Cutting down to the essentials

Self-managed super funds (SMSFs) are an attractive option for those who want more control over their retirement savings. However, trustees who have run a fund for as long as SMSFs have been in existence (around 20 years) are likely to have accumulated a lot of paperwork, especially if they engaged in various super strategies throughout the years.

Since SMSFs have a statutory obligation to retain certain documents for certain lengths of time, it can be difficult to know what records trustees can afford to cull and continue to satisfy super rules. Another consideration is what information is necessary to provide the ATO so it can calculate any tax due when trustees die and the balance remaining in the fund is to be paid to beneficiaries.

For instance, when an SMSF trustee commences a pension, they are required to prepare trustee minutes which must be kept for ten years. The minutes must be signed and retained as they confirm the terms of the pension being paid to the member.

Records of the major investment decisions and any records that relate to the appointment of fund trustees also need to be kept for ten years. Appointing an enduring power of attorney is another long-term record that must be kept.

A good option for those wanting to cut back on storage requirements is to store documents electronically, as the ATO will accept electronic copies of many super documents. All trustees need to do is scan the papers and save them to a storage facility, like a USB thumb drive.

However, trustees should always keep a paper version for one key document; the fund’s trust deed. Trust deeds formally document the existence of a superannuation arrangement between fund trustees and members, as it outlines the rules particular to a super arrangement. Not having a properly executed copy of a trust deed may create some confusion over what rules apply to the super fund.

Super funds with a pension in place should retain a signed record of the commencement documentation. Other records of investments that are older than ten years old could be disposed of unless they are required to confirm the cost base of assets for capital gains purposes.

Contributing a lump sum into super

Australians can make two types of contributions each year; concessional contributions, which are taxed at 15 per cent, and non-concessional contributions, which are not taxed.

There is a limit of $35,000 for concessional contributions and $180,000 for non-concessional contributions. However, individuals do have the option of using the three-year bring forward rule that allows taxpayers to contribute a lump sum of $540,000 as a non-concessional contribution if they are under the age of 65.

Using the three-year bring forward rule means individuals cannot make extra non-concessional contributions over the next two years.

Individuals that have accumulated a large sum of money from savings, an inheritance or sale of an asset, and want to contribute the amount to their super, may be best suited to making a non-concessional contribution.

Making a non-concessional contribution means you will not have to pay tax and will be able to transfer the whole amount as a lump sum contribution into an SMSF.

However, for those who are expecting more funds in the future, it may be better to put $180,000 into the fund on year, and another $180,000 in the following year.

For those who have sold an asset, you may have a capital gain and have to pay capital gains tax. Maximising your concessional contributions ($35,000 a year) can lower your taxable income for the current financial year and also reduce your capital gains tax liability.

Those with an SMSF who are self-employed can contribute a lump sum of $70,000 to their fund at the end of the financial year. They can also allocate $35,000 this financial year and $35,000 next financial year to reduce their capital gains liability.

Five tips for creating a successful SMSF

There are many advantages to having a self-managed superannuation fund (SMSF). Increased flexibility and control over your savings are the most obvious benefits, with many SMSF trustees and members appreciating the ability to make their own investment decisions.

Here are five tips that can help set your SMSF up for success in 2016:

 Have a written investment strategy and review it annually
While having an investment strategy is mandatory for all SMSFs, not having one that is adequate enough is a common mistake among most SMSFs. An SMSF’s investment strategy should be specific and suitable for all members of the fund, including adult children or younger spouses whose investment goals may be different from a retiree.

Don’t mix personal assets with your super fund’s assets
Trustees need to manage their fund’s investments separately from member’s personal or business investments and ensure that the fund has clear ownership of its investment assets. To protect fund assets in a creditor dispute  and prevent costly legal action to prove who owns them, assets should be recorded in a way that:

• distinguishes them from your personal or business assets
• clearly shows legal ownership by the fund.

Make sure your fund is compliant
Never forget that you are the person who is in control of your fund. With that control, comes responsibility. You are responsible for ensuring that your trust deed is up to date, your tax returns are submitted on time, your binding death nominations are up to date (or reversionary), your contribution caps are in line with laws and minimum pensions are drawn if in pension mode.

Learn as much as you can
Education is always beneficial when it comes to looking after your money.  There are many websites that have publish information designed to help individuals better understand their SMSF or potential SMSF.

Seek professional advice
If you’re having problems with your SMSF, or you don’t understand how it works, it is important to ask questions. Professional advice can be quite valuable as you learn how to manage your money in the most tax-effective and effective way possible. Always remember that there is no such thing as a silly question when it comes to your money.

What to consider before starting an SMSF

There are a lot of advantages to having a self-managed superannuation fund (SMSF). Increased flexibility and control over your savings are the most obvious benefits, with many SMSF trustees and members appreciating the ability to make their own investment decisions.

Other advantages include the possibility of investing in a property, the ability to manage administrative costs, and, in some cases, tax breaks.

However, there are also a lot of responsibilities associated with running a SMSF, and it is not necessarily an advisable choice for everyone. Here are some things to consider if you are interested in starting an SMSF:

• To justify the costs associated with running a SMSF, you should have a relatively sizeable amount, or be anticipating a rapid accumulation of funds. The ATO suggests having a minimum of $200,000, however this is often debated amongst industry representatives.

• If you want to manage your own super, you should have a relatively robust understanding of finance and the confidence to make your own investment decisions.

• Managing your own super fund is generally a time-consuming endeavour. There are many compliance issues you need to be aware of, and you also need to ensure that you remain abreast of any current changes to legislation.

Transition to retirement update

A transition to retirement allows older workers who are moving towards retirement to continue working, while at the same time, draw down on some of their superannuation benefits. Since its introduction in 2005 by the Australian Government, the policy has been used by many Australians as a strategy to save tax and boost super before retirement.

Under the tax office’s new transition to retirement rules, those who have reached their preservation age are now able to reduce their working hours without having to reduce their income.

Individuals can do this by topping up their part-time income with a regular ‘income stream’ from their super savings. Under previous rules, taxpayers could only access their super once they turned 65 or retired.

Under the new regulations, individuals can only access their superannuation benefits as a ‘non-commutable’ income stream. A non-commutable income stream cannot be converted into a lump sum. This means that individuals cannot take their benefits as a lump sum cash payment while they are still working. Instead, they must take their superannuation benefits as regular payments.

Employers are still required to make compulsory super guarantee contributions for all eligible employees, which includes people on a transition to retirement.

Those considering the tax aspects of retirement or a transition to retirement should seek financial advice to find out what is best for their individual circumstances.

Strategies to boost retirement savings for low-income earners

Here are four valid strategies low-income earners can use to boost their retirement savings for the future.

Co-contributions
Under the co-contribution strategy, the government matches the non-concessional contributions made by a super member who earns less than $34,454 a year. Super members who earn up to $50,454 a year are eligible for a partial benefit. The maximum amount a low-income earner can receive is $500, and part thereof for those who earn up to a $50,454 in taxable income.

Even though members don’t receive the money until they lodge their tax return, it is a beneficial strategy to undertake, as it is essentially money for nothing.

Spouse contributions
The spouse contribution allows individuals to make a non-concessional contribution of up to $3000 to their spouse’s super account if the spouse earns less than $10,800. The contributing partner receives a tax rebate of up to $540 for the contribution. If a receiving spouse earns up to $13,800, the contributing spouse is then entitled to a portion of the $540 rebate.

Low-income super contributions
Individuals who earn less than $37,000 a year can use the low-income super contribution. The strategy is a rebate of contributions tax. For example, the employer of an individual who earns $35,000 must pay a super guarantee of 9.5 per cent of their salary ($3325) into the individual’s super fund. The fund is then required to pay 15 per cent tax on that amount, which equates to $498.75. That amount ($498.75) is refundable to the fund in the following tax year, thereby boosting the individual’s super and reducing their tax.  

Super-splitting
Super splitting allows individuals to split part or all of their super contributions into their partner’s superannuation fund. This boosts the balance of the receiving partner, who may have taken time out of the workforce for reasons, such as raising the children. The limits on super contributions remains the same ($30,000 or $35,000 a year) depending on the contributing partner’s age. Since 15 per cent of contributions tax is deducted, the amount moved to the partner’s super fund is 85 per cent of the contributions.

Binding death benefit nomination and reversionary pensions

It can often be quite confusing working out what will happen to your super when you die since the terminology surrounding superannuation and death can appear quite technical.

A binding death benefit nomination (BDBN) is an instruction by a fund member regarding who can receive the fund member’s super benefits when they die. Having a BDBN in place can provide peace of mind to a fund member as the fund must follow these instructions upon their death.

Those who are nominated by the fund member receive a death benefit, which is a payment from the superannuation fund. It can take the form of a lump sum payment or in the form of a pension.

For a BDBN to be binding, members must nominate their benefit to be paid to one or more dependants. A dependant can be a spouse, a child of the spouse or anyone who has an interdependent relationship with the member.

A reversionary pension is a pre-existing pension that is payable to a dependant (reversionary beneficiary) upon the death of the primary pension fund member. A reversionary pension is not a new pension; it is a redirection of the existing pension to the reversionary pensioner.

Reversionary pensions are typically paid to surviving spouses.

Reversionary pensions work in a similar way to a BDBN. This means that creating a separate BDBN is only necessary when a reversionary pension direction is not in place and a fund member wants more control over what happens to their super benefits after death.

The three phases of super

Having a basic understanding the different phases that your superannuation goes through during your life can help when it comes to working out the tax treatment of an individual’s fund and any pension they take.

While not directly related, the overall investment strategy of a fund will also tend to change as the super transitions from one phase onto the next.

The lifecycle of superannuation can be divided into three phases; accumulation phase, transition to retirement phase and pension phase.

The accumulation phase is often the longest phase super goes through, running from when an individual starts work until they reach their 50s. The key during this phase, is to save and invest in as much as possible through contributions to super. Individuals can make concessional contributions, which are subject to an annual cap of $30,000 (or $35,000 for those over the age of 49) or non-concessional contributions, which are subject to an annual cap of $180,000.

Even though it is the shortest of the phases, the transition to retirement (TTR) phase is still quite important. A TTR typically starts when an individual turns 55, but individuals can also begin a TTR pension when they reach their preservation age. A TTR allows individuals to reduce their paid working hours (therefore, ‘transitioning into retirement’) and start taking money from their super.

The pension phase is when an individual has stopped accumulating and is now only withdrawing from their savings. The pension phase begins when an individual satisfies a ‘condition of release’. The main conditions of the release are:

• retiring from the workforce at or after your preservation age

• leaving one paid job after age 60

• reaching age 65

Meeting the 10% income test

While the 10 per cent income test rule may come across as sounding fairly complicated, for those who are employed or self-employed, it is simply a process of working out whether or not you’re eligible to claim a tax deduction for super contributions.

Individuals who are substantially unemployed (receive part of their income as an employee) and can satisfy the 10 per cent income test rule are eligible to claim a tax deduction for their super contributions.

Those who are substantially self-employed or substantially not employed (but are an employee) can also claim a tax deduction for super contributions when their employment income is less than 10 per cent of their total income.

To satisfy the 10 per cent rule, an individual’s employment income must be less than 10% of their total income. Total income is an individual’s assessable income (gross income before tax deductions) plus any salary sacrifice contributions and reportable fringe benefits.

Employment income includes reportable employer super contributions, such as salary sacrifice contributions, but doesn’t include Superannuation Guarantee.

Assessable income is an individual’s gross income before any deductions are allowed. It includes:

• salary and wages

• dividends

• interest distributions from partnerships or trusts

• business income

• rent

• foreign source income

• net capital gains

Reportable employer super contributions (such as salary sacrifice contributions) are also added back to assessable income when determining whether an individual satisfies the 10 per cent test.

Individuals cannot claim a deduction if they obtain 10 per cent or more of the following as an employee:

• Assessable income

• Reportable fringe benefits

• total superannuation contributions

Transferring existing super to an SMSF

Individuals who plan to transfer their existing super from an industry fund into an SMSF needn’t worry about going over their superannuation contribution limit.

Transferring these funds, also known as ‘rolling over’, is not considered to be a super contribution since the money is already somewhere in Australia’s superannuation system. It also does not count towards an individual’s non-concessional (after-tax) contribution of $180,000 a year (or $540,000 if using the three-year averaging provision).

Individuals can have multiple super accounts including an SMSF. However, when they transfer money from their industry fund, it is important to ensure that doing so will not forgo benefits such as cheap life and TPD (total and permanent disability) insurance.

A popular strategy to avoid having to sacrifice these benefits is to leave a minimum $5000 balance in the industry fund to keep the life and TPD policy. Industry funds will often require individuals to pay their guarantee monies into that account, however, they can transfer that out at a time that is most convenient.