January 2021 - Practical Systems Super

Why SMSF trustees need to remain alert in 2021

Jan 29,2021 Comments Off

While thankfully there has not been a lot of legislative change relating to self-managed super funds lately, there will still be much to occupy trustees’ minds over the next 12 months.

Auditing changes (whether it be stricter rules on auditor independence or more oversight over investment strategies), the winding back of COVID-19 relief measures and the likely indexation of the $1.6 million transfer balance cap (TBC) and the contribution caps, are all issues they may have to grapple with in 2021.

But perhaps the biggest issue looming is the government’s review into identifying what impedes the supply of good, affordable personal financial advice and then hopefully outlining the necessary steps regulators and industry need to take to improve consumer access to such advice.

This review – submissions to ASIC are due by January 18 – has the potential to lower the cost of advice to SMSF investors without sacrificing quality. Hopefully, it will make it easier for personal advice to be scaled up and down to cover only those areas relevant to the advice they are seeking, thus avoiding the need to pay for a complete – and expensive – advice package.

We saw a glimpse of how this could work when measures were introduced earlier this year, in a limited and temporary form, to help consumers impacted by COVID-19 obtain affordable and timely financial advice. Certainly, for those SMSF investors who shy away from advice because of the cost, this could prove very beneficial.

Although we will not know until the December 2020 quarter CPI figure has been released, it is looking likely that the TBC will be indexed and will increase from $1.6 million to $1.7 million from July 1, 2021.

SMSF investors who start to receive a superannuation pension from their fund, or any superannuation fund, for the first time on July 1, 2021 will have their pension balance assessed against this higher threshold.

For members who had already started a superannuation pension before July 1, 2021, their entitlement to indexation will depend on the amount of the TBC they have not previously used, so their TBC will be somewhere between $1.6 million and $1.7 million.

Spotlight on asset valuations

The concessional contributions cap is expected to increase from $25,000 to $27,500 from July 1, 2021, which means the non-concessional contributions cap will rise to $110,000 and the maximum two-year bring-forward amount will increase to $330,000. From the second half of 2021, this could create new opportunities for some SMSF investors to contribute more to their SMSF without triggering an excess contribution.

Expect SMSF auditors to pay close attention to investment strategies in the wake of new guidelines released by the ATO in early 2020. SMSF trustees must ensure they have properly considered their investment strategy in terms of asset diversification and whether the fund is structured to meet the fund’s investment objective and its liquidity and cash-flow needs.

This is particularly pertinent where a fund has a large proportion of its investments in one asset or asset class. In 2019, the ATO wrote to more than 17,000 SMSF trustees who, according to their records, had 90 per cent or more of the fund’s assets invested in a single asset or asset class. While investing in one asset, or only one asset class, is not necessarily a breach of the rules, the purpose of the ATO letter was to remind trustees of the need to ensure they have properly considered the risks associated with such a strategy.

It was also to remind SMSF trustees of the need to properly construct their fund’s investment strategy by considering the fund’s investment objective, the benefits of investment diversification and the fund’s liquidity and cash flow needs.

The ATO has also recently updated its valuation guidelines for SMSF trustees to ensure they can substantiate the value assigned to investments such as property and other unlisted assets. So asset valuations are also likely to be high on the list of SMSF audit hotspots.

The ATO has also announced stricter rules will apply to SMSF auditor independence. Accounting firms that use “Chinese walls” to prepare an SMSF’s financial accounts and then audit these accounts will, in most cases, no longer be able to do so. Although transitional rules apply, some SMSF trustees may find themselves needing to appoint a new auditor in 2021.

As the COVID-19 relief measures begin to be wound back, SMSFs that own property must ensure they adjust their lease agreements with tenants accordingly, particularly where there is a related-party tenant to ensure payments are consistent with a commercial arm’s length arrangement.

The same principle applies where an SMSF may have borrowed money under a limited recourse borrowing arrangement. If the lender is a related party, it is very important that loan repayments are consistent with an arm’s length arrangement.

The last issue will only concern a small minority of SMSFs, but for those for whom it does, it could be hugely important. Although the legislation is yet to be passed, six-member SMSFs are looking increasingly likely, possibly as early as April. It could open new opportunities for family SMSFs, particularly in terms of reducing fees and providing extra investment flexibility.

Hopefully 2021 proves far less challenging – and stressful – than 2020. But even if that proves to be the case, trustees need to be on full alert. As always in the SMSF world, change is the only constant.

Opinion piece written by John Maroney, CEO, SMSF Association

The optimal size for SMSFs when it comes to costs

Jan 13,2021 Comments Off

New research should finally lay to rest that old canard that self-managed super funds (SMSFs) with balances of $200,000 or more are not competitive on cost compared with APRA-regulated superannuation funds.

The report by actuarial firm Rice Warner, using information from suppliers of SMSF administration services and validated by data from more than 100,000 SMSFs, showed funds with balances of $200,000 or more are cost competitive with industry and retail superannuation funds, and those with balances of $500,000 or more, are typically the cheapest alternative.

The numbers are quite instructive. Even balances of between $100,000 to $150,000 are competitive with APRA-regulated funds, provided a cheaper service provider is used or trustees do some of the administration.

For balances of $250,000 or more, SMSFs become the cheapest alternative provided the trustees do some of the administration, or, if seeking full administration, choose one of the cheaper services.

It’s only when SMSFs fall below $100,000 that they stop being competitive compared with APRA-regulated funds, while funds with less than $50,000 are more expensive than all other alternatives.

The results of the Rice Warner report, which built on work the actuarial firm did on costs in 2013 for ASIC, would not have surprised SMSF trustees.

Over the past seven years, they have observed the average costs of APRA-regulated super funds rising while SMSF costs have fallen, in large part due to technology.

From personal experience they know it’s cost-effective to open and maintain an SMSF at much lower levels than declared by either the Productivity Commission or ASIC.

Important as the findings of this research are, it needs to be emphasised that costs – and investment returns for that matter – are not the prime reasons that individuals set up an SMSF.

Those two factors are important, but as a survey of 800 SMSF Association members found, individuals’ motivations for leaving the APRA-regulated system to take personal control of their superannuation are far more varied and complex.

Control is key

What the survey highlights is that perennial debate about whether APRA-regulated funds or SMSFs are the best superannuation option based on costs and investment returns is largely irrelevant to the very people to whom it is most important – SMSF trustees.

Instead, it’s the control that an SMSF gives individuals over their retirement income goals that plays an important role in the decision-making process when deciding to establish an SMSF.

In fact, the key reasons why trustees chose an SMSF are control, flexible investment choices, dissatisfaction with their existing fund, and tax and estate planning. Costs and investment returns don’t make the list. In essence, what trustees want is control of their financial futures.

When these qualitative factors are added to the mix of reasons as to why individuals set up SMSFs, it helps explain why trustees are prepared to pay the price of higher administrative costs and lower investment returns when their balances are low.

As the Rice Warner research shows, this is undoubtedly the case, with investment performance directly correlating to fund size.

When the average SMSF balance was between $100,000 and $200,000, their average investment returns lagged their APRA cousins, notching returns of 4.56 per cent and 3.86 per cent in 2017 and 2018, respectively.

But once an SMSF breaks through the $200,000 barrier in funds under management, the difference between the two superannuation sectors starts to quickly narrow.

SMSFs with balances between $200,000 and $500,000 returned 7.07 per cent in 2017 and 6.02 per cent in 2018, not far behind their APRA cousins.

And once a fund exceeded $500,000, average investment returns were comparable with the APRA funds, with SMSFs having balances between $500,000 and $1 million earning returns of 8.64 per cent in 2017 and 7.0 per cent in 2018.

What these numbers say is that once an SMSF reaches $500,000 (and, remember, 63 per cent of SMSFs had balances exceeding $500,000 and only 15 per cent had balances below $200,000 in 2019), their capacity for more extensive and diversified investment portfolios allows them to enjoy higher returns.

By contrast, funds with lower balances are weighted towards cash and term
deposits and have less exposure to shares, property and managed funds.

But as the survey found, those smaller SMSFs are prepared to play the waiting game, appreciating higher returns will come as their balances grow. And many grow quickly.

The Rice Warner research shows that of 8,043 funds with balances of less than $200,000 in 2017, 3,208 or 40 per cent had broken through this barrier by 2019, with 24 per cent doing so in the first year.

SMSFs are not for everyone. But for those who do opt for this superannuation vehicle, the Rice Warner research provides reassuring evidence they are not jeopardising their future retirements.

Opinion piece written by John Maroney, CEO, SMSF Association

ATO issues reminder on January deadline for TBAR

Jan 13,2021 Comments Off

For SMSFs that report transfer balance account events on a quarterly basis, the next report will be due on 28 January for events that occurred during the December quarter.

In an online update, the ATO stated that SMSF trustees are required to lodge a TBAR by 28 January if a TBAR event occurred in their fund between 1 October and 31 December 2020 and any member of the SMSF has a total super balance greater than $1 million.

“Different reporting deadlines will apply if any of your members have exceeded their transfer balance cap, and we’ve sent them an excess transfer balance determination or a commutation authority,” the ATO said.

“If no TBA event occurred, you do not need to report.”

It reminded trustees that the TBA is a record of all the amounts transferred that count towards their personal transfer balance cap (TBC).

“The most common events you need to report are when a member starts a retirement income stream or commutes that income stream into a lump sum, including when they commute that pension before rolling it over to a new fund,” it explained.

“There is a lifetime limit on the total amount of super that can be transferred into the retirement phase income streams, including most pensions and annuities. This is called the TBC.”

It also stressed that the TBAR is separate from the SMSF annual return (SAR).

“This is one of your trustee reporting obligations and it enables us to record and track an individual’s transfer balance,” the ATO said.

“This is an important aspect of your fund administration because there can be negative tax consequences if a member exceeds their TBC.”

Source: SMSF Adviser

1800 951 855

[email protected]

Archive January 29, 2021

Why SMSF trustees need to remain alert in 2021

Spotlight on asset valuations

The optimal size for SMSFs when it comes to costs

Control is key

ATO issues reminder on January deadline for TBAR