures for obscure reasons. With most of these changes commencing from 1 July 2017 I have tried to put some useful links together.
A short video overview of the changes is provided below. I have provided more detailed information links and will update these as they are progressively published to help you understand the changes, how they may affect you, and what you may need to know and do now, or in the future as a trustee of a self-managed super fund (SMSF). Even more detailed information is available to help you understand the changes, including for some topics, law companion guidelines (see below) to provide certainty about how the changes will be administered.
For those who wish to dive in to the detail please view the Law Companion Guides below. A law companion guideline is a type of public ruling. It gives the ATO view on how recently enacted law applies. It is usually developed at the same time as the drafting of the Bill.
The ATO normally release a law companion guideline in draft form for comment when the Bill is introduced into Parliament. It is finalised after the Bill receives Royal Assent. It provides early certainty in the application of the new law. Please make sure to look for updates before relying on this information.
The ATO have also released access to answers to some frequently asked questions and they can be found in this document Super Changes Q & As
Example: Q. How are my pensions and annuities valued for transfer balance cap purposes?
ANSWER : You need to contact your fund about the value of your pensions and annuities.
The value of your pension or annuity will generally be the value of your pension account for an account-based pension.
Special rules apply to calculate the value of: • lifetime pensions • lifetime annuities that existed on 30 June 2017, and • life expectancy and market linked pensions and annuities where the income stream existed on 30 June 2017
Lifetime pension and annuities These are valued by multiplying the annual entitlement by a factor of 16.This provides a simple valuation rule based on general actuarial considerations. Your annual entitlement to a superannuation income stream is worked out by reference to the first payment entitlement for the year. The first payment is annualised based on the number of days in the period to which the payment refers. (I.e. the first payment divided by the number of days the payment relates to multiplied by 365).
This means that a lifetime pension that pays $100,000 per annum will have a special value of $1.6 million which counts towards your transfer balance cap in the 2017-18 financial year.
For a lifetime pension or annuity already being paid on 1 July 2017, the special value will be based on annualising the first payment in the 2017-18 financial year. This may include indexation, so may be slightly higher than your current annual lifetime pension payments.
Life expectancy and market linked pensions and annuities being paid on or before 30 June 2017 are valued by multiplying the annual entitlement by the number of years remaining on the term of the product (rounded up to the nearest year).
I hope this guidance has been helpful and please take the time to comment. Feedback always appreciated. Please reblog, retweet, like on Facebook etc to make sure we get the news out there. As always please contact me if you want to look at your own options. We have offices in Castle Hill and Windsor but can meet clients anywhere in Sydney or via Skype. Just click the Schedule Now button up on the left to find the appointment options.
Liam Shorte B.Bus SSA™ AFP
Financial Planner & SMSF Specialist Advisor™
Tel: 02 98941844, Mobile: 0413 936 299
PO Box 6002 BHBC, Baulkham Hills NSW 2153
5/15 Terminus St. Castle Hill NSW 2154
Corporate Authorised Representative of Viridian Select Pty Ltd ABN 41 621 447 345, AFSL 51572
This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs. This website provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such.
This is part of series on the necessary changes to strategies and opportunities that have resulted from the pending 1 July 2017 changes which will see earnings on transition to retirement (TTR) pensions subject to 15% tax in the fund.
I know this has created concerns with many trustees and advisers around the question of should you access the relief and if so how to actually access the CGT relief provisions. People want to know what factors they must take in to consideration.
Some of the concerns have been clarified by the ATO. One concern was that trustees would need to commute their TTR pensions and roll back into accumulation before 1 July to access the CGT relief provisions. Those relief provisions would allow the cost base of all or selected eligible assets to be reset to the current market value on a date chosen by the trustees between now and 30 June. This CGT relief allows trustees to in effect, retain the tax-free status of unrealised capital gains accumulated prior to 30 June 2017.
The newly issued ATO issued Law Companion Guideline (LCG) 2016/8 has provided some excellent clarification. If your SMSF is operating as an unsegregated fund, the LCG states that member will not need to commute back to accumulation phase to be able to elect to reset the cost base of assets the wish to elect to apply the CGT relief.
It is intended that the same basis should be available for segregated funds, but the ATO has indicated is still reviewing options for how to make this work in practice. I will try to keep this blog updated with any guidance from the ATO on this matter but please make sure you adviser/administrator is on top of these matters. An SMSF that only has TTR or account-based pensions (and no accumulation phase) is automatically classified as a segregated fund. However if you put in a new contribution, as many are, this year then that money goes in to accumulation and the fund becomes automatically unsegregated. So look at your contribution intentions.
All is not lost as the fund would still have been segregated until that contribution was made and you may elect for that date to be the new CGT cost base valuation date.
Conversations need to start with YOUR advisers and administrators to check whether:
you should to continue a TTR pension after 1 July 2017 or to commute back to accumulation phase.
you may have already or can trigger a further condition of release such as leaving any one employment position after age 60. To move from Accumulation or TTR to Account Based Pension
Why are TTR pensions still relevant and for whom
The tax advantages of a TTR pension will reduce when the earnings in the fund start to be taxed on 1 July, but advantages may still arise for members who:
Are over age 60 and can draw tax-free income from the TTR
Wish to start accessing super to top-up income or increase income to pay off debts
Want to be able to nominate an automatic reversionary for estate planning purposes
Can use salary sacrifice or personal deductions to contribute a higher net amount into super than they need to withdraw.
If the TTR pension is no longer required, care should be taken with the commutation and timing of the commutation to ensure the CGT relief provisions can be accessed on any assets they wish to claim the relief for.
Looking for an adviser that will keep you up to date and provide guidance and tips like in this blog? Then why now contact me at our Castle Hill or Windsor office in Northwest Sydney to arrange a one on one consultation. Just click the Schedule Now button up on the left to find the appointment options. Do it! make 2016 the year to get organised or it will be 2026 before you know it.
Please consider passing on this article to family or friends. Pay it forward!
Liam Shorte B.Bus SSA™ AFP
Financial Planner & SMSF Specialist Advisor™
Tel: 02 98941844, Mobile: 0413 936 299
PO Box 6002 BHBC, Baulkham Hills NSW 2153
5/15 Terminus St. Castle Hill NSW 2154
Corporate Authorised Representative of Viridian Select Pty Ltd ABN 41 621 447 345, AFSL 51572
This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs. This website provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such
OK so here we are with only a few weeks left to the end of the financial year to get our SMSF in order and ensure we are making the most of the strategies available to us. Here is a check-list of the most important issues that you should address with your advisers before the year-end. But before we start, one warning:
Be careful not to allow your accountant, administrator or financial planner to reset any pension that has been grandfathered under the new pension deeming rules that came in on Jan 1st 2015 without getting advice on the current and possible future consequences at the current and higher deeming rates.
1. It’s all about timing!
If you are making a contribution the funds must hit the Superfund’s bank account by the close of business on the 30th June. . Careful of making contributions through Clearing houses as they often hold on to funds before presenting them to the individual’s superannuation fund for 7-30 days and it’s when the fund receives the payment that the contribution is counted except if paid via the government’s SMall Business Clearing house. Pension payments must leave the account by the close of business unless paid by cheque in which case the cheques must be presented within a few days of the EOFY and there must have been sufficient funds in the bank account to support the payment of the cheques on June 30th
2. Review Your Concessional Contributions – 30K under 49 and $35K if you were 49-64 this year and then work test applies for 65+.
Maximise contributions up to concessional contribution cap but do not exceed your Concession Limit. The sting has been taken out of Excess contributions tax but you don’t need additional paperwork to sort out the problem. So check employer contributions on normal pay and bonuses, salary sacrifice and premiums for insurance in super as they may all be included in the limit.
3. Review your Non-Concessional Contributions
Have you considered making non-concessional contributions to move investments in to super and out of your personal, company or trust name. Maybe you have proceeds from and inheritance or sale of a property sitting in cash. As shares and cash have increased in value you may find that personal tax provisions are increasing and moving some assets to super may help control your tax bill. Are you nearing 65? then consider your contribution timing strategy to take advantage of the “bring forward” provisions before turning age 65 to contribute up to the $500,000 lifetime limit based on contributions since 1 July 2007.
4. Co-Contribution
Check your eligibility for the co-contribution and if you are eligible take advantage. Note that the rules have changed and it is not as attractive as previously but it is free money – grab it if you are eligible.
To calculate the super co-contribution you could be eligible to receive based on your income and personal super contributions, use the Super co-contribution calculator.
5. Spouse Contribution
If your spouse has assessable income plus reportable fringe benefits totaling less than $13,800 then consider making a spouse contribution. Check out the ATO guidance here
6. Over 65? Do you meet the work test? (The 40 hours in any 30 days rule)
You should review your ability to make contributions as if you if you have reached age 65 you must pass the work test of 40 hours in any 30 day period during the financial year, in order to continue to make contributions to super. Check out ATO superannuation contribution guidance
7. Check any payments you may have made on behalf of the fund.
It is important that you check for amounts that may form a superannuation contribution in accordance with TR 2010/1 (ask your advisor), such as expenses paid for on behalf of the fund, debt forgiveness or in-specie contributions, insurance premiums for cover via super paid from outside the fund.
8. Notice of intent to claim a deduction for contributions
If you are planning on claiming a tax deduction for personal concessional contributions you must have a valid ‘notice of intent to claim or vary a deduction’ (NAT 71121). If you intend to start a pension this notice must be made before you commence the pension. Many like to start pension in June and avoid having to take a minimum pension but make sure you have claimed your tax deduction first.
9. Contributions Splitting
Consider splitting contributions with your spouse, especially if:
• your family has one main income earner with a substantially higher balance or
• if there is a n age difference where you can get funds into pension phase earlier or
• If you can improve your eligibility for concession cards or pension by retaining funds in superannuation in younger spouse’s name.
This is a simple no-cost strategy I recommend everyone look at especially with the Government moving on limiting the tax free balance on accounts. See my blog about this strategy here.
10. Off Market Share Transfers (selling shares from your own name to your fund)
If you want to move any personal shareholdings into super you should act early. The contract is valid once the broker receives a fully valid transfer form not before.
11. Pension Payments
If you are in pension phase, ensure the minimum pension has been taken. For transition to retirement pensions, ensure you have not taken more than 10% of your opening account balance this financial year.
The following table shows the minimum percentage factor (indicative only) for each age group.
Age Minimum % withdrawal (in all other cases)
Under 65 4%
65-74 5%
75-79 6%
80-84 7%
85-89 9%
90-94 11%
95 or more 14%
Sacrificial Lamb
Think about having a sacrificial lamb, a second lower value pension that can sacrificed if minimum not taken. In this way if you pay only a small amount less than the minimum you only have to lose the smaller pensions concession rather than the concession on your full balance. When combined with the ATO relief discussed in the following article “What-happens-if-i-don’t-take-the-minimum-pension” you will have a buffer for mistakes.
Before reading the following:Be careful not to reset a pension that has been grandfathered under the new deeming of pension rules that came in on Jan 1st 2015 without getting advice.
12. Reversionary Pension is often the preferred option to pass funds to a spouse or dependent child.
You should review your pension documentation and check if you have nominated a reversionary pension. If not, consider your family situation and options to have a reversionary pension. This is especially important with blended families and children from previous marriages that may contest your current spouse’s rights to your assets. Also consider reversionary pensions for dependent disabled children. the reversionary pension may become more important with the application of the proposed budget measure on $1.6m Transfer limit to pension phase. If funds already in pension and reverting to another person then not necessarily subject to the ca p for the reversionary pensioner but ATO will have to clarify this later.
13. Review Capital Gains Tax Position of each investment
Review any capital gains made during the year and over the term you have held the asset and consider disposing of investments with unrealised losses to offset the gains made. If in pension phase then consider triggering some capital gains regularly to avoid building up an unrealised gain that may be at risk to government changes in legislation like those proposed this year. Remember if you plan to sell an asset for the next 2 years the Temporary Budget Repair Levy may mean 2% extra tax
14. Review and Update the Investment Strategy not forgetting to include Insurance of Members
Review your investment strategy and ensure all investments have been made in accordance with it, and the SMSF trust deed. Also, make sure your investment strategy has been updated to include consideration of insurances for members. See my article of this subject here. Don’t know what to do…..call us.
15. Collate and Document records of all asset movements and decisions
Ensure all the funds activities have been appropriately documented with minutes, and that all copies of all statements and schedules are on file for your accountant/administrator and auditor.
16. Double Dipping! June Contributions Deductible this year but can be allocated across 2 years.
For those who may have a large taxable income this year (large bonus or property sale) and are expecting a lower taxable next year you should consider a contribution allocation strategy to maximise deductions for the current financial year. This strategy is also known as a “Contributions Reserving” strategy but the ATO are not fans of Reserves so best to avoid that wording! Just call is an Allocated Contributions Holding Account.
17. Market Valuations – Now required annually
Regulations now require assets to be valued at market value each year, ensure that you have re-valued assets such as property and collectibles. Here is my article on valuations of SMSF investments in Private Trusts and Private Companies. For more information refer to ATO’s publication Valuation guidelines for SMSFs.
18. In-House Assets
If your fund has any investments in in-house assets you must make sure that at all times the market value of these investments is less than 5% of the value of the fund. Do not take this rule lightly as the new SMSF penalty powers will make it easier for the ATO to apply administrative penalties (fines) for smaller misdemeanors ranging from $820 to $10,200 per breach.
21. Check the ownership details of all SMSF Investments
Make sure the assets of the fund are held in the name of the trustees on behalf of the fund and that means all of them. Check carefully any online accounts you may have set up without checking the exact ownership details. You have to ensure all SMSF assets are kept separate from your other assets.
22. Review Estate Planning and Loss of Mental Capacity Strategies.
Review any Binding Death Benefit Nominations (BDBN) to ensure they are valid (check the wording matches that required by the Trust Deed) and still in accordance with your wishes. Also ensure you have appropriate Enduring Power of Attorney’s (EPOA) in place allow someone to step in to your place as Trustee in the event of illness, mental incapacity or death. Do you know what your Deed says on the subject? Did you know you cannot leave money to Step-Children via a BDBN if their birth-parent has pre-deceased you?
23. Review any SMSF Loans
Have you provided special terms (low or no interest rates , capitalisation of interest etc.) on a related party loan? Then you need to review your loan agreement and get advice to see if you need to amend your loan. Have you made all the payments on your internal or third-party loans, have you looked at options on prepaying interest or fixing the rates while low. Have you made sure all payments in regards to Limited Recourse Borrowing Arrangements (LRBA) for the year were made through the SMSF Trustee? If you bought a property using borrowing, has the Holding Trust been stamped by your state’s Office of State Revenue. Please review my blog on the ATO’s Safe Harbour rules for Related Party Loans here
24. Valuations for EVERYTHING
Not just for property, any unlisted investment needs to have a market valuation for 30 June. If you need assistance on how to value unlisted or unusual assets, including what evidence you’re going to need to keep the SMSF auditors happy, then contact us.
25. Collectibles
Play by the new rules that come into place on the 1st of July 2016 or get them out of your SMSF. More on these rules and what you must do in a good blog from SuperFund Partners here.
26. SuperStream obligations must be met
For super funds that receive employer contributions it’s important to take note that since 2014 the ATO has been gradually introducing SuperStream, a system whereby super contributions are received and made electronically.
If SuperStream compliancy does not already apply to you and you’re not aware of the SuperStream compliancy guidelines, you have until June 30 to familiarise yourself with the obligations. The ATO has given employers with 19 or fewer employees until October 28th, 2016, to become SuperStream compliant.
All funds must be able to receive contributions electronically and will need to obtain an Electronic Service Address (ESA) to receive contribution information. If you are not sure if your fund has an ESA, contact your fund’s administrator, accountant or your bank for assistance.
Many employers are in the process of registering for SuperStream and may ask SMSF members for their ESA, ABN and bank account details. Some employers may also ask for your Unique Superfund Identifier (USI) – for SMSFs this is the ABN of the fund.
Don’t leave it until June, review your Self Managed Super Fund now and seek advice if in doubt about any matter.
Are you looking for an advisor that will keep you up to date and provide guidance and tips like in this blog? then why now contact me at our Castle Hill or Windsor office in Northwest Sydney to arrange a one on one consultation. Just click the Schedule Now button up on the left to find the appointment options.
Happy EOFYS!
Liam Shorte B.Bus SSA™ AFP
Financial Planner & SMSF Specialist Advisor™
Tel: 02 98941844, Mobile: 0413 936 299
PO Box 6002 BHBC, Baulkham Hills NSW 2153
5/15 Terminus St. Castle Hill NSW 2154
Corporate Authorised Representative of Viridian Select Pty Ltd ABN 41 621 447 345, AFSL 51572
This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs. This website provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such.
I am breaking the Budget down in to bite size chunks with strategies to consider going forward for SMSF Trustees. The first part which dealt with pension strategies is available here . This second part deals with changes to contribution options, methods and caps.
Before I go into detail here is a summary of the changes that are relevant to SMSF members (No coverage of Defined Benefit Schemes in this article):
Concessional (Pre-Tax Contributions like employer superannuation guarantee (SGC), salary sacrifice and those contributions where you claim a tax deduction).
Reduction in the concessional contribution cap to $25,000 regardless of age
Carried forward concessional cap for account balances below $500,000 from 1 July 2018
All individuals under 65 will be eligible to claim a tax deduction for personal contributions (bye bye 10% rule). work test applies ot over those 65
Reduction in income threshold to $250,000 where additional super contribution tax applies
Reduction in contribution tax for people earning less than $37,000
Extension of low-income spouse contribution tax offset
Non-Concessional (Post Tax Contribution like personal after tax contributions and Government co-contributions).
Reduction in Non-concessional contribution cap limit to $100 per annum
Reduction of existing annual non-concessional bring forward provisions
Now the detail:
Reduction in the concessional contribution cap to $25,000 regardless of age
The concessional contribution cap will be reduced from the current level of $30,000 to $25,000from 1 July 2017, irrespective of the age of the individual. The higher cap of $35,000 that currently applies to individuals over age 50 will be abolished. The reduced cap will continue to be indexed in future years in line with wages growth.
Carried Forward or Catch-up concessional contributions
From 1 July 2018 individuals will be able to make additional concessional contributions where they have not reached their concessional contributions cap in previous years. Access to these unused cap amounts will be limited to those individuals with a superannuation balance less than $500,000. Unused amounts accrued from 1 July 2018 will be able to be carried forward on a rolling basis for a period of five consecutive years.
This measure allows some additional flexibility in the timing of your contributions like making $125,000 for a tax deduction on the sale of a property or share portfolio if you did not make contributions in the previous 4 years. Your ability to save may vary throughout your career and this measure will assist to some extent, but falls well short of my preferred option for a lifetime cap on concessional contributions. The restriction based on size of account balance will add complication to the administration of this measure when multiple funds are involved.
All individuals under 65 will be eligible to claim a tax deduction for personal contributions
From 1 July 2017, all superannuation fund members up to age 65 will be able to claim an income tax deduction for personal superannuation contributions up to the concessional contribution cap ($25,000), regardless of their employment circumstances. This is good news for people who are partially self-employed and partially wage and salary earners, and individuals whose employers do not offer salary sacrifice arrangements, as they will benefit from this proposal. Personal contributions for which a tax deduction is claimed will count towards the concessional, rather than the non-concessional cap.
While I accept the government’s intention is to increase flexibility for more people to access the concessional contribution cap if they are able to do so, the mechanism requiring individuals to notify their fund of their intention to claim a tax deduction for their personal contributions will add considerable complexity to fund administration. the “she’ll be right” and “I’ll do it later factor” will lead to many missing opportunities.
Over 65’s will still need to meet the work test.
Reduction in income threshold to $250,000 where additional super contribution tax applies
From 1 July 2017, individuals with “relevant income” greater than $250,000 will pay an additional 15 per cent tax on their concessional contributions, down from $300,000. The additional tax, referred to as “Division 293 tax” after the section of the tax legislation which governs the tax, will be payable where the individual’s taxable income (including reportable fringe benefits and certain other amounts) plus concessional contributions (excluding those that exceed the concessional contributions cap) is greater than the $250,000 threshold.
Superannuation still remains attractive despite this change, the 30% tax applied to concessional contributions is still less than the marginal tax rate on earnings so contributing to super remains attractive. But with the lower $25,000 concessional contribution there will be limited scope for you to make optional concessional contributions. For example, if you earn $250,000 and your employer pays the 9.5% SG on your full salary this is an annual employer contribution of $23,750 which has almost fully utilised the new lower cap. If you are on a higher income with disposable income you may look for alternatives outside superannuation or top up your partner/spouse’s superannuation (and potentially receive a tax offset if they earn less than $37,000).
After earlier reports that the threshold would be reduced to $180,000, the proposed threshold of $250,000 means the tax will apply to only around 1 per cent of superannuation fund members. Retention of the existing mechanism which minimises the administrative costs to superannuation funds associated with this tax is welcome.
Reduction in tax for people earning less than $37,000
From 1 July 2017, the Government will introduce a Low Income Superannuation Tax Offset (LISTO) to reduce the tax on superannuation contributions for low-income earners. The measure will apply to individuals with taxable income less than $37,000, and will effectively refund the tax on concessional contributions up to an annual cap of $500. This measure will replace the Low Income Superannuation Contribution (LISC) which was scheduled to be abolished from 1 July 2017, however, the mechanism will be slightly different. Rather than the government making a direct
contribution to the individual’s superannuation account, the offset will apply to the contribution tax deducted by the superannuation fund. The Australian Taxation Office will determine an individual’s eligibility for the LISTO and advise their superannuation fund annually. The fund will then contribute the LISTO to the individual’s account. The government will consult on the implementation of this scheme.
Extension of low-income spouse contribution tax offset
The government will increase access to the low-income spouse superannuation tax offset by raising the income threshold for the low-income spouse from $10,800 to $37,000 and phasing out up to $40,000. This arrangement provides a tax offset of 18 per cent of contributions made by the contributing spouse, up to a maximum offset of $540 per annum.
Non-concessional contribution cap limit of $100,000 or phasing down towards $300,000 using the bring forward provisions
For 2016-17 the single year capped contribution amount is $180,000 and then from 1 July 2017 it reduces to $100,000. So this year you can still use the bring forward rule to contribute the full $540,000 before June 30th 2017 and that has been confirmed by treasury. However if you do not have enough to meet that full contribution limit you can still trigger your cap by contributing at least $180,001 before the end of the year. Note that you may also have already triggered that rule in one of the 2 previous financials years and be wondering how much of the cap you have remaining. Well this table will clarify that for you.
In summary the Limit to Bring Forward Contributions based on year triggered are:
The cap now also limits the ability to use the cash-out and recontribution strategy for members who have triggered a condition of release. We normally used this between age 60 -65 to reduce the taxable component of your account balance. Before considering this strategy you should check the available lifetime cap with your administrator / advisor including all retail / industry funds you have been a member of at any time. Many SMSF members took annual pensions and simply recontributed the payments as NCC every year. DO NOT DO THIS! check your cap first PLEASE!
Phew! that was a lot!
I hope this guidance has been helpful and please take the time to comment. Feedback always appreciated. Please reblog, retweet, like on Facebook etc to make sure we get the news out there. As always please contact me if you want to look at your own options. We have offices in Castle Hill and Windsor but can meet clients anywhere in Sydney or via Skype. Just click the Schedule Now button up on the left to find the appointment options.
Liam Shorte B.Bus SSA™ AFP
Financial Planner & SMSF Specialist Advisor™
Tel: 02 98941844, Mobile: 0413 936 299
PO Box 6002 BHBC, Baulkham Hills NSW 2153
5/15 Terminus St. Castle Hill NSW 2154
Corporate Authorised Representative of Viridian Select Pty Ltd ABN 41 621 447 345, AFSL 51572
This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs. This website provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such.
I am breaking the Budget down in to bite size chunks with strategies to consider going forward for SMSF Trustees. Let’s start with Pensions.
The government is removing the tax exemption for earnings on assets supporting ‘transition to retirement’ pension / income streams but has allowed the pension payments and withdrawals from superannuation by people over age 60 to remain tax-free. No special rules for Self Managed Superannuation funds so these rules apply to all.
Taxing Transition to Retirement Pension earnings
From 1 July 2017 in the TTR pension phase of superannuation the tax-exemption on earnings will no longer apply to transition to retirement (TTR) pensions from.
Most TTRs were started as a tax planning strategy using salary sacrifice and the exempt status of pension income. From 1 July 2017 tax will be applied to the earnings derived in a TTR pension.
In addition, you cannot elect for payments to be taxed as lump sums rather than as pension payments to gain a better tax outcome. We used this for people aged 55-60 and fully retired up until now
Strategy implications for current TTR clients:
SMSFs with existing TTRs for members may wish to maintain them until the changes take effect (and legislation is passed). At that point they should consider one of the following options:
Do a commutation of the pension and roll back to the accumulation phase of superannuation
Convert to a full account-based pension if a condition of release has been met
Continue the Transition to Retirement pension if it suits your circumstances.
Seek advice before making any rash decisions.
From 1 July 2017, 15% tax will be applied to the earnings derived in a TTR pension and combined with the lower concessional contribution caps these strategies are likely to be less effective and less popular but still offer some opportunities for clients so we will review the appropriateness on an individual basis before 1 July 2017
Pension transfer cap of $1.6 million
From 1 July 2017, the maximum amount of superannuation that a person can transfer into pension phase is limited to $1.6 million.
Clients who are already in pension phase before 1 July 2017 will be required to transfer any balance above $1.6 million back into accumulation phase. Clients who are starting pensions from 1 July 2017 cannot roll more than $1.6 million into the pension phase (in total), but the balance rolled over can grow over $1.6 million due to earnings without penalty. some CGT relief will be available on investments moving back to accumulation phase but I will deal with that in a later blog.
The capital value of any Defined Benefit Income Streams will be counted towards the $1.6m limit using a multiple of 16 times the annual income stream.
The ATO has promised a portal or access to a central place where people can check their balances across SMSF, retail, DB and industry funds will be available soon.
Amounts transferred in excess of $1.6 million to retirement will be taxed in a similar way to excess non-concessional contributions. That means both the excess amount and earnings on that excess amount in retirement phase will be taxed. So please do not ignore this limit which applies from 01 July 2017.
Strategy implications for current SMSF pension clients:
This measure limits the tax-free benefits generated from pension phase but do not limit the amount that can be saved in accumulation phase which is only taxed at a maximum of 15%. However the overall amount you can get in to Superannuation is limited by changes to contribution caps.
Those clients who have pension balances in excess of $1.6 million can choose to:
leave savings in the accumulation phase of superannuation where tax on earnings is applied at 15% or
withdraw to invest outside superannuation or
withdraw and recontribute to a spouse / partner with a lower superannuation balance who has not used up their caps.
The $1.6 million cap will be indexed in $100,000 increments in line with the consumer price index. Where a member has previously used up a proportion of their retirement balance limit, they will be able to us the remaining proportion of the indexed cap.
Investment Strategies
We will look at each available strategies to consider the tax implications and comparisons of investment options inside or outside superannuation.
For many the option to withdraw some funds when fully retired and seek other tax effective arrangements including using the Low Income Tax Offset and Seniors and Pensioners Tax Offset to minimise tax on earnings outside of super
For the funds kept in Superannuation we will look at ways to maximise returns from investments within the caps by looking at segregating assets supporting the pension and focusing those on high yield, high return assets that can grow the tax exempt pension balance through earnings above the minimum withdrawal rates. That means we will focus on cash, fixed interest and term deposits in the still concessionally taxed accumulation balance, taxed at a maximum 15%.
Other issues
We have been strong advocates of evening up balances in superannuation between partners and this strategy implemented over the last 10 years will benefit many clients.
The Government has also confirmed that they will remove tax barriers to the development of new retirement income products by extending the tax exemption on earnings in the retirement phase to products such as deferred start lifetime annuities and group self-annuitisation products (Yeah , I am not sure what they are either).
These products can provide more flexibility and choice for Australian retirees, and help them to better manage consumption and risk in retirement.
This change was recommended by the Retirement Income Streams Review. The Government has released the Review and agreed all its recommendations. The announcement also states that they will consult on how the new retirement income products will be treated under the Age Pension means test.
I hope this guidance has been helpful and please take the time to comment. Feedback always appreciated. Please reblog, retweet, like on Facebook etc to make sure we get the news out there. As always please contact me if you want to look at your own options. We have offices in Castle Hill and Windsor but can meet clients anywhere in Sydney or via Skype. Just click the Schedule Now button up on the left to find the appointment options.
Liam Shorte B.Bus SSA™ AFP
Financial Planner & SMSF Specialist Advisor™
Tel: 02 98941844, Mobile: 0413 936 299
PO Box 6002 BHBC, Baulkham Hills NSW 2153
5/15 Terminus St. Castle Hill NSW 2154
Corporate Authorised Representative of Viridian Select Pty Ltd ABN 41 621 447 345, AFSL 51572
This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs. This website provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such.
Image courtesy of Stuart Miles at FreeDigitalPhotos.net
This guide has been requested by a number of our younger clients under 50 who are now taking an interest in retirement savings and tax planning but applies to all working SMSF members especially those who can combine Salary Sacrifice with a Transition to Retirement Pension. Please view this short ATO video on super contributions first and then we will go in to detail:
Salary sacrifice is an arrangement between an employer and an employee, whereby the employee agrees to forgo part of their future entitlement to salary or wages in return for the employer providing them with benefits of a similar value.
Contributions made through a Salary Sacrifice Arrangement (SSA) into super are made with pre-tax dollars, meaning they are not taxed at the member’s marginal tax rate.
They are treated as Concessional Contributions (CCs) and tax of up to 15% will usually be payable, so long as the member does not exceed their CC cap. Higher income earners may have CCs within the cap taxed at 30% (refer to our article Will you be paying the new top up tax on your SMSF contributions? )
The difference between your marginal tax rate and the tax rate on contributions is what makes up the benefit of salary sacrifice for the member of your fund. This has nothing to do with investments, it is just income planning and using the tax system legally to your advantage.
Unlike Superannuation Guarantee (SG) or other employer contributions required under an award or workplace agreement, there is no legislative time-frame specifying when salary sacrifice contributions must be made to superannuation. It’s recommended that a time-frame be specified in the SSA. This could be, for example:
at the same time as SG is paid, or
within three business days of being withheld from salary.
An SSA is only valid until the person turns age 75. Salary sacrifice contributions generally cannot be accepted by a super fund after 28 days from the end of the month in which the member turns 75. Only mandated employer contributions can be made for an employee age 75 or older (SIS Reg 7.04).
What makes a Salary Sacrifice Arrangement (SSA) valid?
There is no legal obligation for employers to offer salary sacrifice to employees. To be effective, only prospective earnings can be sacrificed. This means an SSA will only be valid if there is a prospective agreement in place before the employee has earned the entitlement to receive the relevant amount as salary and wages.
Remember, there is no requirement for an SSA to be in writing, nor is there a standard SSA. It is strongly recommended that a written agreement be in place which states the terms and conditions of that agreement. The ATO provides a detailed explanation in tax ruling TR 2001/10.
What forms of income can be salary sacrificed?
Salary or wages are the most common types of payments that are sacrificed into super. As only future entitlements can be sacrificed, an effective arrangement can’t be made for salary or wages that have already been earned.
This means payments to which an employee is already entitled to (such as earned salary and wages, accrued leave and bonuses or commissions already earned), cannot be salary sacrificed into super unless an effective arrangement was in place prior to the employee becoming entitled to that remuneration. For example, annual and long service leave paid on termination of employment can’t be sacrificed.
If an employee has entered into an SSA and takes leave during employment, the SSA is still effective and salary sacrifice amounts can still be directed to superannuation.
What are the tax implications?
Amounts salary sacrificed into super under an effective SSA are not ‘salary and wages’ in the hands of the employee. Accordingly, employers have no PAYG withholding liabilities in relation to the payment.
Although the super contributions are a benefit derived due to employment, it is specifically exempt from Fringe Benefits Tax (FBT). However, this doesn’t extend to salary sacrifice amounts into another person’s super account (eg a spouse).
Super contributions made under an effective SSA are considered employer contributions for the purposes of the Income Tax Assessment Act 1997 and are deductible to the employer.
Usually, an SSA favours taxpayers subject to the higher marginal tax rates, as they pay just 15% contributions tax on the amount sacrificed into super (or 30% for high income earners). See this ATO video below for a short explanation of the Division 293 Tax
However, for taxpayers with incomes under the 19%( + 2% Medicare) tax rate threshold (currently $37,000), the marginal rate is not markedly different to the 15% tax payable on contributions by the receiving super fund for the sacrificed contribution.
A minor saving can still be made of almost 6% as Medicare Levy (of up to 2%) is not payable on the amount sacrificed to super.
An alternative strategy for lower-income earners is to make personal after-tax contributions to obtain a Government co-contribution of up to $500. Note: Salary sacrificed employer contributions do not qualify for the Government’s co-contribution.
What are the Centrelink implications?
An amount of salary voluntarily sacrificed into super is still counted as income for Centrelink / social security purposes. Contributions are assessed as income where a person voluntarily sacrifices income into super and has the capacity to influence the size of the amount contributed or the way in which the contribution is made reduces their assessable income.
Super contributions that an employer is required to make under the SG Act, an award, a collective workplace agreement or the super fund’s rules are not assessed as income for the member.
What issues should be considered?
Employer or other limitations
It is not compulsory for an employer to allow salary sacrificing, including amounts to superannuation. The first step is for the member to know is if their employer permits salary sacrificing.
Also, even where allowed, the arrangement under which the person is employed may impose limitations. This could be terms in a workplace agreement or award.
For example, some awards specify that a certain level of an employee’s package must be paid as salary. This would effectively place a limit on the amount that could be sacrificed to superannuation
Super Guarantee payments
Salary sacrifice amounts are treated as employer contributions. An employer may decrease an employee’s SG contributions when taxable income is reduced through salary sacrifice.
This is because the minimum amount of SG an employer is required to pay is based on the employee’s Ordinary Time Earnings (OTE). As entering into an SSA reduces an employee’s OTE, it will reduce the amount of SG that an employer is required to pay.
It is also the case that a salary sacrificed amount, being an employer contribution, could meet some or all of employers SG obligations. SMSF members should negotiate with their employer that SG payments are maintained at pre-salary sacrifice levels and include this in the SSA.
Example
Malcolm’s salary and OTE is $105,000 pa. He enters into an effective SSA to forego $20,000 of his salary for additional employer super contributions. Malcolm’s salary/OTE reduces to $85,000 for SG purposes and his employer is only legally required to pay 9.5% on this amount.
Malcolm should have negotiated with his employer to maintain the SG based on his original salary and the salary sacrifice amounts are made in addition.
Entitlements upon ceasing employment
As outlined above, an SSA reduces the salary component of a person’s package. This may also reduce other entitlements when ceasing employment (through resignation or redundancy) such as:
leave loading
calculation of leave entitlements, and
calculation of redundancy payments.
Members of your SMSF should ensure that they understand the impact of entering into an SSA. Where possible, the agreement should ensure no reduction in benefits. However confirmation from the employer is necessary.
Timing of employer contributions
There are clear rules governing an employers’ legal obligation to pay its contributions to a complying super fund either monthly or quarterly.
There are no such rules governing an employer to make a pre-tax voluntary contribution/salary sacrifice contribution into an employee’s super fund when the employee requests it. This means an employer can pay this contribution whenever they want.
SMSF members should include in the SSA the frequency of salary sacrifice contributions to super (eg the same frequency as salary payments).
Reportable employer contributions
Reportable employer super contributions (RESC) including salary sacrifice, are counted as ‘income’ for many Government benefits and concessions, such as:
Government co-contributions
Senior Australians tax offset
Spouse contribution tax offset
10% rule for making personal deductible super contributions
Medicare Levy Surcharge
Family assistance benefits, and
Centrelink and DVA income tests.
RESCs are not added back when calculating the low-income tax offset and Medicare levy.
Termination payments
Long service leave and annual leave paid on termination cannot be salary sacrificed, unless an effective SSA was put in place prior to the leave being accrued.
If termination payments are based on a definition of salary that excludes employer superannuation contributions, the employer can effectively exclude the salary sacrifice amount from the total salary on which these entitlements would be calculated.
As a result, the employee’s termination package would be reduced. SMSF members should ensure that the SSA does not impact on other benefits and entitlements.
Contribution caps
An employer is eligible for a tax deduction for super contributions made on behalf of employees, regardless of the amount.
There is also no limit on the amount that an employee can sacrifice into super. However, salary sacrifice amounts are counted towards the employee’s CC cap. Excess CCs are taxed at the person’s marginal tax rate plus a charge. See the ATO video below for more details
This effectively limits the tax-effectiveness of salary sacrifice to superannuation to the employee’s annual CC cap.
At the beginning of the financial year, it’s critical to review your SMSF member’s existing SSA to ensure they won’t exceed their CC cap.
For example, if a member has received a pay rise, they may now be getting higher SG contributions from their employer. They may therefore need to reduce their salary sacrifice contributions to ensure they don’t breach their CC cap.
Ongoing reviews may also be necessary as the member may receive a pay rise during the financial year or elect to salary sacrifice a bonus which impacts on the total CCs. As well as if the concessional contribution cap increases in future years or the client becomes eligible to use the transitional higher CC cap. We recommend a April or May review of contributions to make sure your SMSF members are under their caps and will stay so up to June 30th.
Checklist
While salary sacrifice can be a tax-effective way for people to save for retirement, there are a number of steps that should be taken to ensure it is properly implemented. The following checklist could be used to help ensure all the key issues are addressed.
1.
Check that the employer permits salary sacrifice
2.
Check on limitations placed on an agreement by employment conditions (eg award, workplace agreement, etc)
3.
Ensure agreement is for future earnings and valid
4.
Ensure other employment entitlements are not impacted by agreement (eg SG,
5.
Check available concessional contribution cap and ensure client will not exceed the cap
6.
Establish the agreement in writing (including timing of contributions)
7.
Review agreement and level of contributions at least on an annual basis (around
I hope this guidance has been helpful and please take the time to comment. Feedback always appreciated. Please reblog, retweet, like on Facebook etc to make sure we get the news out there. As always please contact me if you want to look at your own options. We have offices in Castle Hill and Windsor but can meet clients anywhere in Sydney or via Skype. Just click on the Schedule now link to see some options.
Liam Shorte B.Bus SSA™ AFP
Financial Planner & SMSF Specialist Advisor™
Tel: 02 98941844, Mobile: 0413 936 299
PO Box 6002 BHBC, Baulkham Hills NSW 2153
5/15 Terminus St. Castle Hill NSW 2154
Corporate Authorised Representative of Viridian Select Pty Ltd ABN 41 621 447 345, AFSL 51572
This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs. This website provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such.
Information sourced and valid as of February 2015 from ATO, BT, MLC, Challenger, SIS Act.
What if you are not sure a proposed investment ticks all the boxes?
While you should make your best effort to ensure that the SMSF investments in your fund are compliant with the legislation, it can often be difficult to tell whether a particular investment strategy would be compliant or not.
For example, an SMSF trustee would be able to acquire a property from a member if that property was deemed to be business real property (BRP) but while for most BRP it is obvious that it satisfies the definition like a stand alone warehouse, for other properties it is far from clear such as a retail shop with 2 residential units above it.
In this case, as trustee, you could either decide not to proceed with the acquisition or else they could seek further guidance. you should initially seek guidance from your fund Auditor and other adviser but you may often get a grey answer. While trustees always have the option of seeking legal advice, they also have the ability to go straight to the ATO to seek their opinion before entering the transaction.
The ATO can provide SMSF specific advice about the following topics:
investment rules including
an investment by an SMSF in a company or unit trust
acquisition of assets from related parties
borrowing and charges
in-house assets
business real property
in specie contributions/payments
payment of benefits under a condition of release.
You should use this service if you want specific advice about how the super law applies to a particular transaction or arrangement for a self-managed superannuation fund, but you cannot use this service for tax related questions so that is when you need to look for a Private Ruling.
Private Ruling for Tax Related Scenarios
As an SMSF Trustee, if you have a concern that your circumstances or those of the fund may put you in an unusual tax position, or that a particular financial arrangement doesn’t fit any known approach for tax purposes, or you simply wants to minimise the risk of an unanticipated tax outcome, you can apply for a ‘private ruling’ from the Tax Office.
A private ruling may deal with anything involved in the application of a relevant provision of the law, including issues relating to liability, administration and ultimate conclusions of fact (such as residency status).When you apply for a private ruling about an arrangement, you can also ask the ATO to consider whether Part IVA (general anti-avoidance rule) applies to the arrangement.
In fact a lot of the proposed SMSF projects or strategies we are asked to advise on do not have a clear definable answer. Specific advice is often required on unusual scenarios for contributions involving residency or the work test or benefit payments for those under age 65. Asking for a private ruling can be a good way to ‘test-drive’ a tax arrangement you may be considering, especially where the already existing information from the Tax Office doesn’t seem to adequately cover all the bases and you are concerned about the level of tax or penalties if you get it wrong.
You can apply for a private ruling on behalf of your SMSF yourself but I would recommend using your tax agent or tax law specialist (click here for access to the private ruling instructions, plus additional ATO guidance).
Each ruling is specific to the entity that applied for it, and only to the specific facts and situation considered by the ruling, and can’t be picked up as a standard by any other taxpayer. These are one-off decisions, made only about a certain set of circumstances, and they set out how the Tax Office views that situation.
Binding If you get a private ruling, and base your SMSF tax affairs on that advice, the Tax Office is bound to administer the tax law as set out in that ruling. But, if later, the ATO issues a public ruling and the tax outcome conflicts with the one in your private ruling, you generally have the choice of which one to apply.
A ruling made in respect of a particular tax law will be changed if that law is altered by legislation or by the result of a court decision. But it’s worthwhile remembering that if you follow a ruling’s advice, and that ruling is later found to have not applied the law correctly, that you’re protected from having to repay any tax that would have otherwise been owed, as well as interest and penalties.
If a private ruling affects one of your earlier tax assessments, the Tax Office will not automatically amend it unless you make a point of submitting a written request for an amendment.
But just because you apply for a private ruling doesn’t mean you are going to get one. The Tax Office can refuse if it thinks a ruling would prejudice or restrict the law, if you are being audited over the same issue, or if it deems your application to be ‘frivolous’ or ‘vexatious’.
Are you looking for an advisor that will keep you up to date and provide guidance and tips like in this blog? Then why not contact me at our Castle Hill or Windsor office in Northwest Sydney to arrange a one on one consultation. Just click the Schedule Now button up on the left to find the appointment options.
Liam Shorte B.Bus SSA™ AFP
Financial Planner & SMSF Specialist Advisor™
Tel: 02 98941844, Mobile: 0413 936 299
PO Box 6002 BHBC, Baulkham Hills NSW 2153
5/15 Terminus St. Castle Hill NSW 2154
Corporate Authorised Representative of Viridian Select Pty Ltd ABN 41 621 447 345, AFSL 51572
This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs. This website provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such.
I am always on the look out for interesting tips for clients and while this may not necessarily SMSF related, many of my readers are also involved in family or discretionary trusts. I came across a blog from Dr.Brett Davies at Legal Consolidated over the weekend and found it useful for my own circumstances so, with his permission, I am “paying it forward”.
In his blog Son lost the farm to his sisters – Family Trust guilty he explained how the best intentions of a person in setting out their wishes and division of their assets on death can be overturned by not understanding how control of assets is managed and passed on properly to the intended beneficiaries when dealing with companies and trusts. I’ll leave you to read the blog yourself but I will point out the key 11 issues Brett and his team identified from reviewing thousands of trust deeds over the last few years. Take the opportunity to review your trust deed and look for the ability:
For the Commonwealth Bank and other lenders:
· indemnify out of trust assets
· allowing conflict of interest under both statute and common law
· increasing the class of investments including exotics, warrants, derivatives and options
Allowing greater powers and methods of amending the trust deed
Improve Asset Preservation, strengthen bankruptcy protection and ensure no Partnership relationships
Changing trustee with minimum stamp duty, especially for land rich trusts
Managing Division 7A issues and avoiding automatic breaches
Change the vesting date pursuant to the new taxation cases
Change jurisdictions to allow forum shopping and ease of litigation
Change beneficiaries and classes of beneficiaries (but subject to CGT rules)
Allowing changes to the trust to be verbal and via minute or any other mechanism
to adapt the general ‘Streaming provisions’ based on ATO’s latest rulings:
· franking credits
· streaming different classes of income and capital for minors for deceased estates, life insurance and super funds
· attribution relating to distributing capital gain to beneficiaries
· Bamford Decision including defining ‘income’
· Loss Recoupment
to decide if the majority of Appointors should be able to take all the proceeds of the trust over the minority or not.
Maybe take this list to your advice team (solicitor, accountant and financial planner) and ask them to review your trust deed and estate planning to ensure you have a trust that can confidently meet your needs and manage your affairs for you while alive and for your ultimate beneficiaries. If you are not sure your legal advisers are up to it then ask us to put you in touch with Brett and his team at Legal Consolidated or to liaise with your current solicitor.
Looking for an adviser that will keep you up to date and provide guidance and tips like in this blog? Then why now contact me at our Castle Hill or Windsor office in Northwest Sydney to arrange a one on one consultation. Just click the Schedule Now button up on the left to find the appointment options. Do it! make 2016 the year to get organised or it will be 2026 before you know it.
Please consider passing on this article to family or friends. Pay it forward!
Liam Shorte B.Bus SSA™ AFP
Financial Planner & SMSF Specialist Advisor™
Tel: 02 98941844, Mobile: 0413 936 299
PO Box 6002 BHBC, Baulkham Hills NSW 2153
5/15 Terminus St. Castle Hill NSW 2154
Corporate Authorised Representative of Viridian Select Pty Ltd ABN 41 621 447 345, AFSL 51572
This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs. This website provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such.
Image courtesy of Stuart Miles at FreeDigitalPhotos.net
The SMSF Coach 