Succession planning and the transfer balance cap

The superannuation transfer balance caps have been problematic for SMSF members who don’t take careful consideration when succession planning.

Failure to understand the impact of these transfer balance cap changes can have on your finances may force you to transfer large amounts of money out of your super.

The transfer balance cap of $1.6 million that was introduced as of 1 July 2017 limits the amount of superannuation that can be transferred into an individual’s retirement phase. The cap incorporates all accounts the individual holds balances in.

SMSF members ought be weary of the scenario in which a SMSF is paying two pensions, one to each party of a couple where both parties are receiving money under the transfer balance cap. When one of the spouses die, the remaining spouse could be in breach of the transfer balance cap because now they are the sole beneficiary of more than $1.6 million.

Luckily, if you take time to plan carefully how to avoid the above limitations, you can have control over where (and to who) your super will go to when you pass.

Consider the following:

Accumulation vs pension phase
The new transfer balance cap rules state that, at any given time, individuals cannot have more than $1.6 million in their pension phase. The money in the pension phase is taxed at zero percent; the money in the accumulation phase is taxed at 15 per cent. If you are already in the pension phase, and are with a spouse also in the pension phase, it is fruitful to think ahead as to what will happen to the money when one of you passes. Perhaps looking into what investments you can make now would be wise, particularly given that investment properties held for a period of longer than 12 months are taxed at a rate of 10 per cent.

Nominations
One option is to execute a binding death benefit nomination, which allows an individual to nominate who they would like their death benefits to be paid to. When preparing the BDBN, an individual can elect where their money goes and the trustee of their estate is bound to carry out these wishes. The other option is to execute a non-binding death benefit nomination, which allows the trustee some flexibility as to where they place your money. This is a good option if your wishes for your money are not as tax effective as possible; the trustee has the option to vary where you wanted the money to be placed.

In addition, when succession planning, it is important to remember that superannuation is not an asset that forms part of an individual’s estate; there are limitations as to who is a beneficiary of another’s superannuation. An individual must be a dependent of the deceased or a legal personal representative. If an individual fits this criteria, there are only two ways that they can be paid the benefit; through an income stream or via a lump sum.

To ensure you are not leaving your spouse or children the stress of the repercussions of breaching the transfer balance cap when you pass, speak to one of our accountants to establish the best possible plan for your estate.

Secrets to a savvy SMSF

Opting for a self-managed super fund (SMSF) can be a clever financial decision, but it’s not for everyone.

If you aren’t prepared to adhere to the following tips, your SMSF will most likely fail to perform as well as you would of hoped it to.

Stay informed
You can’t expect your SMSF balance to be the most profitable for you in your retirement phase if you don’t remain educated on the vastly changing compliance laws. Remaining up-to-date with these changes, and how they impact upon your nest egg is an essential aspect of making your SMSF work for you, your spouse and your children.

Strategy
The ultimate long-term goal of your SMSF is to allow you to retire comfortably, maintaining the life you have become accustomed to throughout your working years. To do this, you need to have a strategy; the decisions you make regarding your SMSF should be part of this strategy, not just transfers here and there because your financial advisor told you to. Your strategy should be reviewed at least annually. You need to be aware of how each decision will impact upon and ultimately lead you towards the financial security you work so hard to achieve for your later years.

Seek advice
Running a self-managed super fund doesn’t involve having all the answers, but it does require understanding when it’s time to talk to a professional to get the best advice on your SMSF. You can never ask too many questions when it comes to your future financial security.

Super funds boast high returns in 2017

Superannuation funds in Australia have delivered a return of 10.5 per cent for 2017 – the first double-digit growth since 2013.

According to recent findings, there was a 1.3 per cent rise in November 2017 and 0.6 per cent rise in December 2017 alone.

The new figures mark the sixth consecutive year of positive returns for super funds.

Super fund returns overtook returns in the property market, as property returns weighed in at 9.1 per cent last year.

Investors should review their super fund’s performance at the start of the new year and make sure it is delivering value for money outcomes.

Although the returns provide a degree of confidence for investors, it is important to remember that markets are volatile and having a long-term investment strategy in place is vital.

Super housing legislation

The First Home Super Saver (FHSS) Scheme and the downsizing contributions into superannuation measures passed Parliament on 13 December 2017.

As of 1 July 2017, individuals can make voluntary concessional and non-concessional contributions into their super fund as part of the FHSS Scheme. The scheme may help first home buyers save faster due to the concessional tax treatment within super.

From 1 July 2018, individuals can then apply to release their contributions, along with associated earnings, to help purchase their first home.

The downsizing contributions into super measure allows individuals who are 65 years and over to make a contribution into their super after selling their home.

Contributions of up to $300,000 from the proceeds of your main residence can be added into your super fund. Your spouse may also be able to make a contribution.

To be eligible for a downsizer contribution, you must have entered into the contract of sale on or after 1 July 2018 and have owned the home for 10 years or more.

Downsizer contributions will be taken into account for determining eligibility for the age pension.

Excess Transfer Balance Determinations from January 2018

The Australian Tax Office will start sending Excess Transfer Balance (ETB) Determinations from January 2018.

ETB determinations will be sent to any individuals who have exceeded their transfer balance cap and have not taken any steps to correct this error.

If you manage a SMSF and have exceeded the balance transfer cap by less than $100,000 on 1 July 2017 as a result of income streams in existence prior to 20 June 2017, you have until 31 December 2017 to commute the excess capital, under transitional rules.

If you manage a SMSF and have exceeded the balance transfer cap by more than $100,000, under the transitional rules, you may receive the ETB determination. The ATO becomes aware of transitional balance cap breach based on information APRA funds pass on.

If you receive an ETB determination from the ATO, remember the following:
– The quicker the member rectifies the amount owing set out in the ETB Determination from the retirement phase, the lower the amount of excess transfer balance tax they will be required to pay.
– The SMSF trustee must report information relevant to the member to the ATO, so that they have all the relevant information needed. It is important to do this straight away, if it has not already been done.
– You must commute the amount owing as listed on the ETB Determination from retirement phase. If you choose to remove the amount by making a large pension payment, you will still be in excess of your transfer balance cap as the large pension payment will not, under the circumstances, result in a debit on your transfer balance account.
– You may keep the excess amount determined in the ETB Determination in an accumulation phase account, unless you are commuting a death benefit income stream. If you are, the amount needs to be removed from the super stream.
– Ensure minimum pension payment standards are met at the time of commuting money into your income stream.

If you have any questions or queries regarding Excess Transfer Balance Determinations and how this may affect you, please do not hesitate to contact our office.

ATO action on overdue SMSF annual returns

The Australian Tax Office (ATO) is cracking down on self-managed super funds (SMSFs) that have overdue SMSF annual returns, particularly those with two or more returns overdue.

As part of its compliance action, the ATO is currently:
– Cancelling approximately 9,000 ABNs of SMSFs that show no evidence of operating
– Writing to SMSF trustees who are in pension phase to remind them that they still have a lodgment obligation
– Continuing to focus on SMSFs with high levels of income and/or high-value assets who also have overdue returns
– Taking further compliance and audit action on selected SMSFs
– Visiting selected tax agents to obtain feedback on why their SMSF clients’ lodgments are overdue
– Contacting tax agents by phone to obtain an agreed date for lodgment of overdue SMSF annual returns.

SMSFs that do not meet the agreed lodgment timeframes will be subject to serious financial implications.

SMSFs warned of risky retirement planning

The ATO is warning self-managed super fund (SMSF) trustees about the risks of some emerging retirement planning arrangements.

Retirees or SMSF trustees who are involved in any illegal arrangement, even by accident, may face severe penalties, risk losing their retirement savings, and potentially, their rights as a trustee to manage their own fund.

The Tax Office has released additional information through their Super Scheme Smart Program to help educate retirees and trustees of these complex tax avoidance schemes and arrangements.

Super Scheme Smart provides case studies and information packs to ensure taxpayers are informed about illegal arrangements including what warning signs to look for and where to go for help.

Many of the arrangements are cleverly designed to look legitimate, give a taxpayer a minimal or zero amount of tax or tax refund or concession, aim to give a present day tax benefit and involve a fair amount of paper shuffling.

Some arrangements may be structured in a way which appears to satisfy certain regulatory rules, however, these arrangements are often ‘too good to be true’ and are in fact illegal.

Among the ATO’s previous concerns about dividend stripping arrangements and contrived arrangements involving diversion of personal services income to an SMSF, there are some new arrangements on the Tax Office’s radar, including:
– Artificial arrangements involving SMSFs and related-party property development ventures.
– Arrangements where an individual or related entity grants a legal life interest over a commercial property to an SMSF. This results in the rental income from the property being diverted to the SMSF and taxed at lower rates whilst the individual or related entity retains legal ownership of the property.
– Arrangements where individuals (including SMSF members) deliberately exceed their non-concessional contributions cap to manipulate the taxable component and non-taxable component of their fund balance upon refund of the excess.

If you are concerned about your involvement with such arrangements, you can contact the Tax Office early to work towards a resolution.

SMSF annual return for pension phase trustees

Self-managed super fund (SMSF) trustees who are in pension phase must lodge their SMSF annual returns if they remain active, or choose to wind up the fund.

The ATO is warning SMSF trustees about their regulatory obligations and is paying close attention to those SMSFs that are not meeting their lodgment obligations.

Trustees must lodge a Self-managed superannuation fund annual return 2017 if it was a self-managed super fund on 30 June 2017, or a self-managed super fund that was wound up during 2016-17.

Super funds that are not SMSFs at the end of 2016-17 must use the fund income tax return 2017 and, where required, a separate super member contributions statement.

Even if your fund does not have a tax liability, your SMSF must lodge an SMSF annual return.

SMSFs: Stats

The Australian Tax Office (ATO) has released its June 2017 quarterly SMSF statistical report detailing key SMSF figures.

As of June 2017, the number of SMSFs increased to 596,516. The number of SMSF members in Australia is 1,124,453.

The estimated value of total Australian and overseas SMSF assets is $696.7 billion.

The number of annual wind-ups including both those initiated by trustees and those as a result of ATO compliance and cleansing activity was 1,419 as of June 2017. This is a significant decrease from 10,551 in June 2016.

The top five asset types held by SMSFs by value include listed shares (30 per cent or $212,210m), cash and term deposits (23 per cent or $159,686m), non-residential real property (11 per cent or $74,772m), unlisted trusts (10 per cent or $71,455m) and other managed investments (5 per cent or $37,695m).

SMSF: Capital vs revenue expenses

Self-managed super funds (SMSFs) have access to a range of tax deductions for expenses incurred. Whether the expenses are capital in nature or are considered as revenue will affect eligibility for claiming such deductions.

The Tax Office considers an expense that is incurred in establishing or making enduring changes to a super fund’s structure or function as capital and not deductible under the general deduction provision. For example, the costs of establishing an SMSF are capital in nature. An expense incurred in acquiring capital assets is also usually capital in nature.

Trust deed amendment costs incurred in establishing a trust, executing a new deed for an existing fund and amending a deed to enlarge or significantly alter the scope of the trust’s activities are generally not deductible as they are capital in nature.

If trust deed amendments are required to facilitate the ongoing operations of the super fund, they are generally deductible. For example, if a fund amends a trust deed to keep it up to date with changes in super legislation this would be deductible.

Furthermore, expenses incurred in making changes to the internal organisation or day to day running of the fund are not considered to be capital in nature provided such changes do not result in an advantage of a lasting character. If a super fund is carrying on a business, it may be entitled to deduct certain capital expenses under the specific deduction provision, section 40-880 of the ITAA 1997.

Funds that incur expenditure in gaining or producing exempt income or incur expenditure of a capital, private or domestic nature cannot access a deduction under Section 8-1 of the ITAA 1997.

Contact our office if you have any questions about the deductibility of your SMSF’s expenses.