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.

Herd Mentality and Bubbles – Be Careful When Following the Crowd


Whether you are a long-term investor or an opportunist, many investors find comfort in knowing that many others are investing the same way they are and they get caught up in the media hype on a certain sector. Think of the Dot Com craze in the late 90’s when many invested in this sector even though they did not understand it well and as prices rose even the hesitant among investors poured more money in for fear of missing out or FOMO as I prefer to term it. A good adviser should help you identify the risk of these fads and keep you well diversified.

Here is a good educational video from Franklin Templeton Investments on the subject.

I believe that you always need to do your own research on an investment and then cross check that with others. Be prepared to listen to those who may seem wacky, over optimistic or pessimistic before making your decisions. A good Self Managed Super Fund advisor should be able to get you a selection of research from different sources to stress test any investment.

Bubble’s go back a long time, even centuries and while we are weary of each investment that crashes we rarely learn enough to avoid the next one. From my personal collection is one of my favourite prints called Gekko’s Tulip Mania which you may have seen in the movie Wall Street 2. I have it hanging on my office wall as a constant reminder! You can read more on this bubble at Wikipedia – Tulip Mania

 “This is the greatest bubble story of all time… they call it the Tulip Mania.” - Gordon Gekko

“This is the greatest bubble story of all time… they call it the Tulip Mania.”
– Gordon Gekko

For those looking for a truly Australian history of bubbles I would recommend reading a 2003 paper by the John Simon and published by the RBA available free online called Three Australian Asset-price Bubbles

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™

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.

SMSF Using an Unrelated Unit Trust for Property Development


Following on from my previous article How a SMSF can Purchase a Property with a Related Party – Using a 13.22c Trust , another strategy for those wishing to engage in property development with their SMSF involvement is for the fund trustee to invest in a unit trust that holds the development land / existing property by subscribing for units in the unit trust with partners so that no related entity group owns more than 50% of the units in the trust.

Propert Development

Where the fund trustee invests in an unrelated trust the trustee for the unit trust is not required to comply with the requirements of regulation 13.22C of the SIS Regulations. This means that the trustee for the unit trust can borrow to fund the land development without the fund trustee breaching the in-house asset rules in s71 of the SIS Act.

To make it very clear the unit trust will be unrelated if the fund trustee and its associates do not:

  • exercise Sufficient Influence; or
  • have a fixed entitlement to more than 50% of the income and capital of the unit trust; or
  • have the power to remove or appoint the trustee for the unit trust.

So each SMSF or related group of investors can own exactly 50% in combination between them and still maintain an unrelated trust and meet the above requirements.

Keep it simple as it  is important that the units in the unit trust carry equal rights to income and capital so that you do not also trigger the non arm’s length income provisions under s295-550 of the Income Tax Assessment Act 1997 (1997 Act).

The diagram below shows 2 unrelated Self Managed Superannuation Funds investing in a unit trust equally (50/50) to carry out a property development. One of the SMSFs uses as related party loan to fund their purchase of the units. Remember it is only the units that are offered as security not the property in the trust.

Unrelated Unit Trust

Each SMSF contributes $350,000 and the property is developed for a total cost of $700,000 and sold for $1m. The$300,000 profit flow back through the Unit Trust to the unit holders equally.

Sufficient Influence

Where two unrelated SMSFs each hold 50% of the units in the unit trust, it is important that the trust management decisions are decided on a 50/50 basis. It should be very clear from documentation and minutes of the trust that decisions are made jointly.

How to avoid distributions to the SMSF being treated as non-arm’s length income?

Where the SMSF invests by way of a unit trust structure, any income received by the fund trustee may be treated as non arm’s length income and taxed at 47% under s295-550(5) of the Income Tax Assessment Act 1997 (1997 Act), where:

  • the parties are not dealing at arm’s length terms; and
  • the fund trustee receives an amount it would not otherwise have received if the parties were dealing on arm’s length terms.

Similarly, income the SMSF derives as a beneficiary of the trust, other than because of a fixed entitlement to income, will be treated as non arm’s length income and taxed at 47%.

Therefore, it is important to ensure that the unit trust is a fixed trust, meaning that the entitlement of unit holders to receive income and/or capital from the unit trust is fixed and indefeasible. However, even with a fixed trust it is necessary for the income to be no more than the income that would have been derived if the parties were dealing with each other at arms-length (s295-550(5)).

Managing powers of trustee appointment or removal

Again to avoid falling foul of the legislation, the constitution of the trustee company of the unit trust should be designed to ensure that the SMSF trustee and/or its associates do not have the power to control the trustee by effectively having the power to appoint and remove the trustee for the unit trust by reason that they hold a majority of the shares in the trustee. One trap is a constitution that allows the chairperson to have a casting vote where the chairperson is a SMSF Trustee or representative of the SMSF trustee.

Documentation

When the transaction is structured by way of an unrelated unit trust arrangement, the following documents should be prepared by an experienced legal expert (not off the shelf):

  • purpose specific unit trust deed and accompanying minutes of meeting; and
  • unit holders’ agreement all ensuring none of the requirements breached..

Gradual acquisitions of more units by the SMSF

Where a fund trustee invests in an unrelated unit trust the fund trustee may acquire the units held by the other party over time, subject to complying with the provisions of the SIS Act and keeping their related entity group to less than 50% of the overall trust units.  Keep in mind that where the unit trust is land rich, there may be a corresponding stamp duty liability and there may be capital gains tax implications for the initial owner as well as valuation fees at each transaction date.

Remember the Sole Purpose Test

In the zest for undertaking any strategy I always remind clients about the reason for undertaking any investment. Your aim should be to provide for a better retirement. If that is not the core purpose then you are breaching the sole purpose test and should reconsider the whole strategy. Also you must review or amend your fund’s investment strategy to ensure this investment falsl within it’s guidelines..

Important information (emphasised for use of this material):

The information in this article is provided for illustrative purposes only and does not take into consideration your personal circumstances. You are encouraged to seek financial, tax and legal advice suitable to your circumstances to avoid a decision that is not appropriate. Any reference to your actual circumstances is coincidental. Magnitude, Verante and its representatives receive fees from the provision of financial advice.

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™

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 Magnitude Group Pty Ltd ABN 54 086 266 202, AFSL 221557

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 hywards at FreeDigitalPhotos.net

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