#SMSF Alert : ATO guidance on related party SMSF loans (LRBAs) – Update


ATO guideline LRBAs

The ATO have issued long-awaited¬†guidelines providing SMSF trustees with suggested ‚ÄėSafe Harbour‚Äô loan terms on which trustees may use to structure a related party Limited Recourse Borrowing Arrangement (LRBA) consistent with dealing at arm‚Äôs length with that related party.

By implementing these ‚ÄúSafe Harbour‚ÄĚ loan terms, SMSF trustees are assured by the ATO Commissioner that

..for income tax purposes, the Commissioner accepts that an LRBA structured in accordance with this Guideline is consistent with an arm’s length dealing and that the NALI provisions do not apply¬†purely¬†because of the terms of the borrowing arrangement.

It is absolutely essential that all non-bank SMSF borrowing arrangements (LRBAs)  be reviewed prior now extended to 1 Jan 2017

 Where has this come from?

The ATO first released and then re-issued ATO Interpretative Decisions in 2015 (ATO ID 2015/27 and ATO ID 2015/28), dealing with Non-Arm’s¬†Length Income(NALI) derived from listed shares and real property purchased by an SMSF under an LRBA involving a related party lender ‚Äď where the terms of the loan were not deemed to be on commercial terms.

These ATOIDs state that the use of a non-arm’s length LRBA gives rise to NALI in the SMSF. Broadly, the rationale for this view is that the income derived from an investment that was purchased using a related party LRBA, where the terms of the loan are more favorable to the SMSF, is more than the income the fund would have derived if it had otherwise being dealing on an arm’s length basis.

NALI is taxed at the top marginal tax rate, currently 47% ‚Äď regardless of whether the income is derived while the fund is in accumulation phase where tax is normally 15%¬† or in pension phase when the income would usually be tax exempt.

After that bombshell, the ATO announced that it would not take proactive compliance action from a NALI perspective against an SMSF trustee where an existing non-commercial related party LRBA was already in place, as long as such an LRBA was brought onto commercial terms or wound up by 30 June 2016.

The Nitty Gritty Details of the Safe Harbour Steps

The ATO has issued Practical Compliance Guideline PCG 2016/5. As a result, provided an SMSF trustee follows these guidelines in good faith, they can be assured that (for income tax compliance purposes) their arrangement will be taken to be consistent with an arm’s length dealing.

The ‘Safe Harbour’ provisions are for any non-bank LRBA entered into before 30 June 2016, and also those that will be entered into after 30 June 2016.

Broadly, this PCG outlines two ‚ÄėSafe Harbours‚Äô. These Safe Harbours provide the terms on which SMSF trustees may structure their LRBAs. An LRBA structured in accordance with the relevant Safe Harbour will be deemed to be consistent with an arm‚Äôs length dealing and the NALI provisions will not apply due merely to of the terms of the borrowing arrangement.

The terms of the borrowing under the LRBA must be established and maintained throughout the duration of the LRBA in accordance with the guidelines provided.

Safe Harbour 1 Safe Harbour 2
Asset Type Investment in Real Property Investment in a collection of Listed Shares or Units
Interest Rate RBA Indicator Lending Rates for banks providing standard variable housing loans for investors. Use the May rate immediately preceding the tax year.
(2015-16 year = 5.75%)(2016-17 year = 5.65%)

(2017-18 year = 5.8%)

Same as Real Property + a margin of 2%
Fixed / Variable Interest rate may be fixed or variable. Interest rate may be fixed or variable.
Term of Loan Variable interest rate loans:

Original loan ‚Äst15 year maximum¬†loan term (both residential and commercial).

 

Re-financing ‚Äď maximum loan term is 15 years less the duration(s) of any previous loan(s) in respect of the asset (for both residential and commercial).

 

Fixed interest rate loan:

Rate may be fixed for a maximum period of 5 years and must convert to a variable interest rate loan at the end of the nominated period. The total loan term cannot exceed 15 years.

 

For an LRBA in existence on publication of these guidelines, the trustees may adopt the rate of 5.75% as their fixed rate provided that the total period for which the interest rate is fixed does not exceed 5 years. The interest rate must convert to a variable interest rate loan at the end of the nominated period. The total loan term cannot exceed 15 years.

Variable interest rate loans:

Original loan ‚Äst7 year maximum¬†loan term.

 

Re-financing ‚Äď maximum loan term is 7 years less the duration(s) of any previous loan(s) in respect of the collection of assets.

 

Fixed interest rate loan:

Rate may be fixed up to for a maximum period of 3 years and must convert to a variable interest rate loan at the end of the nominated period. The total loan term cannot exceed 7 years.

 

For an LRBA in existence on publication of these guidelines, the trustees may adopt the rate of 7.75% as their fixed rate provided that the total period for which the interest rate is fixed does not exceed 3 years. The interest rate must convert to a variable interest rate loan at the end of the nominated period. The total loan cannot exceed 7 years.

Loan-Value ‚ÄďRatio

LVR

Maximum 70% LVR for both commercial & residential property.
Total LVR of 70% if more than one loan.
Maximum 50% LVR.

Total LVR of 50% if more than one loan.

Security A registered mortgage over the property. A registered charge/mortgage or similar security (that provides security for loans for such assets).
Personal Guarantee Not required Not required
Nature & frequency of repayments Each repayment is to be both principal and interest.

Repayments to be made monthly.

Each repayment is to be both principal and interest.

Repayments to be made monthly.

Loan Agreement A written and executed loan agreement is required. A written and executed loan agreement is required.
Information sourced from Practical Compliance Guidelines PCG 2016/5.

Potential Trap to be aware of: Importantly, as part of this announcement, the ATO also indicated that the amount of principal and interest payments actually made with respect to a borrowing under an LRBA for the year ended 30 June 2016 must be in accordance with terms that are consistent with an arm’s length dealing.Information sourced from Practical Compliance Guidelines PCG 2016/5.

Where to find the Indicator Rate in future year:

The PGS referred to: Reserve Bank of Australia Indicator Lending Rates for banks providing standard variable housing loans for investors. Applicable rates:
– For the 2015-16 year, the rate is 5.75%
– For the 2016-17 year the rate is 5.65%

For 2017-18 and later years, the rate published for May (the rate for the month of May immediately prior to the start of the relevant financial year)

It is the applicable rate under Column N of the above spreadsheet (click on link). The rate seems to have started in August 2015 but I assume we must use the May rate from now on.

In referencing the Indicator Rate you can use:
Ref: Title: Lending rates; Housing loans; Banks; Variable; Standard; Investor
Lending rates; Housing loans; Banks; Variable; Standard; Investor
Frequency: Monthly
Units: Per cent per annum
Source RBA
Publication Date 04-Apr-2016
Series ID: FILRHLBVSI

Example РReal Property taken from Practical Compliance Guideline PCG 2016/5 Example 1

A complying SMSF borrowed money under an LRBA, using the funds to acquire commercial property valued at $500,000 on 1 July 2011.

  1. The borrower is the SMSF trustee.
  2. The lender is an SMSF member’s father (a related party).
  3. A holding trust has been established, and the holding trust trustee is the legal owner of the property until the borrowing is repaid.

The loan has the following features:

  1. the total amount borrowed is $500,000
  2. the SMSF met all the costs associated with purchasing the property from existing fund assets.
  3. the loan is interest free
  4. the principal is repayable at the end of the term of the loan, but may be repaid earlier if the SMSF chooses to do so
  5. the term of the loan is 25 years
  6. the lender’s recourse against the SMSF is limited to the rights relating to the property held in the holding trust, and
  7. the loan agreement is in writing.

Consistent with ATO ID 2015/27 and ATO ID 2015/28, the LRBA is not considered to have been established or maintained on arm’s length terms. The income earned from the property, which is rented to an unrelated party, will give rise to NALI.

At 1 July 2015, the property was valued at $643,000, and the SMSF has not repaid any of the principal since the loan commenced.

To avoid having to report NALI for the 2015-16 year (and prior years) the Fund has a number of options.

Option 1 ‚Äď Alter the terms of the loan to meet guidelines

The SMSF and the lender could alter the terms of the loan arrangement to meet Safe Harbour 1 (for real property).

To bring the terms of the loan into line with this Safe Harbour, the trustees of the SMSF must ensure that:

  1. The 70% LVR is met (in this case, the value of the property at 1 July 2015 may be used).

Based on a property valuation of $643,000 at 1 July 2015, the maximum the SMSF can borrow is $450,100. The SMSF needs to repay $49,900 of principal as soon as practical before 30 June 2016.

  1. The loan term cannot exceed 11 years from 1 July 2015.

The SMSF must recognise that the loan commenced 4 years earlier. An additional 11 years would not exceed the maximum 15 year term.

  1. The SMSF can use a variable interest rate. Alternatively, it can alter the terms of the loan to use a fixed rate of interest for a period that ensures the total period for which the rate of interest is fixed does not exceed 5 years. The loan must convert to a variable interest rate loan at the end of the nominated period.

The interest rate of 5.75% applies for 2015-16 and 5.65% p.a. applies from 1 July 2016 to 30 June 2017. The SMSF trustee must determine and pay the appropriate amount of principal and interest payable for the year. This calculation must take the opening balance of $500,000, the remaining term of 11 years, and the timing of the $49,900 capital repayment, into account.

  1. After 1 July 2016, the new LRBA must continue under terms complying with the ATO’s guidelines relating to real property at all times.

For example, the SMSF must ensure that it updates the interest rate used for the loan on 1 July each year (if variable) or as appropriate (if fixed), and make monthly principal and interest repayments accordingly.

Option 2 ‚Äď Refinance through a commercial lender

The fund could refinance the LRBA with a commercial lender, extinguish the original arrangement and pay the associated costs.

While the original loan remains in place during the 2015-16 income year, the SMSF must ensure that the terms of the loan are consistent with an arm’s length dealing, and relevant amounts of principal and interest are paid to the original lender.

The SMSF may choose to apply the terms set out under Safe Harbour 1 to calculate the amounts of principal and interest to be paid to the original lender for the relevant part of the 2015-16 year.

Option 3 – Payout the LRBA

The SMSF may decide to repay the loan to the related party, and bring the LRBA to an end before 30 June 2016.

While the original loan remains in place during the 2015-16 income year, the SMSF must ensure that the terms of the loan are consistent with an arm’s length dealing, and the relevant amounts of principal and interest are paid to the original lender.

The SMSF may choose to apply the terms set out under Safe Harbour 1 to calculate the amounts of principal and interest to be paid to the original lender for the relevant part of the 2015-16 year.

Each option will have many advantages and disadvantages Рso it is important to understand what the practical implications of each option are, and how physically you will approach each option. Seek specialised advice on this matter as it is not a strategy suitable for DIY implementation

Important Note to 13.22C or Unrelated Unit Trust Investors

The guidelines provided in this PCG are not applicable to an SMSF LRBA involving an investment in an unlisted company or unit trust (e.g. where a related party LRBA has been entered into to acquire a collection of units in an unrelated private trust or a 13.22C compliant trust). As such, trustees who have entered into such an arrangement will have no option but to benchmark their particular loan arrangement based on commercial loan terms, or to bring the LRBA to an end.

Please visit out SMSF Property page to get details on all available strategies for SMSF property investors.

UPDATE (Relief for those caught by Budget measures)

In a letter to an industry association, the Treasurer, Scott Morrison, has outlined transitional arrangements to allow additional non-concessional contributions above the proposed lifetime limit in certain limited circumstances. Contributions made in the following circumstances may be permitted without causing a breach of the lifetime cap:

  • where the trustees of a self managed superannuation fund (SMSF) have entered into a contract to purchase an asset prior to 3 May 2016 that completes after this date and non-concessional contributions were planned to be made to complete the contract of sale. Non-concessional contributions will be permitted only to allow the contract to complete provided they are within the relevant non-concessional cap that was applicable prior to Budget night, and
  • where additional contributions are made in order to comply with the Australian Taxation Office‚Äôs (ATO) Practical Compliance Guideline (PCG) 2016/5 related to limited recourse borrowing arrangements, provided they are made prior to 31 January 2017.

Additional non-concessional contributions made under these proposed transitional arrangements will count towards the lifetime cap, but will not result in an excess.

I hope this guidance has been helpful and please take the time to comment. Feedback always appreciated. Please reblog, retweet, like on Facebook etc to make sure we get the news out there. As always please contact me if you want to look at your own options. We have offices in Castle Hill and Windsor but can meet clients anywhere in Sydney or via Skype. Click here for appointment options.

Liam Shorte B.Bus SSA‚ĄĘ AFP

Financial Planner & SMSF Specialist Advisor‚ĄĘ

SMSF Specialist Adviser 

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

Verante Financial Planning

Tel: 02„ÄÄ98941844, Mobile: 0413 936 299

PO Box 6002 BHBC, Baulkham Hills NSW 2153

5/15 Terminus St. Castle Hill NSW 2154

Corporate Authorised Representative of Magnitude Group Pty Ltd ABN 54 086 266 202, AFSL 221557

This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs. This website provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such.

One Page SMSF End of Financial Year Checklist 2013


Ok last day to get your SMSF fund in order and ensure we are making the most of the strategies available to us. Here is a one page checklist of the most important issues that you should address with your advisors well before the year-end. For more detail on each issue visit the full article on The SMSF Coach – EOFY 2013 Strategies

1. It’s all about timing! Forget about doing anything for your fund after the Thursday June 27th
2. Review¬† Your Concessional Contributions ‚Äď 25K , 25K, 25K max
3. Review your Non-Concessional Contributions
4. Co-Contribution
5. Spouse Contribution
6. Over 65? Do you meet the work test? (The 40 hours in any 30 days rule)
7. Check any payments you may have made on behalf of the fund.
8. Notice Of Intent To Claim A Deduction
9. Contributions Splitting
10. Off Market Share Transfers (selling shares from your own name to your fund)
11. Pension Payments
12. Reversionary Pension is often preferred option to pass funds to spouse or dependent child.
13. Review Capital Gains Tax Position of each investment
14. Review and Update the Investment Strategy not forgetting to include Insurance of Members
15. Collate and Document records of all asset movements and decisions
16. June Contributions Deductible this year but can be allocated across 2 years.
17. Market Valuations of all assets now required
18. In-House Assets – keep below the 5% limit at all times
19. TPD Insurance (Total Permanent Disability ‚Äď basically ‚Äúnever work again‚ÄĚ insurance)
20. Do you need to update to a Corporate Trustee
21. Check the ownership details of all SMSF Investments
22. Review Estate Planning and Loss of Mental Capacity Strategies.

As always please contact me if you want to look at your own options as we are currently taking on new clients. We have offices in Castle Hill and Windsor but can meet clients anywhere in Sydney or online via Skype.

Liam Shorte B.Bus SSA‚ĄĘ AdvDipFS

Financial Planner & SMSF Specialist Advisor‚ĄĘ

nextgen firm-logo[1]

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

Tel: 02 8853 6833,  Mobile: 0413 936 299

liam@nextgenwealth.com.au

PO Box 6002 BHBC, Baulkham Hills NSW 2153

¬†Liam Shorte is a partner in NextGen Wealth Solutions, Corporate Authorised Representative of Genesys Wealth Advisers Limited, Licence No 232686, Genesys Wealth Advisers Limited¬†ABN 20 060 778 216 ‚ÄĘ AFSL No.232686

Important information :

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

Can My SMSF Buy And Lease Plant And Equipment To My Business


ID-100210503

Plant or Equipment in an SMSF?

I get this question on Plant and Equipment financing regularly from business clients with an SMSF. The technical answer is yes subject to complying with the regulatory provisions of SIS Act. In reality for most businesses the answer is most likely NO as there are so many ways you can breach one or more of the rules governing this area. Let’s look at some of those rules.

Firstly it is a requirement that a SMSF and any assets it considers purchasing must meet the Sole Purpose Test.

Sole purpose test

‚ÄĘ Section 62: trustee must ensure fund is maintained solely for core purposes, such as benefits to members upon retirement and ancillary purposes

Other relevant issues include:

Formulating Investment Strategy

Section 52: trustee must formulate and give effect to investment strategy that has regard to whole of circumstances including:

‚ÄĘ risk involved in making, holding and realising, and likely return from investments having regard to objectives and expected cash flow requirements

Lending to members, relatives and financial assistance:

Section 65: A trustee must not lend fund money or provide financial assistance to:
‚ÄĘ member of fund OR relative of a member

‚ÄĘ ‚ÄėFinancial assistance‚Äô has no technical meaning and their frame of reference is language of ordinary commerce … one must examine commercial realities of transaction and decide whether it can properly be described as giving of financial assistance (Charterhouse Investment Trust Ltd v Tempest Diesels Ltd [1986] BCLC 1, 10)

In-house asset rules:

An In-house asset is:
‚ÄĘ loan to ‚Äėrelated party‚Äô
‚ÄĘ investment in ‚Äėrelated party‚Äô
‚ÄĘ investment in a ‚Äėrelated trust‚Äô
‚ÄĘ asset subject to lease between trustee and a related party (this is the one that matters in your case)

However a SMSF can have up to 5% of fund‚Äôs assets in invested ‚Äúin-house‚ÄĚ assets without breaching the rule so if the equipment’s value were less than 5% of the funds total value then you would not be in breach of this rule‚Ķ.but remember the other rules hold equal importance. Also it is important that this rule is met on an ongoing basis so if stock markets drop or cash is taken out of the fund for pensions you need to revisit the value of the in-house asset.

Arm’s length requirements:

Section 109(1): A trustee must not invest unless:

‚ÄĘ the trustee and the other party are dealing with each other at arm‚Äôs length OR
the terms and conditions are no more favourable to the other party than if they were at arm’s length
‚ÄĘ Section 109(1A): If trustee invests and is required to deal with investment with another party not at arm‚Äôs length, must deal as if were at arm‚Äôs length

‚ÄĘ The term ‘at arm’s length’ is not defined in the SIS Act so open to interpretation

‚ÄĘ implies dealing that is carried out on commercial terms again subject to interpretation

‚ÄĘ useful test to apply is whether prudent person, acting with due regard to own commercial interests, would have made the investment (APRA v Derstepanian (2005) 60 ATR 518, 524)

So example of how this works:

Let’s say you have $600,000 in your SMSF and you want to purchase an excavator for $25,000 to lease to your own business.

  1. The SMSF Trustees do their research and minuted how they calculate a lease rate that takes into account market return on their investments, allows for the depreciation of the asset and insists on the insurance of the vehicle with its interest noted on the policy to protect its investment. They are satisfied that this provides a decent return for the fund not correlated to the other assets of the funds invested in shares and term deposits. Sole Purpose, S62 and S52 satisfied.
  2. They amend the SMSF Investment Strategy to include this type of asset with the target allocation to “Other Assets” or specifically have an allocation to “Plant & Equipment”

  3. They ascertain that the business could be approved to obtain finance for the excavator from a third-party on similar terms. Section 65 met as clear finance available elsewhere and that this is not the reason why the arrangement is being entered into.

  4. As the value of the excavator ($25k) is less than 5% of the fund ($30K) it does not breach the In house asset rule. This needs to be monitored annually.

  5. They arrange for a written commercial lease agreement comparable with the standard lease available in the market to be entered into by all parties. S109(1) satisfied

So in summary, yes it can be done but in reality there are so many ways you can trip up that it is really not worth the hassle and raising the eye of the ATO or challenging your Auditor’s patience. Your first step is to engage your Accountant and a SMSF Specialist before considering these types of strategies. I would be interested to receive comments from people who have implemented these strategies.

Why not checkout my article ”¬†What can my SMSF invest in?” as a good place to start.

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 online via Skype.

Liam Shorte B.Bus SSA‚ĄĘ¬†AFP

Financial Planner & SMSF Specialist Advisor‚ĄĘ

SMSF Specialist Adviser 

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

Verante Financial Planning

Tel: 02„ÄÄ98941844, Mobile: 0413 936 299

PO Box 6002 BHBC, Baulkham Hills NSW 2153

5/15 Terminus St. Castle Hill NSW 2154

Corporate Authorised Representative of Magnitude Group Pty Ltd ABN 54 086 266 202, AFSL 221557

This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs. This website provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such.

Image courtesy of Supertrooper at FreeDigitalPhotos.net

ASIC Releases CHECKLIST for those giving SMSF Advice


The latest ASIC REPORT 337: SMSFs: Improving the quality of advice given to investors includes a useful checklist for those dealing with SMSF advice to the normal person in the street or in technical terms ‚Äúretail clients‚ÄĚ. It also includes some useful examples. Here is the Checklist and I would suggest all those ¬†including¬†Licensed¬†Accountants, Financial Planners, Lawyers, Mortgage Brokers, Property Developers and Share Brokers be prepared to ensure your clients have considered all 32 issues raised or you leave yourself open for scrutiny and litigation if you have been¬†involved¬†in the recommendation of the structure.

Have you considered a SMSF and sought advice? Did your ‚Äúadviser‚ÄĚ mention these issues?

Appendix: Tips for advice providers

Table 6: Some tips for advice providers giving advice to retail clients on SMSFs

Issue: Role and obligations of SMSF trustees

What you should do or consider

C1      The ATO regulates SMSFs and provides a number of useful publications on its website about the obligations and duties of trustees in managing an SMSF. As good practice, you should:

(a)  direct investors to the relevant pages on the ATO website; or

(b)  provide investors with a copy of key ATO publications with their SOA to ensure investors understand their obligations.

C2      You should explain to investors that, by law, each trustee has duties and obligations to:

(a)    act honestly in all matters concerning the SMSF;

(b)    exercise skill, care and diligence in managing the SMSF;

(c)     act in the best interests of all SMSF members;

(d)    take appropriate action to protect SMSF assets and manage them separately from the trustee’s own affairs;

(e)    comply with the SMSF trust deed and review and update it as required;

(f)     be responsible for and control the SMSF, even where the trustees outsource the required expertise or one trustee is more actively involved in the day-to-day running of the SMSF;

(g)    have a documented investment strategy that considers all the circumstances of the fund, and review and update the investment strategy as the members’ financial situation, needs and objectives require;

(h)    consider insurance for fund members as part of the fund’s investment strategy;

(i)      understand which investments are restricted and that SMSF investments must be made solely to pay retirement benefits to members or the members’ dependants if a member dies;

(j)     accept and document contributions in accordance with the superannuation laws;

(k)    ensure the SMSF’s money is invested appropriately (even if the trustee outsources the investment to an advice provider);

(l)      keep proper and accurate tax and superannuation records (e.g. minutes of all investment decisions) and allow members to have access to such information and records;

(m)   comply with the superannuation and tax laws (and the Corporations Act for corporate trustees);

(n)    value the fund’s assets at market value for the purposes of preparing financial accounts and statements;

(o)    have the SMSF audited annually by an independently approved auditor;

(p)    comply with the reporting obligations to the ATO (e.g. report contributions from members, lodge annual returns, report on any changes to trustees, directors or members of the SMSF; lodge a business activity statement if the SMSF is registered for Goods and Services Tax (GST));

(q)   pay the supervisory levy and the SMSF’s income tax liability when due;

(r)    refrain from entering into contracts or behaving in a way that hinders trustees from performing or exercising functions or powers;

(s)   refrain from entering into transactions that circumvent restrictions on the payment of benefits; and

(t)    ensure that the money in the SMSF is only accessed by members when the trust deed and law allow it.

C3      You should explain to investors that, within 21 days of becoming an SMSF trustee, they will need to complete the ATO’s trustee declaration.

C4      You should walk investors through the ATO’s trustee declaration, explain each obligation and duty, and allow investors to ask any questions about their obligations.

C5      If you do not adequately understand the role and obligations of SMSF trustees, it is inappropriate for you to advise investors about SMSFs.

ISSUE: Suitability of an SMSF structure

What you should do or consider

 C6      You should discuss the investor’s fund balance size and whether it is likely to be cost-effective for the investor to set up an SMSF. Cost is just one factor to  consider and does not mean by itself that an SMSF will be appropriate or   inappropriate for the investor.

C7      You should discuss the likely costs associated with running an SMSF, including the costs of establishment, ongoing investment management, compliance and advice,

and explain these costs to the investor before making a recommendation to  establish an SMSF.

C8      Before recommending an SMSF, you should consider the investor’s ability and

willingness to manage the fund and meet their trustee obligations on an ongoing basis.

C9 ¬†¬†¬†¬† Be aware of ‚Äėred flag‚Äô indicators that may suggest an SMSF will not be suitable for¬†an investor, including, but not limited to:

(a) a low fund balance where the members have a limited ability to make future contributions;

(b) the investor wants a simple, low-touch superannuation solution;

(c) the investor wants to delegate decision-making to someone else;

(d) the investor does not have a lot of time to devote to managing their financial affairs;

(e) the investor has little investment decision-making experience;

(f) the investor, or suggested trustee, is an undischarged bankrupt or has been convicted of an offence involving dishonesty (as such, persons are prohibited from acting as a trustee); and

(g) the investor has a low level of financial literacy.

C10     You should explain to investors approaching the pension phase that there may be a point at which the SMSF may cease to be cost-effective because fixed costs will remain constant or increase while the balance of the fund diminishes.

C11     Where appropriate, you should discuss SMSF succession planning issues with investors (this will be more relevant for older investors). Some key questions to discuss include:

(a) For investors who are individual trustees, what will happen if one of the     trustees dies?

(b) If one trustee (the controlling trustee) is more actively involved in the day-to-day management of the SMSF, what will the less active trustee do if the  controlling trustee is unable to manage the SMSF?

ISSUE: Risks of an SMSF structure

What you should do or consider

 C12     You should warn investors looking to set up an SMSF about the lack of Government compensation available to SMSFs. This information will help investors properly weigh up whether an SMSF structure is right for them.

C13     You should warn investors that SMSF trustees and members do not have access to the Superannuation Complaints Tribunal (SCT) to resolve complaints.

C14     You should explain the advantages and disadvantages of establishing an SMSF with a corporate trustee versus individual trustees, and provide investors with relevant ATO publications via hard copy or web-links.

C15     If the investor’s proposed membership structure of an SMSF is unusual, you may need to spend more time discussing the duties and obligations of trustees, the risks associated with the membership structure, and the importance of having a    well documented, specific investment strategy and a trust deed that contains  dispute resolution clauses.

C16     You should reiterate the role and responsibilities of trustees, and explain that, even if one trustee is less actively involved, they are equally liable for the SMSF’s compliance with the superannuation and tax laws.

C17     When you recommend an SMSF to an investor, you will need to discuss their insurance needs. This will often involve discussing:

(a) their existing insurance coverage;

(b) the level of insurance coverage they will need in future;

(c) the cost and options for maintaining, increasing or decreasing (as appropriate)

their existing insurance coverage through an SMSF;

(d) whether the investor has any health issues that may affect their ability to get

insurance coverage;

(e) the advantages and disadvantages of retaining a portion of their APRA- regulated superannuation for insurance purposes (if considered appropriate); and

(f) the impact of the insurance recommendation on the investor’s SMSF balance.

C18     If you identify an investor needs advice on insurance, you must consider and   advise the investor on their insurance needs before recommending an SMSF be established. If you do not have the necessary expertise to provide insurance   advice, you should notify the investor and refer the investor to an advice provider who has the expertise to provide the advice.

Issue Investment strategy

What you should do or consider

C19     You should explain to investors the sole purpose test and the requirement for investments to be made and maintained on an arm’s length basis.

C20     When you are advising investors on their SMSF investment strategy, you should explain the benefits of asset diversification and investing across a number of   asset classes (e.g. shares, real property and fixed interest products) in a long-term investment strategy.

C21     You should explain to investors that some investments are restricted and that it is the trustee’s obligation to ensure that the SMSF does not make restricted Investments: see tip C2(i).

C22     You should explain to trustees that they are required to regularly review the    fund’s documented investment strategy to ensure that it suits the needs of fund members.

C23     If you are recommending that an SMSF be established to invest in a single asset, you should ensure that the SOA adequately documents the basis for the advice in

light of the investor’s financial situation, needs and objectives. In particular, you should set out why the investment is appropriate, rather than a diversified investment portfolio, and whether the investment will generate a sufficient return      to fund the investor’s retirement needs and, if not, what the exit strategy is and any costs or risks associated with this exit strategy.

C24     You should explain to investors that the SMSF investment strategy is likely to change as members approach the retirement phase and their needs and circumstances change.

C25     If an investor has a preference towards a real property investment, you should consider whether the real property investment is appropriate.

C26     If you are recommending a real property investment, you should discuss with the investor:

(a) the needs and circumstances of the fund members (e.g. their age and retirement needs);

(b) if the recommendation involves an investment loan, how long it will take for the investor to repay the loan;

(c) the investor’s ability to repay the loan if an unexpected event occurs (e.g. the investor becomes unemployed for a period);

(d) how the investor’s retirement will be funded by the real property investment (i.e. through the sale of property or through rental income);

(e) how likely the property can be sold quickly (i.e. whether it is in a high-demand area); and

(f) what the investor will do if the property is not rented for a period.

Note: If the investment property is not the SMSF’s sole asset, you may need to spend less time discussing the above issues.

Issue: Switching from an APRA-regulated superannuation fund

What you should do or consider

C27     When recommending an SMSF, you will need to explain the charges and significant consequences the investor will, or may, incur as a result of changing (fully or partially) from an APRA-regulated fund to an SMSF.

C28     When discussing the consequences of a switch, you will need to use language and concepts that the investor will understand.

C29     If you assess an investor has a low level of financial literacy; an SMSF will not be an appropriate retirement savings vehicle for the investor.

Issue: Alternatives to an SMSF structure

What you should do or consider

C30     Before recommending an SMSF to an investor, you should consider whether an APRA-regulated fund will meet the financial situation, needs and objectives of the investor. Many APRA-regulated funds now offer a DIY investment option.

C31     APRA-regulated funds may be more cost-effective for investors than an SMSF, depending on the size of the investor’s superannuation balance, and the extent to which the SMSF trustee(s) would engage external professionals to undertake administrative and other functions.

C32     Setting up an SMSF, which then invests through an investment platform, may not be as cost-effective for investors as becoming a member of a public offer investment

 Thoughts:

As a licensed Financial Planner and Accredited SMSF Specialist Advisor‚ĄĘ I can and do assess these 32 points with my clients and under my license I am required to put the recommendations in writing after considering and high lighting the above points.

There is therefore less chance of me recommending a SMSF to a person not suited to running one but if that should happen they may have recourse to my Professional Indemnity Insurance. However if they have received the advice to set up a SMSF from an unlicensed person then they may have no recourse to PI as that person’s cover would most likely exclude such claims.

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 online via Skype.

Liam Shorte B.Bus SSA‚ĄĘ AdvDipFS

Financial Planner & SMSF Specialist Advisor‚ĄĘ

Verante Financial Planning

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

Tel: 02 8853 6833,  Mobile: 0413 936 299

liam@nextgenwealth.com.au

PO Box 6002 BHBC, Baulkham Hills NSW 2153

¬†Liam Shorte is a partner in NextGen Wealth Solutions, Corporate Authorised Representative of Genesys Wealth Advisers Limited, Licence No 232686, Genesys Wealth Advisers Limited¬†ABN 20 060 778 216 ‚ÄĘ AFSL No.232686

Important information :

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

SMSF End of Financial Year Checklist 2013


OK so here we are already in the last quarter and with only 3 months to the end of the financial year to get our fund in order and ensure we are making the most of the strategies available SMSF 2013 Checklistto us. Here is a check-list of the most important issues that you should address with your advisers well before the year-end.

1.       It’s all about timing!

First thing to note is that June 30th falls on a Sunday this year so forget about doing anything for your fund after the 27th as funds transferred from Friday the 28th are unlikely to hit an account before the 1st July.

2.¬†¬†¬†¬†¬†¬† Review¬† Your Concessional Contributions ‚Äď 25K!, yes only 25K, ¬†yes 25K max

Maximise contributions up to concessional contribution cap but do not exceed the 25 K Concession Limits that applies to everyone who is eligible to contribute this year.  Excess contributions tax is nasty and should always be avoided. So check employer contributions on normal pay and bonuses, salary sacrifice and premiums for insurance in super as they may all be included in the limit.

3.        Review your Non-Concessional Contributions

Have you considered making non-concessional contributions to move investments in to super and out of your personal, company or trust name. ¬†May you have proceeds from and inheritance or sale of a property sitting in cash. As shares and cash have increased in value you may find that personal tax provisions are increasing and moving some assets to super may help control your tax bill. ¬†Are you nearing 65, then consider your contribution timing strategy to take advantage of the ‚Äúbring forward‚ÄĚ provisions before turning age 65 to contribute up to $450,000.

4.       Co-Contribution

Check your eligibility for the co-contribution and if you are eligible take advantage.  Note that the rules have changed and are very different from previous years. To calculate the super co-contribution you could be eligible to receive based on your income and personal super contributions, use the Super co-contribution calculator.

5.       Spouse Contribution

If your spouse has assessable income plus reportable fringe benefits totalling less than $10,800 then consider making a spouse contribution. Check out the ATO guidance here

6.       Over 65? Do you meet the work test? (The 40 hours in any 30 days rule)

You should review your ability to make contributions as if you If you have reached age 65 you must pass the work test of 40 hours in any 30 day period, in order to continue to make contributions to super. Check out ATO Age Related contribution guidance

7.       Check any payments you may have made on behalf of the fund.

It is important that you check for amounts that may form a superannuation contribution in accordance with TR 2010/1 (ask your advisor), such as expenses paid for on behalf of the fund, debt forgiveness or in-specie contributions, insurance premiums for cover via super paid from outside the fund.

8.       Notice Of Intent To Claim A Deduction

If you are planning on claiming a tax deduction for personal concessional contributions you must have a valid ‚Äėnotice of intent to claim a tax deduction‚Äô.¬† If you intend to start a pension this notice must be made before you commence the pension.

9.        Contributions Splitting

Consider splitting contributions with your spouse, especially if your family has one main income earner with a substantially higher balance. This is a simple no cost strategy I recommend everyone look at especially with the Government moving on taxing higher balance accounts. See my blog about this strategy here.

10.   Off Market Share Transfers (selling shares from your own name to your fund)

The proposed ban on Off-Market transfer of shares into a SMSF has been dropped. YEAH!  If you want to move any shareholdings into super you should still act early. Here is the Standard Form for Computershare and here is the Link Market Services Form

11.   Pension Payments

If you are in pension phase, ensure the minimum pension has been taken.  For transition to retirement pensions, ensure you have not taken more than 10% of your opening account balance this financial year.

The minimum payment amounts have been by 25% for the 2012-13 years. The following table shows the minimum percentage factor (indicative only) for each age group.

Age Minimum % withdrawal 2012-13 year for certain pensions and annuities Minimum % withdrawal (in all other cases)
Under 65 3% 4%
65-74 3.75% 5%
75-79 4.5% 6%
80-84 5.25% 7%
85-89 6.75% 9%
90-94 8.25% 11%
95 or more 10.5% 14%

Sacrificial Lamb

Think about having a sacrificial lamb, a second lower value pension that can sacrificed if minimum not taken. In this way if you pay only a small amount less than the minimum you only have to lose the smaller pensions concession rather than the concession on your full balance. When combined with the ATO relief discussed in the following article ‚ÄúWhat-happens-if-i-don‚Äôt-take-the-minimum-pension‚ÄĚ ¬†you will have a buffer for mistakes.

12.    Reversionary Pension is often the preferred option to pass funds to a spouse or dependent child.

You should Review your pension documentation and check if you have nominated a reversionary pension.  If not, consider your family situation and options to have a reversionary pension. This is especially important with blended families and children from previous marriages that may contest your current spouse’s rights to your assets. Also consider reversionary pensions for dependent disabled children

13.   Review Capital Gains Tax Position of each investment

Review any capital gains made during the year and over the term you have held the asset and consider disposing of investments with unrealised losses to offset the gains made. If in pension phase then consider triggering some capital gains regularly to avoid building up an unrealised gain that may be at risk to government changes in legislation like those proposed this year.

14.   Review and Update the Investment Strategy not forgetting to include Insurance of Members

Review your investment strategy and ensure all investments have been made in accordance with it, and the funds deed.¬† Also, make sure your investment strategy has been updated to include consideration of insurances for members. See my article of this subject here.¬†Don’t know what to do..call us.

15.    Collate and Document records of all asset movements and decisions

Ensure all the funds activities have been appropriately documented with minutes, and that all copies of all statements and schedules are on file for your accountant/administrator and auditor.

16.   June Contributions Deductible this year but can be allocated across 2 years.

For those who may have a large taxable income this year and are expecting a lower taxable next year you should consider a contribution allocation strategy to maximise deductions for the current financial year. This strategy is also known as a ‚ÄúContributions Reserving‚ÄĚ strategy but the ATO are not fans of Reserves so best to avoid that wording!

17.   Market Valuations

Regulations now require assets to be valued at market value each year, ensure that you have re-valued assets such as property and collectables. Here is a good article by Liz Westover of the Institute of Chartered Accountants on the subject.

18.   In-House Assets

If your fund has any investments in in-house assets you must make sure that at all times the market value of these investments is less than 5% of the value of the fund. Do not take this rule lightly as the new penalty regime will make it easier for the ATO to apply fines for smaller misdemeanours.

19.¬†¬† TPD Insurance (Total Permanent Disability ‚Äď basically ‚Äúnever work again‚ÄĚ insurance)

Have you reviewed your insurances inside and outside of super? Check your TPD policies owned by the fund for own occupation definition as the rules about deductibility for these policies have changed. Here is a link to a good article about this subject from Money Management

  • 20.¬†¬† Do you need to update to a Corporate Trustee ¬†

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

21.   Check the ownership details of all SMSF Investments

Make sure the assets of the fund are held in the name of the trustees on behalf of the fund and that means all of them. Check carefully any online accounts you may have set up without checking the exact ownership details.  You have to ensure all SMSF assets are kept separate from your other assets.

22. Review Estate Planning and Loss of Mental Capacity Strategies.

Review any Binding Death Benefit Nominations (BDN) to ensure they are valid and still in accordance with your wishes.  Also ensure you have appropriate Enduring Power of Attorney’s (EPOA) in place allow someone to step in to your place as Trustee in the event of mental incapacity or death. Do you know what your Deed says on the subject?

23. Review any SMSF Loans

Have you made all the payments on your internal or third-party loans, have you looked at options on prepaying interest or fixing the rates while low. Have you made sure all payments in regards to Limited¬†Recourse¬†Borrowing Arrangements (LRBA) for the year were made through the SMSF Trustee. If you bought a property using borrowing , has the¬†Holding¬†Trust been stamped by your state’s Office of State Revenue.

Don’t leave it until June, review your Self Managed Super Fund now and seek advice if in doubt about any matter.

As always please contact me if you want to look at your own options as we are currently taking on new clients. We have offices in Castle Hill and Windsor but can meet clients anywhere in Sydney or online via Skype.

Liam Shorte B.Bus SSA‚ĄĘ AdvDipFS

Financial Planner & SMSF Specialist Advisor‚ĄĘ

Verante Financial Planning

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

Tel: 02 8853 6833,  Mobile: 0413 936 299

liam@verante.com.au

PO Box 6002 BHBC, Baulkham Hills NSW 2153

¬†Liam Shorte is a partner in Verante Pty Ltd, Corporate Authorised Representative of Genesys Wealth Advisers Limited, Licence No 232686, Genesys Wealth Advisers Limited¬†ABN 20 060 778 216 ‚ÄĘ AFSL No.232686

Important information :

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

SMSF Borrowing: What Can I Do With An Investment Property Within The Rules.


We constantly have people contacting us with ideas of what they want to do with an investment property once they have borrowed to purchase one in their SMSF. Some are sensible but some show no grasp of the regulations at all and include moving the whole family in to save on their home mortgage or knocking it down to build a multi-storey unit development. If you run a self managed superannuation fund, you have the ability to invest in residential property or commercial property and under certain circumstances a farm. (Note: ability to do something does not mean you should).

Repairs v Improvements

Repairs v Improvements

Borrowing to purchase a property in an SMSF or in the industry jargon a ‚Äúlimited recourse borrowing arrangement (LRBA)‚ÄĚ has been legal since 2007 and is becoming increasingly popular with SMSF¬†owners¬†seeking to leverage their funds.

In May 2012, the ATO released a ruling SMSFR 2012/1, ‚ÄúSelf Managed Superannuation Funds: limited recourse borrowing arrangements ‚Äď application of key concepts.‚ÄĚ To clarify its understanding of the legislation.

It should be noted that the ATO focused on borrowing to invest in property as it saw this as the most likely area people would encounter problem scenarios. They key issues that the ruling addresses are:

–¬†¬† defining a single acquirable asset

–¬† ¬†property development and off-the-plan purchases.

–¬†¬† distinguishing between improvements vs repairs or maintenance.

–¬†¬† improving an asset to the extent if becomes a replacement asset.

In this article I will concentrate on the latter 2 issues as it is ok to use borrowed funds for most repairs or maintenance but you can’t use borrowed money to finance improvements. You can use your other funds in your SMSF to fund improvements so it is a matter of getting the strategy right.

The ATO has given specific meanings to the following words:

‚ÄėMaintaining‚Äô an asset typically involves work done to prevent or anticipate defects, damage or deterioration (in a mechanical or physical sense). For example, repainting a timber house to prevent deterioration is typically maintenance

‚ÄėRepair‚Äô ordinarily means the remedying or making good of defects in, damage to, or deterioration of, property to be repaired and contemplates the continued existence of the property. ¬†A repair replaces a part of something or corrects something that is already there and that is damaged, has become worn out or dilapidated or has deteriorated. Repair may be necessitated through ordinary wear and tear, accidental or deliberate damage or by the operation of natural causes (whether expected or unexpected) during the passage of time.

‚ÄėImprovement‚Äô the guidance is that they mean work that:

  • provides something new
  • generally furthers the income-producing ability or expected life of the property
  • generally changes the character of the item you have improved
  • goes beyond just restoring the efficient functioning of the property

So what can you do and what can’t you do?

The following scenarios outline when an existing LRBA will continue to apply to an asset, based on the ATO’s SMSF ruling.

1. Using Borrowed Money : Repairs and Maintenance (Yes You Can) v Improvement (No You Can’t)

Work to be carried out Repair or maintenance (Yes you Can under an LRBA) Improvement (No you Can’t under an LRBA)
Residential property
A fire damages part of the kitchen (cooktop, benches, walls and ceiling). Restoring the damaged part of kitchen, including addition of a dishwasher, even if there wasn’t one there before (considered minor). Yes you can If as well as restoring the damaged part of the internal kitchen (a repair) a new external kitchen was added to the entertainment area of the house the external kitchen would be an improvement. No you can’t
Replace guttering Yes you can
Replace fence Yes you can
Replace house destroyed by fire Rebuild comparable house. Yes you can Rebuild house not comparable (although if built from insurance proceeds does not affect LRBA) No you can’t
A pergola is built to create an outdoor entertaining area. No you can’t
The addition of a swimming pool or a garage. No you can’t
A house extension to add another bathroom. No you can’t
Cyclone damage to a roof Replace roof: Yes you can Add a second storey at the same time as replacing roof.  No you can’t

Source: ATO SMSFR 2012/1

 

2. Development while under a LRBA: Retains Same Attributes (Yes You Can) v Creates a different asset (No You Can’t)

Asset and Action Result
1.  Vacant block of land on single title. A vacant block of land is subsequently subdivided resulting in multiple titles. One asset has been replaced by several different assets as a result of the subdivision.  Different asset created No You Can’t
2. Vacant block of land on single title. A residential house is built on vacant land which is on a single title. The character of the asset has fundamentally changed from vacant land to residential premises. This is a different asset. Different asset created No You Can’t
3. Residential house and land. A house is demolished following a fire and is replaced by three strata titled units. The character of the asset has fundamentally changed along with the underlying proprietary rights. This has created three different assets. Different asset created No You Can’t
4. Residential house and land. A residential house is converted into a restaurant by renovations which include fitting out a fully functioning commercial kitchen. As a result of the renovation the character of the asset has fundamentally changed from residential premises to restaurant premises. This is a different asset. Different asset created No You Can’t
5. Residential house and land. One bedroom of a residential house is converted to a home office. This would not ordinarily result in a change in the overall character of the asset as a residential house. The conversion of the bedroom into an office does not result in a different asset. ¬†Same asset ‚Äď Yes You Can
6. Residential house and land. A fire destroys a four bedroom house and a new superior residential house is constructed on that land using both insurance proceeds and additional SMSF funds. Rebuilding another residential house (whether of the same size or larger) does not fundamentally change the character of the asset held under the LRBA. The addition of a garage, for example, would also not change the character of the asset. Same asset ‚Äď Yes You Can
7. Residential house and land. While each of the following changes would be improvements each (or all) of the changes would not result in a different asset:

  • ¬∑ an extension to add two bedrooms;
  • ¬∑ the addition of a swimming pool;
  • ¬∑ an extension consisting of an outdoor entertainment area;
  • ¬∑ the addition of a garage shed and driveway;
  • ¬∑ the addition of a garden shed.
Same asset ‚Äď Yes You Can
8. Residential house and land. To allow a road to be widened, a local government authority undertakes the compulsory resumption of a minor portion of the frontage of a property which has a residence on it. While the resumption results in the existing property title being replaced, the minor extent of the resumption is such that the fundamental character of the asset, taking account of not only the proprietary rights but also the object of those proprietary rights, remains that of being the residential property. Same asset ‚Äď Yes You Can
9. Residential house and land. A ‘granny flat’ is to be constructed in the backyard of a property which already has a four bedroom residence established on it. The granny flat will have two bedrooms, a family room, a kitchen and a bathroom and will be connected to utilities such as electricity, water and sewage. The character of the asset would remain residential premises and thus the construction of the granny flat would not result in there being a different asset. Same asset ‚Äď Yes You Can

Source: ATO SMSFR 2012/1

Conclusion

There is no doubt that this ATO ruling and the examples given are good news, and much appreciated by the SMSF industry who have to deal with enquiries every day. It provides a substantial amount of clarity around many issues that had previously been quite unclear. The common sense and commercial approach by the ATO has also been welcomed and was somewhat unexpected.

I always suggest that SMSF Trustees keep sufficient cash flow in the SMSF to finance repairs and maintenance or any expected improvements rather than using borrowed funds and risk running foul of the rules.

You should however carefully consider any strategy in the light of these rules and make sure you get a second opinion as often if you are too close to a project you can be blinded to its faults. That’s where a good team of advisors comes to the fore.

Checkout : Can I borrow to buy a house and land package off the plan in my SMSF?

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 online via Skype.

Liam Shorte B.Bus SSA‚ĄĘ AFP¬ģ

Financial Planner & SMSF Specialist Advisor‚ĄĘ

SMSF Specialist Adviser Follow SMSFCoach on Twitter  Liam Shorte on Linkedin  NextGen Wealth on Facebook  

Verante Financial Planning

Tel: 02 8853 6833,  Mobile: 0413 936 299

liam@verante.com.au

PO Box 6002 BHBC, Baulkham Hills NSW 2153

Corporate Authorised Representative of Magnitude Group Pty Ltd ABN 54 086 266 202, AFSL 221557

This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs. This website provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such.

New changes to Superannuation in summary for SMSF Trustees


Firstly nothing to scary but some stings in the tail.    Tax Reform

Mr Swan and Superannuation Minister Bill Shorten fronted announced a tax exemption on superannuation earnings supporting pensions and annuities will be capped at $100,000, and anything above that level taxed at a rate of 15 per cent from 01/07/2014.

Based on a 5% earnings rate that would only impact on those with super assets of more than $2 million. Remember this is per account so for a couple each of them could have $2,000,000 without paying tax on their pension

The $100,000 threshold will be indexed to the Consumer Price Index (CPI), and will increase in $10,000 increments.

Special Treatment for Capital gains on Assets purchased before 01/07/2014 ( Did not proceed)

-„ÄÄ For existing assets (such as property or shares) that were purchased before 5 April 2013, the reform will only apply to capital gains that accrue after 1 July 2024;

-„ÄÄ For new assets that are purchased from 5 April 2013 to 30 June 2014, individuals will have the choice of applying the reform to the entire capital gain, or only that part that accrues after 1 July 2014; and

-„ÄÄ For new assets that are purchased after 1 July 2014, the new limits will apply to the entire capital gain.

Higher concessional cap for people aged 60 and over brought forward

Accordingly, the government will bring forward the start date for the new higher concessional cap of $35,000  to July 1 for people aged 60 and over. Concessional includes employer SGC (9-12%) and Salary Sacrifice.

Individuals aged 50 and over will be able to access the higher concessional cap of $35,000 from the current planned start date of 1 July 2014.

The general concessional cap is expected to reach $35,000 from 1 July 2018 for those under 50.

Excess contributions tax to be reformed

Mr Shorten said the government will reform the system of excess contributions tax (ECT) that was introduced by the former government in 2007, to make it fairer and give individuals greater choice.

Under the current arrangements, concessional contributions that are in excess of the annual cap are effectively taxed at the top marginal tax rate (46.5 per cent) rather than the normal rate of 15 per cent.

Now you will pay tax on the excess contribution to match what you would have paid at your marginal tax rate. for example if you are on the 37% tax bracket you would pay ECT at 22% rather than 30% if you had to pay it on the top marginal rate of 45% (plus Medicare).

Income Streams will be Deemed like non-superannuation assets

Under the change announced today, standard pension deeming arrangements will apply to new superannuation account-based income streams assessed under the pension income test rules after 1 January 2015.

Instead of the concessional treatment of Account Based Pensions currently for those accessing an Aged Pension, they will be deemed like normal assets. This will affect those on the borderline of $55K income for a single person and $80K for a couple who previously benefited from deductible amounts on their account based or allocated pensions.

Extending concessional tax treatment to deferred lifetime annuities

The Government will encourage the take-up of deferred lifetime annuities (DLAs), by providing these products with the same concessional tax treatment that superannuation assets supporting income streams receive. This reform will apply from 1 July 2014.

Mr Swan also announced the Gillard government will establish a Council of Superannuation Custodians to ensure that any future changes are consistent with an agreed Charter of Superannuation Adequacy and Sustainability.

Here is the link to the full press release “A fairer superannuation system”

As always please contact me if you want to look at your own particular situation and we will break it down in plain English for you. We have offices in Castle Hill and Windsor but can meet clients anywhere in Sydney or online via Skype.

Liam Shorte B.Bus SSA‚ĄĘ AdvDipFS

Financial Planner & SMSF Specialist Advisor‚ĄĘ

„ÄÄFollow SMSFCoach on Twitter  Liam Shorte on Linkedin  NextGen Wealth on Facebook 

NextGen Wealth Solutions

Tel: 02„ÄÄ8853 6833,  Mobile: 0413 936 299

PO Box 6002 BHBC, Baulkham Hills NSW 2153

 

ABN 20 060 778 216 ‚ÄĘ AFSL No.232686

Liam Shorte is a partner in NextGen Wealth Solutions, Corporate Authorised Representative of Genesys Wealth Advisers Limited, Licence No 232686, Genesys Wealth Advisers Limited ABN 20 060 778 216.

Important information :

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

Can I borrow to buy a house and land package off the plan in my SMSF?


I have had a number of enquiries about this strategy in the last few weeks and I felt it was worth clarifying some details.

Off the Plan

Off the Plan

As with any strategy where you commit to a large future purchase in a moving market and also take a risk on the developer performing to contract, buying off the plan can be risky.  Especially because of the way these contracts shift the risk away from the developer.  With a Self Managed Super Fund purchase with a mortgage this can be even more of an issue if the proposed lender’s final valuation comes in lower than the contracted price which is more common recently. You may then be forced to come up with the shortfall in your SMSF which may be more difficult if you have exhausted your contribution limits.

Here are the basic essentials to getting this type of strategy right:

  • The ‚Äúproperty purchase‚ÄĚ should be subject to one contract which must be for the completed house and land. Do not purchase land and then look for an SMSF loan to construct a property on it. You will be too late to use the land as security.
  • It is often better to have the SMSF pay the deposit and only have the lending arranged as part of the settlement. In my opinion the Holding Trust should still be in place with the Custodian/Holding Trustee on the title of the contract from the outset.
  • Ensure that the bank/ lender‚Äôs only security is only over that land and completed house/unit;
  • The only payments made in respect to the purchase are for the deposit and settlement with no ‚Äúprogress payments‚ÄĚ. You may breach the ‚Äúsingle acquirable asset‚ÄĚ rule which is a big no-no!.
  • Be prepared to move quickly at the time of settlement. LRBA loans do not go through lender‚Äôs quickly and you should have as much of the documentation prepared in advance and ready to go as is possible. Drum this into your Mortgage Broker and Solicitor.
  • Do not borrow to the limit of your SMSF. Make sure you have some liquidity to manage low valuations or the demand for a lower LVR from the lender. Alternatively have the capacity and ability to add funds to your SMSF without breaching a contribution cap.

Now there are some who feel that more than 2 payments are possible and that the law is silent on the matter but my philosophy is to KEEP IT SIMPLE! Why makes things difficult for yourself especially when there are developers out there redesigning their contracts to meet the basic 2 payment strategy.

For those looking for more detail I would recommend reading the  issues addressed by the ATO their Taxpayer Alert TA 2012/7 and in the minutes of discussion at the NTLG Super Technical sub-group (December 2012) (if you can find a copy as the ATO took down the page) with specific reference to  example 10 within SMSFR 2012/1.

My final tip is to use a SMSF Specialist Advisor who has dealt with SMSF property borrowing and look for references from client’s they successfully guided through the process. Use a conveyancer or solicitor with experience in the intricacies of these strategies. Use a Mortgage broker that knows how to place these specialised loans and is thinking ahead at all times. Oh and READ YOUR TRUST DEED!

Are you looking for an advisor that will keep you up to date and provide guidance and tips like in this blog? Then why now contact me at our Castle Hill or Windsor office in Northwest Sydney to arrange a one on one consultation. Just click the Schedule Now button up on the left to find the appointment options.

Liam Shorte B.Bus SSA‚ĄĘ AFP

Financial Planner & SMSF Specialist Advisor‚ĄĘ

SMSF Specialist Adviser 

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

Verante Financial Planning

Tel: 02„ÄÄ98941844, Mobile: 0413 936 299

PO Box 6002 BHBC, Baulkham Hills NSW 2153

5/15 Terminus St. Castle Hill NSW 2154

Corporate Authorised Representative of Magnitude Group Pty Ltd ABN 54 086 266 202, AFSL 221557

This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs. This website provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such.

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