The latest ATO approach to SMSF contraventions


The ATO have recently released PS LA 2020/3 Self-managed superannuation funds – administrative penalties imposed under subsection 166(1) of the Superannuation Industry (Supervision) Act 1993 (SISA).

SMSF Specialist Advisers do need to be warning their clients that the ATO will be enforcing these tougher penalties and there will be no forgiveness for contraventions. However good advisers should be able to guide their clients to a better outcome through the use of the SMSF early engagement and voluntary disclosure-service

This Law Administration Practice Statement provides guidelines for the administration of penalties including the circumstances they take into account when considering remission. It acts as an instruction to ATO staff and ensures a consistent and transparent approach.

Every SMSF adviser and Trustees that feel they may have straggled the line or maybe crossed it to cause a contravention should read the statement. As usual, it is the Example Appendix that is most useful and you might even read that first here 

Here are some excerpts from the Practice Statement itself:

1. What this Practice Statement is about

The purpose of this Practice Statement is to provide guidance on:

  • when an entity becomes liable to one or more administrative penalties under the Superannuation Industry (Supervision) Act 1993 (SISA)[1]
  • which entities are liable to pay the administrative penalty
  • the Commissioner’s remission considerations, and
  • objection, review and appeal rights relating to the remission decision.

The SISA sets out who is liable to the penalty, noting that the liability cannot be reimbursed from the SMSF. The penalty is imposed on the following persons:

  • a trustee of an SMSF (including an individual trustee or a corporate trustee), or
  • a director of a body corporate that is a trustee of an SMSF.[3]

2. Compliance treatments – general principles

The penalties, in conjunction with other compliance treatments under the SISA, give us effective, flexible and cost-effective mechanisms for applying appropriate sanctions.

You are not precluded from applying one or more compliance treatments within the one case. The appropriate compliance treatment depends on the circumstances of each case.

Any one or more of the following compliance treatments may also be appropriate:

  • issuing a direction to educate[5]
  • accepting an enforceable undertaking[6]
  • issuing a direction to rectify[7]
  • disqualifying an individual and prohibiting them from acting as a trustee of a super fund or as a responsible officer of a corporate trustee of a super fund[8]
  • issuing a notice of non-compliance to the fund[9]
  • seeking civil and/or criminal penalties through the courts.[10]

The following are relevant when administering these penalties (including in any review process undertaken):

  • The principles underpinning the compliance model require us to be fair to those trustees wanting to do the right thing, and being firm but fair with those choosing to disengage and avoid their taxation obligations.
  • The Taxpayers’ Charter requires us to treat a trustee as being honest. We accept that what they have told us is the truth and the information they have provided is complete and accurate unless we have reason to think otherwise.
  • Decisions must be supported by the available facts and evidence. Conclusions about the trustee’s actions or behaviour should only be made where they are supported by facts, or can be reasonably inferred from those facts.
  • The trustee will be invited to explain their actions before the remission decision is finalised and they may exercise their right to object to our penalty decision.
  • We need to be mindful of our commitment to avoid or resolve disputes as early as possible in accordance with the ATO Disputes policy and annual Dispute management plan.[11]

3. Administering the penalty

There are four basic steps in administering the penalty imposed under section 166:

  • step 1 – determine if a penalty is imposed by law
  • step 2 – determine who is liable to the penalty
  • step 3 – determine if remission is appropriate
  • step 4 – notify each trustee and/or each director of the corporate trustee of the liability to pay the penalty.

Multiple provisions breached

An unjust result may also occur in situations where multiple administrative penalties are imposed when a particular event results in contraventions of more than one provision.

The following table lists examples of possible circumstances where multiple penalties could arise under more than one provision due to a particular event, noting this is not an exhaustive list:

Circumstances or event Contravening provisions Primary contravening provision
A loan to a member or relative that was greater than 5% of the fund’s assets Subsection 65(1) for the loan and subsection 84(1) for the in-house asset Subsection 65(1)
Access to member benefits without meeting a condition of release Subsection 34(1) for operating standards and subsection 65(1) for financial assistance Subsection 34(1)

If one particular event results in multiple penalties under more than one provision, we would generally remit to a level reflecting the primary contravention. The primary contravention is determined by considering the behaviour and intention of the trustees.

Click here for access to the full PS LA 2020/3 statement

If you have read this far then I also highly recommend reading about the SMSF early engagement and voluntary disclosure-service

I applaud the ATO for giving this comprehensive guidance as so much of the concern around contraventions is not knowing how they will be dealt with and therefore people err on the side of trying to hide them!

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.

Please consider passing on this article to family or friends or your tax agent! Pay it forward!

Liam Shorte B.Bus SSA™ AFP

Financial Planner & SMSF Specialist Advisor™

SMSF Specialist Adviser
Follow SMSFCoach on Twitter
Liam Shorte on Linkedin
Verante on Facebook
Verante Financial Planning

Tel: 02 98941844, Mobile: 0413 936 299

PO Box 6002, NORWEST NSW 2153

40/8 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.

The Ultimate SMSF End of Financial Year Checklist 2020


 

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 checklist of the most important issues that you should address with your advisers before the year-end.

Its been a busy year and I have not had as much time as usual to put this together so if you find an error or have a strategy to add then please let me know. Links were working at the time of writing.

Warning before we begin,

Before we start, just a warning as in the rush to take advantage of new strategies you may have forgotten about how good you have it already Be careful not to allow your accountant, administrator or financial planner to reset any pension that has been grandfathered under the pension deeming rules that came in on Jan 1st 2015 without getting advice on the current and possible future consequences resulting in the pension being subject to current deeming rates if you lose the grandfathering. Point them to this document

  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. Get you payments in by Friday 26th or earlier to be sure (yes I’m Irish).

  1. Review Your Concessional Contributions options – 25K per year up to 65 this year but work test from 1 July 2020 will apply to 67.

 The big news is the government have changed the contribution rules from 1 July 2020 to extend the ability to make contributions from age 65 up to age 67. Read more here. 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.   If your Super balance on 1 July 2019 was under $500,000 Review your previous Concessional Contributions (CC) and consider using the ‘Carry forward’ concessional contributions cap

 Broadly, the carry forward rule allows individuals to make additional CC in a financial year by utilising unused CC cap amounts from up to five previous financial years, providing their total superannuation balance just before the start of that financial year was less than $500,000.

This measure applies from 2018-19 so effectively, this means an individual can make up to $50,000 of CC in a single financial year by utilising unapplied unused CC caps since 1 July 2018 and going forward from up to five previous financial years.

Prior to these amendments, if an individual did not fully utilise their annual CC cap in a financial year, they could not carry forward the unused cap to a later year. But please note the balance refers to $500,000 across all of your Superannuation accounts.

 

  1. Review plans for Non-Concessional Contributions (NCC) options

From 1 July 2020 the new age limit of 67 will apply to Non-Concessional Contributions (NCC) without meeting the work test so you have the option of making $100,000 NCC per year up to turning 67.

Hopefully this month (tabled for 18th June 2020 sitting) the Parliament will also pass legislation allowing you to also use the “3 year bring forward rule” up to age 67.

So people who turned 64 0r 65 this year and who planned to use the “3 year bring forward rule” may want to review that strategy if they wish to get more money in to super

Current Option if turned 65 in 2019-20 FY: NCC of $100,000 or $300,000

Proposed Option: NCC $100,000 2019-20, NCC $100,000 2012-21, NCC $300,000 2021-22

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 been hit by the Covod-19 crisis value you may find that it is opportune for personal tax reasons to take this time to move some assets to super may help control your tax bill.

 

  1. Co-Contribution

Check your eligibility for the co-contribution and if you are eligible take advantage. Note that the limits have changed and it is “free incentive money to save for your retirement” – 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.

 

  1. Spouse Contribution

If your spouse has assessable income plus reportable fringe benefits totalling less than $37,000 for the full $540 tax offset and up to $40,000 for a partial offset, then consider making a spouse contribution. Check out the ATO guidance here

 

  1. Over 65 and soon up to 67? 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 . Keep an eye later this month for new of the age limit rising form 65 to 67 before needing to meet the work test from 1 July 2020.

 

  1. 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.

 

  1. 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. The same applies if you plan to take a lump sum withdrawal from your fund. GET THE NOTICE OF INTENT IN FIRST

 

  1. Contributions Splitting to your spouse

Consider splitting contributions with your spouse, especially if:

  • your family has one main income earner with a substantially higher balance or
    • if there is an age difference where you can get funds into pension phase earlier or
    • If you can improve your eligibility for concession cards or age pension by retaining funds in superannuation in the younger spouse’s name.

This is a simple no-cost strategy I recommend everyone look at. See my blog about this strategy here.

 

  1. 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 only valid once the broker receives a fully valid transfer form not before so timing in June is critical.

 

  1. Pension Payments – so many more options this year 2019-2020 and in 2020-2021

If you are in pension phase, the government have brought in the Temporary Reduction in Minimum Pensions as part of the Covid-19 response. So please ensure you take the new minimum pension of at least 50% of your age-based rate below. 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.
Minimum annual payments for super income streams for 2019/20 and 2020/21 Financial years.

Age at 1 July Standard 

Minimum % withdrawal 

50% reduced

minimum pension

Under 65 4% 2%
65–74 5% 2.5%
75–79 6% 3%
80–84 7%  3.5%
85–89 9% 4.5%
90–94 11% 5.5%
95 or older 14% 7%

 

FINER DETAILS with TIPS and TRAPS

Here is some of the finer detail on how these measures will work, along with some tips and traps to consider when taking withdrawals for the rest of this financial year and the full 2020-21 financial year:

The measures are forward looking so if a pension member has already taken your minimum pension for the year then they cannot change the payment for this year but they can get organised for 2020/21. So, no you can’t try to sneak a payment back in to the SMSF bank account!

If a pension member has already taken pensions payments of equal to or greater than the 50% reduced minimum amount, they are not required to take any further pension payments before 30 June 2020.  For example, many would have taken quarterly or half yearly payments. If they add up to the 50% reduced minimum then you do not need to take anymore payments this financial year.

If you still need your pension payments for living expenses but have already taken the 50% reduced minimum then, it may be a good strategy for amounts above the 50% reduced minimum to be treated as either:

  1. a partial lump commutation sum rather than as a pension payment. This would create a debit against the pension members transfer balance account (TBA).  Please discuss this with your accountant and adviser asap as some funds will have to report this quarterly and others on an annual basis. OR
  2. for those with both pension and accumulation accounts to take the excess as a lump sum from the accumulation account balance to preserve as much in tax exempt pension phase as possible going forward to future years.

See here for a worked example

 

  1. 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 above: 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.

 

  1. Reversionary Pension is often the preferred option to pass funds to a spouse or dependent child. Review your options

A reversionary pension to you spouse will provide them with up to 12 months to get their financials affairs organised before having to make a final decision on how to manage your death benefit.

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. T

The reversionary pension has become more important with the application of the  $1.6m Transfer Balance Cap limit to pension phase.

 

  1. 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.

 

  1. 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.

 

  1. 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.

 

  1. 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.

 

  1. 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.

 

  1. 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 misdemeanours ranging from $820 to $10,200 per breach pere trustee.

Covid-Relief – The ATO has responded to current market conditions, and has announced it will not take compliance action against SMSFs where:

  • at 30 June 2020 the market value of an SMSF’s in-house assets is over 5% because of the downturn in the share market
  • the trustee of the SMSF prepares a rectification plan
  • by 30 June 2021, the rectification plan either:
      • cannot be effectively implemented because of market conditions
      • does not need to be implemented because the market recovers and the 5% test is again satisfied at 30 June 2021.

For good guidance on this issue https://www.cgw.com.au/publication/what-to-do-if-covid-19-has-ruined-your-smsfs-in-house-asset-ratio-the-atos-no-action-position-for-some-cases/

 

  1. Is your fund providing Covid-19 Rent Relief to a property tenant whether a related party or not? Get your documentation in place.

If you have provided Rent Relief to a tenant, related or not, then get it documented now before June 30 that you have considered, managed and documented the request, the reasoning behind the Trustee’s decision and the details of the relief provided

The ATO have thankfully provided a non-binding practical approach of broadly not applying resources to this issue for FY2020 and FY2021. However, this announcement, while positive, should not be relied on given the considerable downside risks.

For detail of what your auditors will most likely require please check Item 3 in this blog https://smsfcoach.com.au/2020/05/22/be-prepared-with-these-9-smsf-audit-tips/

 

  1. Careful if replacing TPD Insurance (Total Permanent Disability – basically “never work again” insurance)

Have you reviewed your insurances inside and outside of super? Don’t forget to check your current TPD policies owned by the fund with an own occupation definition as the rules changed a few years ago so be careful about replacing an existing policy as you may not be able to obtain this same cover inside super again.

 

  1. Do you need to update to a Corporate Trustee

We recommend a corporate trustee to all clients. To understand why please read this article on Why SMSFs should have a Corporate Trustee

 

  1. 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.

 

  1. 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?

 

  1. 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 

 

  1. Still have Collectibles in your fund?

Play by the new rules that came 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.

 

  1. 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 data is received and made electronically.

All funds should be able to receive contributions electronically and you should 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.

If you change jobs your new employers 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 after 30 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.

Please consider passing on this article to family or friends. Pay it forward!

Liam Shorte B.Bus SSA™ AFP

Financial Planner & SMSF Specialist Advisor™

SMSF Specialist Adviser 

 Follow SMSFCoach on Twitter Liam Shorte on Linkedin NextGen Wealth on Facebook   

Verante Financial Planning

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.

Be Prepared with these 9 SMSF Audit tips


 

There is no doubt that additional emphasis was being placed on the annual SMSF Audit before Covid-19 and I believe we need to be prepared for more extensive requirements from fund auditors going forward for them to be able to complete the work they do to satisfy the ATO and best practice.

This blog has been prepared by the the Audit team at Super Records and I am grateful for them for some good advice on what additional information/documentation SMSF Trustees and their advisers will be required to provide their Auditor this year. This is not meant to be an exhaustive list but it’s pretty damn good. Not all the requirements listed are obligatory but do reflect best practice so discuss these with your accountant or administrator.

Address: PO Box 236, Parramatta, NSW 2124
ABN: 76 153 889 215 I Phone: 02 8892 3777 I Email: audit@superrecords.com.au I Website: http://www.superrecords.com.au

 

1. Early Release of Superannuation – In the case where the lump sum payment made from an SMSF due to the receipt by the Trustee of a copy of a “Coronavirus – early release of super benefits” approval letter issued by the ATO, we will require below documents for audit:

• A copy of the letter received from ATO
• A copy of the signed application made to the super fund by members for lump sum withdrawal
• A copy of the signed minutes of the meeting of trustees approving the lump sum payment
• A copy of the signed confirmation letter sent to members by trustees.

2. Minimum Pension Withdrawal – Any additional documents are not required to be prepared and provided for this. However, we will be reviewing and making sure that if a pensioner has already drawn more than their reduced minimum, it was not returned to super fund as there is no mechanism to return surplus pension payments. However, if the member was eligible for a contribution, it is possible to contribute additional pensions as contributions.

3. Rent Relief provided by SMSF – In the case where SMSF provides rent relief, as an auditor we need to make sure that the rent relief looks reasonable. We will be using the National Cabinet’s Mandatory Code of Conduct – Commercial Leasing Principles to verify the reasonableness for commercial properties. The code provides that:

• The amount of relief should be proportionate to the tenant’s loss in turnover.
• Rent relief can take the form of:

a. a rent waiver which must be at least 50% of the total rent relief and cannot recouped by the landlord over the lease term and/or
b. a rent deferral for the remaining rent relief with this amount amortised over the remaining lease term or at least 24 months (whichever is greater).

We will require the following documents for audit purpose for all type of properties

• A written request by tenant to SMSF for a rent relief listing the adverse economic effects of COVID-19.
• A minute of meeting of SMSF trustees for the relief to be provided and reasons or basis on which the relief to be provided.
• If the arrangement is not as per above mentioned code and if tenant is a related party, the commercial justification based on which the alternate arrangement was negotiated.
• A lease variation document to confirm the agreed updated lease terms.

4. Loan relief provided by SMSF to borrower – In the case where SMSF provides loan relief to a borrower, as an auditor we need to make sure that the loan relief looks reasonable. We will be using the relief offered by commercial lenders to business as per https://www.ausbanking.org.au/covid-19/the-business-relief-package/. This provides that:

• If your business or not-for-profit has been adversely impacted by COVID-19 your bank will allow you to defer principal and interest repayments for all loans attached to the business for a period of six months. While the interest will be capitalised and paid off over the life of the loan.

We will require the following documents for audit purpose

• A written request by borrower to SMSF for a variation of the loan terms listing the adverse economic effects of COVID-19.
• A minute of meeting of SMSF trustees for the relief to be provided and reasons or basis based on which the relief to be provided.
• A loan variation document to confirm the agreed updated loan terms.

5. LRBA relief provided to SMSF by lender – In the case where SMSF receives loan relief from a third party lender, we will require document related to loan relief offered by lender and new accepted loan terms agreed by SMSF and Lender.

In case where SMSF received loan relief from a related party lender, as an auditor we need to make sure that the loan relief looks reasonable. We will be using the relief offered by commercial lenders to business as per https://www.ausbanking.org.au/covid-19/the-business-relief-package/. This provides that:

• If your business or not-for-profit has been adversely impacted by COVID-19 your bank will allow you to defer principal and interest repayments for all loans attached to the business for a period of six months. While the interest will be capitalised and paid off over the life of the loan.

We will require the following documents for audit purpose:

• A written request by SMSF to lender for a variation of the loan terms listing the adverse economic effects of COVID-19.
• A loan variation document to confirm the agreed updated loan terms.

6. In-house asset exceeding 5% due to current market fall – The downturn in the share market may result in the fund’s in-house assets being more than 5% of the fund’s total assets.

We will require the following documents for audit purpose:

• A written plan by trustee setting out the amount of the excess and the steps trustee proposes to take to reduce the market ratio of in-house assets to 5% or below.
• This plan must be prepared before the end of the next following year of income. If an SMSF exceeds the 5% in-house asset threshold as at 30 June 2020, a plan must be prepared and implemented on or before 30 June 2021 to make sure that excess is removed by 30 June 2021.

Provided the in-house asset limit was not exceeded at “acquisition” time, this situation in itself will not cause a breach of SIS. If we are provided with above mentioned information, we as an auditor will not be taking any actions for FY 2020.

7. Financial Statement Disclosure – For SMSFs who have not yet completed financial statements for FY 2019 and if the value of the assets of an SMSF at the time of issue of financial statements is materially lower than the asset value reported in FY 2019 financial statement, please add Subsequent Events Notes to the financial statement regarding FY 2019.

If asset values continue to fall, a similar disclosure may be required in financial statements of FY 2020.

8. Effect on investment strategy due to current market fall – The downturn in the share market may result in the fund investing outside the asset allocation ranges outlined in the strategy. For audit purpose we will require either an updated investment strategy or a minute for review of investment strategy stating reasons for investments outside the ranges and reasons for not changing the investment strategy.

9. New Investment Strategy Guidelines issued by ATO – ATO has released a new investment strategy guideline this year. As an auditor we will review the investment strategy to make sure that on top of the existing requirements of an investment strategy, investment strategy also covers below mentioned guidelines of ATO.

• Investment strategy should be based on the relevant circumstances of the fund. Relevant circumstances may include (but are not limited to) personal circumstances of the members such as their age, employment status, and retirement needs, which influence your risk appetite. Your strategy should explain how your investments meet each member’s retirement objectives.
• When formulating your investment strategy, it is not a valid approach to merely specify investment ranges of 0 to 100% for each class of investment. You also need to articulate how you plan to invest your super or why you require broad ranges to achieve your investment goals to satisfy the investment strategy requirements.
• Investing the predominant share of your retirement savings in one asset or asset class can lead to concentration risk. In this situation, your investment strategy should document that you considered the risks associated with a lack of diversification. It should include how you still think the investment will meet your fund’s investment objectives including your fund’s return objectives and cash flow requirements.

Please find below the ATO guideline link for guidance.

https://www.ato.gov.au/super/self-managed-super-funds/investing/your-investment-strategy/ 

If investment strategy provided is not as per the guidelines, we may need to qualify the audit report and lodge the contravention with the ATO. Also, in that case each trustee/director may face a penalty upwards of $4,200 from the ATO for a breach of the investment strategy requirements.

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 2019 the year to get organised or it will be 2029 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™

SMSF Specialist Adviser 

 Follow SMSFCoach on Twitter Liam Shorte on Linkedin NextGen Wealth on Facebook   

Verante Financial Planning

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.

COVID-19 Providing rental relief for the tenant in an SMSF property


SMSF Rent Relief

 

Todays blog has been prepared by the SMSF Association and I am grateful for their technical input to a strategy that has to be treated very carefully if used.

The economic impacts of the COVID-19 crisis are causing significant financial distress for many businesses and individuals.

If your SMSF has a property and a tenant in financial distress, you may be able to provide your tenant with rental relief under an agreed commercial arrangement. This may even be the case when the tenant is a related party or yourself. i.e You or your business are your SMSF’s tenant. Learn more about this strategy here

Ordinarily, charging a tenant a price that is less than market value in an SMSF is usually a breach of superannuation laws. However, the ATO have provided guidance which allows SMSF landlords to provide for a reduction in or waiver of rent because of the financial impacts of the COVID-19.

For the 2019–20 and 2020–21 financial years, the ATO will not take action where an SMSF gives a tenant – who may also be a related party – a temporary rent reduction during this period.

What do you need to do?

There are some important things you should ensure are in place when you are providing a rent reduction to a tenant, especially when this is a related party.

  • Ensure the relief only applies to rent.
    • Any relief offered to a tenant can only relate to the rent component of the lease agreement. The ATO concession does not extend to other lease incentives.
  • Ensure that the reduction in rent is only temporary.
    • This means it should have an agreed period of time or agreed date where the rent is reviewed in light of the economic circumstances.
  • The financial difficulty faced by the tenant is linked to the financial impacts of COVID-19.
    • Any negotiated rent relief will need to be measured against the COVID-19 financial impact suffered by your tenant.
  • Clear arrangements which detail the amount of discount, waiver or deferral of the rent.
    • In evidencing that the rent relief is reasonable, it would be best practice if it is consistent with an approach taken by an arm’s length landlord.
  • Ensure you have proper documentation which allows your independent auditor to be satisfied that the temporary rent relief satisfies all of the above.
    • This may take the form of a signed minute, renewed lease agreement or anything deemed appropriate to amend the terms of the lease temporarily.
    • Even if you are both the tenant and landlord, the above should all be documented.

These are extraordinary times and the ATO is providing this guidance to allow SMSF trustees to be flexible and agile.

If trustees act in good faith in implementing a reasonable and measured reduction in rent because of the impacts of COVID-19 they should not fall foul of the law.

How can we help?

If you need assistance providing rental relief or whether this is the right action for you and your specific circumstances, please feel free to give me a call so that we can discuss in more detail. Alternatively, you can refer to the SMSF Association’s trustee education platform, SMSF Connect.

LASTLY BUT IMPORTANTLY PLEASE BE CAREFUL ABOUT CLICKING ON LINKS IN SMS MESSAGES OR EMAILS. IF YOU WANT TO CHECK ANY ATO/CENTRELINK/Government OFFER THEN GO TO YOUR ADVISER/TAX AGENT OR THE ATO/CENTRELINK/GOVERNMENT WEBSITE DIRECTLY TO VERIFY IT.

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 2019 the year to get organised or it will be 2029 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™

SMSF Specialist Adviser 

 Follow SMSFCoach on Twitter Liam Shorte on Linkedin NextGen Wealth on Facebook   

Verante Financial Planning

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.

COVID-19 Stimulus Package #2 reduction in Minimum Pensions and Deeming


Corona Virus Stimulus Package 2

 

On Sunday the 22nd March the Morrison Government announced it is temporarily reducing the minimum pension drawdown requirements on superannuation income streams for the rest of the 2020 Financial Year and all of the 2021 Financial Year. This affects Account-based Pensions, Transition to Retirement Pensions, Allocated Pensions and Market Linked Income Streams

The measure will benefit many retirees not just SMSF members by reducing the need of to sell equity and bond investments that have taken a hit to their value in the last month to fund their minimum pension drawdown requirements.

There are some tips and traps for those running their own funds so please read the detail carefully.

Minimum annual payments for super income streams for 2019/20 and 2020/21 Financial years.

Age at 1 July

Standard 

Minimum % withdrawal 

50% reduced

minimum pension 

Under 65

4%

2%

65–74

5%

2.5%

75–79

6%

3%

80–84

7% 

3.5%

85–89

9%

4.5%

90–94

11%

5.5%

95 or older

14%

7%

FINER DETAILS with TIPS and TRAPS

Here is some of the finer detail on how these measures will work, along with some tips and traps to consider when taking withdrawals for the rest of this financial year and the full 2020-21 financial year:

  • The measures are forward looking so if a pension member has already taken your minimum pension for the year then they cannot change the payment for this year but they can get organised for 2020/21. So, no you can’t try to sneak a payment back in to the SMSF bank account!
  • If a pension member has already taken pensions payments of equal to or greater than the 50% reduced minimum amount, they are not required to take any further pension payments before 30 June 2020.  For example, many would have taken quarterly or half yearly payments. If they add up to the 50% reduced minimum then you do not need to take anymore payments this financial year.
  • If you still need your pension payments for living expenses but have already taken the 50% reduced minimum then, it may be a good strategy for amounts above the 50% reduced minimum to be treated as either:
    1. a partial lump commutation sum rather than as a pension payment. This would create a debit against the pension members transfer balance account (TBA).  Please discuss this with your accountant and adviser asap as some funds will have to report this quarterly and others on an annual basis. OR
    2. for those with both pension and accumulation accounts to take the excess as a lump sum from the accumulation account balance to preserve as much in tax exempt pension phase as possible going forward to future years.

Let’s look at an example:

Example – 50% reduced minimum pension options

Jenny (66) has an account based pension from her Self Managed Super Fund – The Morrison Pension Fund. The balance of her pension at 1 July 2019 was $800,000, which requires her to take a minimum pension payment for the 2019/20 financial year of 5% ($40,000). Her husband Scotty is still working but will have a large pension on retirement.

Thanks to the Stimulus Package Part #2 she can take a 50% reduced minimum pension for 2019-20, meaning that Jenny is only required to draw down $20,000 before 30 June 2020. As Jenny still needs the income and usually takes her pension every month so has already taken $30,000 for the year. There is still room to use a strategy and benefit. Jenny can now stop the monthly payments for April-June and take a Partial Lump Sum Commutation  of $10,000 to cover her income needs but this will now reduce her Transfer Balance Account by $10,000 as well freeing up the ability to add more to pension phase at a later date (such as on the death of Scotty)

If as of 1 July 2020 Jenny’s Pension account has dropped to $600,000 as a result of the impact of the coronavirus on financial markets, Jenny’s now has the option to do some planning for 2020/21 financial year as well. Based on the 1 July balance Jenny’s 50% reduced minimum pension for the 2020-21 financial year is calculated at $$15,000 or $600,000 x 2.5%. So, she can take the $15,000 via monthly pension payments of $1,250 and her remaining income needs for the year of $25,000 via combination of one or more Partial Lump Sum Commutations during the 2020/21 year. Plan ahead with your adviser to document this properly.

The result of this change is that Jenny can still meet her income needs but will be able to free up some of her Transfer Balance Cap for future use.

More details on this package here Supporting Individuals and Households –Temporarily reducing superannuation minimum drawdown rates

Changes to Deeming Rates

In Stimulus Package #2 the government approved new lower Deeming Rates for Centrelink/DVA income tested benefits. the measure is a further 0.25% drop in Lower Rate to 0.25% and the Higher Rate to 2.25% 

On 12 March, the Government had already announced a 0.5 percentage point reduction in both the upper and lower social security deeming rates. The Government will now reduce these rates by another 0.25 percentage points.

As of 1 May 2020, the upper deeming rate will be 2.25 per cent and the lower deeming rate will be 0.25 per cent. The reductions reflect the low interest rate environment and its impact on the income from savings. The change will benefit around 900,000 income support recipients, including around 565,000 Age Pensioners who will, on average receive around $105 more of the Age Pension in the first full year the reduced rates apply.

What are the new deeming rates?
Situation Deeming rate
Single 0.25% on the first $51,800 of your investment assets, plus 2.25% on your investment assets over the amount of $51,800
Couple 0.25% on the first $86,200 of your combined investment assets, plus 2.25% on your investment assets over the amount of $86,200

Examples provided by Government:

Helen is a single part-rate age pensioner
Helen receives a single part-rate Age Pension. She has $200,000 in financial assets with $175,000 held in a term deposit which returns 1.5 per cent and the remainder in a cash transaction account earning a negligible rate of interest.

Under the former deeming rates, Helen’s Age Pension would have been reduced by $8.50 per fortnight as her income was above the income test threshold. With the change in deeming rates Helen has less deemed income and will now be eligible for a maximum rate Age Pension.

Leslie and Brian are an age pensioner couple
Leslie and Brian are an age pensioner couple. They have $550,000 worth of financial assets. They hold $300,000 in a superannuation account with a conservative investment strategy which returned around 5 per cent last year. They have invested $130,000 in a term deposit with an annual return of 1.5 per cent and hold the remainder in a cash transaction account earning a negligible rate of interest.

Under the former deeming rates, Leslie and Brian’s Age Pension would have been reduced by $65 each per fortnight. Under the new deeming rates, Leslie and Brian’s Age Pension will only be reduced by around $32 each per fortnight.

More details on this package here Supporting Individuals and Households –Reducing social security deeming rates

LASTLY BUT IMPORTANTLY PLEASE BE CAREFUL ABOUT CLICKING ON LINKS IN SMS MESSAGES OR EMAILS. IF YOU WANT TO CHECK ANY ATO/CENTRELINK/Government OFFER THEN GO TO YOUR ADVISER/TAX AGENT OR THE ATO/CENTRELINK WEBSITE DIRECTLY TO VERIFY IT.

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 2019 the year to get organised or it will be 2029 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™

SMSF Specialist Adviser 

 Follow SMSFCoach on Twitter Liam Shorte on Linkedin NextGen Wealth on Facebook   

Verante Financial Planning

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.

Turned 65 this year? Superannuation Contribution Rules, Limits and Traps


Updated limits for making contributions when turning 65. Includes the current concessional and non concessional caps, adds warning about Total Super Balance cap, the work test traps and explains the new “Work Test Exemption” which applies from 01 July 2019.

The SMSF Coach

I have had three calls this week on the subject of  making contributions for people who turned 65 this year and want to make non-concessional (after tax) contributions to their funds. I have had to tell one to reject the contribution already made. one to go do some work and the other to relax. The lessons to learn are; do not listen to friends, don’t rush in and seek professional advice from your accountant, financial planner or if you are really smart a SMSF Specialist Advisor™.

Check with Liam Shorte Get advice – Get it right

GENERAL INFORMATION ONLY: DO NOT RELY ON THIS CONTENT FOR YOUR PERSONAL SITUATION – GET PERSONAL ADVICE.

  • If you are 64 then you can still make a contribution of up to the $300,000 max up to June 30th as long as long as you have not triggered your “bring forward” cap previously or exceeded your Total Super Balance…

View original post 956 more words

ATO Looking to Challenge SMSF Trustees About Lack of Diversification


In a rare attempt to guide SMSF Trustees in how they should or shouldn’t invest the ATO has issued a news release about their intention to approach trustees who they believe have not got sufficient diversification in their SMSF portfolio. So it is time to review your strategy if biased to one asset class.

Does your SMSF investment strategy meet diversification requirements?

At the end of August 2019 the ATO intend to contact about 17,700 self-managed super fund (SMSF) trustees and their auditors where their records indicate the SMSF may be holding 90% or more of its funds in one asset or a single asset class.

They are concerned some trustees haven’t given due consideration to diversifying their fund’s investments; this can put the fund’s assets at risk.

They say further in the release that “Lack of diversification or concentration risk, can expose the SMSF and its members to unnecessary risk if a significant investment fails.

We’ll ask trustees to review their investment strategy and clearly document the reasons behind the investment decisions.

We’ll also ask trustees to have their documentation ready for their SMSF’s approved auditor for their next audit to help the auditor form an opinion on the fund’s compliance with these requirements.”

 

So what can you do:

It’s a time to be pro-active and not wait for the contact. Review your investment strategy and reasoning now and make sure it will stand up to scrutiny

6 Key Considerations for your SMSF Investment Strategy

Review the ATO guidance on Investment Strategies in a blog I did here:

SMSF Investment Strategy Explained

Understand exactly what your SMSF invest in:

What can my SMSF invest in?

Ideas on diversification that may help you understand why you need to diversify or to back your personal reasons for limiting your exposure to specific classes:

Best Performing Asset Class Annually for Last 20 Years

SMSF Investing – Understanding Home Country Bias

The added value of franking credits in a SMSF Portfolio

Understanding Currency Exposure When Investing Overseas in your SMSF

Are SMSF Investors really comparing Hybrids vs. Company Shares?

Everything you need to know about Property in a SMSF

BITCOIN, DOLLARS, GOLD: What Is the Future of Money?

SMSFs – allocation to international shares

How can you add diversification simply and cost effectively:

This is not a recommendation as you need to understand your own needs and that of your SMSF and to do your own research or get advice. this is just one example of how to access a broad diversification in a easy and cost effective manner.

Vanguard Diversified ETFs – A Game Changer for SMSF Portfolio Design

Are you looking for an advisor that will keep you up to date and provide guidance and tips like in this blog? Then why not contact me at our Castle Hill or Windsor office in Northwest Sydney to arrange a one on one consultation. Just click the Schedule Now button up on the left to find the appointment options.

Liam Shorte B.Bus SSA™ AFP

Financial Planner & SMSF Specialist Advisor™

SMSF Specialist Adviser 

 Follow SMSFCoach on Twitter Liam Shorte on Linkedin NextGen Wealth on Facebook   

Verante Financial Planning

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.

Evans Dixon US Masters Residential Property Fund URF under scrutiny – Warnings were given 3 years ago


The Australian Financial Review has released an article (behind paywall) today focusing on poor performance of Evans Dixon’s internal funds marketed heavily to many of their clients. The main focus is on the fall in value of their own stock but equally on the heavily fee laden products such as US Masters Residential Property Fund (URF).

source AFR and Bloomberg

Well that’s almost exactly 3 years after another finance website, EVISER,  that I was very proud to be apart of, called out the fund as “A magic pudding, just not for investors” and “one of the most expensive managed funds we’ve ever laid our eyes on”. Here is that full extensive article written by John Nunan and Richard Livingston for Eviser in MAY 2016 and bear in mind that the fund was showing positive returns at the time but hiding its true colours. All data on fees and charges were relevant as of May 2016 but may have changed in the last 3 years.

US Masters Residential Property Fund: A magic pudding, just not for Investors

We explain why the US Masters Residential Real Estate Fund is one of the most expensive managed funds we’ve ever laid eyes on.

KEY INFORMATION

Fund: US Masters Residential Property Fund

Fund manager: URF Investment Management Pty Ltd (part of Dixon Advisory Group)

Closing date: N/A (fund is listed on the ASX)

Website: http://www.usmastersresidential.com.au/

PRODUCT SUMMARY

Product type: ASX listed managed fund

Investment type(s): International real estate

Performance benchmarks: None

ASX code: URF

Minimum investment: N/A

Distributions: Semi-annual

Fund size (at 31 Mar 2016) $622m (market capitalisation)

Inception date June 2011 (listed on ASX in July 2012)

Performance (since inception) at 31 Mar 2016 11.7% per annum (calculated by Dixons based on share price performance, including dividends and adjusted for rights issues).

FEE SUMMARY

Investment management fee: 1.24% pa (plus GST)

Administration fee:  0.25% pa (plus GST)

Responsible entity fee: 0.08% pa (plus GST)

Custodian fee: 0.02% pa (plus GST)

Other:  listing fees, salary and wages recharges, office admin recharges, asset disposal fees, asset acquisition fees, structuring and arranging fee, debt arranging fee and handling fee (see table in article for more information)

Performance fee: None

Buy/sell spread: N/A (traded on ASX)

The Magic Pudding is a classic Australian children’s book that tells the story of a pudding that, no matter how often it’s eaten, is always available for its owners to eat next time they’re ready for a meal.

The US Masters Residential Property Fund (ASX Code: URF) is the magic pudding of investment vehicles – a continuous buffet of fees for the manager and promoter, Dixon Advisory Group (now Evans Dixon) and its associates. When we first read the fund’s financial statements we were amazed at the number of different fees Dixon and its associates (which we’ll refer to simply as ‘Dixon’) were able to charge to the fund. However, buried deep in the balance sheet or related party notes, we’d find yet another fee.

But it’s not just the fees that worry us about this fund. We have so many questions about the fund, its strategy, the strength of its balance sheet and the risks, that even if we were to ignore the fee load, we’d be unlikely to ever get comfortable making an investment.

The fund and its investment strategy

Launched in 2011, and listed on the ASX in 2012, the fund was initially presented as an opportunity for Australian investors, with the benefit of a strong Australian dollar, to invest in residential real estate in the New York metropolitan area (mainly Hudson County, New Jersey) at attractive valuations. Rental yields were expected to be greater than 8 per cent a year.

Over time the investment strategy has morphed into what is today, a strategy of buying and renovating properties in neighbourhoods undergoing rapid growth and gentrification, with the intention of ultimately leasing them. This has transformed the fund into less of a passive, rent earning investor and more of a property speculator, with a large proportion of the fund’s earnings coming from revaluations of the properties it owns (more below).

Property investors know that managing (and renovating) a property isn’t a simple or cheap exercise and this shines through in the portfolio owned by this fund. The fund requires a large range of services, with the key ones provided by Dixon. In addition to being the investment manager, Dixon provides the following paid services: the responsible entity; administration and accounting; architecture, design and construction; property management and leasing; property acquisition and disposal; execution, structuring and arranging (capital raisings); and debt arranging. Dixon also charges a handling fee when it raises new capital from its clients.

You won’t be surprised to learn this shopping list of services isn’t cheap. Details of some of the services and the fees charged can be found in the Services and Fees  section of the fund’s website. In Table 1, we’ve summarised these and the others we’ve found scattered throughout the financial statements and the Product Disclosure Statement (PDS).

We’ll return to the smorgasbord of fees in a moment. First let’s take a quick look at what the fund owns and where the money comes from.

The portfolio

Pictures of funky Brooklyn, Manhattan and Hoboken townhouses are scattered throughout the regular quarterly updates (click here for the 31 March 2016 update). However, it’s not what the properties look like, or where they’re located that’s of interest to us. We’re focused on whether they’re being leased or not.

Table 2 shows the fund’s portfolio at 31 March 2016, including both freestanding properties owned directly and multi-family buildings owned through various joint venture entities. The status of these properties is as follows:

Occupied (leased) – 63 per cent
Renovation/turnover – 34 per cent
For lease – 3 per cent

Due mainly to renovation works, effectively a third of the fund’s assets aren’t available for lease. Combined with rising valuations and falling rental yields, this means the days of the fund being a high yielding investment are gone, at least for now.

In the year ended 31 December 2012, the fund earned $4.2 million of rental income on an average investment property balance of $67 million. Given the rapidly growing nature of the fund it’s a very rough estimate, but this equates to an average rental yield of over 6 per cent. Revaluations of properties contributed another $5.7 million of profit (a little more than the rent).

Fast forward to 31 December 2015 and the (now much larger) fund earned almost $22 million of rental income on an average investment property balance around $703 million. That equates to an average yield just over 3 per cent. Meantime, property revaluations contributed almost twice as much as rent – about $40.8 million.

These figures highlight the increasingly speculative nature of the fund’s investment portfolio and also why the fund has struggled to generate positive operating cash flow since its inception. Even if the fund shifts to a position where the portfolio is fully (or almost fully) leased, this basic proposition is unlikely to change, at least anytime soon.

In the 31 March 2016 update Dixon estimated that the fund would earn another USD11.4 million in rent from the properties currently being renovated. While this might eliminate last year’s $14.4 million ‘core’ loss (see Table 4 and related discussion below) it would only reduce the negative $30.6 million operating cash flow, not turn the fund into a positive operating cash flow producer.

The fund has a low level of income, high level of expenses and relies on non-cash items to turn a profit. This, together with its growing acquisitions, means that it has had to continually tap unitholders on the shoulder for further capital and borrow from a variety of sources.

The current funding structure for the fund is set out in Table 3. A key feature is the two tranches of URF Notes that were issued in 2014 and 2015 and pay a fixed interest rate of 7.75 per cent.

The use of borrowing adds to the speculative nature of the fund’s portfolio. In the case of the URF Notes, often the fund is effectively borrowing money at 7.75 per cent to buy assets which won’t earn a cent initially, will have substantial sums spent renovating them and then will be put out to lease to earn rental income at a rate of say 3 to 4.5 per cent (although hopefully calculated on an upgraded book valuation).

Put this way, it’s fairly obvious why the fund’s strategy is such a cash drainer in the early years and how it could come unstuck. A downturn in the New Jersey or Brooklyn property markets (where most of the fund’s assets are located) could place pressure on both the ability to revalue the properties upwards (post renovation) and flat or falling rents. In this scenario the ability of the fund to pay its interest bill and generate a reasonable profit for unitholders, could be pushed a long way into the distant future.

Depending on the severity, a property downturn could cause the fund to have to sell properties in order to repay the URF Notes (which mature in 2019 and 2020) and other debts, exacerbating the fund’s problems in generating cash.

The early year cash flow drought associated with the underlying portfolio is magnified by the substantial levels of fees and other expenses incurred by the fund.

Let’s take a look at them in more detail.

Financial analysis

To put it bluntly, we’ve seen very few fee-fests like this fund. Perhaps some of the crazy tax deals beat it – for instance, managed agricultural schemes – but we struggle to recall a more traditional investment fund that’s paying fees in the order of five per cent or more (calculated as a percentage of the net asset base), year-in, year-out.

Admittedly, it’s not an apples for apples comparison to something like an Australian share fund, since property is typically a more expensive asset class to manage. But asset class alone doesn’t explain the continually high fee load being borne by this fund.

Table 4 shows the fund’s accounting results for each year since it was launched, and Table 5 shows some key financial ratios. We’ve used our own display format as it better demonstrates how the fund loses money on a ‘core’ basis each year, but generates a profit through renovating and revaluing the properties and, perhaps even more importantly, foreign exchange (FX) gains. It also highlights the amount of fees that have been paid by the fund since it was created.

At 31 December 2015, the fees totalled almost $100 million, and there’s a chance we’ve missed some as the fund’s disclosure of fees is both complicated and in a constant state of flux. If there’s an easily digestible summary of the fees paid by the fund somewhere on the Dixon website, we haven’t found it.

We’ve already discussed the fund’s low level of income and high levels of URF Note interest. When you add in the fees, it explains the large operating cash outflows the fund has experienced since launch. Cumulatively, the fund has burned through almost $50 million in operating cash flow between launch and 31 December 2015.

Fees on borrowed money

Dixon is paid an extraordinary array and volume of fees, but that’s not the only issue. Despite earning fees for managing and renovating the portfolio, making
purchases and sales and raising money, Dixon is paid an investment management fee of 1.24 per cent (for whatever aspect of the fund’s investment management that hasn’t been paid for already), together with administration (0.25 per cent), responsible entity (0.08 per cent) and custodian fees (0.02 per cent). Added together, these percentage fees add to 1.59 per cent, plus GST.

Scarily, these fees are paid on the gross assets of the fund, so it currently works out at around 3 per cent based on the unitholders equity (with all the transaction based fees on top). This is a massive fee load but even worse, the fact the fees are on gross assets gives Dixon a strong disincentive to deleverage the fund (at least, by diverting income or asset sale proceeds to paying down debt) since they’d effectively be costing themselves a substantial amount of money. A perverse incentive like this is the very reason we don’t like geared investment vehicles paying fees on gross assets.

So there you have it: the fund is an extraordinarily expensive cash burner. However, the fund has survived and prospered, largely on the back of three critical factors: property revaluations, foreign exchange gains and the ability to regularly source new capital and borrowings.

Performance

Table 4 demonstrates how the fund relies on property revaluations and foreign exchange gains to compensate for large ‘core’ losses. While the gains on  revaluations may ultimately be reflected in a higher level of rental income (or asset sale proceeds) the FX gains are ‘one-off’ profit items that may not be  repeated, or may even reverse themselves in future years.

Worryingly, through to 31 December 2015, FX gains on translation contributed almost 100 per cent of the cumulative post-tax accounting profits of the fund.
Effectively, for all of the fund’s activity and the substantial revaluation gains made as a result of renovations, the fund’s accounting profits to date have more to do with the recent depreciation of the AUD against the USD than anything property related.

In the 31 March 2016 update, Dixon reported that the fund has produced returns of 11.7 per cent a year since its launch in June 2011. However, over that same period, the US dollar itself has returned over 7 per cent a year (measured in AUD returns) and a simple US property , such as the Vanguard REIT (NYSE Code:  VNQ), has returned around 11.5 per cent.

In AUD terms, that works out at almost 20 per cent a year for a simple real estate , that doesn’t have the development risk or financing risk associated with URF. URF is a great example of reasonable absolute performance hiding terrible relative performance.

Risk

More worrying than the lacklustre performance is the amount of risk taken to achieve it. At first glance, a debt-to-equity ratio for a property trust of just under 50 per cent (at 31 March 2016) is nothing to get too worried about. But this fund is no ordinary property trust. It’s part property owner, part developer, part FX speculator (due to the fact it has issued the URF Notes in Australian dollars) and part guarantor of the juicy Dixon fee arrangements.

Without knowing whether Dixon intends to ease off the ‘buy and renovate’ strategy, repay the URF notes, or restructure some of the fee arrangements it’s difficult to tell when this fund may produce positive operating cash flow, or indeed whether it will ever do so. That means it’s relying on being able to raise further capital, borrow, or sell assets at a profit in order to pay the bills.

The problem with this type of approach is that everything can come unstuck at once. A downturn in the property market would make it difficult to sell assets
at a profit and tough to borrow or raise capital (except at a large valuation discount). In that scenario, the fund may be forced to sell assets at discounted
valuations to raise cash and if that happens the debt to equity ratio can increase rapidly.

If the fund had a property portfolio generating, say, a 5 per cent rental yield, with expenses running at 2 per cent a year, the story might be very different. In that case, it might be able to sit tight, pay its interest bills and wait for a recovery. However, the fund’s constant operating cash outflows means it has to continually tap unitholders and lenders for more cash and if that dries up, the conservative approach is to assume it will have big problems.

Summing it up

We could dig further into the property portfolio – for instance, analyse per square metre lease rates for Hoboken rental properties – but it really doesn’t matter. This fund has produced relatively little for investors versus alternative investments, largely because it suffers under a crushing fee and expense load that has eroded a lot of the gains produced by FX movements and a buoyant underlying property market.

Looking forward, with FX gains more difficult to come by, unitholders are taking on an enormous amount of risk since the fund is now substantially leveraged and has an expense load that keeps on increasing. It’s unclear exactly how a property downturn might play out, but our concern is that this fund could end up suffering a crunch and suffer massive losses from having to sell assets on the cheap.

If you know enough about New Jersey property to be bullish on freestanding Hoboken houses, buy one directly, or team up with some fellow investors to do so. But if you’re simply an Australian SMSF trustee looking for some exposure to global property and infrastructure, there are plenty of better options available. You simply don’t need this fund, or the expense and the risk that comes with it.

Disclaimer: This article is general in nature and does not take your personal situation into consideration. This article is not a recommendation of any investment or facility mentioned in it, and you should seek financial or legal advice specific to your situation before making any financial and/or investment decision. This  disclaimer is in addition to our standard Terms and Conditions. The Product Disclosure Statement (Offer Document) for this fund can be found here.

Are you looking for an advisor that will keep you up to date and provide guidance and tips like in this blog? Then why not contact me at our Castle Hill or Windsor office in Northwest Sydney to arrange a one on one consultation. Just click the Schedule Now button up on the left to find the appointment options.

Liam Shorte B.Bus SSA™ AFP

Financial Planner & SMSF Specialist Advisor™

SMSF Specialist Adviser 

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Verante Financial Planning

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.

Superannuation contribution changes for those nearing retirement


Government Proposal

The Morrison Government is taking action to help Australians boost their retirement savings by giving them greater flexibility as they near their retirement years. 

In a pre-budget announcement, the Treasurer, Josh Freydenberg has announced a number of proposed changes to superannuation contribution rules;

  1. From 1 July 2020 Individuals who are 65 to 66 will be able to contribute to their Superannuation without needing passing the 40 Hours in 30 days work test in the year of contribution. It has already been proposed that individuals over age 65, who have passed the work test in the previous financial year, would be able to contribute so this would seem to be a modification to that announcement. This will align the Work Test with the eligibility age for the Age Pension, which is scheduled to reach 67 from 1 July 2023. 
  2. The previous announcement will still be useful for those who retire aged 67-73.
  3. The spouse contribution age limit will be extended from 69 to 74. This allows a person to contribute up to $3000 to their spouse’s Superannuation and receive a tax offset of up to $540. Currently, those aged 70 years and over cannot receive contributions made by another person on their behalf.
  4. The 3 year non-concessional bring forward age limit will be extended from age 65 to 66. This could allow those who turned 65 and extra year of tax planning to put up to $300,000 in to their Superannuation. Valuable measure if you want to retire at 65 but not sell a CGT asset until the new tax year.

These are still proposals and nothing that the treasurer has proposed will proceed unless there is Opposition support or the current government pull off a surprise election win.   

If they do get passed I will write up some strategies especially for those looking to sell assets to boost super near retirement.

Liam Shorte

@SMSFCoach

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