SMSF deadline approaches for limited recourse borrowing arrangements

SMSF trustees have until 31 January 2017 to review their limited recourse borrowing arrangements (LRBAs) to ensure they are consistent with an arm’s length dealing, or alternatively brought to an end if they are not.

The Tax Office recently provided further guidance to SMSF trustees on when the non-arm’s length income (NALI) provisions apply to an SMSF’s LRBA in their Practical Compliance Guideline (PCG 2016/5) and Taxation Determination (TD 2016/16).

When determining whether the NALI provisions apply, SMSF trustees must recognise it is a two-step process. First, it needs to be determined whether:
1. The terms of the LRBA are consistent with the safe harbours in PCG 2016/5
2. The SMSF trustee can otherwise demonstrate that they are arm’s length.

If the borrowing arrangement is on arm’s length then SMSF trustees do not have to consider TD 2016/16 and the ATO will not apply the NALI provisions.

However, trustees with an LRBA on terms that are non-arm’s length will need to consider TD 2016/16. Trustees will need to consider the second limb of the NALI provisions and whether or not the income the fund obtains under the arrangement is greater than it would otherwise have been.

SMSF trustees should be aware that TD 2016/16 is not an alternative to the safe harbours set out in PCG 2016/5 and only applies if borrowing terms of an LRBA are non-arm’s length.

Salary sacrificing your super

Contributing extra to your superannuation is a good way to boost your retirement funds.

One of the ways you can add more to your super is through salary sacrificing. Salary sacrifice is an arrangement with your employer to forego part of your salary or wages in return for your employer providing benefits of a similar value.

Salary sacrificing your super means your employer will redirect some of your salary or wages into your super fund instead of to you.

These salary sacrifice contributions are taxed at a maximum rate of 15 per cent, which is generally less than your marginal tax rate. The sacrificed amount will not be considered a fringe benefit if the super contributions are made to a complying super fund.

There is no limit to the amount you can salary sacrifice (provided there are no limitations in your terms of employment); however, you must be wary of the concessional (before-tax) contribution cap. If you go over the cap, you may have to pay additional tax.

Keep in mind, the salary sacrificed amounts count towards your concessional contributions cap, in addition to your employer’s contributions (i.e. compulsory employer contributions).

Generally, excess contributions will be included as taxable income, taxed at your marginal tax rate plus an excess contributions charge. Note, that your age may affect the concessional contributions cap, how the cap applies and what options you may have.

Individuals should also consider whether the amount sacrificed will attract Division 293 tax. This tax applies when you have an income and concessional super contributions of more than $300,000, or over $250,000 from 1 July 2017. Division 293 tax levies 15 per cent tax on taxable contributions above this threshold.

If you do choose to salary sacrifice into super, remember contributions don’t count when the payment is sent, only when it is received by your fund. Make sure your fund receives all your contributions by 30 June.

Are you short-changing your employees on super?

A new report has revealed around 2.4 million or almost one third of Australian workers are missing out on some or all of their super entitlements and little is being done about it.

Under the Superannuation Guarantee (SG) employers must contribute 9.5 per cent into the super account of every worker over the age of 18 earning $450 a month.

But, according to data from the Australian Taxation Office and Australian Bureau of Statistics, many Australian employers are dodging compulsory superannuation payments to the tune of $3.6 billion a year (2013-2014). This equates to $1,489 or close to four months of super for the average worker affected.

Small and medium-sized businesses were found to be least likely to pay SG and workers under the age of 30 were more likely to miss out; 37 per cent of 20-24 year-olds compared to 23 per cent of 50-54 year-olds.

Currently, employers have up to four months to pay SG. SG payments must be made to complying funds or retirement savings accounts (RSAs) by the quarterly due dates, which are 28 days after the end of each quarter.

Employers who don’t pay the minimum amount of SG for their employee into the correct fund by the due date, may have to pay the super guarantee charge (SGC).

The SGC is made up of: SG shortfall amounts calculated on the employee’s salary or wages; interest on those amounts (currently 10 per cent) and an administration fee ($20 per employee, per quarter).

Employers who fail to meet their SG obligations may also be liable for a range of penalties or charges on top of the super guarantee charge.

Paying super is an important part of being an employer. To ensure your business remains compliant, remember to: pay the right amount (9.5 per cent) of employee ordinary time earnings; pay on time; pay the right way and keep records to show you have met your obligations.

Benefits of franking credits in a SMSF

Dividend franking turns 30 in 2017. Despite this, many are unfamiliar with the benefits franking credits can bring, especially to SMSFs.

SMSF trustees who invest in Australian shares can benefit from franking credit refunds which can offset the fund’s expenses, such as tax payable or any lump sums. A franking credit, also known as an imputation credit, is the amount of tax paid by a company of the dividend to the SMSF.

Franking credits are particularly beneficial for SMSFs as the tax rate for the fund is 15 per cent, while franking credits can be equal to 30 per cent of the gross dividend – leaving a significant excess to offset any tax payable on the other taxable income earned by the fund.

When the fund is in pension phase, there are even more benefits as the tax rate is reduced to zero per cent. If the franking credits are larger than the SMSFs tax liabilities, the fund will receive a refund for the excess credits.

A company will only distribute franking credits if a SMSF satisfies the holding period rule, where the fund retains the shares “at risk” for at least 45 days, excluding the day your fund acquires or sells its shares. This is extended to at least 90 days for some preference shares.

Government passes ‘fairer’ super changes

The Australian Government has recently passed what it is calling the ‘most significant superannuation reforms in a decade’.

The reforms include the introduction of a $1.6 million transfer balance cap, which places a limit on the amount an individual can transfer into the tax-free earnings retirement phase and the introduction of the Low Income Superannuation Tax Offset, which is expected to boost the retirement incomes of around 3.1 million low income earners.

Under the confirmed changes, which will come into effect on 1 July 2017, the cap on concessional (before-tax) contributions will be decreased from $30,000 (for those under the age of 50) or $35,000 (for those aged 50 years old and over) to the flat rate of $25,000 per year.

From 1 July 2018, individuals with less than $500,000 in their superannuation accounts will also be allowed to make ‘catch-up’ concessional contributions. This is designed to help those with broken work patterns – many of whom are women – better save for their retirement. Previously, this option did not exist for those who had left the workforce.

The tax rate of 15 per cent for those who earn up to $300,000 and 30 per cent for those who earn income above that amount has also been changed. The new income threshold at which the higher tax rate will start will be $250,000.

The overall changes to concessional contributions are designed to level the playing field and provide more Australians with the opportunity to make full use of their concessional contributions cap.

The new annual cap for non-concessional (after-tax) contributions will be reduced from $180,000 to $100,000, and a new lifetime cap of $1.6 million will be introduced. Individuals under the age of 65 will be able to bring-forward three years of contributions.

The tax offset for spouse contributions will be allowed where the spouse’s annual income is less than $40,000. Previously, this offset was only allowed where the recipient’s income was less than $10,800.

After 1 July 2017, the tax-free transfer limit for a fund in pension phase will change to $1.6 million. Earnings will also be tax-free for those with balances of up to $1.6 million and balances above the $1.6 million mark will be taxed at 15 per cent.

The removal of the ‘10 per cent rule’ will also help ensure a level playing field for access to superannuation tax concessions irrespective of a person’s employment situation. According to the Government, this will be of particular help to contractors who also draw income from salary and wages.

Succession planning for SMSFs

A mandatory component of managing a self-managed super fund (SMSF) is planning out what will happen to the fund if its trustee was to pass away.

While succession planning may not be one of the first responsibilities that comes to mind when managing an SMSF, it is a necessity that can provide certainty and peace of mind for a deceased trustee’s family.

It is also especially important in cases where one trustee, for example, a husband, takes a more active role in the management of an SMSF than his wife and fellow trustee, and wants to reduce any potential burdens involved in the fund’s administration and compliance if he was to pass away.

Succession planning can become quite complex if little or no attention is paid to it on an ongoing basis, but there are ways trustees can ensure the best outcome for both the fund and their family.

One option for a sole member fund is to appoint another trustee. Please note that the non-member trustee cannot be the employer of the member unless they are related. This would not be an option for a fund with two members as the available exemptions only apply to single member funds.

Those who appoint a family member or close friend must consider first whether they are suitable for a role; running an SMSF requires expertise and knowledge, and appointing someone with limited experience may not be in the best interest of the fund’s future.

Some SMSF trustees may also choose to appoint an enduring power of attorney. An enduring power of attorney is someone who makes decisions on the trustee’s behalf, if they become incapacitated or pass away. Common power of attorneys include accountants, financial advisors and lawyers; basically those who understand SMSF management and the associated challenges.

Another option is to have a binding death benefit nomination (BDBN) in place. Since a person’s superannuation does not make up part of their estate and is therefore not automatically covered by their Will, a BDBN is often a good solution to help with the distribution of super member benefits.

There are alternative strategies that may be more appropriate than an SMSF, depending on your individual financial situation. As usual any investment decision is best made with the input of an appropriate financial advisor.

The benefits of using a re-contribution strategy

A re-contribution strategy involves withdrawing your superannuation and re-contributing it back into the fund as a non-concessional (after-tax) contribution.

It is an easy strategy to implement and can provide significant tax savings for a trustee and their family in the future. This is because the strategy converts the taxable portion of the withdrawn super amount into tax-free components, therefore reducing the amount of tax payable when the person’s superannuation is passed onto their beneficiaries when they pass away.

However, this strategy is only available to those who have met a condition of release to access their superannuation and are eligible to make a contribution back into their superannuation.

The strategy is most beneficial for those who are 60 years of age. This is because the strategy involves withdrawing a lump sum and paying any necessary tax on the withdrawal, and those who are aged 60 years or over generally do not have to pay tax on lump sum withdrawals they make from super.

Before implementing the re-contribution strategy, individuals should consider whether the strategy will be worthwhile in the long run. Those who are under the age of 60 wanting to use the strategy will not be able to withdraw their total superannuation balance tax-free. Those who have also triggered the bring-forward rule in the financial year they wish to use the strategy may also be at risk of paying more ‘excess contributions tax’.

As with most superannuation strategies, seeking professional financial advice may be best before implementing the re-contribution strategy.

Transition to retirement (TTR) changes

With the Federal Government’s proposed changes to the transition to retirement (TTR) pension to take effect from 1 July 2017, those with existing arrangements should review them to avoid any adverse impact on their retirement funds.

Paying tax on superannuation contributions

The amount of tax an individual pays on their super contributions depends on whether the contributions were made before or after they paid income tax; they have exceeded the super contributions cap or they are a very high-income earner.

Accessing your superannuation

Australians are required to meet a condition of release under superannuation law before they are allowed to cash preserved benefits, restricted non-preserved benefits or access any of their super.

Some conditions of release restrict the form of the benefit or the amount of benefit that can be paid. These are known as ‘cashing restrictions’.