So How Much Can I Contribute to my SMSF Using the Bring Forward Rule


3 Year Bring Forward Rule

3 Year Bring Forward Rule

So the government have announced the revised changes to the budget as outlined in my earlier blog Opportunities after Government back-flip on the superannuation reforms announced in the 2016 Budget. Now to explore in more detail the actual workings of the new Non-Concessional contributions rules and the “Bring Forward Rule” which allows larger lump sums to be contributed by bringing forward 2 future years of the non-concessional contribution cap to the current year.

For 2016-17 the single year capped contribution amount is $180,000 and then from 1 July 2017 it reduces to $100,000. So this year you can still use the bring forward rule to contribute the full $540,000 before June 30th 2017 and that has been confirmed by treasury. However if you do not have enough to meet that full contribution limit you can still trigger your cap by contributing at least $180,001 before the end of the year. Note that you may also have already triggered that rule in one of the 2 previous financials years and be wondering how much of the cap you have remaining. Well this table will clarify that for you.

bring-forward-caps

 

In summary the Limit to Bring Forward Contributions  based on year triggered are:

bring-forward-caps-summary

So for example;

If an SMSF member triggered the Non Concessional Cap bring forward rule this financial year with a $300,000 non-concessional contribution and could not make another NCC contribution before 30 June 2017, they could only contribute $80,000 as a non-concessional contribution in the 2017/18 financial year.

$1.6 million eligibility threshold and how it affects the 3 bring forward rule for contributions made after 1 July 2017

From 1 July 2017 another rule also applies that affects NCC contributions. Individuals are unable to make further NCCs where their total superannuation balance is $1.6 million or more (tested at 30 June of previous financial year). Where an individual’s balance is close to $1.6 million, they can only make a contribution or use the bring forward to take their balance to $1.6 million but not beyond.

Superannuation Balance Contribution and bring forward available
Less than $1,300,000 3 years $300,000
$1,300,000 – $1,400.000 3 years $300,000
$1,400,000 – $1,500.000 2 years $200,000
$1,500,000 – $1,600.000 1 years $100,000
$1,600,000+ NIL

What should you do now

If you are considering making a contribution this year then I strongly recommend that you track your previous 2 years contributions using the above tables  to assess how much you have contributed and how much you can now still contribute under the new rules.

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™

SMSF Specialist Adviser 

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

Verante Financial Planning

Tel: 02 98941844, Mobile: 0413 936 299

PO Box 6002 BHBC, Baulkham Hills NSW 2153

5/15 Terminus St. Castle Hill NSW 2154

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

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

 

#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 ‘Safe Harbour’ loan terms on which trustees may use to structure a related party Limited Recourse Borrowing Arrangement (LRBA) consistent with dealing at arm’s length with that related party.

By implementing these “Safe Harbour” 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 – 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% – 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 ‘Safe Harbours’. 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’s 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 – 15 year maximum loan term (both residential and commercial).

 

Re-financing – 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 – 7 year maximum loan term.

 

Re-financing – 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 –Ratio

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 the 2017-18 and 2018-19 years the rate is 5.8%

For 2019-20 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 – Real 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 – 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 – 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 – so 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’s (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™ AFP

Financial Planner & SMSF Specialist Advisor™

SMSF Specialist Adviser 

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

Verante Financial Planning

Tel: 02 98941844, Mobile: 0413 936 299

PO Box 6002 BHBC, Baulkham Hills NSW 2153

5/15 Terminus St. Castle Hill NSW 2154

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

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

ATO Releases 2016/17 Superannuation Thresholds…But?


The thresholds for the 2016/17 year have recently been updated by the ATO. Each year a number of superannuation thresholds are changed to reflect movements in full-time Average Weekly Ordinary Time Earnings (AWOTE). Importantly, for 2016/17 the concessional and non-concessional contribution caps will remain unchanged. Oh but wait there is a caveat! SUBJECT TO NO BUGGERING ABOUT BY THE GOVERNMENT IN THE BUDGET!

ID-100264730

2016/17 Superannuation thresholds Threshold Existing 2015/16 New 2016/17
Standard Concessional contributions cap (per annum) No change $30,000 $30,000
Temporary (higher) concessional contributions cap1 (per annum) for 2016/17, for people age 49 and over on 30 June 2016 – No change $35,000 $35,000
Non-concessional contributions cap – No change

− Standard (per annum)

− Bring forward (over 3 years)

 

$180,000

$540,000

$180,000

$540,000

Co-contributions (per annum)

− Lower income threshold

− Higher income threshold

 

$35,454

$50,454

$36,021

$51,021

Superannuation Guarantee (SG) maximum contribution base (per quarter)

Note: Current 9.5% SG percentage until 30 June 2021

$50,810 $51,620
CGT cap amount (lifetime limit) $1,395,000 $1,415,000
Low rate cap amount – No change

(Applies to the taxable component of taxed super fund benefits for members aged from preservation age to 59)

$195,000 $195,000

 

Threshold (Continued) Existing 2015/16 New 2016/17
Untaxed plan cap amount

(Applies to the taxable component of untaxed super fund benefits)

$1,395,000 $1,415,000
Tax-free part of genuine redundancy and early retirement scheme payments (per payment)

− Base limit

− Plus, for each completed year of service

 

$9,780

$4,891

$9,936

$4,969

Employment termination payment cap (per annum) No change $195,000 $195,000
Minimum annual payments for super income streams No change
Under age 65 4% 4%
Age 65 – 74 5% 5%
Age 75 – 79 6% 6%
Age 80 – 84 7% 7%
Age 85 – 89 9% 9%
Age 90 – 94 11% 11%
Age 95+ 14% 14%

 

Preservation age reminder
Date of birth Preservation age
Before 1 July 1960 55
1 July 1960 – 30 June 1961 56
1 July 1961 – 30 June 1962 57
1 July 1962 – 30 June 1963 58
1 July 1963 – 30 June 1964 59
From 1 July 1964 60

Confused? – Call me or email.

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

Liam Shorte B.Bus SSA™ AFP

Financial Planner & SMSF Specialist Advisor™

SMSF Specialist Adviser 

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

Verante Financial Planning

Tel: 02 98941844, Mobile: 0413 936 299

PO Box 6002 BHBC, Baulkham Hills NSW 2153

5/15 Terminus St. Castle Hill NSW 2154

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

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

Image courtesy of Stuart Miles at FreeDigitalPhotos.net

SMSF Jargon busting – Who are the related parties of an SMSF?


"Related Parties"

So you have a great idea to move some assets to your SMSF but you want to stay within the rules and keep your fund compliant. Then you hit the jargon associated with Superannuation rules and regulations.

You need to understand who are “related parties” of your SMSF for two reasons, to ensure compliance with the acquisition from a related party rules and to determine the in-house assets.

A related party is defined in the Superannuation Industry Supervision) Act 1993 known as the SIS Act. This is the bible when it comes to Superannuation so you should save that link above. Anyway in the SIS Act sec 10(1) a related party is defined as:

  • Fund member
  • Standard employer-sponsor of the fund or
  • Part 8 associate of a fund member or a part 8 associate of a standard employer-sponsor of the fund.

Ok the first one is easy. Any member including you yourself is a related party.

Standard Employer

A standard employer sponsor of a fund is an employer who contributes to the fund due to an agreement between the employer and the trustee of the fund. These were common in the early days of SMSFs but largely non-existent now.

Where an employer only contributes to a fund due to an agreement between the member and the employer such as under a salary sacrifice arrangement, they will not be considered a standard employer sponsor.

If an SMSF has a standard employer sponsor, which would be uncommon, the relationship will be noted either in the trust deed or in an attached schedule to the deed.

Part 8 associate

Now prepare for a headache to hit you hard after reading this one.

Part 8 associates are broken down in the legislation to Part 8 associates of individuals, companies and partnerships. However, if there is no standard employer sponsor, we only need to examine the part 8 associates of the members who will always be individuals.

The part 8 associates of a member are:

  1. a relative of the member (parent, grandparent, brother, sister, uncle, aunt, nephew, niece, linear descendant or adopted child of the member or their spouse or a spouse of the aforementioned)
  2. other members of the SMSF (a person who is not a member but acting as individual trustee or director under an Enduring Power of Attorney is not necessarily a Part 8 associate)
  3. a partner of the member (legal partnership, not ‘business partners’ i.e. company directors) and their spouses and children
  4. the trustee of a trust the member controls and
  5. a company sufficiently influenced by, or in which majority voting interest is held by the member and their Part 8 associates either individually or together.

A member of the fund will be deemed to control a trust where the member and/or their part 8 associates are:

  • entitled to a fixed entitlement of more than 50 per cent of the capital of the trust,
  • entitled to a fixed entitlement of more than 50 per cent of the income of the trust,
  • able or accustomed (formally or informally) to direct the trustees to act in accordance with their directions or
  • able to appoint or remove trustees.

A company will be deemed to be controlled by a member where the directors are accustomed or under an obligation to act under the instructions of the member and/ or their Part 8 associates or the member and/ or their part 8 associates have more than 50 per cent of the voting rights.

OK, so I warned you to beware of the headache inducing nature of dealing with “Part 8 Associates”. Was I right or was I RIGHT!

The best advice I can give you is to get advice before transferring assets and ask for the advice and get that advice in writing so all parties are sure of the scenario and no mistakes are made.

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

Liam Shorte B.Bus SSA™ AFP

Financial Planner & SMSF Specialist Advisor™

SMSF Specialist Adviser 

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

Verante Financial Planning

Tel: 02 98941844, Mobile: 0413 936 299

PO Box 6002 BHBC, Baulkham Hills NSW 2153

5/15 Terminus St. Castle Hill NSW 2154

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

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

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