What is Salary Sacrificing for Super

One of the most effective ways to add to your super balance is through salary sacrifice. Salary sacrifice involves the employee agreeing to exchange a portion of their salary (before tax) for an increase in superannuation contribution by their employer.

Contributions made through salary sacrifice are classified as employer contributions, not employee contributions. These are taxed at a maximum of 15% (if you earn under $250,000 per year) which is lower than the marginal tax rate most employees are charged. The amount that you ‘sacrifice’ cannot be assessed for taxation purposes i.e. it is not subject to PAYG. Employees should ensure that their contributions per year are not above $25,000 as this is the cap on concessional contributions and if surpassed, will require additional tax to be paid.

Salary sacrifice is an effective way to minimise tax liability and increase super contributions if individuals are earning a greater amount than they require for annual expenses.

After beginning the salary sacrificing process, employees should keep a look out for two important matters. First, the calculation of ordinary time earnings by your employer that super applies to, does not change. Second, the amount which is paid to your super through the salary sacrifice agreement does not contribute towards any super guarantee contributions that are required of your employer. Employees should verify that neither of these occur, and verify any confusion with their employer.

Salary sacrifice is a trade off between income earned in the present, and contributions made for the future. Employees may experience difficulty in finding a balance which suits them or taking different aspects of their finances into consideration for the agreement with their employer. Asking for professional assistance to determine specifications for the agreement could help simplify this procedure.

Amnesty means that 24,000 businesses own up to underpaying Aussies superannuation

An amnesty scheme which ended earlier this month has caused around 24,000 businesses to admit to underpayment of their worker’s super. A total of 588 million dollars will be distributed to almost 400,00 individuals.

The scheme, which covered payments from the introduction of super in 1992, gave employers the opportunity to come clean without any consequences as long as they paid the unpaid super as well as 10% interest for every year the money was overdue.

The ATO will be directing its attention at any businesses that did not admit fault and these businesses will face severe penalties.

Many individuals are looking to access their superannuation early in order to have support during these times. Although there is criticism of early access to super, this facility has been helpful to many families to keep afloat.

What to consider when consolidating your super

The ATO reported that 45% of working Australians were not aware that they had multiple super accounts in 2016. Having multiple super accounts is particularly common for individuals who have had more than one job. If this is you, it is important to identify and manage your super accounts because having more than one can be costly as a result of account fees from multiple funds.To combat this, you may want to consolidate your super, which moves all your super into one account. Not only does this save on fees, but it also makes your super easier to manage and keep track of.

Before consolidating your super, it is important to do the following:

Research your funds’ policy
Compare your active super accounts so you can make the right choice about which one you should close. Things to assess include:

• Exit fees
• Insurance policies
• Investment options
• Ongoing service fees
• Performance of the funds

Check employer contributions
Changing funds may affect how much your employer contributes, as some employers contribute more to certain funds. Check your current accounts to see if changing funds will affect this. Once you have selected a super fund, regardless of whether you choose a new super fund or one of your existing ones, provide your employer with the details they need to pay super into your selected account.

Gather the relevant information
When consolidating your super, you will need to have the following details ready:

• Your tax file number.
• Proof of identity. This could include your driver’s license, birth certificate or passport.
• Your fund’s superannuation product identification number (SPIN).
• Your fund’s unique superannuation identifier (USI).
• Details of your previous fund.

What is an SMSF auditor and what do they do?

Self-managed super fund (SMSF) trustees are required to appoint an ATO-approved SMSF auditor no later than 45 days before lodging their SMSF annual return. An SMSF auditor is a professional who assesses your fund’s compliance with superannuation law and examines your fund’s financial statements.

SMSF auditor eligible requirements
Your SMSF auditor must be:

• Independent. SMSF auditors cannot audit a fund that they hold financial interest in, or have a close personal or business relationship with the SMSF members or trustees.
• Registered with ASIC (Australian Securities & Investments Commission) and holds an SMSF auditor number for you to provide on your annual return.

What will your SMSF auditor do?
An SMSF auditor provides you with an independent opinion on the existing assets in your SMSF and whether or not your fund complies with the rules outlined in the Superannuation Industry (Supervision) Act 1993.

When preparing for an audit, an SMSF auditor will issue a Terms of Engagement Letter to the trustee(s) of the fund, which includes the roles and responsibilities for parties involved in the audit as well as the range of the audit. In the case that your SMSF auditor’s primary contact is your accountant, your accountant will be issued a separate Terms of Engagement Letter.

By clearly outlining each parties’ capabilities, a Terms of Engagement Letter helps you, your accountant and your auditor to avoid any misunderstandings and also protects audit evidence provided by your auditor from unintended alterations. In turn, SMSF auditors who fail to follow standards or take shortcuts can be sued or imposed penalties by the Court.

The Terms of Engagement Letter also acts as a contract to keep parties accountable during compliance breaches and prevents cases of ‘opinion shopping’ where trustees look to other auditors for unqualified opinions. Trustees may end up being audited by the ATO in the event that they breach the Terms of Engagement Letter and ‘opinion shop’, as it comprises auditor independence.

Buying property through your SMSF

Using SMSFs to buy property has become increasingly popular among Australians in recent years, particularly since it became possible for SMSFs to borrow money to fund a direct property purchase.

Residential property

A residential property owned by an SMSF has some limitations as to who it can be leased to.

To buy property through your SMSF, the property must meet the following requirements:

• It meets the ‘sole purpose test’ of solely providing retirement benefits to members of the fund.
• It is not acquired from a related party of a fund member.
• It is not to be lived in or rented by a fund member or a party related to a fund member.

Commercial property

A commercial property owned by an SMSF can be leased to a wider range of tenants than residential properties. Commercial property purchased for business purposes can be purchased from a member of the SMSF or a related entity. This allows small business owners to use their SMSF to purchase the premises from which their own business is run, enabling them to pay rent directly to their fund. This can be preferable to paying rent to an alternate landlord. However, keep in mind that rent must be at market rate and be paid promptly and in full at each due date.

SMSF borrowing

SMSFs can borrow money to purchase a property, however, the borrowing criteria for an SMSF is generally much stricter than regular property loans taken out by individuals. All loans must be undertaken through a limited recourse borrowing arrangement (LRBA). An LRBA involves an SMSF trustee taking out a loan to purchase a single asset, such as a residential or commercial property. Under the Superannuation Industry (Supervision) Act 1993, super fund trustees can use borrowed money to pay for regular repairs and maintenance. However, borrowed money under the LRBA cannot be used for property improvements or renovations that result in the acquirable asset becoming a different asset. This may include adding additional rooms to the property or completely renovating a room.

Tax consequences

Buying and renting property through an SMSF also comes with tax consequences. SMSF funds are required to pay 15% tax on rental income from properties purchased through the fund. However, properties held for over 12 months receive a one third discount on any capital gains made upon the sale, bringing any CGT liability down to 10%.

Expenses such as interest from loans, council rates, maintenance and insurance can be claimed as tax deductions by the SMSF.

As well as this, once SMSF members reach pension phase, any rental income or capital gains arising in the fund will be tax-free.

SMSF property costs

SMSF property sales often attract higher fees that can end up reducing your super balance. Fees and charges can include:

• legal fees,
• property management fees,
• bank fees,
• advice fees, and
• stamp duty.

How to select a default fund for your business

Business owners might be required to select a default fund for employees when they do not want to nominate their own superannuation funds. Funds should meet specific requirements that are stated as per super law, so it is important to select a complying fund. However, there are other factors that you may have to think about before selecting a default fund to make sure that you and your employees get the most out of it.

Pricing
Naturally, one of the main considerations while selecting a super fund should be pricing. Funds that have a lower fee may not cover extras, and this requires careful analysis to see what extras have been left out. Coverage for extras like being able to track down missing super is a key feature that employees will prefer your default fund has.

Employee preferences
Employees are likely to prefer funds that allow flexibility with their investment options and have essential features like insurance policies covering death, total and permanent disability (TPD), and income protection. You may want to consider options that give your employees a comprehensive cover while keeping an eye out for any exclusions that might affect you.

Industry fund
Checking industry funds may help reveal awards that are particularly applicable to employees from your industry. It is a requirement that your default fund is a MySuper product. All listings under Industry SuperFunds are MySuper products, so this can simplify the process of finding an affordable super fund for your employees.

Fund management
Finally, consider taking a closer look at the fund’s insurance offerings. Past performance of the fund doesn’t guarantee high returns in the future. But it is important to be aware of the returns on the fund’s investments to compare how their options have performed against their return objectives. This can increase the chances that the selected super fund will be beneficial to you and your employees.

How to avoid SMSF disputes

Self-managed super funds (SMSF) can be vulnerable to disputes, especially when family members are involved.

SMSF disputes may be caused by a number of reasons such as relationship breakdowns, (common in funds where parents and siblings are in a member and trustee relationship) and fundamental differences in opinions. Other common triggers for SMSF disputes include:

• investment strategy disagreements,
• differences in opinions over the payment of benefits, especially in SMSFs involving both parents and their children,
• payment of death benefit disputes, and
• disagreements on the distribution of SMSF death benefit payments between surviving members.

Consider the following methods to avoid SMSF disputes.

Clear decision-making procedures
Disagreements are bound to occur when it comes to money, so it is important to include concise decision-making provisions to keep things fair for all parties involved. For example, trustee decisions can be made by a simple majority rather than unanimously, and a particular trustee may be provided a casting vote in the case that a deadlock occurs. Provisions could also include voting rights that are based on the value of a member’s account balance within the SMSF to avoid situations where a member with minority interest out-votes a member with a large fund account balance.

Updating your SMSF regularly
An SMSF trust deed will provide provisions which determine the trustees’ rights, obligations and options. It is important to keep your SMSF and trustee information up to date to prevent any unwanted beneficiaries and claims. For example, in the case of an unfinalized divorce or legally unchanged relationship status, a former spouse can claim the others’ superannuation death benefits. To prevent such situations and avoid their inevitable disputes, be sure to update your super fund regularly.

What circumstances permit early access to your super?

Early access to your superannuation is permitted under a few limited circumstances outlined by the ATO. In the case that you are experiencing financial struggle and would like to withdraw from your super, be aware of the particular circumstances that will allow you to do so.

Compassionate grounds:

Withdrawing super on compassionate grounds is permitted in the event that you need money to pay for:

• medical treatment and medical transport for you or your dependant,
• palliative care for your or your dependant,
• making a payment on a home loan or council rates so that you don’t lose your home,
• accommodating a disability for you or your dependant, or
• expenses associated with the death, funeral or burial of your dependant.

Severe financial hardship:

You can also be permitted access to your superannuation due to severe financial hardship. However, when requesting withdrawals under severe financial hardship, individuals need to contact their super provider for access rather than the ATO.

Both of the following conditions must be met for you to be eligible to withdraw some of your super:

• you have received eligible government income support payments continuously for 26 weeks, and
• you are unable to meet reasonable and immediate family living expenses.

Superannuation that is withdrawn due to severe financial hardship is taxed as a super lump sum. You can withdraw up to $10,000 from your superannuation (minimum of $1,000) and in the case that you have less than $1,000 in your super funds, you can withdraw up to your remaining balance after tax.

Terminal medical condition:

You may be eligible to request access to your super (approval by your super fund) in the event that you have a terminal medical condition and all the below conditions are met:

• two registered medical practitioners have certified that you suffer from an illness or injury that is likely to result in death within 24 months of the date of signing the certificate,
• at least one of the two registered medical practitioners is a specialist in the area related to your illness or injury, and
• the 24-month certification period has not ended.

Temporary incapacity:

Those who are temporarily unable to work as a result of physical or mental medical conditions may be eligible for early access to superannuation. Access is dependent on the insurance benefits linked to your super account. Any withdrawals you receive are taxed (with regular rates) as a super income stream.

Permanent incapacity:

Permanent incapacity, also known as disability super benefit, allows for early access to super in the case that a permanent physical or mental condition is likely to stop you from ever working again, in a job you were previously qualified for.

Individuals can choose to receive permanent incapacity super withdrawals as regular payments (income stream) or as a lump sum. Unlike temporary incapacity, permanent incapacity super withdrawals are subject to different tax components, based on:

• the tax-free component of your super funds,
• the taxable component your super provider has paid tax on (tax element), and
• the taxable component your super provider has not paid tax on (untaxed element).

To receive concessional tax treatment, your permanent incapacity must be certified by least two medical practitioners.

Keep in mind that the ATO has also announced a new set of rules for the early release of superannuation due to COVID-19. Individuals who have been adversely affected by the pandemic may be eligible to access some of their superannuation early.

Tax-deductible super contributions

Individuals may be able to claim tax deductions for personal superannuation contributions they make. Personal super contributions are made after-tax, not to be confused with the pre-tax contributions made by employers. This includes contributions made using inheritance money, savings, proceeds from the sale of assets, or from a bank account directly into a super fund. To be eligible, individuals must receive their income from:

• salary and wages,
• super,
• personal businesses,
• investments,
• government pensions or allowances,
• partnership or trust distributions,
• a foreign source.

A valid notice of intent to claim or vary a deduction must be provided to and acknowledged by your super fund before being able to claim a deduction for personal super contributions.

A valid notice may be:

• A Notice of intent to claim or vary a deduction for personal contributions form (NAT71121).
• A form that your super fund provides.
• A written statement to your fund explaining your wish to claim a deduction for your personal super contributions.

Deductions claimed for a super contribution will result in the contribution being subject to 15% tax in the fund. As well as this, after-tax contributions that have been successfully claimed will not be eligible for a super co-contribution from the government.

Individuals who are eligible to contribute to super will be able to claim a deduction, however, some age restrictions may apply. Those aged 65 or over must meet a work test before voluntary super contributions can be made, while those under 18 years of age may only be able to claim a deduction if they have earned income as an employee or business operator during the year.

Individuals claiming deductions for their personal contributions should also keep in mind that their contributions will count towards their concessional contributions cap of $25,000 a year. Penalties may apply if this amount is exceeded.

Tax on super death benefits for dependants vs non-dependants

A super death benefit is the super paid after a person’s death, usually to a nominated beneficiary. These benefits are subject to different tax treatments, depending on whether the beneficiaries are dependant or non-dependant.

Superannuation death benefits will generally be received tax-free by tax dependants, who are considered to be:

• A child of the deceased who is under 18 years of age,
• A spouse or former spouse of the deceased,
• A person who has an interdependency relationship with the deceased (e.g. if they live together or have a close personal relationship),
• A financial dependant of the deceased.

Dependants will not have to pay tax on the tax-free component of their super in the event that they:

• Withdraw it as a lump sum, or
• Receive an account based income stream.

However, they will be taxed at their marginal rate if they receive a capped benefit income stream and:

• The deceased was at least 60 years of age at the time of death
• The dependent is over 60 years of age and the total of their tax-free component and taxed element exceeds their defined benefit income cap.

Not all super death benefits are subject to tax; for non-dependants, there is a taxable portion. This component is largely made up of after-tax super contributions that the deceased member has made.

Super death benefit payments are subject to tax when:

• The payment is made as a result of the SMSF member passing away,
• The payment is provided to a non-dependent for tax purposes,
• The payment has a taxable component.

Non-dependants must calculate how much money in the super account is a:

• Tax-free component,
• Taxable component the super provider has paid tax on (taxed element),
• Taxable component the super provider has not paid tax on (untaxed element).

The amount of tax non-dependants pay will be based on their marginal tax rate, however, this amount may be reduced by tax offsets. For the taxed element of the taxable component, the effective tax rate is your marginal tax rate of 17% (whichever is lower). For the untaxed element of the taxable component, the effective tax rate is 32% or your marginal tax rate (whichever is lower).