There are many reasons to get a superannuation review especially if you are within 15 years of using your super funds more tax effectively (hint over age 45). A lot can be done to dramatically improve your retirement prospects given time. However if you leave it too late, the chances of making significant improvements are limited. Getting good financial advice can make all the difference to the quality of your retirement. You may not want a full advice service but you can just have a Superannuation and Insurance review. So here are a few reasons why a review could be one of the best decisions you make.
You’ve being putting money in to Super for over 20 years and not sure what it’s doing for you. You have more than one superannuation account and cannot keep a track of how them or how they are performing. Consolidating your accounts together could make keeping track of your savings much easier and moving house less of a hassle!
You may be considering adding funds or your tax agent may have recommended some salary sacrifice and you are suddenly more interested in getting value for money.
You may be interested and want to explore the use of a Self Managed Superannuation Fund known as a SMSF (it’s only one of the options available but we can help you assess if it is right for you).
You may not be satisfied with the level of service and advice you are receiving from your superannuation company and/or your adviser if you are getting any at all. Many people receive no service at all but continue paying fees year after year. Is it time for you to step-up and demand advice, we invite clients for a review at least twice per year.
You are concerned that your super or multiple accounts may not be performing very well. Sadly, most people in superannuation schemes have little or no idea how their funds are invested or performing from one year to the next. Reports get thrown in a drawer because the jargon is mind bending!
You may be unsure how much risk you are taking with your superannuation investments. It is undeniable that in order to increase your nest egg value, some risk will need to be taken. However the risk you are taking may not be suitable for you and categories like “Balanced or Core” don’t actually mean what they suggest!.
And how about just getting general health check on your super and how it is performing.
Like many people you have accumulated lots of accounts over the years from various jobs ( I recently consolidated 12 accounts for a couple). It may be beneficial to consolidate them all together in one account (wait don’t rush in, review insurance and fees first).
Identify poor performing superannuation funds and move them to investments that have greater potential for growth or a more consistent return.
You may have an SMSF or Superannuation account sitting in cash and just don’t know what to do as you have lost confidence.
You may have multiple/duplicate insurance arrangements across many funds and be paying premiums for cover that may never pay out.
How a superannuation review works
You are likely to have one or more personal accounts and they could be an industry fund, an employer group plan, a personal retail account, or even a transition to retirement pension .
A relationship with your advisor should last for many years. At Verante and the SMSF Coach, we take the time in our first meeting to understand you, explain how we operate, and what you should expect.
You decide whether you feel comfortable with us.
We determine how we can add value to your set of circumstances.
Together we discover what challenges and opportunities lay ahead.
The second step is our Discovery meeting as we spend a great deal of time gathering the necessary information to build a clearer picture of you. We discover you and your current circumstances – such as family, financials and aspirations. We also help you complete a Risk Profiling Questionnaire; this is designed to help identify what your attitude to risk is and your comfort with different classes of investment.
The third step is to obtain full details of all of your current superannuation, investment, debt and insurance arrangements. We ask superannuation companies more than 20 questions, so that we get a full and complete picture of your current situation.
The fourth step is where we complete a full and comprehensive analysis of your current arrangements, to identify if your super accounts are delivering on expectations, that insurance cover is valid and will protect you and your family and fees are under control.
Step five is to recommend a suitable strategies to move your Superannuation balance forward, should the review reveal that your existing accounts are not working as well as they should be.
Step six is to implement the recommendations, which may mean re-organising and consolidating your accounts into one super or even a pension fund.
And finally step seven is to keep your arrangements under regular review to ensure that it continues to perform and meet your objectives.
Want a Superannuation Review or are you just looking for an adviser that will keep you up to date and provide guidance and tips like in this blog? Then why now contact me at our Castle Hill or Windsor office in Northwest Sydney to arrange a one on one consultation. Just click the Schedule Now button up on the left to find the appointment options. Do it! make this the year to get organised or it will be 2028 before you know it.
Please consider passing on this article to family or friends. Pay it forward!
Also delighted to be named in the 50 most influential investors and win the top awards in the 2017 and 2018 SMSF and Accounting Awards.
Liam Shorte B.Bus SSA™ AFP
Financial Planner & SMSF Specialist Advisor™
Tel: 02 98941844, Mobile: 0413 936 299
PO Box 6002 BHBC, Baulkham Hills NSW 2153
5/15 Terminus St. Castle Hill NSW 2154
Corporate Authorised Representative of Viridian Select Pty Ltd ABN 41 621 447 345, AFSL 51572
This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs. This website provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such.
Most people who have not sat with a planner or read in detail the newsletters from their superannuation funds would believe that they can only access their superannuation when they actually retire and stop working. But there are so many other circumstances that could trigger an all-important “Condition of Release” and make your retirement funds available to you. In this guide for SMSF trustees I will concentrate on meeting the Retirement Condition of Release but you can find out about the other conditions of release here (click it later).
Acknowledgement: I have relied on the excellent guidance of the AMP TAPin team for the majority of the content in this article. They write great technical articles for advisors and I try and make them SMSF trustee friendly.
What is the Retirement condition of release
The retirement condition of release is often subject to complexity and doubt. However, understanding the rules became even more important after 1 July 2017 resulting from the 2016 Budget measures. The tax exemption on investment earnings supporting a Transition to Retirement Income Stream- Accumulation Phase (TRIS – Accumulation) is no longer available. However, a TRIS will regain its tax exempt status once the ‘retirement’ condition of release is satisfied and it becomes a Transition to Retirement Income Stream- Retirement Phase (TRIS – Retirement Phase). Therefore, understanding what constitutes ‘retirement’ for an SMSF member in a TRIS is critical, to achieve that holy grail of a tax-free retirement pension.
Conditions of release – overview
Death is the only condition of release that requires compulsory cashing of benefits. There is no requirement under any other condition of release to either cash out a benefit or commence an income stream from your SMSF, and member accounts can remain in accumulation phase indefinitely.
If you do leave your member account in accumulation phase, it will be subject to an income tax rate of up to 15% instead of a 0% tax rate for investments backing a pension income stream. There is also now a $1.9m limit on how much can be transferred into an income stream with people who already had some money in pension phase having as pro-rata limit of between $1.6m and $1.9m. You can Check on MyGov.> ATO service> Super Tab> Information to see your limit.
The most common conditions of release to access your account are:
Reaching preservation age of 60 and retiring.
Transitioning to retirement (after attaining preservation age): SMSF members who are under 65 and have reached preservation age, but remain gainfully employed on a full-time or part-time basis, may access their benefits as a non-commutable income stream called a Transition to Retirement Income Stream- Accumulation Phase (TRIS – Accumulation Phase) . However from 1 July 2017 that income stream will not be tax exempt until you meet a further Retirement Condition of Release.
Reaching age 65: a Member who is 65 years old may access their benefits anytime without restrictions.
Retirement condition of release
For superannuation purposes, a member’s retirement depends on their age and future employment intentions. A person cannot access superannuation benefits under the retirement condition of release until they reach preservation age. Once you reach your preservation age, the definition of retirement depends on whether the person has reached age 60.
If a person has never been gainfully employed in their life, they cannot use the retirement condition of release to access their Preserved Benefits. Such a person would need to satisfy another condition of release to access their benefits (eg reaching age 65, invalidity, terminal illness, severe financial hardship).
Age 60 but less than 65
When a person has reached age 60, retirement occurs when an arrangement under which the person was gainfully employed has ceased on or after the person reached age 60. It does not matter that the person may intend to return to the workforce. This condition presents an opportunity for many people to move a taxed pension to tax exempt phase earlier.
Example: Reaching age 60
Michelle has worked as a nurse for many years. She resigns from this employment on her 61st birthday. Three months later, Michelle takes up a 3 day position as a grief counsellor. Because Michelle has ceased employment as a nurse after her 60th birthday, she can access all her superannuation accumulated up until that point.
Situations sometimes arise where a person, aged 60 or over, is in two or more employment arrangements at the same time. According to APRA Prudential Practice Guide SPG 280, the cessation of one of the employment arrangements is the condition of release in respect of all preserved benefits accumulated up until that time. The occurrence of the ‘retirement’ condition of release in these circumstances will not enable the cashing of any benefits which accrue after the condition of release has occurred. A person will not be able to cash those benefits until another condition of release occurs (eg,s he also leaves her second employer).
Example: Two employment arrangements
Frank (age 63) works part-time as a school janitor. During the school holidays, he had a short-term six-week contract to work as a Census form collector. The contract finished in September 2021.
Because Frank has ceased one of his employment arrangements, he can access all his superannuation up until that point. However, any later contributions made (employer and personal contributions) and earnings will be preserved.
Director and Employee of own company
Sometimes a person is both an employee and director of their own company. They may wish to cease their employment duties with the company, but retain their directorship. The question arises as to whether such a person (age 60 – 64) can access their preserved superannuation benefits.
If a person is engaged in more than one arrangement of employment, the person can cease any arrangement of employment to meet the ‘age 60’ definition of retirement.
Therefore, as long as a person’s two roles are separate and they terminate in their capacity as an employee of the company, then even though they are still employed in the capacity as director, that person can access their preserved superannuation entitlements.
Note that there must be a distinct termination, ie cessation of all duties as an employee, and the person should now only operate in the capacity as a director for the company.
We see this lot where often a spouse had helped out for years but as the children join the business or the business matures, the requirement for the spouse to continue turning up day-to-day reduces. They can step away from the duties as an employee but they may still handle the liaison with the tax agent on the financials, ASIC re company registration and the ATO to pay tax instalments, which are more akin to Directors Duties.
When is a person gainfully employed?
Someone is said to be ‘gainfully employed’, for superannuation purposes, where they are employed or self-employed for gain or reward in any business, trade, profession, vocation, calling, occupation, or employment.
Gainful employment can either be on a part-time or full time basis.
Part-time means at least 10 hours per week and less than 30 hours per week.
Full time means at least 30 hours per week.
The definition of gainful employment involves two clear components:
Employment or self-employment, and
Gain or reward.
The term employee is not specifically defined in the SIS Act for this purpose; its common law meaning must be considered. One definition of employee is ‘a person in a service of
another under any contract of hire (whether the contract was expressed or implied, oral or written), where the employer has the power or right to control and direct the employee in the material details of how the work is to be performed’.
In contrast, self-employed people work for themselves instead of an employer, drawing an income from a trade, profession, or business that they operate personally. It would be expected that someone who claims to be self-employed would be running their own business (e.g. have a business plan, financial records, an ABN, a regular and frequent level of activity in the business, advertising etc).
The superannuation legislation provides no guidance as to what ‘running a business’ is. However, taxation law does. In particular, paragraph 13 of Tax ruling 97/11 outlines relevant indicators of running a business:
whether the activity has a significant commercial purpose or character;
whether the taxpayer has more than just an intention to engage in business;
whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity;
whether there is repetition and regularity of the activity;
whether the activity is of the same kind and carried on in a similar manner to that of the ordinary trade in that line of business;
whether the activity is planned, organised and carried on in a business-like manner such that it is directed at making a profit;
the size, scale and permanency of the activity; and
whether the activity is better described as a hobby, a form of recreation, or a sporting activity.
Gain or reward is not defined in the superannuation legislation and therefore takes its ordinary meaning. The Macquarie Dictionary defines gain as ‘to get an increase, addition or profit’. Reward is defined as ‘something given or received in return for service, merit, hardship, etc’.
In the context of satisfying the gainful employment definition, it follows that the service, merit, or hardship must be completed with some expectation of an increase, addition, or profit. That is, there must be a direct link (or nexus) between the activity undertaken and the reward provided for the activity. The actual level or amount of gain or reward does not necessarily have to be commensurate with the level of effort or activity undertaken. So, the level of reward could be relatively small yet still suffice – as long as there is a direct link to the activity being performed. Further, the reward doesn’t necessarily have to be received as cash, but could be received as services, fringe benefits, or other valuable consideration.
The gain or reward element is typically difficult to satisfy in the case of charity or volunteer work. Non-paid work for a charity, for example, would clearly not qualify as gainful employment. Mere reimbursement of expenses would not seem to constitute gain or reward.
Also, as discussed earlier, gainful employment for superannuation purposes requires an individual to be either employed or self-employed. Most charities or volunteer organisations will not consider their charity or volunteer workers to be employees.
Transition to retirement pensions – impacts of meeting retirement condition of release
Transition to Retirement Income Stream (TRIS) condition of release allows a member to access their superannuation as a non-commutable income stream once they have reached preservation age called a Transition to Retirement Income Stream- Accumulation Phase (TRIS – Accumulation Phase) . A non-commutable income stream for TRIS purposes is subject to a maximum annual draw down of 10% per annum. Preserved Benefits cannot be accessed through a TRIS as a lump sum until it meets the new “Pension phase” position.
From 1 July 2017 the tax exemption on investment earnings supporting a TRIS – Accumulation Phase is no longer available. The actual income stream (pension payments) will still be tax free after 60. However, a TRIS will regain its tax exempt status once the ‘retirement’ condition of release is subsequently satisfied, for example, where the individual terminates employment at any stage on or after age 60. Its a fairly simple process to confirm to your Pension provider that you have met that further condition of release and they may authomatically move you to Transition to Retirement Income Stream- Retirement Phase (TRIS – Retirement Phase) at 65 anyway, but its worth confirming with them in writing.
It will be vital for SMSF trustees to immediately contact their Accountant/Administrator should the member retire permanently from the workforce, or terminate employment on or after age 60. When the administrator is notified that a no cashing restriction condition of release occurs (eg retirement), the balance of the TRIS account (at that stage) will be converted to a Retirement phase account-based pension (ABP), and the tax exemption on earnings will apply. However, it will then also count towards the individual’s $1.6 – $1.9m million pension transfer balance cap and needs to be reported to the ATO within the new reporting guidelines
Reaching age 65 will automatically result in a TRIS pension becoming a Transition to Retirement Income Stream- Retirement Phase (TRIS – Retirement Phase) and obtaining tax exemption on earnings, if within the individual’s $1.6-$1.9 million pension transfer balance cap.
Evidencing cessation of gainful employment
The cessation must be genuine. Genuine terminations of employment will typically involve the payment of accrued benefits, such as annual and long service leave. SMSF trustees should retain written evidence of the member’s cessation of gainful employment on file and copy to the administrator so the fund auditor has access.
Penalties apply to members, trustees and those who promote ‘illegal early access schemes’ to improperly access superannuation prior to meeting a condition of release.
I hope this guidance has been helpful and please take the time to comment. Feedback always appreciated. Please reblog, retweet, like on Facebook etc to make sure we get the news out there. As always please contact me if you want to look at your own options. We have offices in Castle Hill and Windsor but can meet clients anywhere in Sydney or via Teams or Zoom. Just click the Schedule Now button up on the left to find the appointment options.
Liam Shorte B.Bus FSSA™ AFP
Financial Planner & SMSF Specialist Advisor™
Tel: 02 9899 3693, Mobile: 0413 936 299
PO Box 6002 NORWEST NSW 2153
40/8 Victoria Ave, Castle Hill NSW 2154
Corporate Authorised Representative of Viridian Select Pty Ltd ABN 34 605 438 042, AFSL 476223
This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs. This website provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such.
With all the talk about Total Super Balance caps and where people will invest money going forward if they can’t get it in to superannuation, the spotlight is being shone on “trusts” at present. This has also brought with it the claims of tax avoidance or tax minimisation, so what exactly are trusts and are there differences between Family Trusts, Units Trusts, Discretionary Trusts and Testamentary Trusts to name a few.
Trusts are a common strategy and this article aims to aid a better understanding of how a trust works, the role and obligations of a trustee, the accounting and income tax implications and some of the advantages and pitfalls. Of course, there is no substitute for specialist legal, tax and accounting advice when a specific trust issue arises and the general information in this article needs to be understood within that context.
Introduction
Trusts are a fundamental element in the planning of business, investment and family financial affairs. There are many examples of how trusts figure in everyday transactions:
Cash management trusts and property trusts are used by many people for investment purposes
Joint ventures are frequently conducted via unit trusts
Money held in accounts for children may involve trust arrangements
Superannuation funds are trusts
Many businesses are operated through a trust structure
Executors of deceased estates act as trustees
There are charitable trusts, research trusts and trusts for animal welfare
Solicitors, real estate agents and accountants operate trust accounts
There are trustees in bankruptcy and trustees for debenture holders
Trusts are frequently used in family situations to protect assets and assist in tax planning.
Although trusts are common, they are often poorly understood.
What is a trust?
A frequently held, but erroneous view, is that a trust is a legal entity or person, like a company or an individual. But this is not true and is possibly the most misunderstood aspect of trusts.
A trust is not a separate legal entity. It is essentially a relationship that is recognised and enforced by the courts in the context of their “equitable” jurisdiction. Not all countries recognise the concept of a trust, which is an English invention. While the trust concept can trace its roots back centuries in England, many European countries have no natural concept of a trust, however, as a result of trade with countries which do recognise trusts their legal systems have had to devise ways of recognising them.
The nature of the relationship is critical to an understanding of the trust concept. In English law the common law courts recognised only the legal owner and their property, however, the equity courts were willing to recognise the rights of persons for whose benefit the legal holder may be holding the property.
Put simply, then, a trust is a relationship which exists where A holds property for the benefit of B. A is known as the trustee and is the legal owner of the property which is held on trust for the beneficiary B. The trustee can be an individual, group of individuals or a company. There can be more than one trustee and there can be more than one beneficiary. Where there is only one beneficiary the trustee and beneficiary must be different if the trust is to be valid.
The courts will very strictly enforce the nature of the trustee’s obligations to the beneficiaries so that, while the trustee is the legal owner of the relevant property, the property must be used only for the benefit of the beneficiaries. Trustees have what is known as a fiduciary duty towards beneficiaries and the courts will always enforce this duty rigorously.
The nature of the trustee’s duty is often misunderstood in the context of family trusts where the trustees and beneficiaries are not at arm’s length. For instance, one or more of the parents may be trustees and the children beneficiaries. The children have rights under the trust which can be enforced at law, although it is rare for this to occur.
Types of trusts
In general terms the following types of trusts are most frequently encountered in asset protection and investment contexts:
Fixed trusts
Unit trusts
Discretionary trusts – Family Trusts
Bare trusts
Hybrid trusts
Testamentary trusts
Superannuation trusts
Special Disability Trusts
Charitable Trusts
Trusts for Accommodation – Life Interests and Rights of Residence
A common issue with all trusts is access to income and capital. Depending on the type of trust that is used, a beneficiary may have different rights to income and capital. In a discretionary trust the rights to income and capital are usually completely at the discretion of the trustee who may decide to give one beneficiary capital and another income. This means that the beneficiary of such a trust cannot simply demand payment of income or capital. In a fixed trust the beneficiary may have fixed rights to income, capital or both.
Fixed trusts
In essence these are trusts where the trustee holds the trust assets for the benefit of specific beneficiaries in certain fixed proportions. In such a case the trustee does not have to exercise a discretion since each beneficiary is automatically entitled to his or her fixed share of the capital and income of the trust.
Unit trusts
These are generally fixed trusts where the beneficiaries and their respective interests are identified by their holding “units” much in the same way as shares are issued to shareholders of a company.
The beneficiaries are usually called unitholders. It is common for property, investment trusts (eg managed funds) and joint ventures to be structured as unit trusts. Beneficiaries can transfer their interests in the trust by transferring their units to a buyer.
There are no limits in terms of trust law on the number of units/unitholders, however, for tax purposes the tax treatment can vary depending on the size and activities of the trust.
Discretionary trusts – Family Trusts
These are often called “family trusts” because they are usually associated with tax planning and asset protection for a family group. In a discretionary trust the beneficiaries do not have any fixed interests in the trust income or its property but the trustee has a discretion to decide whether anyone will receive income and/or capital and, if so, how much.
For the purposes of trust law, a trustee of a discretionary trust could theoretically decide not to distribute any income or capital to a beneficiary, however, there are tax reasons why this course of action is usually not taken.
The attraction of a discretionary trust is that the trustee has greater control and flexibility over the disposition of assets and income since the nature of a beneficiary’s interest is that they only have a right to be considered by the trustee in the exercise of his or her discretion.
Bare trusts
A bare trust exists when there is only one trustee, one legally competent beneficiary, no specified obligations and the beneficiary has complete control of the trustee (or “nominee”). A common example of a bare trust is used within a self-managed fund to hold assets under a limited recourse borrowing arrangement.
Hybrid trusts
These are trusts which have both discretionary and fixed characteristics. The fixed entitlements to capital or income are dealt with via “special units” which the trustee has power to issue.
Testamentary trusts
As the name implies, these are trusts which only take effect upon the death of the testator. Normally, the terms of the trust are set out in the testator’s will and are often used when the testator wishes to provide for their children who have yet to reach adulthood or are handicapped.
Superannuation trusts
All superannuation funds in Australia operate as trusts. This includes self-managed superannuation funds.
The deed (or in some cases, specific acts of Parliament) establishes the basis of calculating each member’s entitlement, while the trustee will usually retain discretion concerning such matters as the fund’s investments and the selection of a death benefit beneficiary.
The Federal Government has legislated to establish certain standards that all complying superannuation funds must meet. For instance, the “preservation” conditions, under which a member’s benefit cannot be paid until a certain qualification has been reached (such as reaching age 65), are a notable example.
Special Disability Trusts
Special Disability Trusts allow a person to plan for the future care and accommodation needs of a loved one with a severe disability. Find out more in this Q & A about Special Disability Trusts.
Charitable Trusts
You may wish to provide long term income benefit to a charity by providing tax free income from your estate, rather than giving an immediate gift. This type of trust is effective if large amounts of money are involved and the purpose of the gift suits a long term benefit e.g. scholarships or medical research.
Trusts for Accommodation – Life Interests and Right of Residence
A Life Interest or Right of Residence can be set up to provide for accommodation for your beneficiary. They are often used so that a family member can have the right to live in the family home for as long as they wish. These trusts can be restrictive so it is particularly important to get professional advice in deciding whether such a trust is right for your situation.
Establishing a trust
Although a trust can be established without a written document, it is preferable to have a formal deed known as a declaration of trust or a deed of settlement. The declaration of trust involves an owner of property declaring themselves as trustee of that property for the benefit of the beneficiaries. The deed of settlement involves an owner of property transferring that property to a third person on condition that they hold the property on trust for the beneficiaries.
The person who transfers the property in a settlement is said to “settle” the property on the trustee and is called the “settlor”.
In practical terms, the original amount used to establish the trust is relatively small, often only $10 or so. More substantial assets or amounts of money are transferred or loaned to the trust after it has been established. The reason for this is to minimise stamp duty which is usually payable on the value of the property initially affected by the establishing deed.
The identity of the settlor is critical from a tax point of view and it should not generally be a person who is able to benefit under the trust, nor be a parent of a young beneficiary. Special rules in the tax law can affect such situations.
Also critical to the efficient operation of a trust is the role of the “appointor”. This role allows the named person or entity to appoint (and usually remove) the trustee, and for that reason, they are seen as the real controller of the trust. This role is generally unnecessary for small superannuation funds (those with fewer than five members) since legislation generally ensures that all members have to be trustees.
The trust fund
In principle, the trust fund can include any property at all – from cash to a huge factory, from shares to one contract, from operating a business to a single debt. Trust deeds usually have wide powers of investment, however, some deeds may prohibit certain forms of investment.
The critical point is that whatever the nature of the underlying assets, the trustee must deal with the assets having regard to the best interests of the beneficiaries. Failure to act in the best interests of the beneficiaries would result in a breach of trust which can give rise to an award of damages against the trustee.
A trustee must keep trust assets separate from the trustee’s own assets.
The trustee’s liabilities
A trustee is personally liable for the debts of the trust as the trust assets and liabilities are legally those of the trustee. For this reason if there are significant liabilities that could arise a limited liability (private) company is often used as trustee.
However, the trustee is entitled to use the trust assets to satisfy those liabilities as the trustee has a right of indemnity and a lien over them for this purpose.
This explains why the balance sheet of a corporate trustee will show the trust liabilities on the credit side and the right of indemnity as a company asset on the debit side. In the case of a discretionary trust it is usually thought that the trust liabilities cannot generally be pursued against the beneficiaries’ personal assets, but this may not be the case with a fixed or unit trust.
Powers and duties of a trustee
A trustee must act in the best interests of beneficiaries and must avoid conflicts of interest. The trustee deed will set out in detail what the trustee can invest in, the businesses the trustee can carry on and so on. The trustee must exercise powers in accordance with the deed and this is why deeds tend to be lengthy and complex so that the trustee has maximum flexibility.
Who can be a trustee?
Any legally competent person, including a company, can act as a trustee. Two or more entities can be trustees of the same trust.
A company can act as trustee (provided that its constitution allows it) and can therefore assist with limited liability, perpetual succession (the company does not “die”) and other advantages. The company’s directors control the activities of the trust. Trustees’ decisions should be the subject of formal minutes, especially in the case of important matters such as beneficiaries’ entitlements under a discretionary trust.
Trust legislation
All states and territories of Australia have their own legislation which provides for the basic powers and responsibilities of trustees. This legislation does not apply to complying superannuation funds (since the Federal legislation overrides state legislation in that area), nor will it apply to any other trust to the extent the trust deed is intended to exclude the operation of that legislation. It will usually apply to bare trusts, for example, since there is no trust deed, and it will apply where a trust deed is silent on specific matters which are relevant to the trust – for example, the legislation will prescribe certain investment powers and limits for the trustee if the deed does not exclude them.
Income tax and capital gains tax issues
Because a trust is not a person, its income is not taxed like that of an individual or company unless it is a corporate, public or trading trusts as defined in the Income Tax Assessment Act 1936. In essence the tax treatment of the trust income depends on who is and is not entitled to the income as at midnight on 30 June each year.
If all or part of the trust’s net income for tax purposes is paid or belongs to an ordinary beneficiary, it will be taxed in their hands like any other income. If a beneficiary who is entitled to the net income is under a “legal disability” (such as an infant), the income will be taxed to the trustee at the relevant individual rates.
Income to which no beneficiary is “presently entitled” will generally be taxed at highest marginal tax rate and for this reason it is important to ensure that the relevant decisions are made as soon as possible after 30 June each year and certainly within 2 months of the end of the year. The two month “period of grace” is particularly relevant for trusts which operate businesses as they will not have finalised their accounts by 30 June. In the case of discretionary trusts, if this is done the overall amount of tax can be minimised by allocating income to beneficiaries who pay a relatively low rate of tax.
The concept of “present entitlement” involves the idea that the beneficiary could demand immediate payment of their entitlement.
It is important to note that a company which is a trustee of a trust is not subject to company tax on the trust income it has responsibility for administering.
In relation to capital gains tax (CGT), a trust which holds an asset for at least 12 months is generally eligible for the 50% capital gains tax concession on capital gains that are made. This discount effectively “flows” through to beneficiaries who are individuals. A corporate beneficiary does not get the benefit of the 50% discount. Trusts that are used in a business rather than an investment context may also be entitled to additional tax concessions under the small business CGT concessions.
Since the late 1990s discretionary trusts and small unit trusts have been affected by a number of highly technical measures which affect the treatment of franking credits and tax losses. This is an area where specialist tax advice is essential.
Why a trust and which kind?
Apart from any tax benefits that might be associated with a trust, there are also benefits that can arise from the flexibility that a trust affords in responding to changed circumstances.
A trust can give some protection from creditors and is able to accommodate an employer/employee relationship. In family matters, the flexibility, control and limited liability aspects combined with potential tax savings, make discretionary trusts very popular.
In arm’s length commercial ventures, however, the parties prefer fixed proportions to flexibility and generally opt for a unit trust structure, but the possible loss of limited liability through this structure commonly warrants the use of a corporate entity as unitholder ie a company or a corporate trustee of a discretionary trust.
There are strengths and weaknesses associated with trusts and it is important for clients to understand what they are and how the trust will evolve with changed circumstances.
Trusts which incur losses
One of the most fundamental things to understand about trusts is that losses are “trapped” in the trust. This means that the trust cannot distribute the loss to a beneficiary to use at a personal level. This is an important issue for businesses operated through discretionary or unit trusts.
Establishment procedures
The following procedures apply to a trust established by settlement (the most common form of trust):
Decide on Appointors and back-up Appointors as they are the ultimate controllers of the trust. They appoint and change Trustees.
Settlor determined to establish a trust (should never be anyone who could become a beneficiary)
Select the trustee. If the trustee is a company, form the company.
Settlor makes a gift of money or other property to the trustee and executes the trust deed. (Pin $10 to the front of the register is the most common way of doing this)
Apply for ABN and TFN to allow you open a trust bank account
Establish books of account and statutory records and comply with relevant stamp duty requirements (Hint: Get your Accountant to do this)
Are you looking for an advisor that will keep you up to date and provide guidance and tips like in this blog? then why now contact me at our Castle Hill or Windsor office in Northwest Sydney to arrange a one on one consultation. Just click the Schedule Now button up on the left to find the appointment options.
Liam Shorte B.Bus SSA™ AFP
Financial Planner & SMSF Specialist Advisor™
Tel: 02 98941844, Mobile: 0413 936 299
PO Box 6002 BHBC, Baulkham Hills NSW 2153
5/15 Terminus St. Castle Hill NSW 2154
Corporate Authorised Representative of Viridian Select Pty Ltd ABN 41 621 447 345, AFSL 51572
This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs. This website provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such.
There are all sorts of unexpected consequences coming out of the changes to the superannuation rules. As a result of moving funds over $1.6m back to accumulation to meet the Transfer Balance Cap (TBC), you may in fact now qualify for the Commonwealth Seniors Health Care card.
How?
There may be a silver lining to the new $1.6 million transfer balance cap (TBC) for some SMSF members. Having less money in an account based pension and more money in accumulation or other assets may result in some SMSF members being entitled to receive the Commonwealth Seniors Health Card (CSHC). This is because amounts held in accumulation phase are not deemed for the CSHC and are not included in a member’s personal taxable income.
Now if the excess over the $1.6m is/was withdrawn out of superannuation, whether it will count as income for the CHSC will depend on how the client invests it. for example financial investments such as shares, rented investment property and interest will be deemed but a Holiday home not rented out will not be deemed towards the CSHC income test.
Older pensions may be even more forgiving!
Income from an account based pension is deemed under the usual Centrelink deeming rates unless the account based pension commenced before 1 January 2015, and the client was entitled to the card before 1 January 2015 and continues to hold the card. This is known as the grandfathering rules.
For SMSF members who are not eligible for the grandfathering rules, holding a significant amount of money in an account based pension means that they have a lower likelihood of being eligible for a CSHC. Prior to 1 July 2017, for most SMSF members it was more beneficial to hold as much as possible in an account based pension for tax purposes even if this meant they were ineligible for the CSHC. The tax savings on the excess would have outstripped the CSHC benefit.
However, from 1 July 2017, SMSF members can only hold up to $1.6 million in an account based pension and if they are also receiving defined benefit pension income the amount which can be held in account based pensions will be lower. Depending on other income the member receives, this may result in them now being entitled to the CSHC.
You don’t believe me? The following example explains how this works in a simple scenario:
Example – single person
James is single and is age 67. In the 2016 -2017 financial year, he had $2 million in his account based pension, and no other income.
The deemed income from his account based pension is calculated as $64,247 based on deeming rates and thresholds as at 1 July 2017. His deemed income exceeds the income threshold of $52,796 for the CSHC and therefore he is not entitled to a CSHC.
On 30 June 2017, he rolls $400,000 back to accumulation leaving $1.6million in his account based pension.
The deemed income on $1.6 million is $51,247 and is under the income threshold of $52,796 (20 March 2017) meaning that James is entitled to a CSHC after rolling back money from his account based pension to accumulation.
Are you looking for an advisor that will keep you up to date and provide guidance and tips like in this blog? then why now contact me at our Castle Hill or Windsor office in Northwest Sydney to arrange a one on one consultation. Just click the Schedule Now button up on the left to find the appointment options.
Liam Shorte B.Bus SSA™ AFP
Financial Planner & SMSF Specialist Advisor™
Tel: 02 98941844, Mobile: 0413 936 299
PO Box 6002 BHBC, Baulkham Hills NSW 2153
5/15 Terminus St. Castle Hill NSW 2154
Corporate Authorised Representative of Viridian Select Pty Ltd ABN 41 621 447 345, AFSL 51572
This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs. This website provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such.
I am always on the lookout for good Australian educational content for new SMSF trustees and I know many people enjoy content delivered in short videos. Today we have another guest post but one with a difference.
Owen Raszkiewicz from Rask Finance has a passion for delivering free educational content and has just completed his 15 part video course which is an introduction to investing in shares, managed funds and ETFs. The course is suitable for those starting out and a good refresher for experienced investors trying to explain concepts to other trustees. He has kindly agreed to me providing these 15 1-2 minute bite size videos here on my blog for you.
So off we go:
And finally for those looking at investing in direct shares overseas
I hope this course has been helpful and please scroll down to comment and make sure to visit Owen’s webpage Rask Finance for more educational content or follow him on twitter @OwenRask .
Feedback always appreciated. Please reblog, retweet, like on Facebook etc to make sure we get this educational material out there. As always please contact me if you want to look at your own planning needs or an SMSF review. We have offices in Castle Hill and Windsor but can meet clients anywhere in Sydney or via Skype. Just click the Schedule Now button up on the left to find the appointment options.
Liam Shorte B.Bus SSA™ AFP
Financial Planner & SMSF Specialist Advisor™
Tel: 02 98941844, Mobile: 0413 936 299
PO Box 6002 BHBC, Baulkham Hills NSW 2153
5/15 Terminus St. Castle Hill NSW 2154
Corporate Authorised Representative of Viridian Select Pty Ltd ABN 41 621 447 345, AFSL 51572
This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs. This website provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such.
Not only do SMSF members need to have an up-to-date will but everyone who is a member of an SMSF needs to also put into place an enduring power of attorney.
The Australian Law Reform Commission’s (ALRC) recommendations in its final report titled “Elder Abuse – A National Legal Response” are positive steps towards helping mitigate the risks that could face ageing self-managed super fund (SMSF) members.
It involves changes to the superannuation laws to ensure that trustees consider planning for the loss of capacity of an SMSF member and estate planning as part of a fund’s investment strategy, and for the ATO to be told when an individual becomes a trustee of an SMSF because of an enduring power of attorney (EPOA).
TRUSTING SOMEONE TO DEAL WITH YOUR FINANCIAL MATTERS IF YOU CAN’T
An enduring power of attorney (EPOA) deals with your finances if you lose capacity or are unable to attend to financial matters personally and/or as a trustee of your SMSF. Your attorney is able to deal with your assets in the same way that you deal with them (subject to any directions or limitations and being appointed as a director of the SMSF Corporate Trustee). This includes signing tax returns and financial statements of the fund, buying and selling real estate or shares, accessing bank accounts and spending money on behalf of yourself personally and on your behalf as trustee of your SMSF.
For an EPOA to take your place as Trustee you must resign and they are appointed in your place. They cannot manage affairs of the SMSF using the EPOA alone, they must be made a trustee or a trustee director.
This is because if a member loses their mental capacity, perhaps through having a stroke or suffering onset of dementia, they will no longer be able to be a trustee of their fund, or a director of the corporate trustee, putting at risk the complying status of the fund.
Another occasion may be if a member departs overseas indefinitely. In this case their enduring attorney in Australia can become the trustee or director of the trustee in their place to avoid fund residency issues under subsection 295-95(2) of the Income Tax Assessment Act 1997.
Scenario we handled: Judith’s father was in the UK and had a fall. She flew back to check he was ok but found it was worse than expected and that he would need multiple surgeries and rehab over a protracted period and she would need to be there most of the time to manage the process and care for him. Her son, James, was her EPOA so she resigned as Director of the Trustee Company and James used the Enduring Power of Attorney to allow him to be appointed as director with her 2nd husband for the 3 year period she was away.
If you do not address the situation within the six-month period of grace allowed under section s17A(4) of the Superannuation Industry (Supervision) Act 1993 (SISA), the consequences for the fund and your retirement savings could be very serious indeed and attract severe penalties.
Unlike a general power of attorney, an EPOA continues to operate in the event that you lose capacity.
WHY SHOULD YOU HAVE A TRUSTED ENDURING POWER OF ATTORNEY?
It is important to have an EPOA in place for each fund member because without it, in the event that you lose capacity, your next of kin would have to make an application to the NSW Civil and Administrative Tribunal (or relevant government body in your state) to obtain a financial management order to deal with your assets. This lengthy (often more than the 6 month grace period allowed under the SIS Act) and costly process can be avoided if you have the foresight to establish your EPOA in advance. It can also lead to major friction in the family and especially with blended families and outcomes you did not expect or wish for under any circumstances!
EPOA SHOULD BE SOMEONE YOU TRUST AND CONSIDER APPOINTING SUBSTITUTE ATTORNEYS
We recommend that you seek legal advice and arrange for an EPOA to be prepared covering your personal finances and SMSF role. You may like to appoint your spouse, adult child, accountant, lawyer, business partner or close friend as your attorney in the first instance. Our legal advisers also suggest appointing substitute attorneys in case your primary attorney is unwilling or unable to act. We had one case where father had dementia but son who was EPOA was on secondment to PNG so could not take up the power of attorney
Your nominated attorney should be someone whom you trust and believe would make decisions in your best interests. I often recommend that you leave written details of your preferences for dealing with asset sales, buy backs, dividend reinvestment plans, term deposit maturities, minimum pensions and add clear instructions if they should work with trusted advisers like Financial planners, accountants and auditors before making major decisions.
You should of course consider having reversionary pensions or non-lapsing binding death nominations to ensure as much as possible that your wishes are carried out.
So when next reviewing your wills and powers of attorney just ask your solicitor if they are confident that the EPOA would also cover Superannuation matters or if that should be specifically mentioned.
I hope this guidance has been helpful and please take the time to comment. Feedback always appreciated. Please reblog, retweet, like on Facebook etc to make sure we get the news out there. As always please contact me if you want to look at your own options. We have offices in Castle Hill and Windsor but can meet clients anywhere in Sydney or via Skype. Just click the Schedule Now button up on the left to find the appointment options.
Liam Shorte B.Bus SSA™ AFP
Financial Planner & SMSF Specialist Advisor™
Tel: 02 98941844, Mobile: 0413 936 299
PO Box 6002 BHBC, Baulkham Hills NSW 2153
5/15 Terminus St. Castle Hill NSW 2154
Corporate Authorised Representative of Viridian Select Pty Ltd ABN 41 621 447 345, AFSL 51572
This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs. This website provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such.
Client Question : My next question is about the threshold income level at which my wife and I will start to pay personal tax in 2017-18. I read “about $28,000” in the paper the other day for my situation (age >65), but my wife does not turn 65 until 2018, so her tax-free level may be different. It would be useful to know these numbers in the case we decide to take some lump sums out of super because of the new limits. We are considering investing some money tax-free in our personal names, free of SMSF red tape.
Personal Tax-free Thresholds
The amount you can earn before you have to pay tax, actually depends on your age.
Under 65
For those people under age 65, the effective tax-free threshold is currently $20,542. How do we calculate this amount? Well, if you look at the ATO’s current Individual income tax rate table, you pay no tax on the first $18,200 you earn in a year.
However, you also get the benefit of the full low income tax offset if you earn below $37,000. That means the tax office will offset up to $445 from the tax you would normally have to pay. So you can earn another couple of thousand dollars before you have to pay tax.
How much can I earn before paying taxes after age 65
For those who have reached age pension age, they can earn even more without paying tax. If you are over 65, you get access to the Seniors and Pensioners Tax Offset (SAPTO). This reduces or eliminates the tax that would normally be liable to pay on some additional income
Using the SAPTO benefit, the amount you can earn each year as a pensioner before having to pay tax, is:
$32,279 for single people,
$28,974 each for members of a couple or $57,948 combined.
The beauty of this benefit is that for clients in SMSF Pension phase any income drawn from a super fund income stream once over 60 is tax-free and non-assessable, meaning it doesn’t count towards the above thresholds.
Based on an earnings rate of 5% this means that a couple could have over $500,000 in each of their names and not pay any tax. But be careful as if you are investing in growth assets then triggering capital gains in the future may mean exceeding these thresholds where as within the SMSF the CGT on pension assets is NIL and 10-15% in accumulation.
Also consider the tax position if you are likely:
to receive an inheritance
large capital gain on an asset he’d outside super
to have one parter live significantly longer (they may end up with large amounts outside the super system)
Are you looking for an advisor that will keep you up to date and provide guidance and tips like in this blog? then why now contact me at our Castle Hill or Windsor office in Northwest Sydney to arrange a one on one consultation. Just click the Schedule Now button up on the left to find the appointment options.
Liam Shorte B.Bus SSA™ AFP
Financial Planner & SMSF Specialist Advisor™
Tel: 02 98941844, Mobile: 0413 936 299
PO Box 6002 BHBC, Baulkham Hills NSW 2153
5/15 Terminus St. Castle Hill NSW 2154
Corporate Authorised Representative of Viridian Select Pty Ltd ABN 41 621 447 345, AFSL 51572
This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs. This website provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such.
Tax free Image courtesy of Stuart Miles /FreeDigitalPhotos.net
What seems like a worthwhile SMSF reporting requirement to help trustees that is being introduced from next year has potential to push local accountants out of the SMSF administration sector and play into the hands of major administrators.
In order to help administer the new transfer balance cap reporting, the Australian Taxation Office (ATO) is in the process of developing a self managed superannuation fund (SMSF) event based reporting regime. This new regime is likely to be in the form of a report to be called the Transfer Balance Account Report or TBAR. (Don’t you love another 4 letter acronym).
At this stage nothing has been finalised but the TBAR reporting regime is expected to be as follows:
Where the event is a pension being commuted (ie stopped) in part or in full or a rollover occurs – that must be reported to the ATO with 10 business days after the end of the month that the event occurs.
Where the event is the commencement of a pension – that must be reported within 28 days of the end of the quarter that the event occurs.
Transition Period
The ATO is also expected to introduce a transition period for events that occur in the first part of the 2018 year (ie from 1 July 2017):
Where the event is the commencement or commutation of a pension, that event does not need to be reported until the SMSF is due to lodge its 2017 tax return (typically before May 2018)
However, all events that occur after that date have to be reported in the normal manner (ie monthly or quarterly)
The transition period will not apply to some events – such as rollovers
For many accounting practitioners, and SMSF trustees, this will be a fundamental change in how they manage the administer of their SMSFs. Where an SMSF trustee needs to commence, or commute a pension they can no longer see their accountant / administrator once a year. They will have to see their administrator before, or soon after, an event occurs. While accountants may have to prepare “real time” accounts so that they can lodge such reports. They will find it hard to pass on the additional costs to trustees and many will just not be able to cope with regular reporting.
Timing Problem
It is unlikely that many, if any, existing SMSFs administered by suburban accountants are capable of reporting on a monthly basis. For example, just a simple end of year reconsolidation of accumulation and pensions will now be reportable by the 10th August each year but many tax reports from investment managers, AREITS and platforms don’t come out until after this date. We presently minute the request on 1 July but finalise implementing on receipt of financials later in the year.
Don’t panic: Many SMSFs will have no TBAR reporting obligations because they have no pensions or they are not starting any new pensions or commuting any existing pensions.
However, if you are an SMSF trustee that maybe affected by the new Transfer Balance Account Report (TBAR) regime, you should ensure that your accountant / administrator have systems, staffing and processes in place that will enable your fund to comply with this new reporting obligation.
I hope this guidance has been helpful and please take the time to comment. Feedback always appreciated. Please reblog, retweet, like on Facebook etc to make sure we get the news out there. As always please contact me if you want to look at your own options. We have offices in Castle Hill and Windsor but can meet clients anywhere in Sydney or via Skype. Just click the Schedule Now button up on the left to find the appointment options.
Liam Shorte B.Bus SSA™ AFP
Financial Planner & SMSF Specialist Advisor™
Tel: 02 98941844, Mobile: 0413 936 299
PO Box 6002 BHBC, Baulkham Hills NSW 2153
5/15 Terminus St. Castle Hill NSW 2154
Corporate Authorised Representative of Viridian Select Pty Ltd ABN 41 621 447 345, AFSL 51572
This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs. This website provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such.
I found this excellent article on LinkedIn and and re-blogging it here for your guidance.
By now, many of us would be aware, that from 1 July 2017, earnings generated by Transition to Retirement (TtR) pensions are taxed at accumulation rates. Indeed, we are questioning what to do with an existing TtR pension, whether to roll it back to accumulation or maintain it post 30 June 2017?
Estate planning dynamics of Transition to Retirement (TtR) pensions
Through this post, I hope to share with you an estate planning consideration in situations involving TtR pensions, especially in light of typical TtR range clients (preservation age but less than 65) contributing $540,000 before 1 July 2017.
For some clients, this estate planning benefit of TtR pensions could provide sufficient benefits to maintain TtR pensions or deal with new ones in a specific way.
Hopefully, the example can highlight the role of the proportioning rules in ITAA 1997 307-125 at play and its use in estate planning context.
What about TtR clients contributing $540,000 before 30 June 2017 or $300,000 after 1 July 2017?
Julie (56) has an existing accumulation phase balance of $600,000 (all taxable component). A TtR pension on the existing $600,000 balance wasn’t recommended in the first place because:
i. her cashflow is in surplus, not needing the income from a TtR pension to use the concessional contributions cap of $35,000 (in 2016-17)
ii. given the balance is entirely taxable component, the 4% minimum pension payment were surplus to her needs and cost her more in personal income tax (despite the 15% rebate on the pension payments). The rise in personal income tax was more than the benefit of tax-free earnings of a TtR pension
So that’s just setting the scene around current state of play with Julie’s superannuation savings.
With advice, Julie contributes $540,000 to superannuation before 30 June 2017 under the bring-forward provisions (the concept applies equally to TtR range clients contributing $300,000 post 30 June 2017).
Unfortunately, Julie recently became widowed. She has no other SIS dependents other than adult children. She has nominated her financially independent adult children as her beneficiaries under a binding death benefit nomination.
One initial question is where to contribute the $540,000? Into her existing accumulation fund of $600,000 or a separate accumulation account/fund?
Focusing on public offer funds, there is a chain of thought that perhaps Julie might consider contributing the $540,000 non-concessional contribution into a separate super account to the existing one and immediately soon after starting a TtR pension.
The benefit of contributing to a separate retail fund plan / account:
At the heart of the issue, TtR pensions despite not being classed as retirement phase income streams from a tax perspective (and therefore paying accumulation phase tax rate) are still pensions under SIS standards. It is this classification of it being pension under SIS that allows a favourable proportioning rule compared to accumulation phase.
Earnings in accumulation phase are added to the taxable component whereas earnings in pension phase are recorded in the same proportion of tax components as at commencement.
If a pension is commenced with 100% tax-free component, then this pension during its existence will consist of 100% tax-free component, irrespective of earnings and pension payments.
Had the $540,000 contribution added to existing accumulation balance of $600,000, then any pension commencement soon after, will have tax-free component of 47% (540,000 / 1,140,000)
So if Julie contributes to a separate super fund or a separate super account and starts a TtR pension immediately soon after, her $540,000 TtR pension will start with $540,000 tax-free component. If it grows to $600,000 in a year’s time or two, the balance will still be 100% tax-free component.
To flesh out the benefit of proportioning rules, imagine if she passed away in 8 years time. The $540,000 has grown nicely by $100,000 with the TtR pension balance standing at $640,000 (all tax-free component).
Had she left the funds in accumulation, the $100,000 growth would be recorded against the taxable component.
The benefit to her adult children is to the tune of $17,000.
As can be seen, starting a TtR pension means that adult children benefited by an additional $17,000 and shows the differing mechanics of earnings in accumulation and TtR pensions. The larger the growth, the bigger the death benefit tax saving when comparing funds sitting in accumulation or TtR pension phase.
But the TtR pension does come with a downside doesn’t it? While the pension payments are tax-free as the TtR pension consists entirely of non-concessional contributions and therefore tax-free component, there is leakage of 4%, being the minimum pension payment requirement of the TtR. For some clients, this may be a significant hurdle, not wanting leakage from superannuation, as it is getting much harder to make non-concessional contributions. For others, this could be overcome where non-concessional cap space is available (or refreshed once the bring-forward period expires) in their own name or in a spouse’s account.
Going back to Julie, she may be okay with the 4% leakage as her total superannuation balance is well below $1.6 million for the moment. The 4% minimum pension payments are accumulated in her bank account and contributed when the 3 year bring forward period is refreshed on 1 July 2019. On 1 July 2019, assuming her total superannuation balance is less than $1.4 million, she could easily contribute up to $300,000 non-concessional contributions under the bring-forward provisions at that time.
It is this favourable aspect of the superannuation income stream proportioning rules which could offer estate planning benefits for TtR pensions. I have seen the proportioning rules as they apply to TtR pensions mentioned by some but not by many as the focus has been the loss of exempt status on the earnings. As demonstrated by Julie’s example, for some of our clients, when relevant, the proportioning rule may be something to look out for as we look to add value to our client’s situation.
Other estate planning issues around pensions (including TtRs)
1. What if Julie was retired and over 60? Has an existing standard account based pension of $600,000 (all taxable component) with $540,000 non-concessional contribution earmarked to be in pension phase?
Would you have one pension or two separate pensions?
There is a chain of thought that two separate pensions, keeping the 100% tax-free component one separate, allows more planning options with drawdown and may assist with minimising death benefit tax. If Julie’s requirements are more than the minimum level (4%), then stick to minimum from the one that is 100% tax-free component and draw down as much as needed from the one that has the higher proportion in taxable component.
Two separate pensions can dilute the taxable component at the point of death whereas one loses such planning option involving drawdown where a decision is made to consolidate pensions.
2. What if Julie was partnered?
Naturally, there are many variables but the concept of separate pensions and proportioning continues from an estate planning perspective.
The impact of $1.6 million transfer balance cap upon death for some clients may show the attractiveness of separating pensions where possible for tax component reasoning.
Say Julie had $800,000 in one pension (all taxable component) and $700,000 in another pension (all tax-free component). To illustrate the issue simplistically, if the hubby only has a defined benefit pension using up $900,000 of the transfer balance cap, then having maintained separate pensions has meant that he possibly may look to retain the $700,000 (all tax free component) death benefit pension and cash out the $800,000 pension outside super upon Julie’s death.
This way the $700,000 account based pension (and whatever it grows to in the future) could be paid out tax-free to the beneficiaries down the track.
Had Julie’s pensions been merged at the outset, the proportion of components would have been 53% taxable (800,000 / 1.5 million) and 47% tax-free. Her husband would have inherited those components. Any subsequent death benefit upon the hubby’s death passed onto the adult children would have incurred up to 17% tax on 53% of the death benefit.
The example hopefully shows the power of separate pensions in managing estate planning issues.
3. Going back to Julie. What if she was over 60 and under 65, still working and intending to work for the next 6-7 years? Has no funds to contribute to super but has accumulation phase of $600,000
You could consider having a TtR pension simply for taking 10% of account balance out as a pension payment and re-contributing it back as a non-concessional contribution assuming Julie has non-concessional contribution space available.
To ensure the re-contribution strategy dilutes as much of taxable component, there may be a need for separate pensions though. For example:
1. $600,000 TtR pension on 1 July 2017. 10% pension payment ($60,000) taken out closer to the end of FY
2. $60,000 contributed to a separate accumulation interest before in 17-18 and separate TtR pension commenced with $60,000. At this point, Julie has two pensions. One with $60,000 and the other with say $540,000.
3. Next FY in 18-19, 10% taken from both pensions and the amount contributed to a separate accumulation interest and a TtR pension commenced. The smaller TtR pension balance are consolidated (with all tax-free component) and similar process is repeated Julie turns 65 at which time she could do a cash-out and recontribution if she has non-concessional space, including the application of bring-forward provisions.
Slightly different application to SMSFs
While the concepts regarding proportioning of tax components and multiple pension interests remain the same in SMSFs, the steps taken to plan and organise multiple pension interests is different to public offer funds. In public offer funds, it is typically straightforward to establish a separate superannuation account. In SMSF’s, the planning around such things requires further steps.
Relevant to SMSFs, the ATO’s interpretation is that a SMSF can only have one accumulation interest but is permitted to have multiple pension interests.
Here is the ATO link with detail on this concept of single accumulation interest and multiple pension interest for SMSFs.
Conclusion
No doubt, there are many other things to consider with many variables leading to different considerations.
I hope this guidance has been helpful and please take the time to comment. Feedback always appreciated. Please reblog, retweet, like on Facebook etc to make sure we get the news out there. As always please contact me if you want to look at your own options. We have offices in Castle Hill and Windsor but can meet clients anywhere in Sydney or via Skype. Just click the Schedule Now button up on the left to find the appointment options.
Liam Shorte B.Bus SSA™ AFP
Financial Planner & SMSF Specialist Advisor™
Tel: 02 98941844, Mobile: 0413 936 299
PO Box 6002 BHBC, Baulkham Hills NSW 2153
5/15 Terminus St. Castle Hill NSW 2154
Corporate Authorised Representative of Viridian Select Pty Ltd ABN 41 621 447 345, AFSL 51572
This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs. This website provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such.
Thankfully after the reams of changes to superannuation in last years budget that we are still trying to negotiate the through the implementation minefield, the government have left SMSFs and Superannuation largely untouched this year. As the SMSF Association have said “Stability and confidence for superannuation is the good news coming out of the 2017-18 Federal Budget.” However there are a few issues and gladly opportunities you need to be aware of.
Contributing the proceeds of downsizing your home to superannuation (or just taking advantage of strategy if moving house)
Tip: If you’re over 65 self funded retiree and your marginal tax rate is more than 15% then strategy may be useful. May also help avoid the Medicare levy increase in 2 years time.
It is proposed that from 1 July 2018, people aged 65 and over will be able to make a non-concessional contribution of up to $300,000 from the proceeds of selling their home. These contributions will be in addition to the existing contribution caps.
Features associated with this measure include:
The property must have been the principal place of residence for a minimum of 10 years
Both members of a couple will be able to take advantage of this measure for the same home, meaning $600,000 per couple can be contributed to superannuation through the downsizing cap
Amounts will count towards the transfer balance cap when used to commence an income stream
Contributions will be subject to social security means testing when added to a superannuation account
Contribution eligibility requirements, such as the work test and restrictions on contributions from age 75 will not apply to these contributions. The requirement to have a total superannuation balance of less than $1.6 million to be eligible to contribute will also not apply.
Social security changes
Pensioners who lost their Pensioner Concession Card entitlement due to the assets test changes on 1 January 2017 will have their card reinstated. This card provides access to a wider range of concessions than those available with the Health Care Card, such as subsidised hearing services. Pensioner Concession Cards will be automatically reissued over time with an ongoing income and assets test exemption.
As of 1 July 2018, there will be stricter residence requirements for the age pension and disability support pension. From that date, pension recipients will need to have at least 15 years’ residence in Australia or 10 years’ continuous residence with certain restrictions.
First home super saver scheme – talk to us about how you can use this to help your children or grandchildren
From 1 July 2017 individuals will be able to make voluntary contributions to superannuation of up to $15,000 per year and $30,000 in total, to be withdrawn for the purpose of purchasing a first home. Both voluntary concessional and non-concessional contributions will qualify.
These contributions (less tax on concessional contributions) along with deemed earnings can be withdrawn for a deposit from 1 July 2018. When withdrawn, the taxable portion will be included in assessable income and will receive a 30 per cent offset.
Features associated with this measure include:
Contributions will count towards existing concessional and non-concessional contribution caps
Earnings will be calculated based on the 90 day Bank Bill rate plus three percentage points.
The ATO will administer this scheme, calculate the amount that can be released and provide release instructions to superannuation funds.
The amount withdrawn (including the taxable component) will not flow through to income tests used for tax and social security purposes, such as for the calculation of HECS/HELP repayments, family tax benefit or child care benefit.
Example of how to use this strategy: Get your child or grandchild to salary sacrifice up to $15,000 each year until they max out the $30,00 limit and let them live at home or support their living costs to ensure they can still make ends meet. This way you promote a savings culture and they get a tax incentive at the same time. Boost the savings by matching what they put in to the super account dollar for dollar in to an High Interest Savings account.
If you are giving money to children then teach them a valuable life lesson on regular saving at the same time…best gift you can give to them.
Bank levy may hit dividends or term deposit rates
The Government will introduce a major bank levy which will raise $6.2 billion in the next four years. This will either be passed on to customers with lower rates on deposits or higher mortgage rates or to shareholders in the form of lower dividends. Another good reason to review your exposure to the large banks as the market cycle changes.
PROPERTY INVESTORS
Integrity of limited recourse borrowing arrangements
The Government is proceeding with amendments to the transfer balance cap and total superannuation balance rules for limited recourse borrowing arrangements (LRBAs). The outstanding balance of an LRBA will now be included in a member’s annual total superannuation balance for all new LRBAs once this legislation is passed.
Integrity of non-arm’s length arrangements
The Government will amend the non-arm’s length income rules to prevent member’s using related party transactions on non-commercial terms to increase superannuation savings by including expenses that would normally apply in a commercial transaction.
Disallow certain deductions for residential rental property
From 1 July 2017, deductions for travel expenses related to inspecting, maintaining or collecting rent for a residential rental property will be disallowed.
Investors will not be prevented from engaging third parties such as real estate agents for property management services. These expenses will remain deductible.
Also from 1 July 2017, plant and equipment depreciation deductions will be limited to outlays actually incurred by the SMSF in residential real estate properties. Plant and equipment items are usually mechanical fixtures or those which can be ‘easily’ removed from a property such as dishwashers and ceiling fans. Here’s the list of residential #property plant and equipment items that will go in crack down on negative gearing deductions. Here’s the list of residential property plant and equipment items that will go in crack down on negative gearing deductions.
This measure addresses concerns that some plant and equipment items are being depreciated by successive investors in excess of their actual value. Acquisitions of existing plant and equipment items will be reflected in the cost base for capital gains tax purposes for subsequent investors.
Other matters: Energy Assistance Payment
A one-off Energy Assistance Payment will be made in 2016-17 of $75 for single recipients and $125 per couple for those eligible for qualifying payments on 20 June 2017 and who are a resident in Australia.
Qualifying payments include the Age Pension, Disability Support Pension, Parenting Payment Single, the Veterans’ Service Pension and the Veterans’ Income Support Supplement, Veterans’ disability payments, War Widow(er)s Pension, and permanent impairment payments under the Military Rehabilitation and Compensation Act 2004 (including dependent partners) and the Safety, Rehabilitation and Compensation Act 1988.
I hope this guidance has been helpful and please take the time to comment. Feedback always appreciated. Please reblog, retweet, like on Facebook etc to make sure we get the news out there. As always please contact me if you want to look at your own options. We have offices in Castle Hill and Windsor but can meet clients anywhere in Sydney or via Skype. Just click the Schedule Now button up on the left to find the appointment options.
Liam Shorte B.Bus SSA™ AFP
Financial Planner & SMSF Specialist Advisor™
Tel: 02 98941844, Mobile: 0413 936 299
PO Box 6002 BHBC, Baulkham Hills NSW 2153
5/15 Terminus St. Castle Hill NSW 2154
Corporate Authorised Representative of Viridian Select Pty Ltd ABN 41 621 447 345, AFSL 51572
This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs. This website provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such.
The changes to the superannuation system, announced by the Australian Government in the 2016–17 Budget, have now received royal assent and the finer details of how to implement them have been released. While the government claim these changes were designed to improve the sustainability, flexibility and integrity of Australia’s superannuation system, they did not work with industry or the ATO before announcing them and as such it has been a nightmare to try to get your head around what the actual changes are and how strategies need to be implemented to manage them.
As a result we are getting last-minute guidance from the ATO and software providers as well as SMSF, Industry and Retail Super providers. The government have back-flipped on some measures, amended others because of collateral damage and tightened other measures for obscure reasons. With most of these changes commencing from 1 July 2017 I have tried to put some useful links together.
A short video overview of the changes is provided below. I have provided more detailed information links and will update these as they are progressively published to help you understand the changes, how they may affect you, and what you may need to know and do now, or in the future as a trustee of a self-managed super fund (SMSF). Even more detailed information is available to help you understand the changes, including for some topics, law companion guidelines (see below) to provide certainty about how the changes will be administered.
For those who wish to dive in to the detail please view the Law Companion Guides below. A law companion guideline is a type of public ruling. It gives the ATO view on how recently enacted law applies. It is usually developed at the same time as the drafting of the Bill.
The ATO normally release a law companion guideline in draft form for comment when the Bill is introduced into Parliament. It is finalised after the Bill receives Royal Assent. It provides early certainty in the application of the new law. Please make sure to look for updates before relying on this information.
The ATO have also released access to answers to some frequently asked questions and they can be found in this document Super Changes Q & As
Example: Q. How are my pensions and annuities valued for transfer balance cap purposes?
ANSWER : You need to contact your fund about the value of your pensions and annuities.
The value of your pension or annuity will generally be the value of your pension account for an account-based pension.
Special rules apply to calculate the value of: • lifetime pensions • lifetime annuities that existed on 30 June 2017, and • life expectancy and market linked pensions and annuities where the income stream existed on 30 June 2017
Lifetime pension and annuities These are valued by multiplying the annual entitlement by a factor of 16.This provides a simple valuation rule based on general actuarial considerations. Your annual entitlement to a superannuation income stream is worked out by reference to the first payment entitlement for the year. The first payment is annualised based on the number of days in the period to which the payment refers. (I.e. the first payment divided by the number of days the payment relates to multiplied by 365).
This means that a lifetime pension that pays $100,000 per annum will have a special value of $1.6 million which counts towards your transfer balance cap in the 2017-18 financial year.
For a lifetime pension or annuity already being paid on 1 July 2017, the special value will be based on annualising the first payment in the 2017-18 financial year. This may include indexation, so may be slightly higher than your current annual lifetime pension payments.
Life expectancy and market linked pensions and annuities being paid on or before 30 June 2017 are valued by multiplying the annual entitlement by the number of years remaining on the term of the product (rounded up to the nearest year).
I hope this guidance has been helpful and please take the time to comment. Feedback always appreciated. Please reblog, retweet, like on Facebook etc to make sure we get the news out there. As always please contact me if you want to look at your own options. We have offices in Castle Hill and Windsor but can meet clients anywhere in Sydney or via Skype. Just click the Schedule Now button up on the left to find the appointment options.
Liam Shorte B.Bus SSA™ AFP
Financial Planner & SMSF Specialist Advisor™
Tel: 02 98941844, Mobile: 0413 936 299
PO Box 6002 BHBC, Baulkham Hills NSW 2153
5/15 Terminus St. Castle Hill NSW 2154
Corporate Authorised Representative of Viridian Select Pty Ltd ABN 41 621 447 345, AFSL 51572
This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs. This website provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such.
This is part of series on the necessary changes to strategies and opportunities that have resulted from the pending 1 July 2017 changes which will see earnings on transition to retirement (TTR) pensions subject to 15% tax in the fund.
I know this has created concerns with many trustees and advisers around the question of should you access the relief and if so how to actually access the CGT relief provisions. People want to know what factors they must take in to consideration.
Some of the concerns have been clarified by the ATO. One concern was that trustees would need to commute their TTR pensions and roll back into accumulation before 1 July to access the CGT relief provisions. Those relief provisions would allow the cost base of all or selected eligible assets to be reset to the current market value on a date chosen by the trustees between now and 30 June. This CGT relief allows trustees to in effect, retain the tax-free status of unrealised capital gains accumulated prior to 30 June 2017.
The newly issued ATO issued Law Companion Guideline (LCG) 2016/8 has provided some excellent clarification. If your SMSF is operating as an unsegregated fund, the LCG states that member will not need to commute back to accumulation phase to be able to elect to reset the cost base of assets the wish to elect to apply the CGT relief.
It is intended that the same basis should be available for segregated funds, but the ATO has indicated is still reviewing options for how to make this work in practice. I will try to keep this blog updated with any guidance from the ATO on this matter but please make sure you adviser/administrator is on top of these matters. An SMSF that only has TTR or account-based pensions (and no accumulation phase) is automatically classified as a segregated fund. However if you put in a new contribution, as many are, this year then that money goes in to accumulation and the fund becomes automatically unsegregated. So look at your contribution intentions.
All is not lost as the fund would still have been segregated until that contribution was made and you may elect for that date to be the new CGT cost base valuation date.
Conversations need to start with YOUR advisers and administrators to check whether:
you should to continue a TTR pension after 1 July 2017 or to commute back to accumulation phase.
you may have already or can trigger a further condition of release such as leaving any one employment position after age 60. To move from Accumulation or TTR to Account Based Pension
Why are TTR pensions still relevant and for whom
The tax advantages of a TTR pension will reduce when the earnings in the fund start to be taxed on 1 July, but advantages may still arise for members who:
Are over age 60 and can draw tax-free income from the TTR
Wish to start accessing super to top-up income or increase income to pay off debts
Want to be able to nominate an automatic reversionary for estate planning purposes
Can use salary sacrifice or personal deductions to contribute a higher net amount into super than they need to withdraw.
If the TTR pension is no longer required, care should be taken with the commutation and timing of the commutation to ensure the CGT relief provisions can be accessed on any assets they wish to claim the relief for.
Looking for an adviser that will keep you up to date and provide guidance and tips like in this blog? Then why now contact me at our Castle Hill or Windsor office in Northwest Sydney to arrange a one on one consultation. Just click the Schedule Now button up on the left to find the appointment options. Do it! make 2016 the year to get organised or it will be 2026 before you know it.
Please consider passing on this article to family or friends. Pay it forward!
Liam Shorte B.Bus SSA™ AFP
Financial Planner & SMSF Specialist Advisor™
Tel: 02 98941844, Mobile: 0413 936 299
PO Box 6002 BHBC, Baulkham Hills NSW 2153
5/15 Terminus St. Castle Hill NSW 2154
Corporate Authorised Representative of Viridian Select Pty Ltd ABN 41 621 447 345, AFSL 51572
This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs. This website provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such
I knew with all the recent changes to Superannuation that many of my clients would need to update their SMSF Trust Deeds and started doing my research for a blog. Then I came across a recent blog from Dr.Brett Davies at Legal Consolidated today and I could not really improve on it. So with his permission, I am re-blogging his content here.
Self-Managed Super Fund (SMSF) Deeds previously required updates in:
– 1999 – ‘Excluded Funds’ became ‘Self-Managed Super Funds’, preservation & in-house assets
– 2007 – ‘Simpler Super’
– 2017 – Legislation passed in 2016, requires the changes below
The 15 changes to SMSF Deeds required after the 2016 Budget are to:
Internally ‘rollback’ pensions to accumulation;
Segregate assets between accumulation and pension phases;
Reject contributions;
Refund contributions;
Deal with excess transfer balance tax and excess non-concessional contributions;
Allow income streams and Account Based Pension (grandfathered);
Specify guardians for incapacity and death;
Identify the Power of Attorney when living overseas for more than 2 years;
Resettle pensions with flexible timing without mingling with accumulation account;
Allow reversionary beneficiary nominations;
Provide for CGT relief;
Deal with segregated and unsegregated assets;
Cease or keep Transition to Retirement Income Streams;
Calculate member balances, across different funds; and
Calculate internal pension rollbacks to accumulation.
These SMSF updates are all required to give maximum flexibility to your accountant and adviser.
Why does my SMSF Specialist Advisor / Accountant want to apply these SMSF updates?
Pre-2012 SMSF Deeds fail to deal with these 10 issues:
Removing clauses requiring the Trustee to do something that is no longer legal or beneficial;
Changing the sections that are ‘regimented’ with unnecessary rules vs being ‘permissive’. There is no point stating mandatory SIS requirements. In fact, it is dangerous to re-state legislation. This is because it dates your deed;
Accounting for an increased concessional contribution cap;
Removing insurance cover where the conditions are out of date;
Incorporating clauses about losing the pension at death or when the minimum payment has not been made;
Allowing for excess concessional contributions taxed at member’s marginal rate (-15% offset);
Updating the Investment Strategy to incorporate the ATO’s new Audit approach;
Changing market valuation clauses to leave the mechanism for the Accountant;
Allowing remuneration for non-trustee duties; and
Allowing non-lapsing Death Benefit Nominations.
Update your Deed to ensure your SMSF is compliant. Then you get the most out of your SMSF.
There is no risk of resettlement
‘Resettlement’ is when you create a new ‘trust estate’ out of an old trust. This applies to SMSFs and causes significant tax implications. However, there is no risk of resettlement under the High Court authority of Commercial Nominees (2010).
Updating your SMSF Deed through Legal Consolidated does not result in the resettlement of your SMSF. We retain the parts of the old Deed that are required by legislation and previous court decisions. But this does not affect a resettlement.
Make sure to check your with your own current deed provider or ask your adviser to check out Legal Consolidated’s offer.
Looking for an adviser that will keep you up to date and provide guidance and tips like in this blog? Then why now contact me at our Castle Hill or Windsor office in Northwest Sydney to arrange a one on one consultation. Just click the Schedule Now button up on the left to find the appointment options. Do it! make 2016 the year to get organised or it will be 2026 before you know it.
Please consider passing on this article to family or friends. Pay it forward!
Liam Shorte B.Bus SSA™ AFP
Financial Planner & SMSF Specialist Advisor™
Tel: 02 98941844, Mobile: 0413 936 299
PO Box 6002 BHBC, Baulkham Hills NSW 2153
5/15 Terminus St. Castle Hill NSW 2154
Corporate Authorised Representative of Viridian Select Pty Ltd ABN 41 621 447 345, AFSL 51572
This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs. This website provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such.
The ATO have released the analysis of the SMSF sector based on the financial returns for 30 June 2015 and some 2016 figures from their records. It’s always good to understand how the sector is developing and how your SMSF compares in the overall scheme of things. In this article I cherry-pick some of the stats that may be of interest to you.
Number of new SMSFs setup each year rising again.
The SMSF sector continues to grow with another up tick in 2015-6 after a slow down in 2014 and 2015.
One of the stats that still defies the belief of most SMSF Specialist Advisors is the number of funds being set up with Individual Trustees. In all our interaction with professional advisors over 90% recommend Corporate Trustees but the ATO stats on new setups show continued preference, over 90%, for Individual Trustees. When you are finished this blog I would urge readers to look at my earlier blog Why Self Managed Super Funds Should Have A Corporate Trustee (click now an it will open in another tab for reading later)
SMSF trustee type
This table shows the trustee structure (either corporate or individual trustees) of the SMSF population as at 30 June 2016, plus new registrations for the years 30 June 2014 to 30 June 2016.
SMSF trustee type
Trustee
type
% of all SMSFs (at 30/06/16)
2014 registrations
2015 registrations
2016 registrations
Corporate
23.23%
2,813 (7.70%)
1,781 (5.45%)
2,433 (7.24%)
Individual
76.77%
33,718 (92.30%)
30,916 (94.55%)
31,183 (92.76%)
Total
100%
36,531 (100%)
32,697 (100%)
33,616 (100%)
Size of SMSF sector
SMSFs make up 99.6% of the number of funds and 29% of the $2.1 trillion total superannuation assets as at 30 June 2016.
SMSFs make up 99.6% of the number of funds and 29% of the $2.1 trillion total superannuation assets as at 30 June 2016.
There were 577,000 SMSFs holding $622 billion in assets, with more than one million SMSF members.
Over the five years to 30 June 2016, growth in the number of SMSFs averaged almost 6% annually.
45% of SMSFs have been established for more than 10 years, and 17% have been established for three years or less.
Growth of SMSF assets
In 2015, the average assets of SMSFs reached $1.1 million, a growth of 20% over five years. Average assets per member were $590,000, the highest over five years.
In 2015, the average assets of SMSFs reached $1.1 million, a growth of 20% over five years.
Average assets per member were $590,000, the highest over five years.
For SMSFs established in 2015, the average fund assets were $392,000, an increase of 15% compared to average assets of funds established in 2011.
48% of SMSFs had assets between $200,000 and $1 million, accounting for 23% of all SMSF assets.
The majority of SMSF assets were held by funds with assets between $1 million and $5 million, representing 54% of total SMSF assets.
Contributions
Total contributions to SMSFs increased by 38% over the five years to 2015. This is 6% higher than the growth of total contributions to all superannuation funds (32%) over the same period.
Member contributions increased to more than $26 billion or by 54% over the five-year period.
Employer contributions made to SMSFs fell by 0.5% over the five years to 2015.
The Graph below compares contributions to SMSFs as a proportion of all super fund contributions for the years ended 30 June 2011 to 30 June 2015.
At 30 June 2015, contributions to SMSFs represented 24% of all super fund contributions. Member contributions into SMSFs, accounted for 51% of all member contributions across all super funds in 2015, an increase of 2% over the five-year period. In contrast, the proportion of employer contributions to SMSFs has dropped over the period to only 8% of all employer contributions across all super funds in 2015.
Graph 3: Contributions to SMSFs as a percentage of total Australian super contributions (for member, employer, and total) 2011–2015
SMSF benefit payments
Benefit payments have increased from $19.2 billion in 2011 to $35 billion in 2015. The proportion of SMSF members receiving a benefit payment also increased by 24% in 2015.
In 2015 the average benefit payment per fund was $126,000, and the median payment $62,900.
In 2015, 94% of all benefit payments were in the form of income stream (including transition to retirement income streams).
Transition to retirement income streams have remained steady representing 12% of total benefit payments in 2015.
SMSF payment phase
The majority of SMSFs continued to be solely in the accumulation phase (52%) with the remaining 48% making pension payments to some of or all members.
Over the five years to 2015, there was a shift of funds moving into the pension phase (7%).
Of SMSFs that started to make pension payments in 2015, 50% were more than five years old, while 23% were less than two years old.
Of funds established over the last 10 years to 2015, 69% have not started making pension payments.
SMSF member demographics
SMSF member demographics
At 30 June 2016 there were almost 1.1 million SMSF members, of whom 53% were male and 47% female
The trend continued for members of new SMSFs to be from younger age groups. With the median age of SMSF members of newly established funds in 2015 decreased to 48 years, compared to 59 years for all SMSF members as at 30 June 2016.
In 2015, SMSF members tended to be older than members of APRA funds and had both higher average balances and higher average taxable incomes.
The proportion of members receiving pension payments from an SMSF continued to trend upwards. In 2015, 41% of members were fully or partially in pension phase, compared to 34% in 2011
SMSF member balances
At 30 June 2015 the average SMSF member balance was $590,000 and the median balance was $355,000, an increase of 21% and 26% respectively over the five years to 2015.
The average member balances for female and male members were $498,000 and $633,000 respectively. The female average member balance increased by 24% over the five-year period, while the male average member balance increased by 17% over the same period.
Over the five years to 2015, the proportion of members with balances of $200,000 or less decreased to 31% of all members.
Graph : Asset size SMSF and SMSF member 2011–2015
SMSF asset allocation
SMSFs directly invested 81% of their assets, mainly in cash and term deposits and Australian-listed shares (a total of 57%).
For the third consecutive year the proportion of total assets held in cash and term deposits decreased slightly (by 2%).
As fund asset size increased, the proportion of assets held in cash and term deposits decreased significantly while the proportion of assets held in trusts and other managed investments increased.
SMSFs in the pension phase had similar assets to SMSFs in the accumulation phase. The only noticeable differences are that SMSFs in pension phase tend to slightly favour listed shares and managed investments more, while those in accumulation phase favoured property assets more.
In 2015, 6% of SMSFs reported assets held under LRBAs, which is consistent with the prior year (5.7%). The majority of these funds held LRBA investments in residential real property and non-residential real property. In terms of value, real property assets held under LRBAs collectively made up 91% or $18.5 billion of all SMSF LRBA asset holdings in 2015.
SMSF borrowing
At 30 June 2015, SMSFs held total borrowings of $16.9 billion representing 2.8% of total SMSF assets. The average amount borrowed increased from $346,000 in 2011 to $378,000 in 2015.
Investment performance
Investment performance
In 2014–15, estimated average return on assets for SMSFs was positive (6.2%), a decrease from the estimated returns in 2014 (of 9.7%), but remains in positive terms and is consistent with the trend of investment performance for APRA funds of more than four members over the five years to 2015.
SMSF expenses
The estimated average total expense ratio of SMSFs in 2015 was 1.1% and the average total expenses value was $12,200.
The average ‘investment expense’ and ‘administration and operating expense’ ratios were consistent at 0.60% and 0.50% respectively.
SMSFs in pension phase incurred higher average total expenses than funds solely in accumulation phase.
The average expense ratios for SMSFs declined in direct proportion to the increased size of the fund.
SMSF auditors
In 2015, there continued to be a trend towards SMSF Auditors performing audits for a larger number of SMSFs, with most (53%) performing between five and 50 SMSF audits, and 28% of auditors performing between 51 and 250 SMSF audits.
There were 5% of SMSF auditors conducting more than 250 audits, representing 44% of total SMSF audits in 2015
I hope this guidance has been helpful and please take the time to comment. Feedback always appreciated. Please reblog, retweet, like on Facebook etc to make sure we get the news out there. As always please contact me if you want to look at your own options. We have offices in Castle Hill and Windsor but can meet clients anywhere in Sydney or via Skype. Just click the Schedule Now button up on the left to find the appointment options.
Liam Shorte B.Bus SSA™ AFP
Financial Planner & SMSF Specialist Advisor™
Tel: 02 98941844, Mobile: 0413 936 299
PO Box 6002 BHBC, Baulkham Hills NSW 2153
5/15 Terminus St. Castle Hill NSW 2154
Corporate Authorised Representative of Viridian Select Pty Ltd ABN 41 621 447 345, AFSL 51572
This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs. This website provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such.
I recently had my 17-year-old son do some work experience in the office and after a few days he asked “what do you do for your clients dad?” I rattled off my elevator speech about my core belief that “I put people back in control of their finances and empower them to plan for a brighter future.” He looked at me as if I had two heads and said “yeah but what do you actually do?” Well that hit me like a brick and I realised that many people do not know what I actually do as a Professional Financial Planner. No not just a Financial Planner but a professional who lives and breathes his work and is building a business around the clients he takes care of and not around the amount of funds under management.
When I sat down with my business partner, Michael Rambaldini, and our team and we looked at what we have done for clients over the last few decades. We split the role in to 5 parts:
The financial plan designer who deals with the big picture of your goals and dreams and strategies to achieve them from a financial perspective. As part of this we help get back control by ensuring you are more organised.
The relationship builder – someone who earns your trust, becomes your financial coach and guides you through your financial journey with confidence. We deal with many clients so understand the changes in lifestyle and monetary needs as you age.
The investment strategist who chooses how to build wealth to fund those objectives. We bring that third-party view to help you avoid emotionally driven investment.
The insurance adviser who makes sense of the options available and make an assessment of the needs of the family in terms of risk management and protecting the family’s financial future.
The tax consultant (often with an accountant) to minimise the leakage from those returns and ensure compliance.
Now to actually show how that is done and the actual services provided I have made some lists and while not exhaustive they encompass 99% of what I can do for my clients.
A Professional Financial Planner:
Guides you to think about areas of your financial life you may not have considered.
Formalises your goals and puts them in writing.
Helps you prioritise your financial objectives in the right order not what’s easy first.
Helps you determine realistic benchmarks.
Makes you accountable for your own strategies through regular reviews.
Studies possible alternatives that could meet your goals.
Helps you work out your best Salary Sacrifice strategy
Prepares a “big picture” financial plan called a Statement of Advice for you. This should be a reference document for the detailed strategy.
Suggests creative alternatives that you may not have considered including the best way to maximise Centrelink benefits.
Assists you in setting up a Superannuation plan and maybe even an SMSF when the time is right.
Reviews your children’s educational cost funding strategy.
Provides reminders about updates to key financial planning data.
Checks with you before the end of the year to identify any last-minute financial planning needs.
Guides you on ways to fund health care and other lump sum expenses in retirement.
Assists in preparing an estate plan for you.
Cares more about you and your money than anyone who doesn’t share your last name.
A PERSONAL FINANCIAL COACH:
Monitors changes in your life, career and family situation.
Proactively keeps in touch with you with news and ideas, educating you along the way.
Serves as a human glossary of financial terms such as alpha, P/E ratio, and franking credits.
Provides referrals to other professionals, such as accountants, auditors and lawyers.
Shares the experience of dozens of his clients who have also faced circumstances similar to yours. (I’m Irish so I love a story to relay a solution)
Helps with the continuity of your family’s financial plan through generations.
Keeps you on track with reviews to achieve your objectives.
Identifies your savings shortfalls and strategies to plug the gap.
Develops and monitors a strategy for debt reduction.
Is a wise sounding board for ideas you are considering.
I provide the necessary resources to facilitate your decisions, and explaining the opportunities and risks associated with each option.
Provides “the sleep factor” so you are not stressed about money
Is there for your spouse and family should anything happen to you.
Is honest with you, always, even when it means saying NO!
AN INVESTMENT STRATEGIST:
Prepares an asset allocation for you so you can achieve the best rate of return for a given level of risk tolerance.
Stays up to date on changes in the investment world.
Monitors your investments.
Reviews your investments in your company superannuation plans.
Reviews the costs of your existing plan to ensure it is value for money
Helps transition your investments from Accumulation phase to providing a retirement income.
Refers you to mortgage broker for loan and debt financing.
Suggests alternative strategies to increase your income during retirement.
Researches and keeps records of your cost basis on shares and property
Provides you with reliable investment research and often differing views from a range of sources.
Provides you with personal investment analysis.
Determines the risk level of your existing portfolio.
Helps you consolidate and simplify your superannuation and investments.
Can provide you with technical, fundamental, and quantitative investment analysis.
Provides introductions to new investment opportunities.
Shows you how to access your statements and other information online.
AN INSURANCE ADVISER:
Reviews and recommends life, TPD, Trauma and Income Protection insurance policies to protect your family.
Advises on the best structure in terms of within or outside of superannuation to hold the policies
Advises on which entity should own these policies to achieve the desired outcome in the event of a claim.
Looks at Keyman and Business Expenses Insurance for professional and small business clients.
Holding your hand or if the worst happens, your family’s hand while we process a claim with you in the event of illness, injury or death.
ATAX CONSULTANT (within the limits of my licence):
Suggests alternatives to manage income streams and lower your taxes during retirement.
Reviews your tax strategies/returns with an eye to possible savings in the future.
Stays up to-date on tax law changes.
Helps you reduce your current taxes.
Helps you determine and fund your desired income in retirement and minimum pension payments.
Re-positions investments to take full advantage of tax law provisions.
Facilitates the transfer of investments from individual names to trust(s), or from an owner through to beneficiaries.
Works with your accountant, tax agent and legal advisers to help you meet your financial goals.
I can’t live your life for you but I can smooth the way!
Are you looking to build that sort of relationship? Do you want a professional advisor that will take the time to build that trusted relationship with you. Please contact me if you want to look at your own options. We have offices in Castle Hill and Windsor but can meet clients anywhere in Sydney or via Skype. Just click the Schedule Now button up on the left to find the appointment options.
Liam Shorte B.Bus SSA™ AFP
Financial Planner & SMSF Specialist Advisor™
Tel: 02 98941844, Mobile: 0413 936 299
PO Box 6002 BHBC, Baulkham Hills NSW 2153
5/15 Terminus St. Castle Hill NSW 2154
Corporate Authorised Representative of Viridian Select Pty Ltd ABN 41 621 447 345, AFSL 51572
This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs. This website provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such.
The majority of SMSFs continued to be solely in the accumulation phase (52%) with the remaining 48% making pension payments to some of or all members.
The SMSF Coach 