Liam Shorte

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Have you contributed over your Superannuation limit? Here is what happens next

So you or your employer have mistimed contributions or doubled up on a payment to you super. This can happen in a number of ways:

Employer paid June 2017 contribution in July last year without you knowing;
You worked out your salary sacrifice based on $25,000 less employer contributions on your salary but forgot they pay SG on bonuses too!;
Employer brought forward June 2018 contributions to ensure they got a tax deduction early;
You received a spouse contribution but did not realise this counted towards your cap;
You, your tax agent or super fund accountant has made an error in claiming tax deductions for nonconcessional contributions
Just a genuine mistake.

How do you manage the mistake?

Do nothing until the ATO issues you with a Determination that you have exceeded one of your caps. You cannot just take the funds back out of your SMSF. The ATO will issue the determination and then provide you with a Release Authority which can be processed on paper or (coming soon) via My.Gov.au/mygov

You need to approve the commutation of the excess contribution amount from your account by the ATO as soon as possible after you receive a determination. This will limit the amount of penalty interest that you will be liable to pay.

If you exceed the concessional contributions cap

If you have excess concessional contributions the ATO will issue you with an excess concessional contributions determination. The determination advises you that your excess concessional contribution amount has been included as assessable income in your tax return. It also advises what actions are required of you. The excess concessional contribution determination contains the:

amount of the excess concessional contributions
amount of the excess concessional contributions charge
period of the excess concessional contributions charge
rate of the excess concessional contributions charge.

With your determination, you will also receive an income tax return Notice of assessment/ Notice of amended assessment.

If the contribution information within the determination is incorrect, either:

contact your super fund accountant/administrator and your personal tax agent to have them re-report any incorrectly reported contributions
amend your tax return if you did not claim the correct personal super contribution deduction in your tax return, or did not claim it at the correct label.

If you exceed the non-concessional contributions cap

You now have 60 days (see details of how this has improved below) from the date of your determination, to choose one of the following options:

Option 1 – Release the excess from your super funds

You can elect to release all your excess non-concessional contributions and 85% of your associated earnings from your super funds.

The full associated earnings amount stated in your determination will be included in your assessable income and taxed at your marginal rate of tax. A non-refundable tax offset equal to 15% of your associated earnings is applied to recognise any tax paid by your super fund.

The ATO will issue a release authority to the super funds you nominate and they will pay this amount directly to the ATO.

Option 2 – Leave your excess non-concessional contributions in your super funds

If you choose not to release your excess non-concessional contributions from your super funds, you receive an excess non-concessional contributions tax assessment. The excess amount is taxed at the highest marginal tax rate. IF you have more than one account/fund then you must elect a fund to release your excess non-concessional contributions tax from.

You must select this option if your only fund is a defined benefit.

If you do nothing

The ATO will ask your super funds to release and send amounts to them. They will also amend your income tax assessment to include your associated earnings. You will pay tax on your associated earnings at your marginal tax rate. Because of the delay the tax on associated earnings will be higher.

The ATO will use the money released to pay any tax or Australian government debts and refund any remaining balance to you

If you have no money left in super for any reason, they will amend your income tax assessment to include your associated earnings amount. You will pay tax on your associated earnings at your marginal tax rate.

If your only super interest is held in a defined benefit fund or a non-commutable super income stream and the fund cannot or will not voluntarily release The ATO will send you an excess non-concessional contributions tax assessment

STOP! my head is hurting!

Finally some simplification! From 1 July 2018 the release authority process for excess contributions and Division 293 liabilities will be consistent and streamlined. The changes will apply to the following release authorities:

excess concessional contributions
excess non-concessional contributions
excess non-concessional contributions tax
division 293 due and payable
division 293 deferred debt.

The changes include:

•Standard 60 day time frame for when an individual could request to release an amount from super (previously this ranged between 21 to 60 days)

•The individual makes a request when replying to the ATO’s determination (this can be done via their myGov account), but it is the ATO that submits the release authority to the super fund. Prior to the rule change, individuals could also submit the release authority directly to the super fund

•The payment is always made to the ATO, credited to the individual’s tax liability with any residual amounts then paid to the individual

•The default election for excess non-concessional contributions is to release the contribution and 85% of the associated earnings. This prevents what is generally the more detrimental position of applying the top marginal tax rate on the excess contribution unreleased, from occurring. For example this may have occurred in the past if the individual is away on holidays when they receive the notice of determination

Temporary timeframe extension for SMSF and APRA funds to release the money.

From 1 July 2018 the Commissioner of Taxation has temporarily extended the timeframes for the return and payment of streamlined release authorities from 10 to 20 business days.

The change applies to release authorities for excess contributions and Div 293 liabilities.

This temporary extension will continue until the ATO digitises their release authority process. When they change the process from paper to being managed via SuperStream the system will return to the legislated 10 business days.

This extension was given after practitioners raised concerns over their ability to meet this legislated time frame to return their release authority statement, with a paper form being the only channel available. Yeah like we trust Australia Post to get anything back quickly!

For further information please see the following https://www.ato.gov.au/…/Release-authority-streamlining-up…/

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.

1 Comment

by SMSF Coach - Liam Shorte on August 14, 2018 • Permalink

Posted in News & Stats, Pensions, Retirement Planning, SMSF Management

Posted by SMSF Coach - Liam Shorte on August 14, 2018

https://smsfcoach.com.au/2018/08/14/have-you-contributed-over-your-superannuation-limit-here-is-what-happens-next/

Who will mind my super and take care of me? – SMSF Member Incapacity and Estate Planning Checklist

What’s your plan for future incapacity

I recently did a co-presentation with Louise Biti from Aged Care Steps for the Self Managed Superannuation Fund Association on how SMSF Trustees can plan for incapacity or just that time when they no longer wish to run their fund. The response was great and the questions from the floor really brought it home to us that people are very concerned about how they pass control of their wealth and well-being to others. A copy of the presentation slides are available here . As part of my preparation I developed a simple checklist of issues that SMSF trustees should use when they consider their options. This list is not exhaustive so please add your own tips or suggestions in the comments section below.

When planning for the management of your funds in your SMSF you must first read the Deed!

You do have an Original copy of the Deed or a Certified copy don’t you?

Who do you want to manage your fund if you die or are incapacitated?

On death for Corporate Trustees you leave the shares in the trustee company via your will to the person(s) so they have a right to be a director of the trustee company.
For incapacity you provide an Enduring Power of Attorney (EPOA) and when required you resign as a director and they are appointed in your place. If it is your spouse and they are the only other member then they become Sole Director.
On death for Individual Trustees your Executor will usually have a right to be a trustee of the fund.
For incapacity you provide an Enduring Power of Attorney and when required you resign as a trustee and they are appointed in your place. If it is your spouse and they are the only other member then they need to find a second person to act as a trustee or move to a sole director company trustee.

What to consider in the choice of an EPOA/Executor

Are they good with money and making decisions?
Will they be willing to seek advice from specialists if necessary?
Will there be conflict between beneficiaries – Sibling rivalry? Blended families?
Should you consider 2 or more EPOAs/Executors for safety or support
a power of attorney (or POA) can either become effective immediately, or upon the occurrence of a future event (such as your mental incapacity).
A power of attorney can have specific clauses with instructions for the operation of the power.
If you have a spouse or dependant you may want to include Dependants Clauses to ensure your funds can be used for their needs.
You may want to consider a Conflict of Interest clause to allow a EPOA to make decisions that may suit them as well as you but to the detriment of other possible beneficiaries.

Who do you want to receive your SMSF account balance?

For Spouse / Dependants you should consider using a Reversionary Pension election or Non-Lapsing Binding Death Benefit Nomination direct to beneficiaries or via your will using Non-lapsing Binding Death Nomination to your Legal Personal Representative with option in your will to set up a Testamentary Trust. Normal BDBNs lapse after 3 years.
For Adult children you can use Non-Lapsing Binding Death Benefit Nomination direct to beneficiary or via your will using non-lapsing binding nomination to Legal Personal Representative with option in your will to set up a Testamentary Trust
For your parents, your siblings or non-family via your will using Non-lapsing Binding Death Benefit Nomination to your Legal Personal Representative with option in your will to set up a Testamentary Trust
Do any of the beneficiaries in your Will have special needs? For disabled beneficiaries consider a Special Disability Trust. For those poor with money or in a highly litigious career or in possible bankruptcy then a Testamentary Trust should be considered.

Who do you want to manage your care options if you are incapacitated?

Ensure you have an Enduring Power of Guardianship in place so that your lifestyle and medical treatment decisions can be made by a trusted family member or friend in the event that you become mentally incapable?
Do you have an Advanced Healthcare Directive in place in the event that you become terminally ill and are unable to articulate your wishes?
Have you spoken to your chosen Enduring Guardian so they are clear on your wishes and preferences, explained why you have made those decisions so that they can discuss these with any family members who have cause to question your wishes.

What to consider in the choice of an Enduring Guardian

Are they good with making personal decisions under pressure?
Will there be conflict with other family that they can handle– Sibling rivalry? Blended families?
Should you consider 2 or more EGs for safety or support

Information your Attorneys/Executors will need

Bank Accounts and Investments:

The BSB and account numbers for any accounts or credit cards you have.
The HIN, SRN of any Personal or SMSF shareholdings and
Account IDs for Share Brokers, Online Banking and Managed Fund holdings
Location of property deeds and contact details for Property manager

Insurance:

Details of policies such as the policy number and type of insurance.
Life and TPD cover, Motor vehicles, House Insurance, Private Medical Insurance and Funeral Plans

Advisers:

If you have an accountant, financial planner, lawyer or other professional advisor include their contact details.

Business Records:

If you have a business include details of where the company records are kept and the computer the ASIC Corporate Key is on.

Your secret place:
If important documents such as certificates of property title, jewellery and other valuables or personal items are being held in safe custody elsewhere or stashed in the attic then you should identify the location.

Your digital life:

Include all your email login in details and loyalty scheme account details. This includes your membership to social media and cloud data sites so your executors and family may be able to access your on-line data, including books or music files.
Appoint a Legacy Contact if you use Facebook.
Instructions on what is and isn’t to be shared with family

Direct Debits:

If you have any direct debits in place you should include details so that they can be cancelled pending a grant of probate.

Superannuation:

Do you have other superannuation accounts. Your most recent superannuation statement(s) should also be included. If it is self-managed super the financial statements should be included.

IMPORTANT POINT: Talk regularly to your Executors and Powers of Attorney and Enduring Guardian
Discuss your wishes in terms of lifestyle, healthcare and treatment options with your chosen Attorney and Guardian and if possible with the broader family and make sure that they understand your wishes. Australian’s are very reluctant to talk about illness or death but it is essential to ensure your wishes are followed and to avoid family conflict.

As I mentioned at the start this list is not exhaustive so please add your own tips or suggestions in the comments section below.

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

Leave a comment

by SMSF Coach - Liam Shorte on May 21, 2018 • Permalink

Posted in Checklists, Enduring Power of Attorney, Estate Planning, News & Stats, Pensions, Retirement Planning, SMSF Management

Posted by SMSF Coach - Liam Shorte on May 21, 2018

https://smsfcoach.com.au/2018/05/21/who-will-mind-my-super-and-take-care-of-me-smsf-member-incapacity-and-estate-planning-checklist/

Best Apolitical Analysis of Franking Credit Refund Removal Debate

Over this last week I have read so many politically biased responses to Bill Shorten’s proposed strategy to stop the refunds of franking credits that I despaired and I know it is going to be a political football rather than part of comprehensive tax reform. Then I came across a really well explained and positioned argument from Scott Phillips of The Motley Fool fame that takes the politics out of the analysis. I immediately reached out to Scott and asked him could I re-post it for my readers who may be finding the debate confusing or hard to explain to others. So here goes:

Why Bill Shorten is wrong — and right — on dividends

Scott Phillips

What’s that? Bill Shorten has announced a new policy on the refund of franking credits?

I hadn’t noticed.

Okay, that’s not true. I noticed. And, based on feedback on Twitter over the last week, many of you noticed, too.

If Shorten wanted to stir a hornet’s nest, he got just that. Maybe it’s clever politics. Maybe the focus groups told the pollsters this was a smart political strategy.

It sure as heck isn’t good policy, in my view.

Before you fire off an email to either abuse me or suggest I be knighted, let me explain.

I’m going to start with three premises that I think most people can agree on:

The tax system should be fair
You shouldn’t have to pay tax twice on dividend income; and
The tax system, as it stands, is broken.

That last point seems to be Shorten’s main thrust. And it’s a battle cry taken up by many partisans:

“We have a problem, and I have a solution. If you don’t like my solution, you’re saying we don’t have a problem.”

To which I reply:

“We absolutely have a problem. But your solution is a poor one. There are better ways to skin this cat.”

And before we go any further, please leave your political affiliations at the door. This week, on Twitter, I have bagged and praised Labor for different policies. I’ve done the same in the past to the Libs. If you can’t put aside your team jersey and engage in a discussion of ideas, then there’s not much for you in what follows.

But if you’re interested in good policy, read on.

Bill Shorten’s policy, as announced, goes something like this:

“We’re happy for you to reduce your tax using franking credits, but we’re not going to give you a refund.”

There are a few problems with that approach:

First, it implies that if you pay tax, you’re welcome to use the credits to reduce your tax burden to zero.

Second, those credits somehow magically are worthless once you hit zero, meaning that to me they’re worth something, but to a retiree in a 0% tax bracket, they’re worth nothing.

How can franking credits be worth different amounts to different people in different circumstances? Search me… I’m buggered if I know.

And third, and this is what’s stirred up most heat among those who have gone into bat for the policy:

“I pay tax and my taxes shouldn’t go to give a refund/handout to people who already have a lot of money.”

Now, don’t get me wrong. I think the current situation — regarding the ability to pay exactly zero tax on certain income in retirement that might be up to $80,000 — is crackers.

But, Shorten’s policy doesn’t fix that problem. Here’s why:

Consider three people, all of whom have SMSFs in pension phase, and who — according to the current tax rules — pay 0% tax: Banking Betty, Rental Richard and Dividend Davina.

Banking Betty deposits $100,000, and earns $2,000 each year in interest. Betty doesn’t pay any tax.
Rental Richard has a $100,000 property that pays him $2,000 each year in rent. Richard doesn’t pay any tax.
Dividend Davina buys $100,000 worth of shares that earned a profit of $2,000. The company paid tax of $600, so Davina gets $1,400. Davina doesn’t pay any tax.

See the difference here? Because Davina’s investment is in the form of shares in a company, she gets less than the other two. Even though she’s not supposed to pay any tax, the company paid tax, so she gets less.

Under current rules, she’d get the $600 back, delivering on the current government policy of a 0% tax rate, and equalising the return for each of those investors.

Bill Shorten, in effect, is penalising people for owning shares.

Now, let’s address the elephant in the room. Yes, because the company has already paid tax on that $2,000, Davina does officially get a refund. And the optics of that are bad: it looks like somehow the taxpayer is subsidising Davina.

But it’s all a question of cash flows and timing. The ATO just gives Davina back the money the company paid in tax.

And remember, a company is just a legal structure to organise your ownership interest in an asset. Shares in a company aren’t all that different in effect to accounts at a bank. Your bank account is evidence that you have a claim to a share of that bank’s assets, even if you don’t know specifically which notes you deposited.

Imagine a scenario under which Banking Betty’s bank withholds 30% of her interest and sends it to the government as tax. And where Rental Richard’s property manager is obligated to send 30% of his rental income to the ATO.

Both of these investors would have to fill out a tax return and the ATO would send them a refund — because tax was paid on their income, even though the tax rate should have been 0%.

Would Bill Shorten stop Betty and Richard getting their money back?

I doubt it.

But somehow, because Labor has (unfortunately, disingenuously) used extreme examples to make their point, and because they’ve dressed it up as a handout, they’ve mischaracterised the situation.

Somehow Dividend Davina is a fatcat living high on the hog, while Betty and Richard are perfectly entitled to pay no tax.

Essentially, because of the asset class they decide to invest in, our three protagonists are being treated differently.

Sound fair to you?

No, me neither.

Yes, the idea of a ‘refund’ for someone who has paid no tax feels, somehow, deeply wrong. But it’s because tax was paid by the company, on behalf of a shareholder who shouldn’t be paying tax, so the ATO is essentially just righting that wrong.

Still with me? Excellent!

Still fuming that well-off people pay no tax? Me too.

What? Didn’t I just spend 984 words (don’t waste time counting them. I checked) defending those people?

Well, yes. And no.

Here’s where both parties are engaging in a phony war of words. And we’re poorer for it.

Having an essentially uncapped income at a 0% tax rate is madness.

Yes, yes, it’s not technically uncapped, for a host of reasons. So let’s say $80,000 among friends.

You and I pay a decent slug of tax on an $80,000 income. And there’s no reason that a well-off retiree should be able to draw a completely untaxed income of a similar amount, when they likely have a very decent asset base — say a home and a seven-figure superannuation balance.

It’s simply not sustainable, especially as more boomers retire, to have that slice of the economic income pie remain completely untaxed.

But — and this is important — that doesn’t mean we should simply ban franking credit refunds and assume that fixes the problem.

Let’s go back to our alliterative actors, Betty, Richard and Davina.

If Betty was earning $80,000 in interest, should that be untaxed? Should Richard’s $80,000 in rent be untouched by the taxman? Should Davina’s $80,000 in dividends remain completely unscathed?

I don’t think so. But again, it’s not a question of the source of the income; it’s the size.

Under Bill Shorten’s plan, Davina would be worse off, but Betty and Richard laugh all the way to the bank. Does anyone, seriously, think that’s a good basis for a tax plan?

I didn’t think so.

Here’s what I’d do: I’d have a generous tax-free threshold for income from superannuation, maybe $10,000 or so above the pension level. It’s not unreasonable that you’re allowed a little extra, given the sacrifice you made to save for your retirement.

But above that level, I’d implement a progressive tax scale not unlike the one that applies to regular income: The more you earn, the higher your marginal tax rate.

Simple, no?

Fair, yes?

That way, the tax code doesn’t discriminate on the basis of the asset class. There are no free lunches. And the unsustainable tax situation that currently applies to Super is fixed.

So Bill Shorten, and Chris Bowen, it’s time to admit defeat and go back to the drawing board. Feel free to use my template, above.

And Scott Morrison and Malcolm Turnbull, please stop with the emotive and negative language and grandstanding.

Politics should be a battle of ideas, not soundbites The best idea, well explained, should win, regardless of political party or ideological affiliation.

And, ladies and gentlemen of the Parliament, the Australian people will give you bonus points for explaining it clearly and for anything that reduces the complexity of our tax affairs, while ensuring fairness.

Indeed, Turnbull and Morrison’s political forebear, John Howard spoke to the National Press Club in 2014 when he shared the stage with former Labor PM, Bob Hawke. At that event, according to the Sydney Morning Herald , Howard said

“We have sometimes lost the capacity to respect the ability of the Australian people to absorb a detailed argument. They will respond to an argument for change and reform [but] they want two requirements. They want to be satisfied it’s in the national interest, because they have a deep sense of nationalism and patriotism. They also want to be satisfied it’s fundamentally fair.”

I’d like to think that’s still true.

I agree with Bill Shorten’s characterisation of the problem. I disagree completely with his solution.

I imagine I lost the most partisan readers — of both stripes — a few minutes ago. If you’re still reading, thank you for engaging in a discussion of ideas.

I hope I’ve convinced some of you. Of those I haven’t convinced, I hope I’ve at least done a decent job of addressing the issue, without bias, grandstanding or misdirection. Thanks for reading.

At the very least, I hope I’ve productively added to the conversation. It’s the least each of us can do.

Fool on! Scott is @TMFScottP on Twitter and can be found here on The Motley Fool

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

5 Comments

by SMSF Coach - Liam Shorte on March 18, 2018 • Permalink

Posted in Franking Credits, Investor Education, Pensions, Tax Planning

Posted by SMSF Coach - Liam Shorte on March 18, 2018

https://smsfcoach.com.au/2018/03/18/best-apolitical-analysis-of-franking-credit-refund-removal-debate/

Introducing our new Financial Knowledge Centre – for DIY Research

At SMSF Coach and our Financial Planning arm Verante, we believe in your financial wellbeing and improving your understanding of financial concepts.

We understand that the financial industry is full of jargon and concepts that can be difficult for people to get their head around or remember.

So to learn more about money and finance, our Financial Knowledge Centre is a great place to start.

It contains a huge library of articles, life events, videos, quiz’s and calculators, so that you can learn about managing money while having a bit of fun at the same time.

The best part of all is that you work at your own pace and we offer a free trial to one and all but it will always be free to our clients as part of our advice service.

Watch this short video which explains what is available in this vast knowledge base.

Visit The Financial Knowledge Centre and try it out FREE for a month

No Credit Card required.

It includes a whole module on SMSF education and

Self-Managed Super Funds section includes:

–	SMSF Overview
	What is an SMSF?
+	The Decision Making Process
+	The Costs of running an SMSF
+	Setting up an SMSF
+	Appointing trustees
+	Individual Trustee vs. Corporate Trustee
+	Ongoing Administration
+	Accepting Rollovers and Contributions
+	Investment decisions and rules
+	Insurance Considerations
+	Tax Considerations for SMSFs
+	Paying Benefits from an SMSF
+	Death of an SMSF member
+	Estate Planning
+	Getting more help
+	Closing a SMSF
+	Federal Budget 2017/18 Proposals
+	SMSF Summary

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

Leave a comment

by SMSF Coach - Liam Shorte on January 18, 2018 • Permalink

Posted in education, Financial Planning, Insurance Strategies, News & Stats, Retirement Planning, SMSF Management

Posted by SMSF Coach - Liam Shorte on January 18, 2018

https://smsfcoach.com.au/2018/01/18/introducing-our-new-financial-knowledge-centre-for-diy-research/

Do you have an SMSF Trust Deed that is Signed and Dated

Ok this may seem like a boring question but have you actually checked if you have a copy of your latest SMSF deed on file or that your accountant and financial adviser have one of file? Has it been dated properly and signed and witnessed properly by all parties.

In this era of everyone rushing around and having busy lives, it’s the little things that get missed and that can cause a huge problem later. An unsigned or undated deed may result in your fund being found non-compliant and unable to function or leave major headaches for your beneficiaries. If you are a professional adviser then those disgruntled parties will be looking for someone still alive to blame and pick up the costs.

An SMSF trust deed is a legal document that sets out the rules for establishing and operating your fund. It includes such things as the fund’s objectives, what the fund can invest in, who can be a member and whether benefits can be paid as a lump sum or income stream. The trust deed and super laws together form the fund’s governing rules.

The trust deed must be:

prepared by someone qualified to do so – it’s a legal document
signed and dated by all trustees
properly executed according to state or territory laws
regularly reviewed, and updated as necessary.

I take over management of a lot of funds and we are seeing many cases where the original trust deed was signed correctly and dated but a subsequent update or deed of amendment is sitting on the file unsigned or undated.

It is illegal to sign and backdate documents. As the Trustee of your fund it is your responsibility to ensure that deeds are legally compliant, signed and up to date.

If you are an Accountant, Administrator, Financial Planner or Auditor then you may share in the responsibility to ensure that deeds are compliant and properly completed. Your client may love you but their beneficiaries may come looking for someone to blame if an unsigned deed means a compliance breach with heavy tax or administrative penalties.

So what should you do.

See if you have a SMSF deed in your files and check if it is properly signed, witnessed and dated.
If you don’t have a copy then email your accountant and financial adviser and ask then to confirm if they have a signed and dated original copy on file. If they do then ask for a Certified Copy.
If in checking you see that the deed is dated pre-2012 then ask your Administrator or Accountant if it has been updated and read my previous blog 15 Reasons to update your SMSF Deed for new strategies in 2017
If it has been updated with a Deed of Amendment, has that been signed and dated? Get a copy of all Deeds of Amendment for your records so you can show the full history of your fund. Keep a copy yourself in case you fall out with your professional advisers.

Don’t be the one who leaves a mess behind!

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

2 Comments

by SMSF Coach - Liam Shorte on December 7, 2017 • Permalink

Posted in Audit, Deeds, SMSF Management, Trustee

Posted by SMSF Coach - Liam Shorte on December 7, 2017

https://smsfcoach.com.au/2017/12/07/do-you-have-an-smsf-trust-deed-that-is-signed-and-dated/

The importance of the Retirement Condition of Release after age 60

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

3 Comments

by SMSF Coach - Liam Shorte on August 5, 2017 • Permalink

Posted in Checklists, Investment Strategies, SMSF Management

Posted by SMSF Coach - Liam Shorte on August 5, 2017

https://smsfcoach.com.au/2017/08/05/the-importance-of-the-retirement-condition-of-release-post-1-july-2017/

Shares101 – Free Educational Video Course on Investing in Shares

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

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by SMSF Coach - Liam Shorte on July 4, 2017 • Permalink

Posted in Franking Credits, Investment Strategies, Investor Education

Posted by SMSF Coach - Liam Shorte on July 4, 2017

https://smsfcoach.com.au/2017/07/04/shares101-free-educational-video-course-on-investing-in-shares/

Why do SMSF Trustees need an enduring power of attorney (EPOA)?

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.

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

3 Comments

by SMSF Coach - Liam Shorte on June 15, 2017 • Permalink

Posted in Binding Death Nominations, Enduring Power of Attorney, Reversionary Pension, SMSF Management, Trustee

Posted by SMSF Coach - Liam Shorte on June 15, 2017

https://smsfcoach.com.au/2017/06/15/why-do-smsf-trustees-need-an-enduring-power-of-attorney-epoa/

SMSF Game Changer – proposed monthly Transfer Balance Account Reporting to shake up Accountant services

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.

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

2 Comments

by SMSF Coach - Liam Shorte on May 25, 2017 • Permalink

Posted in News & Stats, Pensions, Retirement Planning, SMSF Management

Posted by SMSF Coach - Liam Shorte on May 25, 2017

https://smsfcoach.com.au/2017/05/25/smsf-game-changer-proposed-monthly-transfer-balance-account-reporting-to-shake-up-accountant-services/

Estate Planning for Transition to Retirement Pensions

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.

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

1 Comment

by SMSF Coach - Liam Shorte on May 15, 2017 • Permalink

Posted in Contribution Strategies, Estate Planning, Pension Strategies, Reversionary Pension, Tax Planning

Posted by SMSF Coach - Liam Shorte on May 15, 2017

https://smsfcoach.com.au/2017/05/15/estate-planning-for-transition-to-retirement-pensions/

Budget matters relevant to SMSF Trustees

Sigh of relief!

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.

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

1 Comment

by SMSF Coach - Liam Shorte on May 10, 2017 • Permalink

Posted in Contribution Strategies, LRBA, News & Stats, Retirement Planning, Superannuation

Posted by SMSF Coach - Liam Shorte on May 10, 2017

https://smsfcoach.com.au/2017/05/10/budget-matters-relevant-to-smsf-trustees/

Superannuation changes for Self-Managed Super Funds – useful ATO links

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.

Overview of super changes

Law Companion Guides

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.

LCG 2016/8 – Superannuation reform: transfer balance cap and transition-to-retirement reforms: transitional CGT relief for superannuation funds
LCG 2016/9 – Superannuation reform: transfer balance cap
LCG 2016/D10 – Superannuation reform: defined benefit income streams – non commutable, lifetime pensions and lifetime annuities
LCG 2016/11 – Superannuation reform: concessional contributions – defined benefit interests and constitutionally protected funds
LCG 2016/12 – Superannuation reform: total superannuation balance
LCG 2017/D1 – Superannuation reform: defined benefit income streams – pensions or annuities paid from non-commutable, life expectancy or market-linked products
LCG 2017/D3 – Superannuation reform: Transfer Balance Cap – Superannuation death benefits

Super changes Q&As

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).

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

2 Comments

by SMSF Coach - Liam Shorte on April 21, 2017 • Permalink

Posted in Checklists, Contribution Strategies, Estate Planning, News & Stats, Pension Strategies, Pensions, Retirement Planning, Salary Sacrifice, Small Business CGT, SMSF, SMSF Management, Superannuation, Superannuation Splitting, Tax Planning, Trustee

Posted by SMSF Coach - Liam Shorte on April 21, 2017

https://smsfcoach.com.au/2017/04/21/superannuation-changes-for-self-managed-super-funds-useful-ato-links/

Insights in to the ATO SMSF statistical overview of 2014–15 released February 2017

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.

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.

Limited recourse borrowing arrangement (LRBA) assets

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

To see the full report in more detail click here https://www.ato.gov.au/about-ato/research-and-statistics/in-detail/super-statistics/smsf/self-managed-superannuation-funds–a-statistical-overview-2014-2015/?page=1#Introduction

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

Leave a comment

by SMSF Coach - Liam Shorte on February 27, 2017 • Permalink

Posted in News & Stats, SMSF

Posted by SMSF Coach - Liam Shorte on February 27, 2017

https://smsfcoach.com.au/2017/02/27/insights-in-to-the-ato-smsf-statistical-overview-of-2014-15-released-february-2017/

Buying Property through your Super – SMSF

So you have heard you can buy an investment property with your superannuation? Here is some general information and pros and cons of property in an SMSF. I have also provided links to more comprehensive information on the strategies most often used.

People have been using their superannuation to buy property in their SMSF for decades now but it really came to the fore when SMSFs were allowed to borrow to buy assets in 2007 and when this was given more clarity in terms of borrowing to buy residential property in 2010.

Investing in property within superannuation is not as straightforward as investing outside the superannuation environment and you need to do your homework. Buying property through super can be great way to invest for retirement but it’s probably most suitable for people who are only 15 to 25 years away from it. Not only do they probably have 20 years or more contributions and hence sufficient balances for a deposit at their disposal, they are also more likely to be able to hold the property until after retirement to realise the best of the tax savings.

I have also provided some more detailed general guidance on specific strategies and the implementation process on my Property in an SMSF page.

Property Investment in an SMSF:

People are able to combine their superannuation accounts in to an SMSF and use then are able to buy both residential and commercial property with or without the support of a mortgage from a lender.

However it’s important to note that all investments need to be in the best interests of fund members and meet the Sole Purpose test of superannuation and the legislation dealing with this topic.

So please make sure that any property investment has an income stream and realistic prospects for capital growth. Overall, an SMSF investment strategy needs to take into account the personal circumstances of all the fund members, including their age and risk tolerance and needs to consider:

diversification (investing in a range of assets and asset classes)
the liquidity of the fund’s assets (how easily they can be converted to cash to meet fund expenses)
the fund’s ability to pay benefits (when members retire) and other costs it incurs
the members’ needs and circumstances (such as, their age and retirement needs).
the steps that will be taken to insure the members and protect their retirement savings.

What you should make clear in the investment strategy:

When it comes to purchasing any investment asset through a SMSF, the Australian taxation office (ATO) provides the following guidance:

Investments must be purchased on an ‘arm’s length’ basis and must be maintained on a strict commercial basis.
The investment must meet the sole purpose test of providing retirement benefits to fund members.

In terms of property, this means that the purchase cost and sale price – as well as the rental income – must reflect a true market rate of return. It also means that you usually cannot buy the property from – or sell the property to – someone associated with any of the Fund’s members. This is called a “Related Party” transaction.

It also means that neither you nor anyone associated with you can receive any personal benefit of holding the asset. (more on this below)

So what are the pros and cons of holding a property in Superannuation?

Pros

Combined investing as a couple or family:. Your personal savings outside superannuation – or even your individual account balance(s) within superannuation – may not be enough to meet the deposit requirements of a direct property. Combining your account balances with the other members of your family, though, may give you the purchasing power you need to invest in a large asset.

It can be tax-effective. Superannuation receives concessional tax treatment on assets used to save for retirement. The earnings within your superannuation fund are taxed at only 15% with a 33% discount for assets held more than 12 months (i.e 10% CGT)– which is most likely less that your marginal tax rate. The big bonus is if you hold on to that property until retirement the earnings within the pension phase are tax-free. That is on the rent if you keep the property or the sale proceeds if you sell it. (subject to the $1.6m pension transfer limit per member from 1 July 2017).

Making repayments from pre-tax dollars. If you can afford to save and have room within your concessional contribution limits then you can salary sacrifice additional income to super to pay off the loan quicker from pre-tax dollars. So paying 15% on salary sacrifice and then making additional repayments rather than paying your marginal tax rate on the income and saving it outside super.

Supporting Business growth . While the rules prevent you purchasing a residential property from yourself or a related party, you can buy a commercial or industrial property (know as Business Real Property) to lease back to your own business – provided you pay a current market rate of rent. This helps free up funds to grow the business.

The feel of Bricks and Mortar! – providing more control over your investments. Many SMSF investors appreciate having control over the investments they buy and the ability to “value add” to their property investments via renovation or development (See more detail in SMSF Borrowing: What Can I Do With An Investment Property Within The Rules. there is no substitute for that feeling when you have a real understanding of where your money is invested.

Cons

Big lumpy illiquid asset. Diversification – the wise move of not having all your eggs in one basket is more difficult to achieve if your SMSF owns just one or two large assets. That lack of diversification may not be in the best interests of the SMSF members especially across generations. The old adage “You can sell off a bathroom when you need cash” comes to mind so make sure you plan your “what if strategies” and look at insurance, cash buffers and especially the funding of future pensions upfront.

Set up costs are higher. There are thousands of dollars in set-up costs and there are sometimes higher fees involved in getting a loan through your SMSF with lenders. As always set up costs should be balanced against long term benefits of the strategy. Because of the costs buying property through a SMSF is generally only suitable for funds with $200,000 or more.

Not great for Negative Gearing. If you borrow to buy property through your super and you’re negatively geared, the tax offset only applies to other income earned within the fund taxed at only 15% – not at your marginal tax rate on your regular income.

You cannot benefit personally from the property. Investments within a SMSF must be purchased via an ‘arm’s length’ transaction and must be maintained on a strict commercial basis. As such with a residential property, you cannot purchase from, lease to, or rent to a related party. The ATO advises that one of the most common breaches of the sole purpose test is in assets that provide a pre-retirement benefit to a member or associate. Some examples of a breach would be using a SMSF property as a personal holiday house, or renting a SMSF property to a family member.

You must be certain of future cash flow. Firstly you must expect to have to provide a higher deposit than if borrowing directly. While you can borrow to buy property within a SMSF, you cannot borrow to build or improve the property. Ensure that your level of contributions, plus the rental income, will be enough to cover any costs that you will need to meet from cash. Think seriously about having decent Income Protection insurance as well as Life and TPD insurance for the term of the loan. Again, a cash buffer is essential.

Liquidity at retirement. When your superannuation transfers to the pension phase you will need to ensure that you have built up a sufficient amount of cash to fund the required pension payments without risking a fire sale of the property. This can range from 4% of the pension member’s balance before 65 to 5% from 65-74 and upwards from there.
Reduction in Personal borrowing capacity: With banks typically asking for personal guarantees now which then restricts your personal borrowing power. (Thanks Mark Hearne).

There are many tips and traps to be aware of when it to comes to investing within a SMSF that I have done over 14 separate articles on the subject and all are available free on my blog at www.smsfcoach.com.au . So do some reading and your own research and please ensure that you get professional advice on your own circumstances, and assistance either via our team or your own advisors before you set up your fund or start the strategy.

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

5 Comments

by SMSF Coach - Liam Shorte on February 13, 2017 • Permalink

Posted in Borrowing, Investment Strategies, LRBA, Property

Posted by SMSF Coach - Liam Shorte on February 13, 2017

https://smsfcoach.com.au/2017/02/13/buying-property-through-your-super-smsf/

Top Ten Investment Rules Every SMSF Trustee Should Review Annually

Bob Farrell is a Wall Street veteran with over 50 years of experience in the investment business. He started as a technical analyst at Merrill Lynch in 1957. Bob’s ten investment rules have come from his decades of experience with all sorts of markets: dull, bull, bear, bubbles, and crashes. I thought I would share with you a short version of these Top Ten Rules to guide SMSF Trustees in reviewing their fund’s Investment Strategy

Markets tend to return to the mean (average price) over time. Basically, this means that after a strong uptrend or downtrend, prices tend to move back toward the long-term average.
Excesses in one direction will lead to an opposite excess in the other direction. Similar to above. It is not a coincidence that the ASX 300 has not reached the previous high 9 years after the pre-GFC top in 2008.
There are no new eras—excesses are never permanent. “This time is different” are the four most dangerous words in investing.
Exponential rapidly rising or falling markets usually go further than you think, but they do not correct by going sideways. Corrections are as ugly as advances are exciting.
The public buys the most at the top and the least at the bottom. Greed and fear drive the investing public far more than logic.
Fear and greed are stronger than long-term resolve. This is a corollary to number 5. It is easy to say you are a long-term investor when your account is rising; much more difficult when you find yourself down 40%.
Markets are strongest when they are broad and weakest when they narrow to a handful of blue chip names. A rally that has few stocks rising shows modest conviction and is more indicative of a market about to falter. Conversely, a rally that encompasses a broad number of stocks tends to be indicative of a “healthy” bull run.
Bear markets have three stages—sharp down, reflexive rebound, and a drawn-out fundamental downtrend. Bear markets often start with a sharp, swift decline, then a sharp rebound, then the longer, grinding down of the third stage.
When all the experts and forecasts agree, something else is going to happen. If everyone expects something “unexpected” to happen, the greater likelihood is it doesn’t. By definition, a “black swan” event is something few see coming, but after the fact, many say it should have been foreseen by everyone.
Bull markets are more fun than bear markets. Psychologically, it is easy to invest in a bull market; after all the market confirms your “skill” and “brilliance” by going up. In a bear market, fear, panic, and even depression take over as nothing seems to go your way.

Recently Lance Robert’s website, realinvestmentadvice.com, reviewed Bob’s investment rules with great illustrated graphs to back up the veracity of those 10 investment rules. I would highly recommend a visit to that article for those needing further detail.

Mr. Farrell’s rules are not meant as hard and fast rules but something to keep in mind as you review you strategy and to ensure you do a fair critical review rather than just coasting along. There are always exceptions but these are good rules to keep in mind when reviewing your Self Managed Superannuation Fund investment strategy and positioning your portfolio for long-term investing success.

Liam Shorte B.Bus SSA™ AFP

Financial Planner & SMSF Specialist Advisor™

Tel: 02　98941844, Mobile: 0413 936 299

PO Box 6002 BHBC, Baulkham Hills NSW 2153

5/15 Terminus St. Castle Hill NSW 2154

Corporate Authorised Representative of Viridian Advisory Pty Ltd (ABN 34 605 438 042) (AFSL 476223)

1 Comment

by SMSF Coach - Liam Shorte on December 5, 2016 • Permalink

Posted in Checklists, Investment Strategies, SMSF Management

Posted by SMSF Coach - Liam Shorte on December 5, 2016

https://smsfcoach.com.au/2016/12/05/top-ten-investment-rules-every-smsf-trustee-should-review-annually/

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Liam Shorte

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If you exceed the concessional contributions cap

If you exceed the non-concessional contributions cap

If you do nothing

Temporary timeframe extension for SMSF and APRA funds to release the money.

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Why Bill Shorten is wrong — and right — on dividends

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At SMSF Coach and our Financial Planning arm Verante, we believe in your financial wellbeing and improving your understanding of financial concepts.

Watch this short video which explains what is available in this vast knowledge base.

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It includes a whole module on SMSF education and

Self-Managed Super Funds section includes:

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Don’t be the one who leaves a mess behind!

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What is the Retirement condition of release

Conditions of release – overview

Retirement condition of release

Age 60 but less than 65

Transition to retirement pensions – impacts of meeting retirement condition of release

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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.

WHY SHOULD YOU HAVE A TRUSTED ENDURING POWER OF ATTORNEY?

EPOA SHOULD BE SOMEONE YOU TRUST AND CONSIDER APPOINTING SUBSTITUTE ATTORNEYS

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Transition Period

Timing Problem

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Other estate planning issues around pensions (including TtRs)

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Contributing the proceeds of downsizing your home to superannuation (or just taking advantage of strategy if moving house)

Social security changes

First home super saver scheme – talk to us about how you can use this to help your children or grandchildren

Bank levy may hit dividends or term deposit rates

PROPERTY INVESTORS

Integrity of limited recourse borrowing arrangements

Integrity of non-arm’s length arrangements

Disallow certain deductions for residential rental property

Other matters: Energy Assistance Payment

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Overview of super changes

Law Companion Guides

Super changes Q&As

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Number of new SMSFs setup each year rising again.

SMSF trustee type

Size of SMSF sector

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What you should make clear in the investment strategy:

So what are the pros and cons of holding a property in Superannuation?

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