Retirement planning is vitally important and with the new rules it may be more important to start as early as possible. New limitations on contributions to super will mean you must be actively making additional contributions sooner. Then when you have been working hard to get money into the super environment, and have complied with all the rules and contribution caps, you want to ensure you are maximising your opportunities when you start to draw on your super savings for a retirement income stream.
What are the changes?
A maximum limit of $1.6 million is permitted to be transferred into retirement income stream products.
Excessive balances can remain in super in accumulation phase
Earnings on assets supporting transition to retirement income streams will be taxed within super
Limits on amounts that can be transferred into retirement income streams
There has been considerable talk in recent times about whether a limit should be placed on the amount that can be accumulated within super and afforded tax concessions. Rather than simply place an arbitrary ceiling on how much can be held inside super, the Government has instead targeted potentially excessive superannuation balances by limiting the amount that will be eligible for the nil tax on earnings concession. From 1 July 2017, the maximum amount that can be placed into retirement income streams will be $1.6 million. For anyone who has started income streams and account balances exceeding that limit, there will be a requirement to roll-back (or withdraw) amounts to bring them in line with these new maximums. The current tax free status of earnings on assets supporting superannuation income streams will only be available to the extent that the income streams are within this new limit.
Excessive balances can remain in superannuation
There is a lot of media hype and some misconceptions floating around at present. It’s important you understand that if you are in the fortunate position to have more than $1.6 million in super, you aren’t forced to withdraw the additional benefits. Amounts above the $1.6 million threshold can remain in super, but must remain in the accumulation phase. Earnings will be taxed at the standard superannuation tax rate of 15% which for many people will be better than paying their marginal tax rate on the earnings if they take the funds out of the system.
Also remember if you have $1.6m in pension then if you take the excess funds out of your SMSF then you will not have an opportunity to put the funds back in as you will be blocked form making further non-concessional (after tax) contributions.
For some, it may be worthwhile to explore taking some of the excess out in to your own names after July 2017 if you have a low level of assets outside in your personal names or through family trusts. But remember if you’re minimum pensions from the remaining money in superannuation pensions is more than you need to live on then these funds can build up quickly outside of the system and you could be come taxable now or when the first spouse passes.
Earnings on assets supporting transition to retirement income streams will be taxed within super
Despite considerable speculation, the Government has not removed the ability to commence and run transition to retirement (TTR) income streams. TTR income streams are available to you once you reach your preservation age. They allow you to access your super in the form of an income stream without the need to retire or alter your employment arrangements. However, the Government has opted to reduce the concessions available for these income streams. From 1 July 2017, instead of earnings on assets supporting these income streams being exempt from tax within the super environment (as would apply to all other income streams within the new $1.6 million threshold), earnings will instead remain subject to the standard 15% tax rate that applies to funds in accumulation phase.
So for those accessing their super via a TTR so they can salary sacrifice more of their wages back to super within the new $25,000 limit from 1 July 2017, then this is still a very valid strategy. How ever if you have the savings and can manage without accessing your super balance then it may be better to move your fund to accumulation phase.
Look for opportunities to change from a transition to retirement income streams to a full account based pension
If you retire before 60 or leave any one employer after age 60 then you can switch your TTR to a full tax free pension. So think about your situation and do you or can you do marking of exams, AEC electoral role work, stocktaking, Christmas short term employment, part-time survey work, bar work, filling in for family in a business while they go on holidays. If you can document a work arrangement and it genuinely ceases then you can meet that further condition of release which could move your fund in to tax free earnings phase again.
Summary
What hasn’t changed is the tax treatment of superannuation benefits received by individuals from their retirement savings. Payments received after reaching age 60 will continue to be received tax free. To ensure you get the right advice for your situation give us a call on 02 9984 1844 or click here to schedule an appointment
We have offices in Castle Hill and Windsor but can meet clients anywhere in Sydney or via Skype.
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 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
I knew with all the recent changes to Superannuation that many of my clients would need to update their SMSF Trust Deeds and started doing my research for a blog. Then I came across a recent blog from Dr.Brett Davies at Legal Consolidated today and I could not really improve on it. So with his permission, I am re-blogging his content here.
Self-Managed Super Fund (SMSF) Deeds previously required updates in:
– 1999 – ‘Excluded Funds’ became ‘Self-Managed Super Funds’, preservation & in-house assets
– 2007 – ‘Simpler Super’
– 2017 – Legislation passed in 2016, requires the changes below
The 15 changes to SMSF Deeds required after the 2016 Budget are to:
Internally ‘rollback’ pensions to accumulation;
Segregate assets between accumulation and pension phases;
Reject contributions;
Refund contributions;
Deal with excess transfer balance tax and excess non-concessional contributions;
Allow income streams and Account Based Pension (grandfathered);
Specify guardians for incapacity and death;
Identify the Power of Attorney when living overseas for more than 2 years;
Resettle pensions with flexible timing without mingling with accumulation account;
Allow reversionary beneficiary nominations;
Provide for CGT relief;
Deal with segregated and unsegregated assets;
Cease or keep Transition to Retirement Income Streams;
Calculate member balances, across different funds; and
Calculate internal pension rollbacks to accumulation.
These SMSF updates are all required to give maximum flexibility to your accountant and adviser.
Why does my SMSF Specialist Advisor / Accountant want to apply these SMSF updates?
Pre-2012 SMSF Deeds fail to deal with these 10 issues:
Removing clauses requiring the Trustee to do something that is no longer legal or beneficial;
Changing the sections that are ‘regimented’ with unnecessary rules vs being ‘permissive’. There is no point stating mandatory SIS requirements. In fact, it is dangerous to re-state legislation. This is because it dates your deed;
Accounting for an increased concessional contribution cap;
Removing insurance cover where the conditions are out of date;
Incorporating clauses about losing the pension at death or when the minimum payment has not been made;
Allowing for excess concessional contributions taxed at member’s marginal rate (-15% offset);
Updating the Investment Strategy to incorporate the ATO’s new Audit approach;
Changing market valuation clauses to leave the mechanism for the Accountant;
Allowing remuneration for non-trustee duties; and
Allowing non-lapsing Death Benefit Nominations.
Update your Deed to ensure your SMSF is compliant. Then you get the most out of your SMSF.
There is no risk of resettlement
‘Resettlement’ is when you create a new ‘trust estate’ out of an old trust. This applies to SMSFs and causes significant tax implications. However, there is no risk of resettlement under the High Court authority of Commercial Nominees (2010).
Updating your SMSF Deed through Legal Consolidated does not result in the resettlement of your SMSF. We retain the parts of the old Deed that are required by legislation and previous court decisions. But this does not affect a resettlement.
Make sure to check your with your own current deed provider or ask your adviser to check out Legal Consolidated’s offer.
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.
Bob Farrell is a Wall Street veteran with over 50 years of experience in the investment business. He started as a technical analyst at Merrill Lynch in 1957. Bob’s ten investment rules have come from his decades of experience with all sorts of markets: dull, bull, bear, bubbles, and crashes. I thought I would share with you a short version of these Top Ten Rules to guide SMSF Trustees in reviewing their fund’s Investment Strategy
Markets tend to return to the mean (average price) over time. Basically, this means that after a strong uptrend or downtrend, prices tend to move back toward the long-term average.
Excesses in one direction will lead to an opposite excess in the other direction. Similar to above. It is not a coincidence that the ASX 300 has not reached the previous high 9 years after the pre-GFC top in 2008.
There are no new eras—excesses are never permanent. “This time is different” are the four most dangerous words in investing.
Exponential rapidly rising or falling markets usually go further than you think, but they do not correct by going sideways. Corrections are as ugly as advances are exciting.
The public buys the most at the top and the least at the bottom. Greed and fear drive the investing public far more than logic.
Fear and greed are stronger than long-term resolve. This is a corollary to number 5. It is easy to say you are a long-term investor when your account is rising; much more difficult when you find yourself down 40%.
Markets are strongest when they are broad and weakest when they narrow to a handful of blue chip names. A rally that has few stocks rising shows modest conviction and is more indicative of a market about to falter. Conversely, a rally that encompasses a broad number of stocks tends to be indicative of a “healthy” bull run.
Bear markets have three stages—sharp down, reflexive rebound, and a drawn-out fundamental downtrend. Bear markets often start with a sharp, swift decline, then a sharp rebound, then the longer, grinding down of the third stage.
When all the experts and forecasts agree, something else is going to happen. If everyone expects something “unexpected” to happen, the greater likelihood is it doesn’t. By definition, a “black swan” event is something few see coming, but after the fact, many say it should have been foreseen by everyone.
Bull markets are more fun than bear markets. Psychologically, it is easy to invest in a bull market; after all the market confirms your “skill” and “brilliance” by going up. In a bear market, fear, panic, and even depression take over as nothing seems to go your way.
Recently Lance Robert’s website, realinvestmentadvice.com, reviewed Bob’s investment rules with great illustrated graphs to back up the veracity of those 10 investment rules. I would highly recommend a visit to that article for those needing further detail.
Mr. Farrell’s rules are not meant as hard and fast rules but something to keep in mind as you review you strategy and to ensure you do a fair critical review rather than just coasting along. There are always exceptions but these are good rules to keep in mind when reviewing your Self Managed Superannuation Fund investment strategy and positioning your portfolio for long-term investing success.
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.
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.
In it latest quarterly review of the SMSF sector Class have indicated that Platform use is actually rising a little among SMSF Trustees from 55% to 58%. However there is some change in the guard in terms of which platforms are seeing inflows. From the media release on the report:
Investment platforms have maintained their share of self-managed super funds in the past two years but the market share of the providers has shifted in favour of the non-aligned in the latest Class SMSF Benchmark Report.
The September quarter Report, based on an analysis of 120,000 SMSFs, shows that slightly less than 1 in 5 SMSFs use platforms and this has remained relatively stable for the past two years. However, the proportion of assets these funds hold on the platform has actually increased since 2014, from 55% to 58%, suggesting that predictions of the imminent demise of platforms in the SMSF market are premature. However, the market share of different platform types has shifted significantly over the same period.
While all platforms increased the value of SMSF assets they held, most institutional platform providers lost ground compared to their non-aligned peers, especially Praemium, HUB24 and netwealth. The notable exception among the institutions was BT, which was able to build on its leading position and grow from 41% to 46% of all platform assets. Excluding BT, institutional platforms saw their share of platform assets drop from 47% to 40%.
I don’t find this a surprise as BT has launched its new generation BT Panorama platform which works especially well for SMSF investors. You can access Cash, very competitive Term Deposits from BT, Westpac and St George as well as shares, hybrids, ETFs, managed funds and managed accounts all on the one reporting platform as well as include external assets in the report. We have started using this platform for new clients as it is keenly priced with no administration charge for cash or term deposits and competitive admin fees for shares and managed funds.
Platform users more likely to use Managed Funds
Again the report also shows a higher use of managed funds by those using Platforms which no doubt is due somewhat to the preference for platforms by many SMSF advisers and also that many trustees use platforms to access sectors or managers they can’t get direct/retail. Again from the report:
The Report also found that SMSFs that use a platform allocate their assets differently to those that don’t. SMSFs that use platforms hold less cash and direct property but almost three times the percentage of managed funds as other SMSFs.
While the two categories of SMSFs have a similar direct exposure to shares, those that use platforms appear to be increasingly holding their equities off the platform, such as through a broker.
You can access the full Class Benchmark report and previous release here
I found the table of the Top 20 investment holdings in each class very insightful as it shows the increase in use of ETFs in SMSF portfolios. Hear is a summary of the top 5 ETFs from the data:
1 IVV Ishares S&P 500 ETF – Chess Depositary Interests 1:1 IshS&P500
2 IOO Ishares Global 100 ETF – Chess Depositary Interests 1:1 Ishglb100
3 STW SPDR S&P/ASX 200 Fund – Exchange Traded Fund Units Fully Paid
4 VTS Vanguard Us Total Market Shares Index ETF – Chess Depositary Interests 1:1
5 VEU Vanguard All-World Ex-Us Shares Index ETF – Chess Depositary Interests 1:1
Likewise the top 5 Managed funds
1 PLA0002AU Platinum International Fund
2 MGE0001AU Magellan Global Fund
3 PLA0004AU Platinum Asia Fund
4 FID0008AU Fidelity Australian Equities Fund
5 MAQ0482AU Winton Global Alpha Fund
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.
Like every strategy we discuss with clients we stress that have to look at the exit strategies up front rather than scramble to react if something happens that changes the financial position of the members or of the fund.
While a self managed superannuation fund can increase its assets and leverage the potential growth by borrowing to purchase a property, that borrowing can also cause financial distress if a fund member dies or becomes disabled. The lack of liquidity and cash flow could force the trustee to:
Sell the property in a difficult or dropping market
Realise capital gains or losses before expected i.e. before the members are in pension phase
Have to deal with increased transaction costs.
Since August 2012 Trustees of an SMSF have been required to consider insurance for members and we would say that is very sensible when debt is involved.
SUPERANNUATION INDUSTRY (SUPERVISION) REGULATIONS 1994 – REG 4.09 (2)(e)
The trustee of the entity must formulate, review regularly and give effect to an investment strategy that has regard to the whole of the circumstances of the entity including, but not limited to, the following:
for a self managed superannuation fund – whether the trustees of the fund should hold a contract of insurance that provides insurance cover for one or more members of the fund
In the past strategies like Cross insurance on each member of superannuation fund was often used to reduce the impact that the sudden death or disability of a member may have on a fund however the ATO have ruled out many of these strategies including using the SMSF to fund Buy-Sell Agreements between business partners.
SMSF mortgage repayment solutions on death
If there is life insurance on the member that dies then any proceeds are added to their account balance and can be paid as a lump sum out of the fund to beneficiaries but that may leave a fund a debt still to be paid off and with less contributions going in as one member is deceased and the fund may not have the free cash-flow to fund the full balance pay out without selling the property.
The strategies outlined below are those now available as to manage the cash-flow liquidity issues and death benefit payment requirements that have arisen when a fund member dies suddenly, whilst the fund still has a Limited Recourse Loan Arrangement in place.
Payment of insurance benefits as an income stream to spouse
If it is 2 spouses or defacto’s that have set up an SMSF and borrowed to purchase an investment property, life insurance is often used to extinguish the debt. The reason for this is that generally the disability or death will eliminate or reduce the level of contributions that are made for the member, from which the loan repayments have been sourced.
Where the members of a fund are spouses then death benefits can be paid as an income stream. This means that even if a fund has borrowed to purchase a property, the property does not need to be disposed of to pay out the death benefit. This is even more important if your business is run out of the property.
In this case the life/TPD cover can be held by the member covered by the insurance and the premium can be paid from that members account. These arrangements comply with the SIS Regs, and the policy can be held through the self managed fund.
If the member dies or becomes disabled, the proceeds will be credited to the affected member’s account and loan will be repaid. Following the repayment of the loan a pension will commence to be paid to the member in the event of TPD or to the spouse in the event of death. If under 65 they can take as little as 4% per annum to keep as much in the fund as possible.
Example: Tax Dependants like spouses
Jack and Diane are married and members of Mellencamp Family Super Fund (“SMSF”)
Account Balances:
Jack – $100,000
Diane – $100,000
SMSF took out a loan of $300,000 to acquire property valued at $500,000
Jack dies after getting a bad knock playing football ( for the younger readers get the full story here
anyway thank you for indulging me and now back to the example:
SMSF Cash flow after Jack’s death
The loan is paid out.
Diane starts a minimum 4% annual death benefit pension. Only one member left contributing now but no interest to pay.
Rent
$17,500
Concessional contributions
$5,000
Total inflows
$22,500
Interest
$0
Operating costs
($2,000)
Life premiums
$0
Pension
($16,000)
Total outflows
($18,000)
Tax
($675)
Net cash flow (surplus)
$3,825
what are the tax implications of the pension
Age at Death
Type of Super Death Benefit
Age of Recipient- DEPENDANT
Taxation Treatment of Taxed Element
Any age
Lump Sum
Any age
Tax free
60 & above
Income stream
Any age
Tax free
Below 60
Income stream
60 & above
Tax free
Below 60
Income stream
Below 60
Marginal rate of tax less 15% tax offset
To implement the strategy, the following factors, need to be considered:
The funds trust deed must permit the fund to hold the insurance and to pay the TPD or death benefits as an income stream
The fund’s investment strategy should state that the trustees have considered the needs of the individual members and determined to take out life insurance for the fund members in order to repay any outstanding mortgage under an LRBA
Whether the fund’s cash flow allows for the taking out of the insurance policies. The premiums will normally be deductible in this circumstance as the benefits can be paid as a pension. For younger trustees you should consider Level Premiums and reviewing the cover as the loan is paid down.
Funding benefits from a reserve
If a fund is not able to pay a death or disability benefit in the form of a pension because they don’t have a spouse or the fund trust deed does not permit the payment of a benefit as a pension, then it may need to consider the use of a reserve strategy.
This strategy involves the fund trustee taking sufficient TPD and death cover over the lives of the fund members to enable the repayment of a loan and the payment of benefits as a lump sum.
The fact that the insurance policies are paid from the fund’s reserve and the insurance proceeds in the event of an insured event are credited to the reserve, means that the insurance benefit can remain in the fund. The fact that the insurance proceeds can remain in the fund means that insurance liabilities can be met and the loan repaid without the asset purchased under the borrowing arrangement needing to be sold.
In order to implement the strategy effectively, insurance policies premiums for each of the fund members will need to be paid from the reserve. The fact that the premium is paid from the reserve will then require any insurance proceeds after an insured event to be credited to the reserve.
Example 2 – Non- Tax Dependants – 2 brothers in a business
So sadly Brad dies …big ahhhh!
SMSF Cash flow after Brad’s death
Death benefits are held in a Reserve.
The loan is paid out but the value is held in the reserve account
Results in large reserve ($400,000)
allocate back to Brian < 5% of his balance p.a. or
allocate up to $25,000 p.a. this year and $25,000pa going forward to Brian’s account depending on other concessional contributions in year
Rent
$17,500
Concessional contributions
$10,000
Total inflows
$27,500
Interest
($18,000)
Operating costs
($2,000)
Life premiums
($1,500)*
Pension
$0
Total outflows
($21,500)
Tax
($900)
Net cash flow (surplus)
$5,100
* Deducted from general fund expenses
Other Issues to consider
There are a number of other issues that fund trustees will need to consider when implementing this strategy:
If the members of the fund are business partners rather than spouses, the spouse of the deceased member may feel that the business partners are benefiting from the death of their spouse. It is really important to discuss these strategies upfront with family so they know they are provided for but that the business needs stability too.
When the insurance proceeds are credited to a reserve, it may be difficult to transfer that reserve back to fund members without exceeding the excessive concessional contributions cap.
The insurance premiums are not tax-deductible under Section 295-465 of the ITAA 97 because the policy is not held for the purpose of providing a fund member with a death or disability benefit.
The cost of the insurance premiums could be very high so seek advice on all possible solutions.
The cost of the insurance premiums may limit the trustee’s capacity to take out other insurance cover for members
By the Way – one other reason to cover your exit strategies
What happens if a trustee fails to address insurance in their SMSF?
The trustees could be fined 100 penalty units ($21,000) for each trustee – Section 34 SIS Act; Section 4AA Crimes Act 1911
and if someone else has been affected by the loss as a result:
A person who suffers loss or damage …may recover … against that other person or against any person involved in the contravention. – Section 55(3) SIS Act
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 Vichaya Kiatying-Angsulee at FreeDigitalPhotos.net
On the home page of this blog I outline the Benefits of a Self Managed Super Fund – SMSF in some detail. Well, when looking at any investment structure I always like to assess the alternative options and eventual exit strategies. While many of you will know of the Retail and Industry superannuation fund options, you may not be as familiar with a close relation to the SMSF known as a Small APRA fund (SAF). So let’s look at little closer at this option.
What is an Small APRA Fund (SAF)?
An SAF is similar to an SMSF but instead of the client(s) being the trustee(s), a professional licensed trustee is responsible for all of the administrative, compliance and legislative responsibilities of running the superannuation fund.
SAFs offer an alternative for clients looking for the increased flexibility of an SMSF but without the burden of being a trustee and the associated compliance risk. They are also an effective solution for clients who are non-residents or bankrupt and therefore unable to be trustees of an SMSF.
I always warn new clients that if your career or business relies on you being a director then you must take the decision to set up an SMSF very carefully and be ready to put the time and effort in or choose SMSF specialist advisors to ensure your fund remains compliant so that you don’t lose your ability to be a director of any company because of breaching SMSF legislation.
SAFs provide all of the legislative advantages afforded to SMSFs, without the risks associated with breaching legislative compliance requirements.
Let be very honest up front and say this is not a suitable option for small balances as you are incurring an extra layer of trustee fees. However for those with larger balances the option can be very cost-effective especially when you consider the ability to relieve yourself of the trustee responsibilities.
Main benefits of the SAF structure
1. Offloading the Compliance risk
The main advantage of running an SAF is that the compliance risk is borne by the professional licensed trustee whose core responsibility is the provision of trustee services. If an SAF is in breach of the rules, the members of the fund will not be liable for the compliance mistakes of the professional trustee. In an SMSF, all members must be a trustee or director of a corporate trustee which means all members bear the compliance liability. You cannot claim your spouse was solely responsible for running the fund. One case clearly shows the risk of being a “silent trustee”where the verdict found the former wife, in her role as a trustee of the fund, was personally liable when it became non-complying after her former husband stripped out most of the assets and headed overseas. See Shail Superannuation Fund and Commissioner of Tax[2011] AATA 940
2. Administration of the fund
A professional licensed trustee in charge of an SAF typically appoints professional organisations to carry out the administration of the fund or is skilled and experienced enough to avoid common breaches of legislative requirements. As the professional licensed trustee administers all information and transactions, record keeping is typically timely and accurate. In SMSFs, the trustees are typically responsible for collating all the documentation and reports so their chosen administration service can prepare the financials of their fund (Not so hard as it sounds nowadays but when your busy?…paperwork suffers)
3. Travelling overseas for extended periods
SAFs are more flexible for people who may go overseas for an indefinite period compared to SMSFs which are strictly regulated in that circumstance. Members of an SMSF who relocate for an extended period of time have to fulfil two requirements – the central management and control of an SMSF needs to be in Australia, and the active member test needs to be fulfilled . If any of these requirements are breached, the SMSF loses its residency status, is deemed non-compliant and will face exorbitant penalty taxes of up to 46.5%. An SAF however can have offshore members – as long as they are Australian residents for tax purposes.
4. Protection and access to Superannuation Complaints Tribunal
In the case of fraudulent conduct or theft, SAFs have more readily available redress options including a grant of financial assistance as statutory compensation and access to the Superannuation Complaints Tribunal which deals with complaints about the decisions and conduct of APRA-regulated fund trustees and other decision makers. Conversely, no compensation scheme exists for SMSFs and they instead have to rely on courts to resolve disputes or look to the Corporations Law to take action against a financial adviser, accountant or administrator for losses they believe are due to misconduct, negligence or inappropriate action.
5. Disqualified persons – Bankruptcy or Criminal record
Individuals are not allowed to be trustees of an SMSF or directors of a corporate trustee if they have committed a crime involving dishonesty such as fraud, theft or embezzlement or if they have been declared bankrupt. The Tax Office will ban individuals from taking on positions of responsibility in an SMSF if it believes the person has breached the superannuation laws either very seriously or persistently or it believes the person is not a fit or proper person and hence should be disqualified. There are no issues with a disqualified person becoming a member of an SAF as they are not required to fill the role of trustee and it is in fact an often preferred solution for those with an SMSF who find themselves in that unenviable position with assets that aren’t liquid.
6. Responsibility concerns due to ageing or onset of mental illness
Some older people may prefer to use an SAF because they have reached an age where they are no longer able, or may not want to, make effective management and operational decisions. SAFs still allow investors to be in charge of the asset allocation – subject to trustee approval (but they are becoming a lot more flexible) – and to maintain or acquire a similarly broad range of assets and avail of strategies available to SMSF investors. Problems often arise in an SMSF when an older trustee loses the capacity to function and participate in the fund’s inner workings whereas in an SAF, the professional licensed trustee will continue to manage the fund for the benefit of its members.
7. Estate planning
There are a number of estate planning scenarios where an SAF being a better alternative to an SMSF. In an SMSF, the death of a fund trustee changes the composition of the trustees and may provide potential for disputes especially in blended families. In an SAF, the licensed trustee is an independent and unbiased party with no family relationship issues that we often see arise with estates. In an SMSF, it is possible to try to include safeguards into the trust documentation; however, if one of several feuding beneficiaries has the cheque book, it may take the remaining beneficiaries considerable time and expense to track down the person and the money. As one colleague said:
“a remaining trustee with a cheque book can do a lot of damage to an SMSF balance while family fight for control in the courts”
8. Taking care of vulnerable beneficiaries
SAFs can provide very tax effective death benefit income streams to intellectually disabled adult children. The hurdle of the person with a disability or their legal personal representative needing to be a trustee is removed because, unlike an SMSF, an SAF has a professional trustee. The use of the professional trustee also ensures that ongoing services can continue to be provided to a disabled person is over 18 and once the parents have died or lost capacity. There is the ability to pay a death benefit income stream to the disabled child and then have any capital remaining return to the parent’s estate on death.
9. Employer – Employee Fund
In an SMSF, a trustee cannot be an employee of another member – unless they are family. In an SAF however, a member can be an employee of another member. Further, since SAFs have a professional licensed trustee, the related-party issues that crop up in an SMSF are not an issue in an SAF.
In summary while an SMSF may be ideal for people who want to be fully in control of their investment decisions and retirement savings, an SAF is ideal for those who would like to actively participate in investment decisions but retain a low-level of compliance and legislative responsibilities. It is possible to switch from an SMSF to an SAF or vice versa without incurring capital gains tax as all they have to do is retire as trustees themselves and appoint a professional licensed trustee to govern their SAF.
So why may a SAF be a better option than a Retail or Industry Fund?
Moving to a SAF is Not a CGT event whereas it would be if you moved to a retail or industry fund
Likely to be able to keep assets such as direct shares, bullion, collectables and residential and commercial property subject to rules.
The member can still direct investments within the approved list
Member directed death benefit nominations are still possible and in fact often more achievable as the trustee can follow your wishes.
No issues with single member funds
Retains privacy for those in high-profile positions
I would like to acknowledge that much of my information in this area has been gathered from articles and presentations by Julie Steed of Australian Executor Trustees who are very experienced in running SAFs and working as a team with clients and their financial planners.
I hope this guidance has been helpful and please comment below. 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 additional information on switching fund structures.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.
Source: FPA Dare to Dream national research report conducted by McCrindle Research, August 2016
So do you or a family member or friend talk about your future dreams of an early retirement or what you plan to do in retirement but then give a big sigh and say it is “Just a dream” or “a pipe dream” or maybe put it in the “to hard basket” to try and achieve those goals. Realistic goals are achievable with good planning and some of the whackier ones just take a little more effort or courage!
Did you know that this week is Financial Planning Week? Every year, the Financial Planning Association (FPA) holds Financial Planning Week, to remind Australians about the importance of financial planning.
The theme for this year is “Dare to Dream” and I think it’s a great reminder of why we need a plan in place to realise our biggest dreams. After all, financial planning is not just about numbers – it’s about deciding what we want out of life, then putting in steps to achieve it. It’s also a nice reminder about the importance of financial independence – whatever life stage we find ourselves at.
This short video featuring Jane Caro sets the scene to the dare to dream challenge:
So are you ready to read a bit more? Something you might find particularly interesting, is the Dare to Dream research report which has some eye opening insights about how Australians feel about their financial future. The report highlights that whilst one in two Australians dream more about the future now than five years ago, a massive 63% have made “no plans” or “very loose plans” to practically achieve those dreams. Just click the link Dare to Dream research report
The report also shows that property is still a big part of the ‘Great Australian Dream’ (surprisingly even for Gen Y), and that the biggest financial regret in life for Australians is a lack of saving (a huge 47% stated this!). The report is well worth a read.
The FPA has also developed a fun online quiz, to help you discover what kind of financial personality you are. I encourage you to take the quiz and share it on Facebook with your family and friends. You can access this quiz here at Dreamer Profiles
Oh in case you want to know I got “Mover and Shaker” as my financial personality ….my dreams have already been put in to an Action Plan…what about yours?
I hope this guidance has been helpful and please take the time to comment or at least let me know what your personality result was! 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 and achieving those dreams. 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.
In my earlier blog Get Super Scheme Smart – ATO warns on dangers of retirement planning schemes I went through the ATO guidance and their push to educate trustees about early release schemes and fraud attempts. In a recent case they showed that they will enforce the penalty regime where a trustee has deliberately flouted the rules. The penalty, $40,000 and loss of right to be a trustee in future.
The case of Deputy Commissioner of Taxation v Rodriguez resulted in significant penalties being imposed following a large number of unauthorised withdrawals by an SMSF trustee.
In this case, the fund trustee fabricated a loan arrangement, made cash withdrawals to purchase gold bars (later selling them and depositing the proceeds of sale into his own bank account), as well as making a number of other unauthorised withdrawals for his own personal benefit over a number of years.
The court considered that there had been the following contraventions of the SIS Act:
− in making the loans and giving financial assistance the trustee failed to ensure that the fund was maintained solely for one or more of the purposes prescribed in section 62(1)
− in making the loans and giving financial assistance, the trustee failed to ensure that the fund did not lend money or give any other financial assistance using the resources of the fund to a member, contravening section 65(1)
− the trustee failed to prepare a written plan specifying: the amount by which the in-house assets of the fund exceeded the market value ratio of 5% at the end of each income year; and the steps by which the trustee proposed to dispose of the in-house assets equal to or greater than the excess amount, contravening s 82.
In imposing the penalties, the court took into account the trustee’s cooperativeness with the ATO, investigating officers, solicitors and the court process. The court also accepted that the trustee was contrite and apologetic, and was a person of good character. It was also apparent from the material before the court that the trustee was a troubled person at the time of the contraventions.
It should also be noted that some attempt had also been made to repay amounts withdrawn (including an interest component).
In addition to a monetary penalty of $40,000, the trustee was barred from acting as a trustee.
This should be taken as a strong warning to small business owners and company directors who may also endanger their ability to control their business or be a company director in their business life because of issues caused by managing their Self Managed Superannuation Fund poorly.
For those who feel the additional risk of running an SMSF may expose their career to unacceptable risk then they should consider a retail or industry fund or if you have assets that are unable to be held via one of those, like a property, art or bullion, then you should consider moving the Trustee responsibilities to a professional trustee via a Small APRA fund. I will deal with this option in a future blog.
If you are in a position of financial hardship or want to do a complex investment then why not contact us to se if there is a legal way to achieve the same goal without getting yourself in trouble.
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
The old adage “if it sounds too good to be true then it usually is” holds firm especially with superannuation “release” schemes. The ATO is stepping up its education efforts to help consumers while clamping down on promoters of such schemes. Here at SMSF Coach and our sister firm Verante Financial Planning we are always willing to offer a second opinion on any recommendation you are concerned about.
The Australian Taxation Office (ATO) is extending a helping hand to pre-retirees through Super Scheme Smart, a new initiative launched recently that educates people on the dangers of risky and illegal retirement planning schemes.
The ATO has identified a significant number of retirement planning schemes designed solely to help people avoid paying tax on their assets in an illegal manner and is working to close these down.
From the ATO media video below with ATO Deputy Commissioner, Michael Cranston, he warns:
While retirement planning schemes can vary, there are some common features that people should be aware of. Usually these schemes:
• are artificially contrived and complex, usually connected with a SMSF
• involve a lot of paper shuffling
• are designed to leave the taxpayer with minimal or zero tax, or even a tax refund
• aim to give a present day tax benefit by adopting the arrangement
Individuals caught using an illegal scheme identified by the ATO may incur severe penalties under tax laws. This includes risking loss of their retirement nest egg and also their rights as a trustee to manage and operate a SMSF.
The ATO is delivering practical help and information through their Super Scheme Smart website, including a comprehensive information pack, case studies and videos, as well as sending taxpayer alerts into the community about schemes and why they don’t fit within the law.
Mr Cranston urged people undertaking retirement planning to remain vigilant and to come forward if they believe they are at risk or are already involved in a scheme.
“Retirement planning makes good sense provided it is carried out within the tax and superannuation laws. Make sure you are receiving ethical professional advice when undertaking retirement planning, and if in doubt, seek a second opinion from an independent, trusted and reputable expert.
“We do our best to shut down dodgy schemes but the best defence is working together. Blowing the whistle on those promoting retirement planning schemes will help us stop them from risking your or others’ retirement savings,” Mr Cranston said.
All those approaching retirement who are yet to get “Super Scheme Smart”, are encouraged to take advantage of these resources and report promoters of dodgy schemes by calling 1800 177 006, or via email to reportataxscheme@ato.gov.au
Some examples provided of the current schemes they are concerned about include:
The schemes the ATO are currently worried about include:
Dividend stripping – Where the shareholders in a private company transfer ownership of their shares to a related SMSF so that the company can pay franked dividends to the SMSF. The purpose being to strip profits from the company in a tax-free form. (refer to Taxpayer Alert (TA 2015/1))
Non-arm’s length limited recourse borrowing arrangements – When an SMSF trustee undertakes limited recourse borrowing arrangements (LRBAs) established or maintained on terms that are not consistent with an arm’s length dealing. For more information, see Practical Compliance Guide.
Personal services income – Where an individual (with an SMSF often in pension phase) diverts income earned from personal services to the SMSF where it is concessionally taxed or treated as exempt from tax (refer to Taxpayer Alert (TA 2016/6)).
As mentioned above at Verante Financial Planning we take very good care of our clients and ensure all our client strategies are fully compliant and tick all the boxes so our client can sleep securely at night know that while they have used the superannuation and tax systems to maximise their savings position, they are always within the regulations and the spirit of the law.
The whole focus of this blog, the SMSF Coach is about educating and promoting use of legal strategies and we are consistently warning people of the pitfalls of some strategies and investments out there such as our recent warning on the failed GUEVRA IPO not being suitable for SMSF clients or our very popular Property through super in a SMSF – Part 3: 20 most common mistakes
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.
Let’s start with a definition of what is an Enduring Power of Attorney (EPoA).
An enduring power of attorney is a legal agreement that enables a person to appoint a trusted person – or people – to make financial and/or property decisions on their behalf. An enduring power of attorney is an agreement made by choice that can be executed by anyone over the age of 18, who has full legal capacity.
We make decisions for ourselves on a range of family, work and lifestyle issues everyday and often we are reluctant to admit that there may come a time when we may no longer be able to do so. People don’t like to think about becoming mentally incapacitated by illnesses such as Alzheimer’s or dementia, or becoming physically or mentally incapacitated as the result of an illness or accident. But if it does occur it is vital there is a vehicle in place allowing someone else to legally make decisions.
If we have legal documents prepared prior to us losing capacity to make them, our decisions can be made by someone we know and trust. If we do not have those documents in place before we lose capacity then decisions may have to be made by a government department set up for the purpose of dealing with financial and personal affairs of an incapacitated person.
Most of us given the choice would probably choose the first one but to do this we need to make the documents whilst we have the mental capacity to make them. A person has capacity to make valid legal documents if they can understand why they are making the document and the choices which may be involved (choosing a person to act for you). You must be able to weigh up the result of giving power to someone else to act for you and you must be able to communicate your decision to make a legal document.
The main reason why we have legal documents giving a person or persons the power to act for us is that they will know our wishes and preferences and will act in our best interests. It is also a cost-effective way of protecting our family, finances and assets.
So why is it important for an SMSF member to have an EPoA
Well except in very limited circumstances, a self managed superannuation fund will only qualify as an SMSF where each member of the fund is either a trustee of the fund or a director of the fund’s corporate trustee. It is because of this threshold requirement for existence as an SMSF that the EPoA becomes a very important document for the SMSF member.
Consider the implications for the SMSF if someone is incapable of making decisions:
How does the SMSF run?
How can documents be executed?
How does a corporate trustee operate?
How can a new trustee appointed?
How will assets be bought or sold?
How are pensions or lump sum withdrawals approved and facilitated?
If there isn’t an EPoA what can happen?
Documents requiring two signatures, can’t be executed
Possible Audit contravention
The ATO may render the fund non-complying
Cannot roll-out an incapacitated member as SIS regulations require member consent (can’t be given if incapacitated)
Apply to QCAT, VCAT, NCAT, SAT(for WA) – Civil and Administrative Tribunal
Apply for guardianship
But who will they appoint? Surviving spouse, son/daughter, Public Trustee?
Do you think the Public Trustee wants to be running a SMSF?
What happens to the SMSF while waiting?
Technical Part (I don’t like to quote reams of legislation but sometimes it is necessary)
Subsection 17A(3) if the Superannuation Industry (Supervision) Act 1993 (SISA) provides that an SMSF will continue to be an SMSF where, amongst other things:
(b) the legal personal representative of a member of the fund is a trustee of the fund or a director of a body corporate that is the trustee of the fund, in place of the member, during any period when:
(i) the member of the fund is under a legal disability; or
(ii) the legal personal representative has an enduring power of attorney in respect of the member of the fund;
The term “legal personal representative” is defined at subsection 10(1) of the SISA as follows:
… the executor of the will or administrator of the estate of a deceased person, the trustee of the estate of a person under a legal disability or a person who holds an enduring power of attorney granted by a person.
So, in short, under the superannuation legislation:
the enduring power of attorney is the key to allowing a fund to continue to qualify as an SMSF notwithstanding that the member may not be acting as trustee of the fund;
the enduring power of attorney “relief” can be invoked to assist not only when the member is under a legal disability.
However, as also evident from the above, the fact of the EPoA being drawn up, properly signed and sitting in someone’s drawer is not enough.
Implementing the exercise of the EPoA with your SMSF
In order to meet the requirements set out in the Superannuation Industry (Supervision) Act and the Self Managed Superannuation Funds Ruling SMSFR 2010/2, the following conditions must be satisfied:
The LPR/EPoA must be appointed as a trustee of the SMSF, or as a director of the corporate trustee of the SMSF. The appointment of the LPR/EPoA must be in accordance with the trust deed, the constitution of the trustee company (if any), the Superannuation Industry (Supervision) Act, and any other relevant legislation (such as the Powers of Attorney Act 1998 (Qld), the Guardianship and Administration Act 1990 (WA) and the Corporations Act 2001 (Cth)).
A member who has lost capacity must cease to be a trustee of the SMSF or a director of the corporate trustee upon the appointment of their LPR.
Where the EPoA appoints multiple attorneys, one or more of those attorneys can be appointed as trustee or as director of the corporate trustee in place of the member.
Similarly, multiple members are able to execute an EPoA for the same LPR, who can be appointed as a trustee or a director of the corporate trustee in place of each of those members.
A member is also able to execute an EPoA in favour of an existing member who is a trustee or director of the corporate trustee. In this case, the incapable member can cease to be a trustee, or director of a corporate trustee, and their LPR, already a trustee or director in their own capacity, will also be considered to be appointed in the capacity as LPR for the incapable member.
Acting as a trustee under the EPOA
Once appointed, the attorney performs their duties as trustee or director of the trustee company as a trustee or a director rather than as attorney or agent for the member. The attorney will be subject to the obligations of a trustee and must sign the trustee declaration stating that they understand their duties as a trustee. The attorney cannot be a disqualified person and must be eligible to be appointed as trustee.
The decision to act as an attorney and the legal duties are significant. The attorney must:
Consider the interests of the donor when making decisions as the attorney;
Take care of property/assets;
Avoid conflicts of interest;
Comply with relevant legislation, and
If necessary, prove that they have been appointed your attorney.
In summary
While the decision to grant an EP0A should not be taken lightly, it is an important document which all adult Australian’s should have in place, but it is particularly vital that every adult who is a member of a SMSF execute a valid EPoA. Failing to have an EPoA can result in delays or a financial disaster if a member loses capacity. Having an EPoA will ensure that upon the loss of capacity of a member, the fund can continue to be a complying SMSF.
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.
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.
Ok so as SMSF trustees you are obliged to consider insurance for members but you might think you don’t need it or that you can manage risks. Here is a light-hearted look at some reasons why you might need to reconsider that decision.
Cats have 9 lives. You don’t. Enough said.
Cats get a free ride. You pay the rent/mortgage. Living in an lane way or the bush might work for a feral feline, but for your family, not so much. Your rent or mortgage still needs to be paid regardless of illness, injury or death.
Cats can hunt. You can barely handle the line at the Woolies.
Stalking prey for dinner is not an option. Your family needs cash to put food on the table.
Kittens move out at 8 weeks. Your kids may still be at home when they’re 25..30..and back again at 45 with a few kids in tow!
Your kids may leave for uni at 18, but they could be freeloading off your parental generosity well past their studying years…focusing on becoming an “entrepreneur”, an “artist” or just “finding themselves”.
Cats always land on their feet. You need a safety net. Life on the edge might be thrilling for you, but a nightmare for your family.
Cover your life and your income. Protect your family’s most important asset—you and your earning capacity (unless, of course, you’re a cat).
Contact us to figure out the life and income protection insurance you need.
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.
Rate for 2025-26 Related Property LRBA is 8.95%and Listed Shares 10.95%
Old Rate for 2024-25 Related Property LRBA was 9.35% and Listed Shares 11.35%
The ATO have issued long-awaited guidelines providing SMSF trustees with suggested ‘Safe Harbour’ loan terms on which trustees may use to structure a related party Limited Recourse Borrowing Arrangement (LRBA) consistent with dealing at arm’s length with that related party.
By implementing these “Safe Harbour” loan terms, SMSF trustees are assured by the ATO Commissioner that
..for income tax purposes, the Commissioner accepts that an LRBA structured in accordance with this Guideline is consistent with an arm’s length dealing and that the NALI provisions do not apply purelybecause of the terms of the borrowing arrangement.
It is absolutely essential that all non-bank SMSF borrowing arrangements (LRBAs) be reviewed prior now extended to 1 Jan 2017
Where has this come from?
The ATO first released and then re-issued ATO Interpretative Decisions in 2015 (ATO ID 2015/27 and ATO ID 2015/28), dealing with Non-Arm’s Length Income(NALI) derived from listed shares and real property purchased by an SMSF under an LRBA involving a related party lender – where the terms of the loan were not deemed to be on commercial terms.
These ATOIDs state that the use of a non-arm’s length LRBA gives rise to NALI in the SMSF. Broadly, the rationale for this view is that the income derived from an investment that was purchased using a related party LRBA, where the terms of the loan are more favorable to the SMSF, is more than the income the fund would have derived if it had otherwise being dealing on an arm’s length basis.
NALI is taxed at the top marginal tax rate, currently 47% – regardless of whether the income is derived while the fund is in accumulation phase where tax is normally 15% or in pension phase when the income would usually be tax exempt.
After that bombshell, the ATO announced that it would not take proactive compliance action from a NALI perspective against an SMSF trustee where an existing non-commercial related party LRBA was already in place, as long as such an LRBA was brought onto commercial terms or wound up by 30 June 2016.
The Nitty Gritty Details of the Safe Harbour Steps
The ATO has issued Practical Compliance Guideline PCG 2016/5. As a result, provided an SMSF trustee follows these guidelines in good faith, they can be assured that (for income tax compliance purposes) their arrangement will be taken to be consistent with an arm’s length dealing.
The ‘Safe Harbour’ provisions are for any non-bank LRBA entered into before 30 June 2016, and also those that will be entered into after 30 June 2016.
Broadly, this PCG outlines two ‘Safe Harbours’. These Safe Harbours provide the terms on which SMSF trustees may structure their LRBAs. An LRBA structured in accordance with the relevant Safe Harbour will be deemed to be consistent with an arm’s length dealing and the NALI provisions will not apply due merely to of the terms of the borrowing arrangement.
The terms of the borrowing under the LRBA must be established and maintained throughout the duration of the LRBA in accordance with the guidelines provided.
Safe Harbour 1
Safe Harbour 2
Asset Type
Investment in Real Property
Investment in a collection of Listed Shares or Units
Interest RateNote: as of 10 Jan 2019: The RBA no longer round the rates to the nearest 5 basis points.
RBA Indicator Lending Rates for banks providing standard variable housing loans for investors. Use the May rate immediately preceding the tax year. (2015/16 year = 5.75%)(2016-17 year = 5.65%)(2017-18 year = 5.8%)(2018-19 year = 5.8%)(2019-2020 year = 5.94%)(2020-2021 year = 5.1%) (2021-2022 year = 5.1%)(2022-2023 year = 5.35%)2024 FY = 8.85% (2024-25 year = 9.35%) (2025-26 year 8.95%)
Same as Real Property + a margin of 2%
Fixed / Variable
Interest rate may be fixed or variable.
Interest rate may be fixed or variable.
Term of Loan
Variable interest rate loans:Original loan – 15 year maximum loan term (both residential and commercial).Re-financing – maximum loan term is 15 years less the duration(s) of any previous loan(s) in respect of the asset (for both residential and commercial).Fixed interest rate loan:
Rate may be fixed for a maximum period of 5 years and must convert to a variable interest rate loan at the end of the nominated period. The total loan term cannot exceed 15 years.
For an LRBA in existence on publication of these guidelines, the trustees may adopt the rate of 5.75% as their fixed rate provided that the total period for which the interest rate is fixed does not exceed 5 years. The interest rate must convert to a variable interest rate loan at the end of the nominated period. The total loan term cannot exceed 15 years.
Variable interest rate loans:Original loan – 7 year maximum loan term.Re-financing – maximum loan term is 7 years less the duration(s) of any previous loan(s) in respect of the collection of assets.Fixed interest rate loan:
Rate may be fixed up to for a maximum period of 3 years and must convert to a variable interest rate loan at the end of the nominated period. The total loan term cannot exceed 7 years.
For an LRBA in existence on publication of these guidelines, the trustees may adopt the rate of 7.75% as their fixed rate provided that the total period for which the interest rate is fixed does not exceed 3 years. The interest rate must convert to a variable interest rate loan at the end of the nominated period. The total loan cannot exceed 7 years.
Loan-Value –RatioLVR
Maximum 70% LVR for both commercial & residential property. Total LVR of 70% if more than one loan.
Maximum 50% LVR.Total LVR of 50% if more than one loan.
Security
A registered mortgage over the property.
A registered charge/mortgage or similar security (that provides security for loans for such assets).
Personal Guarantee
Not required
Not required
Nature & frequency of repayments
Each repayment is to be both principal and interest.Repayments to be made monthly.
Each repayment is to be both principal and interest.Repayments to be made monthly.
Loan Agreement
A written and executed loan agreement is required.
A written and executed loan agreement is required.
Information sourced from Practical Compliance Guidelines PCG 2016/5.
Potential Trap to be aware of: Importantly, as part of this announcement, the ATO also indicated that the amount of principal and interest payments actually made with respect to a borrowing under an LRBA for the year ended 30 June 2016 must be in accordance with terms that are consistent with an arm’s length dealing.Information sourced from Practical Compliance Guidelines PCG 2016/5.
For the 2017-18 and 2018-19 years the rate is 5.8%
For the 2019-20 year the rate is 5.94%
For the 2020-21 year the rate is 5.1%
For the 2021-22 year the rate is 5.1%
For the 2022-23 year the rate is 5.35%
For the 2023-24 year the rate is 8.85%
For the 2024-25 year the rate is 9.35% until 30 June 2025
For the 2025-26 year the rate is 8.95%
For 2019-20 and later years, the rate published for May (the rate for the month of May immediately prior to the start of the relevant financial year)
It is the applicable rate under Column H of the above spreadsheet (click on link). The rate seems to have started in August 2015 but I assume we must use the May rate from now on.
In referencing the Indicator Rate you can use: Ref: Title: Lending rates; Housing loans; Banks; Variable; Standard; Investor Lending rates; Housing loans; Banks; Variable; Standard; Investor Frequency: Monthly Units: Per cent per annum Source RBA Publication Date 04-Apr-2016 Series ID: FILRHLBVSI
A complying SMSF borrowed money under an LRBA, using the funds to acquire commercial property valued at $500,000 on 1 July 2011.
The borrower is the SMSF trustee.
The lender is an SMSF member’s father (a related party).
A holding trust has been established, and the holding trust trustee is the legal owner of the property until the borrowing is repaid.
The loan has the following features:
the total amount borrowed is $500,000
the SMSF met all the costs associated with purchasing the property from existing fund assets.
the loan is interest free
the principal is repayable at the end of the term of the loan, but may be repaid earlier if the SMSF chooses to do so
the term of the loan is 25 years
the lender’s recourse against the SMSF is limited to the rights relating to the property held in the holding trust, and
the loan agreement is in writing.
We do not consider that this LRBA has been established or maintained on arm’s length terms. The income earned from the property, which is rented to an unrelated party, may give rise to NALI.
At 1 July 2015, the property was valued at $643,000, and the SMSF has not repaid any of the principal since the loan commenced.
If after considering TD 2016/16, it is determined that the income earned from the property is in fact NALI, to avoid having to report NALI for the 2015-16 year (and prior years) the Fund has a number of options.
Option 1 – Alter the terms of the loan to meet guidelines
The SMSF and the lender could alter the terms of the loan arrangement to meet Safe Harbour 1 (for real property).
To bring the terms of the loan into line with this Safe Harbour, the trustees of the SMSF must ensure that:
The 70% LVR is met (in this case, the value of the property at 1 July 2015 may be used).
Based on a property valuation of $643,000 at 1 July 2015, the maximum the SMSF can borrow is $450,100. The SMSF needs to repay $49,900 of principal as soon as practical before 30 June 2016.
The loan term cannot exceed 11 years from 1 July 2015.
The SMSF must recognise that the loan commenced 4 years earlier. An additional 11 years would not exceed the maximum 15 year term.
The SMSF can use a variable interest rate. Alternatively, it can alter the terms of the loan to use a fixed rate of interest for a period that ensures the total period for which the rate of interest is fixed does not exceed 5 years. The loan must convert to a variable interest rate loan at the end of the nominated period.
The interest rate of 5.75% applies for 2015-16 and 5.65% p.a. applies from 1 July 2016 to 30 June 2017. The SMSF trustee must determine and pay the appropriate amount of principal and interest payable for the year. This calculation must take the opening balance of $500,000, the remaining term of 11 years, and the timing of the capital repayment, into account.
After 1 July 2016, the new LRBA must continue under terms complying with the ATO’s guidelines relating to real property at all times.
For example, the SMSF must ensure that it updates the interest rate used for the loan on 1 July each year (if variable) or as appropriate (if fixed), and make monthly principal and interest repayments accordingly.
Option 2 – Refinance through a commercial lender
The fund could refinance the LRBA with a commercial lender, extinguish the original arrangement and pay the associated costs.
For any period after 1 July 2015 that the original loan remains in place, the SMSF must ensure that the terms of the loan are consistent with an arm’s length dealing, and relevant amounts of principal and interest are paid to the original lender.
The SMSF may choose to apply the terms set out under Safe Harbour 1 to calculate the amounts of principal and interest to be paid to the original lender for the relevant part of the 2015-16 year.
Option 3 – Payout the LRBA
The SMSF may decide to repay the loan to the related party, and bring the LRBA to an end before 30 January 2017.
For any period after 1 July 2015 that the original loan remains in place, the SMSF must ensure that the terms of the loan are consistent with an arm’s length dealing, and the relevant amounts of principal and interest are paid to the original lender.
The SMSF may choose to apply the terms set out under Safe Harbour 1 to calculate the amounts of principal and interest to be paid to the original lender for the relevant period.
Each option will have many advantages and disadvantages – so it is important to understand what the practical implications of each option are, and how physically you will approach each option. Seek specialised advice on this matter as it is not a strategy suitable for DIY implementation
Important Note to 13.22C or Unrelated Unit Trust Investors
The guidelines provided in this PCG are not applicable to an SMSF LRBA involving an investment in an unlisted company or unit trust (e.g. where a related party LRBA has been entered into to acquire a collection of units in an unrelated private trust or a 13.22C compliant trust). As such, trustees who have entered into such an arrangement will have no option but to benchmark their particular loan arrangement based on commercial loan terms, or to bring the LRBA to an end.
Please visit out SMSF Property page to get details on all available strategies for SMSF property investors.
UPDATE (Relief for those caught by Budget measures)
In a letter to an industry association, the Treasurer, Scott Morrison, has outlined transitional arrangements to allow additional non-concessional contributions above the proposed lifetime limit in certain limited circumstances. Contributions made in the following circumstances may be permitted without causing a breach of the lifetime cap:
where the trustees of a self managed superannuation fund (SMSF) have entered into a contract to purchase an asset prior to 3 May 2016 that completes after this date and non-concessional contributions were planned to be made to complete the contract of sale. Non-concessional contributions will be permitted only to allow the contract to complete provided they are within the relevant non-concessional cap that was applicable prior to Budget night, and
where additional contributions are made in order to comply with the Australian Taxation Office’s (ATO) Practical Compliance Guideline (PCG) 2016/5 related to limited recourse borrowing arrangements, provided they are made prior to 31 January 2017.
Additional non-concessional contributions made under these proposed transitional arrangements will count towards the lifetime cap, but will not result in an excess.
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. Click here for appointment options.
Liam Shorte B.Bus FSSA™ AFP
Financial Planner & SMSF Specialist Advisor™
Tel: 02 9899 3693, Mobile: 0413 936 299
PO Box 6002, Norwest NSW 2153
U40, 8 Victoria Ave., 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 I am going to be a bit morbid today but based on the lack of preparation by many new clients I think we need to talk death, mental incapacity and other things legal. Why me? Because for some reason many seem scared of lawyers so I want to give you good reasons to overcome that fear!
When did you last review your will, your enduring power of attorney (“EPOA”) and your appointment of enduring guardian (“EG”) documents and of course your SMSF Trust Deed.
As a financial planner we recommend you personally review these documents every 3 years and have a solicitor review them every 5 years. Just take them out (if you haven’t forgotten the “safe place” you put them!) and have a look through them after considering changes to you family circumstances including the following triggers.
So here is a list of the changes to your circumstances that should prompt you to review these documents as soon as possible and which may even require you to create new documents or update existing ones.
These changes include:
1. Setting up an SMSF or making a large or non-standard investment via your SMSF
Ok as a SMSF blog you know I had to deal with this first. When you first set up an SMSF you may have been told to read the deed but did anyone tell you it’s essential to appoint your Enduring Power of Attorney to ensure the SMSF can continue to run smoothly if your health deteriorates.
If you decide to make an unusual investment or loan or arrangement in your fund the you must first know that your SMSF Deed and Investment Strategy allows such a move. So read the SMSF deed and have a written SMSF investment strategy.
2. Marriage automatically revokes a will, unless the will was made in contemplation of marriage. After you marry, you should make a new will.
Your Power Of Attorney is not revoked by marriage. If your EPOA was signed before your marriage it is still effective. However, if, for example, your EPOA appointed your former spouse, you may wish to formally revoke the EPOA and make a new EPOA appointing another person as your attorney.
Your appointment of an Enduring Guardian is revoked on marriage even if you appointed your current spouse as your EG. After marriage, you need to sign a new appointment of EG document.
If you wish to bring your new spouse into your SMSF then you need to follow the rules of appointing a new trustee or director and accepting a new member. Read the deed and the company trustee constitution. Don’t forget to notify ASIC.
Check your Binding Death Nomination and any reversionary pensions.
3. Separation
Unlike marriage, separation does not affect the validity of your will. As a result, there have been several cases where a couple have separated, one spouse has died after separation but before the divorce and their former spouse has been entitled to the whole of their estate either due to their failure to update their will after separating or by not having any will in place at all and the rules of intestacy applying in favour of their former spouse.
Similarly, your EPOA and EG documents will not be affected by separation. You should consider whether you need to revoke the existing appointments and make a new EPOA and appoint a new EG after separating
There maybe some allowances for the transfer of SMSF assets in the event of a finalised property settlement and again you need to understand the exceptions that apply once the financial/property settlement has been agreed and signed off and read the deed before assuming you can move or split assets.
Check your Binding Death Nomination, insurance nominations and any reversionary pensions
4. Divorce
I know I am repeating myself but Check your Binding Death Nomination , insurance nominations and any reversionary pensions.
There are specific rules allowing the transfer of SMSF assets in the event of divorce without triggering CGT or Stamp Duties and again you need to understand the exceptions, the process and read the deed before assuming you can move or split assets.
Divorce does not revoke your EPOA or EG documents appointing your former spouse. In order to cancel these appointments, you need to sign a revocation and serve it on your former spouse.
Divorce only revokes or cancels any gift made in your will to your former spouse. It also cancels your spouse’s appointment as executor, trustee or guardian in your will. It does not cancel the appointment of your former spouse as trustee of property left on trust for beneficiaries that include the children of you and your former spouse. However this will not apply if the Court is satisfied you did not intend to revoke the gift or the appointment by the divorce. Instead of leaving these matters to the Court, if you have not made a new will after separating, it is imperative that you make a new will as soon as possible after your divorce.
5. Birth of an additional beneficiary.
This is likely to necessitate a change to an existing will unless your solicitor has catered for future arrivals. This is another care where being too specific can require frequent updates and legal fees.
6. Death of a spouse, an existing beneficiary, your executor, your attorney or your EG.
Review your will, Enduring Powers of Attorney and Enduring Guardianship, Binding Death Nomination, insurance nominations and any reversionary pensions.
Do you need to appoint a new individual SMSF trustee or director to keep your SMSF compliant?
7. A change to the needs of your children or grandchildren
Review your will and look at Testamentary Trusts or Special Disability Trusts. Last thing you want is for your beneficiary to lose their Disability Pension because of an inheritance.
8. A material change in your financial circumstances.
Have you sold or transferred assets that would have formed part of your estate? Make sure you have not mistakenly left someone with nothing.
If you have been bankrupted or considering filing for bankruptcy then you will not be able to continue as a member of your SMSF. You need to look at rolling to a Small APRA fund or a retail fund.
You also need to have your own parents if still with us to reconsider any direct inheritances to you as your creditors may grab them.
9. A breakdown in a relationship with relatives or friends who you may have appointed as:
the executors of your estate;
beneficiaries under your will;
guardians of your minor children; and/or
your attorney or your EG
10. The decline in health or some other change of circumstances
For example bankruptcy of a child (let’s face it, everyone under 30 thinks they are an entrepreneur and that’s going to lead to trouble!) so that, for example, a beneficiary under your will may no longer be able to manage their own finances,
The person you appointed as your executor, your attorney or your EG may no longer be suitable or capable of administering your estate or managing your affairs or making personal decisions for you.
If it is you or your spouse who have been diagnosed with onset of dementia or Alzheimer’s for example then you need to decide if you should have your EPOA step in now rather than later to help manage your self managed superannuation fund.
11. Retirement
Retirement often results in people restructuring their affairs. This is an ideal time to be proactive in your estate planning and possibly consider setting up tax effective arrangements through your will that you have not done previously.
Have you started a pension in your SMSF? Have you documented it properly including a reversionary pension election or Binding death nomination?
Have you sold assets like a business premises or investment property previously allotted to someone specific in your will? Are they losing that benefit!
When any of these events occur, you should review your SMSF and estate planning documents and, if necessary, create new documents taking into account the relevant change of circumstances. Don’t be afraid to ask advice but make sure you are dealing with a specialist in each area.
If you have been paying attention you will notice I said “12 Triggers”. Well I’ll leave the 12th for you to add in the comments section below. Come on I must have missed a few and I know some really sharp minds read this blog so help us out! I will add the best one to this list after a month or add my own, so why not subscribe to the blog in the “Free email updates” section on the left hand-side of the page.
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.
Adapted from an original article “Time for an estate planning “check-up” by BWS Lawyers
Image courtesy of Stuart Miles at FreeDigitalPhotos.net
The SMSF Coach 