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Liam Shorte
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Funding the transfer of the business to the next generation | MYOB Blog
Posted by SMSF Coach - Liam Shorte on August 17, 2012
https://smsfcoach.com.au/2012/08/17/funding-the-transfer-of-the-business-to-the-next-generation-myob-blog/
Trading Company as SMSF Trustee or Sole Purpose SMSF Trustee Company?
Traditionally the majority of SMSFs steered away from using a company trustee due to the costs associated with it. This has been changing in the last decade as Trustees see the difficulty of adding or removing members or trustees from a fund. The process of replacing a director on the other hand is relatively simple.
The cost to establish a company to act as Trustee for a fund varies from $660 – $1600, depending on who you engage to organise it for you. A SMSF with a corporate trustee can usually be set up within a few days with the ABN and TFN taking up to a month to organise with the ATO and get listed on the Super fund Lookup site http://superfundlookup.gov.au/
The Company is required to prepare and lodge an Annual Review with ASIC each year and pay an ASIC lodgement fee of $276. (The lodgement fee is reduced from $290 to $59 for companies who are used solely as SMSF Trustee companies commonly now known as a Sole Purpose SMSF Trustee Company).
The problem is people still look to save on costs so occasionally clients ask if they can utilise an existing trading company to act as the SMSF Trustee, to save on “cost”.
The strict answer is yes but just because you can do something, doesn’t mean you should. Using a company for multiple purposes is fraught with risk. You would have to be meticulous about keeping transactions and record keeping of the 2 functions absolutely accurate.
I really recommend against this for a number of reasons:
- the accounts and bookkeeping for the trustee company inevitably become much more complex, having to account for its trading activities separately from its activities as a trustee. This in turn results in higher accounting fees and risk of mistakes;
- SMSF auditors are very delicate individuals who follow rules to the nth degree. There can’t be any overlap between SMSF funds and other company funds. We often get clients calling and advising us that they accidentally used the wrong cheque book or transferred funds by Bpay to or from the wrong account. (This is also a reason I suggest clients use a different bank for the SMSF )Yes it was accident, but the SIS Act and Regulations say this is totally illegal. You can never guarantee that you will never make mistakes. Avoid this hassle and set up a separate sole purpose corporate trustee;
- if the company gets into financial difficulty and a receiver or liquidator is appointed – the SMSF fund assets could be at risk. This is because using a trading company may result in you losing control over your SMSF if the company entered some form of administration due to trading difficulties. Even if you have kept clear records the liquidator or receiver may look to freeze those assets while you prove the true ownership which could take months or years if record keeping not perfect;
- there are potential issues associated with identifying the true owner of the assets. If all of the company/SMSF assets are held in the same company name, how does one distinguish between assets held in capacity of trustee compared with those held beneficially for the company? For example in most States the Land Titles Office will only record the Trustee name not the “ATF XYZ Super Fund”;
- Introduce some Business Real Property, say a warehouse, leased back to the business and it gets even messier. The company as trustee for the SMSF leases the business premises back to itself in its capacity as the trading company. Now if the trading company gets in difficulty and can’t make lease payments then the same company has an obligation in its capacity as Trustee of the SMSF to chase itself for recovery of the lease payments!;
- then to the subject of liability. Trustees of funds are generally prohibited from borrowing but nevertheless, liabilities can still arise. For example, a plumbing contractor engaged to repair a residential investment property might suffer an injury and can sue the trustee for damages. This could mean that if the SMSF does not have the funds to meet any damages, the assets of the business may now become a target for the lawyers of the victim. Again in time this could be sorted and true ownership proved but could you or your business afford the time arguing the case or funding the defence.
- The ATO ruling SMSFR 2008/2 further highlights the critical importance of the sole-purpose test for SMSFs, clarifying that SMSF trustees must focus solely on providing retirement benefits to members.
This ruling is particularly pertinent for SMSFs with a trading company as a trustee, as it raises questions about the company’s ability to maintain the fund’s exclusive retirement focus.
For those who do have a Trading Company as Trustee, then if the company or business is in trading difficulty your first step is go to the ASIC advice for small company directors at http://www.asic.gov.au/asic/ASIC.NSF/byHeadline/Directors%20and%20insolvency
NEW UPDATE 2022
In early 2021, the Federal Government amended insolvency legislation to include a new debt restructuring process and a simplified liquidation process. It is available to small companies, and requires the appointment of a restructuring practitioner.
In December 2021, amendments were made to the Superannuation Industry (Supervision) Act (SIS Act) to reflect these changes, introducing a new category of disqualified persons.
This new category applies when a restructuring practitioner is appointed to a corporate trustee, and triggers the disqualification of the corporate trustee from managing a SMSF.
If your SMSF has a corporate trustee, and a “restructuring practitioner” is appointed to that trustee, the company will no longer be able to act as the corporate trustee, as it is disqualified. This is so even though the stated goal of the Corporations Amendments is to assist financially distressed businesses to remain viable and continue trading.
I would also suggest a quick visit to your Adviser to put in place a new Trustee Company in charge of your fund or if you really feel you are going to be in trouble you might opt to become a Small APRA regulated fund where you hand over the running of the fund to an Approved Trustee but you may struggle to find one willing to take over in such circumstances.
What are your thoughts? I would be interested in feedback from lawyers, accountants and advisers and of course auditors on this issue!
Liam Shorte B.Bus SSA™ AFP
Financial Planner & SMSF Specialist Advisor™
Tel: 02 9899 3693, Mobile: 0413 936 299
- PO Box 6002 NORWEST NSW 2153
- Suite 40, 8 Victoria Ave, Castle Hill NSW 2154
- Suite 4, 1 Dight St., Windsor NSW 2756
Corporate Authorised Representative of Viridian Advisory Pty Ltd ABN 34 605 438 042, AFSL 476223
This information has been prepared without taking into account 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.
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Posted by SMSF Coach - Liam Shorte on August 9, 2012
https://smsfcoach.com.au/2012/08/09/trading-company-as-smsf-trustee-or-sole-purpose-smsf-trustee-company/
Seeking advice makes people proactive on super – SMSF clients even more so.
According to new research released by Mercer, superannuation fund members who obtain advice are twice as likely to make additional contributions,.
The research – released in August 2012 – said those receiving advice were also twice as likely to make a beneficiary update and five times more likely to make an insurance underwriting enquiry. (source: Money Management article on Mercer study 07/08/2012)
I will go a step further and say that of all superannuation sectors it is SMSF members and trustees who take the bull by the horns and make the most of the strategies available to them after receiving competent advice from a SMSF Specialist Advisor™. they start an SMSF to have control and flexibility but after taking advice :
- They are more likely to use a Transition to retirement strategy earlier after getting advice
- They consider retaining insurance in a separate fund to save fees or transfer the cover rather than simply letting it lapse on rollover.
- They are more proactive about seeking out lost super funds
- They are more likely to have multiple pensions segregating tax free amounts for estate planning.
- They are focused on maximising the potential of the concessionally tax structure by investing in high yield and highly franked investments.
- They are more likely to adjust their portfolios tactically to take advantage of the change in market cycles.
- They are more focused on getting the best rate for their cash and fixed interest investments rather than accepting the offer from the current provider.
- More likely to use Super Splitting to even up accoutn balances and protect against future legislative change
- They can learn the benefits of recontribution strategies for Estate Planning.
So if you have an SMSF or indeed a retail or industry superannuation fund go and take some advice as it opens your eyes to the potential strategies available to you no matter your age, assets or experience.
For those who have benefited from advice or are advisors, I challenge you to add other benefits to this list (leave a comment) so others can learn.
Feedback always appreciated. Please reblog, retweet, put on your Facebook page etc to make sure we get the news out there to seek advice.
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.
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Posted by SMSF Coach - Liam Shorte on August 7, 2012
https://smsfcoach.com.au/2012/08/07/seeking-advice-makes-people-proactive-on-super-smsf-clients-even-more-so/
Do you want a say in who gets your superannuation if you die? Then put some strategies in place now.
You may have ignored your Super up to now as you feel young , immortal or just don’t like thinking about death (see I said “if you die” not “when you die”” just so you would continue reading). But in doing so you may not have left your superannuation to the person you intended.
Strict rules govern how your super is distributed when you die – and it’s important to follow those rules to make sure your money goes to whom you want instead of having a faceless Super Fund Trustee or worse an out of date Trust Deed decide.
One of the most important decisions you make when you join a super fund has nothing at all to do with investment. It revolves around the question of whom to nominate as the beneficiaries of your super when you die.
It is a critical decision – because if you don’t get it right your savings could be given to someone other than your preferred beneficiaries or the funds could be held up while disputes are mediated.
Few exceptions
When a fund member dies, subject to the trust deed, his or her superannuation may only be paid to:
- The member’s spouse (including a de facto spouse, whether same-sex or not)
- The member’s children
- A person who was financially dependant on the deceased member at the date of death
- A person with whom the deceased member had an interdependency relationship at the date of death
- The member’s legal personal representative (estate)
- NOTE that none of the above automatically include Mother, Father, Brothers or Sisters.
An interdependency relationship is defined as one between two persons (whether or not related by family) where it is very clear that:
- They have a close personal relationship; and
- They live together; and
- One or each of them provides the other with financial support; and
- One or each of them provides the other with domestic support and personal care.
For the purposes of that definition, all of the circumstances of the relationship between the persons must be taken into account, including (where relevant):
- the duration of the relationship; and
- whether or not a sexual relationship exists; and
- the ownership, use and acquisition of property; and
- the degree of mutual commitment to a shared life; and
- the care and support of children; and
- the reputation and public aspects of the relationship; and
- the degree of emotional support; and
- the extent to which the relationship is one of mere convenience; and
- any evidence suggesting that the parties intend the relationship to be permanent;
A determination can take into account a statutory declaration signed by one of the persons to the effect that the person is, or (in the case of a statutory declaration made after the end of the relationship) was, in an interdependency relationship with the other person
In the case of a Retail or many Industry fund the beneficiaries you nominate when you join a fund are normally only a guide – the trustees of your fund will have the ultimate discretion as to who will receive your super. They will take into consideration any nomination of beneficiaries that you have made, but are not bound by your request.
The only exception is where your super fund allows you to make a “Binding Death Benefit Nomination” or even better a ” Non-Lapsing Binding Death Benefit Nomination” . This is a nomination that the trustees are obliged to follow. You may only nominate a spouse, child, someone who you held an interdependency relationship with, or a financial dependant.
If you want your superannuation to pass to someone else, such as a friend or charity, you should consider nominating your estate as the preferred beneficiary of your superannuation entitlements. You superannuation will then be distributed according to the terms of your will – you would need to nominate such people or bodies as beneficiaries of your will.
Regular review
It is important to review death benefit nominations regularly and to include full details of your beneficiaries – including their relationship to you, their full name and their address. This applies even if you have used a Non-Lapsing BDBN as your circusmtances may have changed,
Keeping your super fund trustee informed of any changes to your beneficiaries – or changes to their personal details – will make the task of distributing your super much less complex for all involved.
It’s also worth noting that the basic binding death benefit nominations are only valid for three years – so make sure you update your nomination regularly or ask for a Non-lapsing Binding Death Nomination form.
To be valid, a binding death benefit nomination must be:
- Made to the trustee in writing, clearly setting out the proportion of benefits to be paid to respective beneficiaries;
- Be signed by the member in the presence of two witnesses over 18 years of age and who are not themselves named as beneficiaries;
- Include a signed witness declaration;
- Received by the trustee; and
- Renewed every three years, although it is possible and in my opinion preferred to have a non-lapsing binding death benefit nomination.
Who to leave your superannuation to (and how) can be a complex question that can involve tax, social security and other financial considerations. You are well advised to seek professional assistance from a financial planner in this area and if dealing with an SMSF then a SMSF Specialist Advisor™ is the best place to start.
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 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.
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Posted by SMSF Coach - Liam Shorte on July 13, 2012
https://smsfcoach.com.au/2012/07/13/do-you-want-a-say-in-who-gets-your-superannuation-if-you-die-then-put-some-strategies-in-place-now/
Last minute planning checklists for everyone from Small Business Owners to SMSF Trustees as well as Personal planning.
Have you left your financial planning until the last minute? Go over this checklist with your accountant or financial planner as soon as possible. Some of these strategies apply every year, while others are specific to this year because of the changes in the tax rate, the end to the flood levy, and some changes to small business write offs in the next year.
Checklists for:
Personal / Family
Small Business Owner:
SMSF Trustee
Investment Property Landlord
See full article: http://myob.com.au/blog/end-of-financial-year-planning-checklists/#ixzz1ysA6ExvQ
I hope this guidance has been helpful and please take the time to comment. Feedback always appreciated.
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.
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Posted by SMSF Coach - Liam Shorte on June 26, 2012
https://smsfcoach.com.au/2012/06/26/last-minute-planning-checklists-for-everyone-from-small-business-owners-to-smsf-trustees-as-well-as-personal-planning/
How is your SMSF protected in the event of bankruptcy?
If you or your business is experiencing financial difficulty and bankruptcy is the likely outcome, you should consider carefully what impact this may have on your self-managed super fund and superannuation accounts before accessing them under any condition fo release.
How does bankruptcy affect your SMSF?
Should you become an insolvent under administration, such as an undischarged bankrupt or have entered a personal insolvency agreement with your creditors, the super laws consider you to be a ‘disqualified person’. This has ramifications for your self managed super fund because a disqualified person can’t act as, or become, a trustee of an SMSF or a director of an SMSF’s corporate trustee.
Steps to take before entering bankruptcy:
We know in circumstances like this you may be under a weight of paperwork and pressure but you should take action to preserve what you can.
- If you’re an existing trustee/director of an SMSF, the best option would be to resign from this role before becoming a “disqualified person”. If you don’t, and continue to act in this role, you and your SMSF may be liable for penalties or your SMSF could lose its complying status which would result in lost tax concessions and a harsh tax bill for your fund. You may also be liable for a fine and up to two years’ imprisonment.
- You must take action to ensure your SMSF continues to meet the basic condition that all fund members are also trustees/directors. You have a grace period of six months to consider your options, which include :
- rolling your benefits to a retail or industry super fund or
- converting your SMSF to a small APRA fund whereby an “approved trustee” takes over the running of the fund.
The best option for you will depend on your particular circumstances such as the investment mix within your fund, the liquidity of the assets in that portfolio as well as the potential capital gains tax payable on realising assets and the wishes of other fund members such as your spouse.
Are your SMSF assets protected?
A bankrupt’s entire interest in a regulated super fund is potentially protected from creditors.
This protection has a couple of important limitations. Bankruptcy legislation states that a contribution made after 27 July 2006 to a super fund can be ‘clawed back’ if the main purpose was either to prevent the transferred property being available to creditors or to hinder or delay the process of making property available for division among creditors.
Under the rules, a transaction is assumed to be made for this purpose if at the time of the transfer, you were, or were about to become, insolvent. It is therefore critical that you make, and keep, records to prove that you’re solvent at the time of making a contribution to prevent your contributions being clawed back.
Any transactions that are ‘out of character’ may also be seen to be made for the main purpose of defeating creditors. For example, if you salary sacrificed $1,000 per month for the past 5 years, it would be unlikely that the $1,000 contributed in each of the final months before becoming bankrupt would be considered out of character and clawed back. In contrast, if you made a once-off contribution of $100,000 in the week before declaring bankruptcy, it’s likely you would have to prove why this amount should not be made available to creditors.
Case Law Example:
Official Trustee in Bankruptcy v Trevor Newton Small Superannuation Fund Pty (an SMSF fund)
In the Official Trustee in Bankruptcy v Trevor Newton Small Superannuation Fund Pty Ltd (2001) 114 FCR 160; [2001] FCA 1267, Madgwick J determined that the potential for a payment to a superannuation fund to be caught by the relation back or avoidance provisions of the Act was not excluded by the protection provided to the bankrupt’s interest in a superannuation fund even though such a payment might give rise to an interest in the fund.
It could be said that the protection operates in favour of any lawful interest in a regulated superannuation fund.
In this case one payment was made by the debtor after the deemed commencement of his bankruptcy and as such was recoverable. This is because the money had already vested in the hands of the bankruptcy trustee and accordingly the debtor did not have the authority to deal with it. The SMSF trustee (keeping in mind it was an SMSF and the bankrupt was a director of the SMSF trustee) was taken to be aware of that lack of authority and therefore did not derive title to the moneys paid.
Two earlier payments prior to the commencement of bankruptcy were voidable by reason of the operation of section 121 (transfers to defeat creditors). It assisted this recovery that at the time of both earlier transfers the debtor was or was about to become insolvent, and the superannuation fund trustee (the bankrupt being a director of the SMSF trustee) was also aware of this.
In summary an SMSF trustee is unlikely not to know the purposes or intent of the member (or third party) making the contributions. In addition the SMSF trustee is likely to know the solvency or otherwise of the relevant member.
Recovery of void contributions
A bankruptcy trustee is able to make an application to the Court directly under section 128B or 128C of the Bankruptcy Legislation Amendment (Superannuation Contributions) Act 2007 to recover a void superannuation contribution. In addition, a bankruptcy trustee can request the Official Receiver to issue a notice under section 139ZQ for the recovery of a void contribution on the same basis as these notices are available to recover other void transfers of property.
The Act also includes provisions enabling some tracing, by the Court, of superannuation contributions through the superannuation system. This is important particularly where the contribution may have been rolled-over and is no longer in the plan which originally received it.
Can you access your Superannuation early because you are a bankrupt?
Funds held in and payments made from your superannuation are protected from your creditors under the Bankruptcy Act. In certain limited circumstances you may be able to access your superannuation early, such as severe financial hardship.
However, the fact you are bankrupt does not mean that you will automatically be entitled to get early access to your superannuation. Bankruptcy is not on its own a ground for the early release of your super. It is up to your superannuation provider or APRA to decide whether to grant early access to your super and they should be consulted if you believe you have grounds for early release of your funds.
If you are granted early access to your super the lump sum payments from your superannuation fund made on or after the date of bankruptcy will be protected from your creditors.
What about pension payments? Are they protected?
If your total annual income exceeds a certain amount, half the excess will typically becomes available to pay your creditors. The relevant income thresholds are shown in the table below:
| Actual Income Threshold Amount (AITA) With dependants Used when calculating a bankrupt’s income contributions which vary according to the number of dependants | |
| Number of Dependents |
Income Limit |
|
0 |
$56,674.80 |
|
1 |
$66,876.26 |
|
2 |
$71,977.00 |
|
3 |
$74,810.74 |
|
4 |
$75,944.23 |
|
Over 4 |
$77,077.73 |
Limits updated twice a year: 20 March and 20 September.
Source: Insolvency & Trustee Service Australia. INDEXED AMOUNTS as of 09/07/2018
Income counted towards these thresholds includes salary and wages, salary sacrifice, fringe benefits from your employer and income which you earn which is paid to someone else. Pension income from a superannuation fund is also counted as income. In contrast, lump sum payments mentioned earlier from your superannuation fund are not counted as income and are protected even if you’re bankrupt.
STRATEGY TIP:
Given this protection in respect to lump sums, it may often be more beneficial to keep your super balance in the “accumulation phase” during the bankruptcy period and only make lump sum withdrawals if additional cash is required.
So as you can see while In cases where bankruptcy is unavoidable, most of your assets will be divisible among your creditors, fortunately, your superannuation balance and lump sum withdrawals are generally protected. Taking pre-emptive action and seeking expert advice if you’re facing financial troubles may help protect your Self Managed Super Fund and preserve some of your wealth for retirement.
Me on My High Horse! This protection should also act as a solid reason for all business owners to regularly contribute to superannuation throughout their working lives as circumstances can change rapidly. While your business may in your mind be your idea of your retirement savings, it may offer no protection in difficult times so put money away outside of your business structure to protect you and your family.
What about circumstances where the asset of the SMSF is in the wrong name because we made an error when setting up an account or used a Trading company as the Trustee of our SMSF (Idiot, kick yourself in the ass first):
See my blog on Trading Company as SMSF Trustee or Sole Purpose SMSF Trustee Company? To see why you never should use a Trading company.
Now back to the issue. Let’s consider the situations where a business has become bankrupt (wound up?) and the court tries to link assets held in the name of the business entity in its/their capacity as Trustee of the SMSF to the bankruptcy action?
Example: Property is purchased by the SMSF but for whatever reason is held in the name of the trading company or individual trustees; or
Possible solution in most cases: A Declaration of Trust outlining beneficial ownership should be prepared contemporaneously with the purchase of the property or asset. You must seek legal advice on how to word this document but it should include:
Declaration as to who is the beneficial owner
Who provided the funds for the investment.
That the beneficial owner is entitled to any benefits and always has been
The Beneficial owner has the right to transfer ownership to any other entity
All actions are taken on the instructions of the SMSF
As I said above seek legal advice on how to word this and do not attempt any half baked efforts from Googling!
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.
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Posted by SMSF Coach - Liam Shorte on May 26, 2012
https://smsfcoach.com.au/2012/05/26/how-is-your-smsf-protected-in-the-event-of-bankruptcy/
Consider prepaying next years Private Health Insurance before June 30th – EOFY Money Saving TIP #1
As a result of the introduction of mean testing of the Private Health Insurance Premium Rebate wewant to alert you to a one-off savings possibility in relation to the private health insurance rebate.
If you pre-pay your 2012/13 private health insurance premium before 30 June 2012, you may still be able to access the Government rebate.
As you may be aware, the Government currently provides a non-means tested rebate for private health insurance premiums. The rebate can be claimed directly from the insurer, or as a tax offset when you lodge your income tax return. the majority of clients claim it upfront and if you don’t then you may need to consider doing so this year.
The rebate is currently 30% for those under 65 and rising from 35% to 40% of the premium depending on the age of the policy holder.
The Government has now passed the required legislation that will apply an income test to the availability of the rebate to any premiums paid on or after 1 July 2012. The more income you earn, the lower the rebate as follows:
Private Health Insurance Incentive Tiers (2011-2012) with effect 1 July 2012
|
Singles |
<$84,000 |
$84,001-97,000 |
$97,001-130,000 |
>$130,001 |
|
Families |
<$168,000 |
$168,001-194,000 |
$194,001-260,000 |
>$260,001 |
| Rebate | ||||
| < age 65 | 30% | 20% | 10% | 0% |
| Age 65-69 | 35% | 25% | 15% | 0% |
| Age 70+ | 40% | 30% | 20% | 0% |
| Medicare Levy Surcharge | ||||
| All ages | 0.0% | 1.0% | 1.25% | 1.5% |
Note: The thresholds increase annually, based on growth in Average Weekly Ordinary Time Earnings (AWOTE). Single parents and couples (including de facto couples) are subject to the family tiers. For families with children, the thresholds are increased by $1,500 for each child after the first.
Singles earning $84,000 or less and families earning $168,000 or less will continue to receive the existing 30, 35 and 40 per cent rebate, depending on their age.
Once your ‘adjusted’ income is greater than $130,000 (or $260,000 as a family), no rebate will be available.
For a family with gross premiums of say $2,500, this will result in an increase to the out of pocket premium costs of $750.00
The current rebate applies to a premium ‘paid’ during the income year. Accordingly, it follows that if you prepay your 2012-13 premium on or before 30 June 2012, the current rules should apply and the rebate should be available.
If you are interested in this one-off savings opportunity, we suggest you contact your private health insurer to discuss the possibility of pre-paying next year’s premium and ensure that their is no penalty for prepayment and that their system can cope with the prepayment.
Increase to Medicare Surcharge levy for High Income Earners
For those without Private Health Cover be aware that the Medicare levy surcharge for people without private health insurance will lift to 1.5 per cent of taxable income for those top earners without private health insurance cover. (see table above)
I hope this guidance has been helpful and please take the time to comment. Feedback always appreciated.
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.
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Posted by SMSF Coach - Liam Shorte on May 23, 2012
https://smsfcoach.com.au/2012/05/23/consider-prepaying-next-years-private-health-insurance-before-june-30th-eofy-money-saving-tip-1/
The added value of franking credits in a SMSF Portfolio
One of the least understood and core benefits of SMSFs are the value of franking credits attached to many blue chip share dividends. You can tilt your portfolio to enhance the taxation benefits to your fund.
Targeting of imputation credits received predominantly from direct share investment in Australian, and to a lesser extent through managed funds is not that difficult. Franking credits (properly known as Imputation credits) can also be used to offset the tax payable on the taxable income of the fund if still in accumulation stage or refunds can be received from the ATO if in pension phase (don’t you just love receiving money from the ATO!)
The key point to understand around franking credits is the fact that the income tax rate for super funds is only 15% in Accumulation phase and 0% in Pension phase, while imputation credits from fully franked dividends can be as high as 30% of the gross dividend of an Australian share. This means that the franking credit covers the tax payable on the dividend received, and leaves a significant excess to be used to reduce the other tax payable by the fund or to be claimed as a refund
So how does it work in reality ?
So company Widget Ltd makes $1.00 profit and therefore is required to pay company tax at the rate of 30% on this $1 profit. Consequently the taxed $0.30 (30% of $1) will be paid in cash to the tax office and the company then records this $0.30 into their franking account. The franking account is only a record of what was paid and does not contain actual money. The company’s ability to frank its dividend will depend on the balance of this franking account. If the franking credit contains a surplus, the company may declare a fully franked (100% franked) dividend. If the franking account isn’t large enough, perhaps because it pays tax overseas, then the company may declare a partially franked dividend. That is, the dividend received by the SMSF is “grossed up” by the amount of the imputation credit to achieve a grossed up dividend. It is on this amount that tax is then assessed at 15% or 05 depending on the phase of your SMSF. The fund is then entitled to a tax offset for the franking credit.
Example: a worked example below of a SMSF that only holds Telstra shares and ANZ shares:
| Dividend | Franking Credits | Taxable Income Accumulation Phase | Taxable Income Accumulation Phase | |
| TLS Shares | $1260 | $540 | $1,800 | $1,800 |
| ANZ Shares | $840 | $360 | $1,200 | $1,200 |
| Total | $2100 | $900 | $3,000 | $3,000 |
| Tax @ 15% | $450 | |||
| Tax @ 0% | $0 | |||
| Less: Franking credits | $900 | $900 | ||
| Excess Franking credits | $450 | $900 |
In this example, not only will the fund pay no tax on the dividend income of these two shareholdings, but it will have:
- Accumulation Phase $450 of excess franking credits
- Pension Phase $900 of excess franking credits ;
Which the SMSF Trustees can use to offset against other tax liabilities of the fund (such as other income, capital gains, and taxable contributions) or if none exists, then the SMSF fund can receive a refund of this amount. (Love it!)
The 45 day rule
As the examples have shown fully franked dividends and franking credits make investing in Australian shares a very tax effective strategy. However, the ATO realises this and to prevent investors from abusing the system (called dividend stripping) they introduced the 45 day rule. The 45 day rule states that shareholder must hold shares for 45 days (not counting days of purchase or sale) for any franking credits over $5,000.
Beware of blind dividend chasing , you can hit a wall!
A word of warning before you decide to put your life savings into chasing shares with the highest dividends. While some high yielding dividend stocks may look enticing it would be useless if those shares drop in value (falling capital value). Always research the company and look for strong fundamentals, for example what does the company’s dividend history look like? Are the dividends growing year on year in line with the earnings per share? Is there long term potential for this company? Will earnings rise in the near term and are they sustainable.
Want a Superannuation Review or are you just 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.
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Posted by SMSF Coach - Liam Shorte on April 27, 2012
https://smsfcoach.com.au/2012/04/27/the-added-value-of-franking-credits-in-a-smsf-portfolio/
Superannuation Guarantee Age Limit to be Abolished in 2013
This change last November has gone under the radar but its needs to be highlighted as it will be especially important to Self Managed Super Fund members who run their own businesses as it will enhance their ability to tax plan and continue contributing to Super tax effectively.
The Government has announced that the 70 year age limit for superannuation contributions required to be made by an employer under the Superannuation Guarantee (Administration) Act, 1992 will be abolished. Currently, employers are not required to make any SG contributions in respect of employees once they attain age 70.
The Government had originally aimed to increase the age limit to 75 but has subsequently decided to remove the age limit entirely.
This is a win for older working Australians with the House of Representatives passing amendments to the Superannuation Guarantee (Administration) Amendment Bill 2011 that abolish the superannuation guarantee age limit.
From 1 July 2013, eligible employees aged 70 and over will receive the superannuation guarantee for the first time. This increases the coverage of the superannuation guarantee scheme to an additional 51,000 Australians aged 70 and over, who will get the benefit of the superannuation guarantee if they continue working.
“Making superannuation contributions compulsory for these mature-age employees will improve the adequacy and equity of the retirement income system, and provide an incentive to older Australians to remain in the workforce for longer,” Mr Shorten said.
A 1 July 2013 commencement date provides time for employers and older Australians to adjust to the new superannuation arrangements.
The changes will also ensure that employers will be able to claim income tax deductions for superannuation guarantee contributions made to employees aged 70 and over from 1 July 2013.
It ensures employers will not bear a higher cost in employing workers 70 and over compared with other workers.
Feedback always appreciated.
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.
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Posted by SMSF Coach - Liam Shorte on April 26, 2012
https://smsfcoach.com.au/2012/04/26/superannuation-guarantee-age-limit-to-be-abolished-in-2013/
Superannuation Splitting to a Spouse already in or entering Transition to Retirement Phase
So I got a question about continuing to Super Split to a spouse who is over 55 and already using a Transition to retirement Pension but not fully retired.
If a client is over 55 with a TRIS/TTRAP Pension and an Accumulation Account as they are still working or not fully retired, can they continue to receive Super Splits from their spouse?
The answer is yes they can receive the splits into their accumulation account as they are between 55 and 64 and not retired which meets the eligibility rules. The ATO guidelines state:
“Which members are eligible to apply?
All your members are eligible, although it’s your decision whether to offer a splitting facility to all members. They can apply to split contributions regardless of their own age, but their spouse, to whom you transfer the contributions, must be either:
less than 55 years old
55 to 64 years old and not retired.”
The super contributions splitting provisions operate independently from the pension payment rules. So as long as each set of provisions are complied with, there shouldn’t be an issue.
The question was then asked “could the spouse then consolidate their TRIS/TTRAP and Accumulation accounts the following year and thereby moving those funds to pension phase and possibly accessing a higher maximum pension including the amount super split from their spouse.”
I again believe yes as otherwise the accounting would have to quarantine Super Split amounts until 65 or retirement and the ATO have again said:
“There are no requirements for funds to specially report to us amounts that have been rolled over or received as a result of a contributions-splitting application”
This clarifies the way to continue implementing two strategies:
- When looking to maximise clients TRIS/TTRAP pensions – often to use the 10% to pay off debt
- Ensuring a member can do rollbacks, consolidations and recommencements to maximise the amount in pension phase.
Make sure to get individual advice on your personal circumstances and be aware that the Super split amount will count towards the receiving spouse’s concession caps.
I hope this guidance has been helpful and please take the time to comment. Feedback always appreciated. Click here to arrange a meeting/call back or contact our Castle Hill or Windsor offices for an appointment to discuss your needs.
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.
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Posted by SMSF Coach - Liam Shorte on April 18, 2012
https://smsfcoach.com.au/2012/04/18/superannuation-splitting-to-a-spouse-already-in-or-entering-transition-to-retirement-phase/
What can my SMSF invest in?
Control over investment decisions lies with the Trustees of the Fund.
We find this is the main reason so many Australians are establishing their own Self-Managed Superannuation Fund or SMSF for short. The range of investments you can consider for your portfolio include almost anything you yourself could invest in as an individual including:
- Direct investments (such as shares, ETFs, cash, term deposits, hybrids, income securities, gold/silver bullion and bonds)
- Cryptocurrencies, Bitcoin, Ethereum, initial Coin Offerrings (Just because you can doesn’t mean you should)
- Direct property (Residential houses, villas, units, as well as Commercial property such as offices, warehouses, factory units, shops and land.)
- Managed funds (retail or wholesale, domestic and/or international)
- Private Unit Trusts
- A business (non-related party to avoid hassle) and business property
- Non-traditional assets such as coins, antiques, art , taxi plate licences, ATMs (some of these have been subject to major losses)
The first step is to ensure your Trust Deed allows you to invest in the items you are considering. I know it is a long boring document but you need to know its contents so go through it regularly to get a handle on it. If it does not specifically mention cryptocurrencies then you should have the trust deed updated to allow them as they may not fall under any other category.
Once satisfied the Trust deed does not exclude an investment, the types of investments the SMSF actually holds are determined by the fund’s investment strategy, which is formulated by you, along with the other members in the fund, and often advised by an SMSF Specialist Advisor™. The fund’s strategy should reflect your objectives, risk profile/tolerance, liquidity needs and the investments you intend to utilise. This is not set and forget or forged in stone. The investment strategy can be changed as often as you wish, to suit your changing circumstances and to take advantage of new investment opportunities. The fund can also incorporate different strategies to suit each of its members.
An important benefit of this having this ultimate control is that, during retirement phase, you can continue to invest in growth assets. This contrasts the approach of many retail providers, who lock ‘pension phase’ investors into income-producing assets such as cash and fixed interest, increasing the risk that the investor may outlive their retirement savings. This is coming back on the agenda now as many funds move to ”Lifecycle strategies” which I believe are dangerous in assuming that fixed interest is low risk when inflation is a real risk and bubbles can effect the capital value of even “conservative”options.
It is important to understand that there are certain regulatory limitations placed on SMSF; for example, a fund cannot borrow money to invest in assets such as property or shares unless the funds are provided through a Limited Recourse Borrowing Arrangement (LRBA) .
A fund cannot acquire assets from related parties of the fund or invest in in-house assets; for example the fund could not purchase your assets (such as your house or residential investment property) from you. Other restrictions placed on the fund include the inability to lend funds to members or their relatives or to provide the assets of the fund as security for personal borrowing.
As part of our service, we can provide you with access to a range of investments for your SMSF.
Can I invest in equipment and leased it to my business?
Technically yes but there are so many ways you can get in trouble it may not be worth the hassle. I went into this in more debt in this article.
Can I buy a Classic or Vintage Car within my SMSF?
Again technically and theoretically yes you can, but it would be very difficult with many pitfalls. You’d also have to be able to prove to the ATO that the investment meeting the sole purpose test and was going to generate income for your retirement and not for personal enjoyment now! You can own but you or a related party cannot drive it even for maintenance purposes! If you invest in classic cars, they would have to be hired out to generate income. It would be difficult for you to drive. Remember if you are driving you need to be covered by the vehicle’s insurance, and that would make it obvious to the ATO you are using the car for your own purposes.
Can I use a property within my SMSF?
SMSFs are expressly forbidden from investing in the family home or holiday home for your personal use. But they are able to invest in investment properties – as long as the property is only used for investment purposes. Likewise properties within holiday resorts or golf courses can draw the ire of the ATO as again you may be seen to benefitting members personally rather than providing for retirement
This means fund members can’t go and stay in the property or rent it out to family members. The property should generally be managed by a real estate agent to satisfy the sole purpose test regulations unless you can show genuine evidence that you are managing it professionally yourself.
If I want to push the limits! Coins, jewellery, antiques, wine and art?
You can invest in coins – but you can’t display them if you want to satisfy the sole purpose test. Coins are collectables if their value exceeds their face value. Therefore, if bullion coins have a value that exceeds their face value and they are traded at a price above the spot price of their metal content, they will be a collectable and your SMSF must comply with regulation 13.18AA in relation to the investment
Likewise, you can invest in wine but you can’t drink it unless you are in pension fully retired and taking it out as a lump sum pension payment! If your fund acquired the wine on or after 1 July 2011 it must not be stored in the private residence of any related party. A private residence includes all parts of a private dwelling (above or below ground), the land on which the private residence is situated and all other buildings on that land, such as garages or sheds.
SMSF investments in art operate in a similar way. You can’t hang it in the hall at home, but you can rent it to a non-related company or an art bank that rents out artworks on an ongoing basis.
Here is a link to the ATO’s guidance on leasing and selling artworks:
ok so what about stepping into the Cryptocurrency or Bitcoin mania?
Just because it may be possible does not mean you should. If you want to then you need to do some major research and follow normal compliance rules to the Nth degree. Read my blog SMSF Research – BITCOIN, DOLLARS, GOLD: What Is the Future of Money?
Although it might seem like a good idea to use your super to invest in exotic assets, the value of these types of investments is notoriously volatile and the market for these asset classes is generally pretty illiquid. If you have special or professional knowledge in a particular subject then you may be able to put forward a better case than an ordinary person for engaging in those assets as part of your funds strategy. Again make sure that you are not using your SMSF or its assets to prop up your own business.
I hope these thoughts have been helpful and please take the time to comment if you know of other investments as I know this is not an exhaustive list. Would love some feedback as well.
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 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.
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Posted by SMSF Coach - Liam Shorte on March 26, 2012
https://smsfcoach.com.au/2012/03/26/what-can-my-smsf-invest-in/
Understanding transition to retirement pensions
If you have reached your preservation age you can use a transition to retirement pension to access your superannuation as a non-commutable income stream while you are still working. This may be particularly attractive if you have reduced your working hours and need to top-up your income to maintain your standard of living.
There was another great benefit of setting up the pension which was that all the funds supporting the pension move in to a tax exempt status. Yes that means those funds paid no earnings tax and in fact they received a full refund of any franking credits on your investments. For the average investor this can increase your returns by 0.5% to 1% a year risk free every year! However that tax free status was removed as of 1 July 2017.
The strategy still remains effective for those needing a boost in income or those who can combine the pension with salary sacrifice.
What is a transition to retirement pension?
Transition to retirement pensions allow you to access your superannuation as a non-commutable income stream, after reaching preservation age (see below), but while you are still working.
The aim of these income streams is to provide you with flexibility in the lead up to retirement. For example, you may choose to reduce your working hours and at the same time access your superannuation as a transition to retirement pension that can supplement your other income. It may also allow you to salary sacrifice to give your retirement savings a boost.
Not all superannuation funds offer the transition to retirement pensions, so you need to check with your own fund to see if they do. You can also start one in a self-managed superannuation fund.
Are there any special characteristics?
These pensions are essentially like a normal account-based pension, but with two important differences.
Firstly, they are non-commutable, which means they cannot be converted into a lump sum until you satisfy a condition of release, such as retirement or age 65.
Secondly, you have a minimum pension amount you must withdraw each year but you can only withdraw up to 10% of the account balance (at 1 July). No lump sum withdrawals are allowed.
What is my preservation age?
Your preservation age is generally the date from which you can access your superannuation benefits and depends upon your date of birth.
| Date of birth | Preservation Age |
| Before 1 July 1960 | 55 |
| 1 July 1960 – 30 June 1961 | 56 |
| 1 July 1961 – 30 June 1962 | 57 |
| 1 July 1962 – 30 June 1963 | 58 |
| 1 July 1963 – 30 June 1964 | 59 |
| After 30 June 1964 | 60 |
How are transition to retirement pensions taxed?
Transition to retirement pensions are taxed the same as regular superannuation income streams.
If you are under age 60, the taxable part of your pension will be taxed at your marginal rate, but you receive a 15% tax offset if your pension is paid from a taxed source*.
However, once you reach 60, your pension is tax-free if paid from a taxed source*.
- Most people belong to a taxed superannuation fund. Some government superannuation funds may be untaxed and you will pay higher tax on pensions.
Can you still contribute to superannuation?
As long as you are eligible to contribute, you and your employer can still contribute to superannuation for your benefit. In any case, your employer’s usual superannuation guarantee obligations would still apply. You need to have an accumulation account to pay these amounts into.
Is a transition to retirement pension right for you?
Transition to retirement pensions can provide you with flexibility in the years leading up to your retirement and can help to boost your retirement savings in some circumstances.
People who might find the transition to retirement pensions attractive include those who:
-
have reduced working hours from full-time to part-time, eg down to three days per week. The reduced salary can be topped up with income from the transition to retirement pension
-
are able to salary sacrifice to your superannuation or your spouse’s super for tax savings – the outcome of combining the transition to retirement pension with salary sacrifice can be a greater build-up of superannuation savings by the time you reach actual retirement
The transition to retirement rules and associated strategies can be very complicated. It is recommended that you seek expert advice from your financial adviser before deciding if this type of income stream and strategy is right for you.
Want a Superannuation Review or are you just 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 this year the year to get organised or it will be 2030 before you know it.
Please consider passing on this article to family or friends. Pay it forward!
Liam Shorte B.Bus FSSA™ AFP
Financial Planner & SMSF Specialist Advisor™
Tel: 02 9899 3693, Mobile: 0413 936 299
PO Box 6002 BHBC, NORWEST NSW 2153
40/8 Victoria Ave , CASTLE HILL NSW 2154
Suite 4/1 Dight St, Windsor NSW 2765
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.
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Posted by SMSF Coach - Liam Shorte on March 14, 2012
https://smsfcoach.com.au/2012/03/14/understanding-transition-to-retirement-pensions/
7 Common SMSF Pension Errors
Having set up over 120 pensions and taken over many other clients we know that having the right documentation and following the guidelines set down for accessing pensions is essential to remain compliant and access tax exempt status. Here are some of the common mistakes we see on documentation of pensions that clients bring to us from other sources.
1. Pension entitlement – don’t bend the rules
You must be over the preservation age to commence a pension. This means that you must have reached the preservation age at the time the pension documents say the pension starts. A common mistake is to assume this means at the time the first pension payment is made, which is wrong. For example, you may be turning which is your preservation age on the 1st of October and think that you can start the pension on the 1st of July but not pay any pension payments until after the 1st of October and get the full year of tax exempt income. This is not possible; in order to start the pension you must have reached the preservation age at the 1st of October. the income for that year will be split pro-rata across the period in accumulation phase pre- 1st of October and in pension phase after that date.
2. Market valuation of assets funding the pension
SMSF Advisors, Accountants and trustees must make sure the assets of the fund are valued at market rates before the pension is calculated. Further they should ensure the assets are revalued at the end of financial year. This is important in determining the level of pension in the coming year is correct and reflects the true value of the assets in the fund. There used to be some leeway especially with property but auditors now seem to be implementing a more rigorous checking system to ensure property values are updated annually.
3. Use a Comprehensive Pension Kit
Timely documentation is essential to ensure that the pension actually commences when you want it to commence. Typically, a pension may start well before an actual pension payment is made as often the financials for the SMSF are not completed yet. Often the pension start date will be 1st July and the actual pension payment may be made quarterly or half-yearly later in the year. The pension kit should reflect this and include at a bare minimum such things as a pension request form from the member to the trustee(s), minutes of the trustee acknowledging and agreeing to the request, notification from the trustee to the member with a draft pension agreement stating the type of pension, start date, frequency of payments and if a reversionary pension is to be applied. Importantly, it should also include a Product Disclosure Statement which is a legal requirement. The initial pension documentation does not have to have the exact figure of the pension amount but should refer to the fact that this figure will be clarified once the financials are completed. We update the initial kit with a set of minutes after the financials are provided which shows the exact amount in the pension and the relevant minimum and maximums or selected pension payment for that year and the Tax free component of the pension.
Your SMSF advisor of accountant should be able to help with this documentation.
4. Minimum Pension Payments (don’t ignore letters from your advisor!)
Pension payments are only tax-free if you met the conditions required to take advantage of the Tax Exempt Pension Income within the fund (0% tax on the income from the assets supporting the pension). The minimum pension amount must be paid within the financial year. This means that the pension payment must physically leave the SMSF bank account by the 30th June. That is a benefit is paid when the member accepts the money, banks the cheque which is subsequently honoured or receives a credit by way of electronic transfer from the SMSF. As an example, if at the 30th June you have made $6,000 worth of pension payments but your minimum pension payment for the year is $10,000, the $4,000 cannot be carried over and paid at a later date. In this instance the fund has failed to meet its pension requirements and the pension would be invalid and the entire pension account subject to tax for the full year.
During the financial year all pensions paid must be paid in “cash”;. That is a benefit is cashed when the member accepts the money, banks the cheque which is subsequently honoured or receives a credit by way of electronic transfer from the SMSF. Therefore if a member receives a cheque dated 30/6 and banks it after 30/6, this amount cannot be classed as “cash” for the year ending 30/6 on the cheque. Also a member cannot receive a pension via an in-species transfer from the SMSF to the member.
Our process is to remind clients in April/May each year by advising them in writing the minimum amount payable by the 30th June. We ask clients to confirm they have taken these payments by ticking a questionnaire and returning it to us. If you are receiving a Transition to Retirement Pension the advice also indicates the maximum amount of pension and requests confirmation that this has not been exceeded.
Some strategies are in place for correcting errors before the 30th of June but once that clock ticks over to 1st of July there is little that can be done to amend strategies.
5. Tax and Estate Planning -Tracking the Tax Free Component Amount/Percentage
On commencing a pension the Tax Free and Taxable Components need to be calculated. This percentage split remains the same for the life of the pension. The tax free percentage is calculated by dividing the Tax Free Components by the total starting balance of the pension. The Tax free component should be shown in your Pension Kit (once financials completed) and then reaffirmed in your members account statement annually.
Why is this important if Pension payments are tax free?
The tax free component does not refer to the annual pension payments. The Tax Free Component percentage becomes relevant upon death of the last member without a reversionary beneficiary and can make significant difference to the tax paid by your dependents (particular adult children). Good pension planning may see more than one pension being set up for a member with each Pension allocated towards the most tax efficient recipient beneficiary. i.e. spouse may receive pension with low tax free % while adult children receive the pension with a higher Tax free %.
Some smaller accountants or those who do not have the relevant software may not be tracking your Tax Free component and this may cause a problem later when your remainder pension needs to be distributed. Check your last statement and If in any doubt you should discuss with your accountant or SMSF Advisor.
6. Ongoing Contributions
A member’s pension account cannot receive new contributions during the year. You can make contributions but these contributions must be credited to a separate accumulation account. A SMSF a member may have more than one pension account but cannot have more than one accumulation account. As an aside this is necessary for a Transition to Retirement Strategy combined with Salary Sacrifice to work properly.
You can rollback (stop) a pension and add the accumulation account balance and then start a new pension. We term this as RCR (Rollback, Consolidation and Recommencement). Before stopping a pension you must ensure that you first pay the minimum pension to keep the fund tax exempt for the year to that date. For this reason we often rollback the pension at the end of the financial year and recommence on 01st July.
7. Actuarial Certificate
If you have a pension account and accumulation account during the year (i.e you have made contributions) and the fund’s assets have not been segregated you will need to obtain an actuarial certificate to identify the tax exempt percentage of the investment income. The Actuarial Certificates are normally outsourced by the Accountant to an Actuary but you should ensure that they do take responsibility for arranging it for you annually.
As you can see these pension rules can be a minefield to negotiate and advice from a SMSF Specialist Advisor is highly recommended. Through Verante’s SMSF Coaching Service we remind our clients that when it comes to “their money” that there is no such thing as a silly question. With pensions it is essential to get it right up front and double-check before June 30th!
I hope these thoughts have been helpful and please take the time to comment if you know of other common mistakes as I know this is not an exhaustive list. Would love some feedback as well.
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 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.
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Posted by SMSF Coach - Liam Shorte on February 25, 2012
https://smsfcoach.com.au/2012/02/25/7-common-smsf-pension-errors/
10 common mistakes made by many SMSF Trustees
I run regular sessions educating Trustees in small groups on how to utilise their SMSF and to avoid common mistakes so I thought I should share the more common ones. Self managed superannuation funds can be kept simple or they can involve very complex strategies. The superannuation system has many rules and regulations that members need to adhere to. To ensure that you avoid the traps when it comes to self managed superannuation read on! 
1. Jumping in too early with a low balance.
Unless you expect to make regular large contributions in the coming years or expect to put a large lump sum (e.g. inheritance) in soon, the administration fees of maintaining a Self Managed Superannuation Fund will erode away any profits and may also eat into your contributions. The general agreed rule of thumb among honest SMSF professionals for a minimum balance for a Self Managed Superannuation Fund would be $200k. This would only be on the proviso you would be making contributions at or near your concessional cap depending on your age and that you may also be adding some non-concessional funds on a regular basis so that your fund has $400-$500K within 3-5 years.
If there are 2-4 members that are contributing to the fund with frequently largely sized contributions this can justify the use of a self managed superannuation fund earlier. Just remember that generally it costs around $2,200.00 per annum in auditing, accounting, tax agents fees and ASIC fees for the fund as well as a general 1% investment fee.
2. Failing to educate yourself first, before you open your fund so you know the basic SMSF rules.
Self managed superannuation funds can be very complex, if you do not know the basic rules of a fund and you are not using a fund administrator like an Accountant or a specialised service, you are asking for trouble! As the number of self managed superannuation funds increase rapidly the ATO as regulators will begin to take a stronger position. Currently non compliant funds can lose up to 46.5% of the funds assets to tax plus fines for the Trustees!
There is jargon like concessional and non=concessional contributions and tax free and taxable components so take the time to understand them.
The main reasons of funds losing their compliance status is due to providing loans members. Anyone who has just started a self managed superannuation fund whether they have a manager or not that controls the funds should know the basic rules.
Here are some places to start:
ATO central access point for information on SMSFs http://www.ato.gov.au/super/self-managed-super-funds/
The SMSF Association is pleased to provide you with this ATO SMSF Trustee online resource. ATO approved SMSF Trustee Education Program
By the end of this course, you will have learnt;
- The basic facts about Superannuation and Self-Managed Superannuation Funds
- How an SMSF works
- The investment rules for SMSFs
- The administration process to keep your SMSF healthy.
http://www.smsftrustee.com/ The Self Managed Superannuation Fund Trustee Education Program has been released by the Joint Accounting Bodies
We run regular seminars on educational topics for SMSF Trustees in groups of 6-10 people. Contact us for more details liam@verante.com.au
3. Drawing on your SMSF for business or personal needs – Read and learn to stick by the Sole Purpose Test
Always remember it is your money but not yet! You are receiving generous tax concessions for providing for your retirement. Break the rules and you will lose those concessions! Self managed superannuation funds are not to be used to fund personal or business needs of the members of the fund or their relatives. While many may be able to justify a small loan for a short period of time there is a total restriction on lending to members of the fund or related parties which may be extended family members or entities such as Family Trusts, Companies or partnerships.
Another example would be if you invested in a holiday resort unit managed independently by a management company and as part of the arrangement, you are entitled to private use of the apartment, 2 weeks per year. This arrangement would breach of the sole purpose test if used by your or any related party.
4. Arranging for your SMSF to own your business premises without thinking the strategy through to the end
I actually love this strategy but there are positives and negatives to this situation and you will need guidance from your legal, accounting and SMSF Specialist Advisor. Many owners of small to medium enterprises use this as an effective strategy but others do a half-baked job and leave themselves exposed.
Pros:
- Direct control of your super investments and a real understanding of where your money is invested.
- The fund will pay only 15% tax on commercial rent paid
- If the premises is sold no capital gains tax may be applicable once you are in pension phase and 15% or less if earlier.
- You can be your own landlord with secured tenancy which allows you greater certainty when fitting out or installing equipment.
- Keeps liquidity in the business to fund other costs.
Cons:
- There are thousands of dollars in set-up costs and there are sometimes higher fees involved in getting a loan through your SMSF.
- If a member of the fund dies without the proper insurance in place the fund may have to pay out death benefits leading to a rushed sale of the commercial premises.
- If sold to a third-party then there is a possible loss of tenancy to the business which could destroy it.
- There are strategies that can be built to avoid the cons, it is best to speak to an advisor so that they can see what is best for your personal situation.
5. Choosing the wrong type of Trustee for the job
76% of funds in this country still have Individual Trustees or a Trading company as trustee when a Sole Purpose Corporate Trustee would be much more suitable for long-term planning.
With individuals as trustees you need to change the name on all investments if one person leaves (divorce, death, Incapacity to act) or you add a new member (bring in a child, business partner or second spouse!). The paperwork involved is time-consuming and expensive just when it usually most inconvenient.
Please see my previous blog on this subject for more detailed discussion on this topic https://smsfcoach.com.au/2012/08/09/trading-company-as-smsf-trustee-or-sole-purpose-smsf-trustee-company/
6. Failing to plan for death or serious illness of a member
If the fund is run by a husband and wife or run predominantly by one member, if that member passes it could have devastating impact on the remaining member and the self managed superannuation fund. Strategies should be put in place so that all members involved in the fund understand the rules and regulations as well as the funds investment strategy.
Effort should be made to ensure the “silent” member is aware of and has met the Accountant, Auditor, and Financial Advisor and is comfortable that they could deal with them in the event of needing them. What’s the use in having a city based advisor if your spouse does not feel comfortable driving into the CBD. Choose a local Advisor for your later years.
All shares should be properly Chess sponsored and all members should have access to account numbers and passwords.
Binding Death Nominations and Reversionary Pensions should be reviewed regularly to ensure they still meet your wishes. The idea of leaving 20% to a son or daughter may have been fine when the fund was doing well but is it still a good idea in 2017? Make sure you do not leave your spouse short!
7. Rolling to a SMSF without maintaining or transferring Insurance First.
One of the most important factors is to undergo a review of current insurances and to have life insurance integrated into your self managed superannuation fund. When transferring from retail, employer or industry superannuation fund look to get “Transfer Terms” from insurers to open a new policy in the name of the SMSF without extensive underwriting. DO NOT LEAVE THIS UNTIL AFTER YOU HAVE ROLLED OVER! Despite your own perception of your health and vigour, you may find it hard to find new cover on the same terms or any terms so preserve what you have. Often we keep a small balance in a retail or industry fund just to continue the insurances in there at the group or discounted rates available.
8. Getting behind on paperwork
More than just filing statements, trustees are required to document every decision that is made whether this is to make an investment, take out insurance, or change bank accounts. This should come in the form of minutes with details regarding who made the decision, on what day and where the decision was made.
The record keeping requirements of an SMSF can be quite onerous and failing to meet them is an easy way to fall foul of the ATO. Business owners usually have enough paperwork as it is, so paying professionals who can look after your record keeping may make sense for you.
9. Exceeding the contributions cap
The cap on concessional contributions has changed so often in the last decade that confusion reigns each year.
The cap on concessional contributions for 2018/19 is $25,000. The after tax contributions (non-concessional) is capped at $100,000 per annum
There are a number of ways members can get caught out and exceed the cap. For example,
- if you are paying for life insurance held in another super fund, the insurance premium can be deemed as a contribution. This premium would then be levied at penalty tax rates.
- If your employer made last year’s June Super contribution in July of this year.
We can show you strategies for a couple to get up to $800,000 to $1,200,000 into super in one year by using a mix of contributions and a holding account strategy.
10. Not having a proper Cash Hub and losing interest and paying unnecessary fees
If you go to your normal bank to set up a bank account for your SMSF, they will most likely suggest that you use a business bank account. These accounts generally have high monthly fees, transaction fees and provide little to no interest.
We estimated the average cash balance of SMSFs to be between $50,000 and $80,000. Based on these figures, by using business bank accounts, trustees may be costing themselves approximately $3,000 per annum in fees and lost interest.
There are better options out there. Look at Macquarie’s Cash Management Account almost matching the RBA cash rate (noting for first $5K). Link these to an ING Direct Savings Maximiser for the Fund or a RaboDirect Notice Saver Account paying up to 1.8 to 2.35% higher for cash. Use 6, 9 and 12 month Term Deposits where funds are not needed short-term.
Make sure all accounts are opened correctly in the name of all trustees. Get it wrong and it can cost a lot to rectify.
I hope these thoughts have been helpful and please take the time to comment if you know of others common mistakes as I know this is not an exhaustive list.
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 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.
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Posted by SMSF Coach - Liam Shorte on October 20, 2011
https://smsfcoach.com.au/2011/10/20/10-common-mistakes-made-by-many-smsf-trustees/
How to react to this volatility as a SMSF Trustee / Investor.
The volatility over the last 6 months has been staggering but it is not unusual in historical terms as it has happened many times before. The difference now is that we are bombarded through all the forms of media with the daily movements of our investments and you just cannot ignore that weight of news. Also many people are now able to take more control of their investments via their own Self Managed Super fund or retail Master Trust / Wrap account.
It’s enough to make an anxious investor abandon shares entirely. But if you jettison equities from your portfolio in favour of cash, bonds and term deposits, it will take you much longer to reach your savings goals, and you may not get there at all.
When you look at current interest rates as being a pretty good predictor of what bonds/fixed interest will return in the future, the outlook isn’t particularly good with the 3yr bond yield hovering around 3.87% and inflation tickling the 3% band.
Likewise, interest rates from term deposits and high interest cash accounts have been dropping sharply in the last 2 weeks with 4s and 5s now in front of 6 month rates where 6s were common last month and forecasters now looking at rate cuts in October.
While short-term fluctuations in the market can be unnerving, they rarely affect long-term returns, for example investors who moved their savings into cash at the end of 2008 and stopped contributing to their superannuation accounts now have an account balance worth 20% less than investors who remained in the market.
With no end to volatility in sight, how do you keep your head while all around you are losing theirs? Here are some coping strategies:
Rebalance, Rebalance, Rebalance. Volatile markets can distort your portfolio. For example, if your goal is to have 35% of your savings in Australian equities, 20% in International Equities, 10% in property, 25% in Fixed Interest and 10% in cash, a big market meltdown could increase the amount you have in Fixed Interest and lower your allocation in equities and property.
To rebalance, you should sell some of your best-performing funds (fixed Interest, bond and cash funds) and put the money in your worst performers, something many investors lack the fortitude or commitment to do. We all know in theory what we’re supposed to do, but in reality do the opposite and flee to the best performer or cash. I know it hurts but you have to understand market cycles as opposed to “herd mentaility”. Look at Warren Buffet this week investing $5 Billion in Bank of America when most were fleeing the stock. He has a strong track record of buying when stocks are out of favour with the mainstream.
Don’t be blind to significant changes in markets like the rise of Asia or the risk of sovereign debt. Look out for changing trends like the move towards income orientated stocks. Your adviser should be pointing these matters out to you and identifying strategic asset allocations to allow for them.
How often should you rebalance? We recommend conducting regular portfolio reviews every six months, but only rebalancing when your allocation is at least 5 percentage points way from your benchmark.
Revisit you long term strategy and stick to it. If the thought of rebalancing makes your palms sweat, consider investing your savings a “life cycle” strategy. This name for the common strategy, which has become much more popular in the last decade, invests in a mix of shares, bonds and cash and gradually become more conservative as you approach retirement. It is nothing new and most advisers will adjust your portfolio this way as part of your overall strategy but maybe you have not discussed this with them for awhile and the volatility may have led to inaction. Well now is the time to consider your future strategy and get that down in writing so you and your adviser are clear on your objectives, timelines and changing strategy over time.
Resist chasing this year’s ‘winner’ is just as likely to be next year’s ‘loser’. Even during the darkest days, some investments will shine. Lately, the flavour of the day has been gold, which is up considerably this year vs. a decline of almost 9% for the All Ordinaries.
The rise of exchange traded funds and similar products in the past few years has made it easier for small investors to invest in “hard” assets, such as gold and other commodities. In small doses, such investments can diversify your portfolio, but they’re easily abused. For example, while gold has been a winner this year, it’s not for the fainthearted. Factoring in inflation, it would have to reach $2,113 an ounce to reach its 1981 high of $850. That was a long time in the doldrums in between its peaks!
Have a look at the Russell Long Term Investment Returns report for more insight in to this subject. http://www.russell.com/AU/_pdfs/market-reports/asx/ASX_Report_2011.pdf
Save more. In this uncertain world, the amount you save is one of the few things you can control. If your employer matches super contributions or you take advantage of the Government co-contribution fro you or your spouse, you’re guaranteed an investment return — something even gold can’t deliver.
If you look back at just how complicated and volatile the last 10 years have been, people who diversified and rebalanced and kept contributing are well ahead of where they were a decade ago.
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.
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Posted by SMSF Coach - Liam Shorte on August 30, 2011
https://smsfcoach.com.au/2011/08/30/how-to-react-to-this-volatility-as-a-smsf-trustee-investor/
The SMSF Coach 