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Eight things you need to know about SMSFs and property

How do I decide if buying a property through my SMSF is right for me?

Having an SMSF is usually all about having greater control over your super, but with this comes a serious set of responsibilities and obligations, along with the requirement to exercise self-control. These attributes are even more important should you consider purchasing property through your SMSF.

One very strict rule that is commonly misunderstood or not known is that if you are purchasing a residential property through your SMSF, you can’t live in it and neither can anyone related to you, even if they pay market-based rent.

Further to this, if you already own a residential property, your SMSF cannot purchase this from you – again, even at market price. If you feel you may be tempted to utilise said property, or need to purchase an investment property for family to live in – don’t use an SMSF.

Commercial/business premises, however, can be leased to you or a third party related to you, providing this is done on a commercial arms-length basis. This is a particularly attractive proposition to small business owners. Your SMSF can purchase a business premises from which you can conduct your business, and pay rent to the super fund.

Many small business people don’t pay themselves super, so paying rent that would otherwise go into someone else’s pocket into the super fund for their own retirement makes a lot of sense.

You may already own the building you run your business from. Subject to contribution caps and considering stamp duty and capital gains tax personally, you can contribute the premises to an SMSF, providing it is done at market value.

You need to have a decent balance already in super to make setting up an SMSF to buy property a viable proposition. This is very important should you need to obtain finance to complete the purchase.

Why? Banks will require an SMSF to have at least 40% of the value of the property as a deposit, will most likely charge a higher rate of interest and will not entertain approving finance for a fund that doesn’t have at least $200,000 initially, and decent liquidity (cash and/or shares) in the fund post property purchase.

This is due to the requirement that an SMSF can only borrow via a limited recourse borrowing arrangement (LRBA).

You need to consider whether the fund can cover ongoing property ownership costs should the property be vacant for a period and there is no rental income.

Similarly, if the meeting of mortgage payments is reliant on super guarantee contributions – what happens if one or all the members of the super fund become unemployed?

You can contribute personal monies (subject to contribution caps) if there is a cash flow issue within the fund, but they are counted as contributions and cannot be repaid to you. Do you have adequate monies outside of super to put into your SMSF should the need arise?

An SMSF can invest in anything, providing it meets the “sole purpose test”. That is, each investment made or action undertaken by the SMSF is done so for the sole purpose of providing retirement benefits for its members, or death benefits to a member’s beneficiaries if they die.

In the case of purchasing property, will it be providing an adequate income stream and what is the likelihood of capital growth? Will these be sufficient to ensure the members of the fund are able to access suitable income streams when eligible?

As a trustee of an SMSF you are required to formulate an investment strategy and consider among other things, the diversification of assets held. Diversification is considered an integral part of any long-term investment plan. It doesn’t guarantee gains or protect you from losses but assists in ensuring consistent returns over a period of time.

If your super fund’s only asset is property, you are putting all your “super eggs in one basket”. Is this appropriate for the members of the fund, their circumstances, age and risk tolerance? There is nothing that prevents the fund holding only real property, but make sure it is appropriate and is justified by the fund’s investment strategy.

Depending on your personal marginal rates of tax, the concessional tax rates offered to complying super funds may provide an incentive to consider setting up an SMSF to purchase property.

All earnings of an SMSF are taxed at 15%, and the effective rate of tax on any capital gains is 10%. Once the super fund is in retirement phase there is no tax payable on earnings and capital gains.

Are you willing to be very hands on with your super? Other asset classes allow for a “set and forget” approach. You need to be willing to be actively engaged in managing and being responsible for not only the SMSF, but also a property.

If you are a fan of the “renovator’s delight” and want to use your ability to flip a property to improve your super balance, you need to understand the additional rules that apply when the property is owned by an SMSF. If you’ve had to borrow to purchase the property, any improvements can only be paid with existing super monies, you can’t borrow to finance the renovations.

In addition to this, you will be in breach of the restrictive LRBA terms if you improve the property to the point it becomes “substantially different to the original asset”.

By Kimberlee Brown, Director with H&R Block SMSF Solutions

2. What are the key advantages of investing in property through my SMSF?

Combined investing as a couple or family

Combining your account balances with the other members of your family may give you the purchasing power you need to invest in a property that would be beyond your personal capacity at present.

It can be tax effective

The earnings within your superannuation fund are taxed at only 15% with a 33% capital gains discount for assets held more than 12 months (that is 10% CGT) and if you hold on to that property into pension phase, the rent and/or sale proceeds may be tax free. (Subject to the $1.6m pension transfer limit per member from 1 July 2017.)

Salary sacrifice

You can salary sacrifice additional income to pay off the loan quicker from pre-tax dollars. Paying 15% tax on salary sacrifice and then making additional repayments rather than paying your marginal tax rate on the income.

Supporting business growth

You can buy a business property to lease back to your own business. This may help free up funds to grow the business.

Bricks and mortar – feeling more in control of your investments

Many SMSF investors appreciate having control over the investments they buy and the ability to “value add” to their property repairs or renovations.

Land tax

The SMSF is a separate entity for land tax

By Liam Shorte, director of Verante Financial Planning

3. What are the risks of investing in property through my SMSF?

Property investment using an SMSF will not make it immune to any of the usual risks involved in property investment. There are some issues, however, that are unique to holding property in an SMSF and they are outlined as follows.

Property is a lumpy, relatively illiquid asset. It can take time to sell and settle and you aren’t able to sell a part of it – it’s all or nothing.

Once members move into retirement phase there must be a minimum drawdown from the fund each year to maintain the funds’ tax-exempt status. If the property isn’t positively geared, and the fund only holds the property and little cash, it is difficult to meet these requirements.

It proves a difficult asset to hold when the focus of the fund moves from the building of wealth for retirement, to being in retirement and needing to draw a regular income stream.

The usual strategy is to sell the property when members reach retirement to have sufficient liquidity to pay the appropriate income streams. The timing of this may not be ideal if the property hasn’t been held for sufficient time or there is still a decent mortgage over the property. These scenarios need to be worked through as part of the fund’s long-term investment strategy.

Properties have ongoing costs and without sufficient contributions to the fund and rental income these become difficult to finance within the fund. As well as regular ongoing costs, there may be large unexpected costs that will also need to be financed. You may need to find personal monies to cover these costs, and they can’t be paid back by the fund.

You need to consider the impact that purchasing property within an SMSF will have on your non-superannuation monies.

The superannuation space continues to be subject to legislative changes. It is not known whether future changes may impact negatively on those who hold property within an SMSF.

If the property investment requires finance, the additional requirements involved because it is being purchased in an SMSF are both more expensive and complicated. Failure to understand these complexities or engage appropriate professionals who know how to navigate the space can result in further unnecessary costs and potential loss of your retirement savings.

Additional stamp duty is a big danger if a property purchased via an LRBA for an SMSF is not executed correctly.

If you don’t already have an SMSF but want to establish one to purchase property and you require finance, it is strongly recommend you gain pre-approval first.

If you set up an SMSF then seek finance, you may be disappointed to find that you are unable to gain sufficient finance for your proposed plan and you are left with having to pay for the establishment of the fund and the ongoing compliance obligations that come with it. It’s a much harder set of rules and obligations that need to be met by the SMSF than if you were to do the same personally.

The temptation! If you have purchased a residential property or holiday home through your SMSF, you must resist temptation to use it personally or let anyone related to you do so. Doing so risks the complying status of your super fund and, in the worst-case scenario, the loss of the majority of your super in tax and fines.

By Kimberlee Brown, Director with H&R Block SMSF Solutions

4. Is buying a property through an SMSF a good idea if I’m close to retirement?

Generally speaking, buying a property through an SMSF when you are close to retirement is not a great idea, unless you were seeking to diversify the asset mix in your portfolio and the property only formed part of a broad asset mix. The primary reason for this is illiquidity.

The whole point of superannuation is to build up a pool of assets that will sustain your lifestyle throughout retirement, and when retirement comes, you will need to start drawing on this pool. That requires liquidity, which property, being a “bulky asset”, does not give you.

Furthermore, if your SMSF is paying you a pension in retirement, you need to ensure that the assets in your SMSF are able to generate enough cash flow in order to pay the legal annual minimum pension of at least 4% of the value of SMSF pension assets, which may be difficult if your SMSF is fully invested in low-yielding property.

By Andrew Yee, director of superannuation at HLB Mann Judd

5. What is a limited recourse borrowing arrangement?

A limited recourse borrowing is an arrangement where an SMSF borrows money to purchase an asset, either from a commercial lender or a related party of the SMSF (the lender can even be the members themselves).

As these can be complex arrangements, it is crucial that trustees turn to their adviser to help them navigate any compliance pitfalls and avoid running foul of the legislation.

Legislative requirements include the asset being held by a holding trustee (or custodian) for the SMSF trustee while the loan remains in place, the SMSF providing all of the purchase money and limitations on improvements to the property.

In addition to legislative requirements, the SMSF will need to obtain specialist advice on the stamp duty implications of their proposed acquisition prior to signing any transactional documents.

If the arrangement is not properly set up and implemented from the start, the SMSF runs the risk of not only contravening the superannuation legislation but also incurring double (or even triple) the amount of stamp duty that would normally be payable.

By Julie Hartley, an associate with Townsends Business & Corporate Lawyers

6. Can I buy overseas property within my SMSF?

The short answer is yes, your SMSF can buy overseas property. This is course assuming that your SMSF trust deed allows for it and your SMSF investment strategy has specifically provided for such investments.

The main difficulty for an SMSF buying overseas property is that many countries have restrictions on overseas property buyers, especially where the buyer is not a natural person.

For example, in many states of the US, SMSFs can only buy property through a US limited liability company. The SMSF may be required to open an overseas bank account for the rental receipts and payments.

This may be problematic if the overseas banking institution does not allow or recognise an SMSF to be a valid holder of an overseas bank account. Also the SMSF may need to report its income on the property to the overseas taxing authority, for local, state and federal taxes.

By Andrew Yee, director of superannuation at HLB Mann Judd

7. Can I renovate a property owned by my SMSF?

Yes, you can renovate the property but you cannot use borrowed money to do so. So, for example, if you borrow to buy the property and intend to renovate the kitchen then you can only use the SMSF’s own funds or additional contributions from the members to pay for the renovation, not borrowed money.

Also, while the property is under a loan you cannot change the nature of the property.

For example, you could not change a residential house into a three townhouse development. The good news is that you can add a granny flat under the rules.

Be very careful as trustee if you take payment for doing the renovations, as trustees must have the formal skills and qualifications that allow them to perform a specific duty or deliver a service for which remuneration is normally expected.

So as a DIY renovator you cannot charge the fund for your time painting the property if your usual job is an accounts manager. 

By Liam Shorte, director of Verante Financial Planning

8. What happens when I want to sell the property?

When the SMSF decides to sell the property, the usual transaction methods for a sale should be followed, for example contract, deposit, outgoings adjustments, settlement, etc.

While this would generally be expected if the purchaser is an independent third party, it is important to also proceed in this manner if the property is to be sold to a related party of the SMSF.

In addition to the above, the trustee should also make sure that the property is sold at market value to avoid any compliance or detrimental tax implications.

If the property is held by a holding (bare) trustee under a limited recourse borrowing arrangement, the property can be sold directly to a third party without being first transferred to the SMSF trustee. It is important, however, that the relevant compliance documentation is prepared to note the vesting of the holding trust arrangement.

By Julie Hartley, an associate with Townsends Business & Corporate Lawyers

Source: moneymag.com.au

SMSF sector continues to grow

Latest annual stats show the SMSF sector continues to grow

The ATO has released the ninth edition of their annual statistical report on self-managed superannuation funds (SMSFs). The overview provides high-level observations and commentary on 2016–17 statistics gathered from SMSF annual returns, SMSF registrations and auditor contravention reports.

Highlights include:

  • 596,000 SMSFs holding $750 billion in assets, with more than 1.1 million SMSF members, as at 30 June 2018
  • in 2016–17, the average assets of an SMSF were just over $1.2 million. This is an increase of 10% from 2016, and 27% over the last five years
  • 55% of SMSFs have been established for over 10 years
  • 48% of SMSFs had assets between $200,001 and $1 million. This accounts for 21% of total of SMSF assets
  • the median age of SMSF members of newly established funds in 2017 was 48, compared with 59 for all SMSF members as at 30 June 2018
  • at 30 June 2017, the average member balance for females had increased by 32% over the past five years, while the average balance for males increased by 25% over the same period

Click here for infographic of the key figures in this report

Click here for the SMSF statistical overview 2016-17

 

Source: www.ato.gov.au

ATO statistics contain “positive story” for SMSFs

The SMSF Association says new superannuation statistics from the ATO “tell a positive story” about the SMSF sector.

The ATO has recently released its statistical overview of SMSFs for 2016/17, based on SMSF Annual Returns, registrations and auditor reports.

SMSF Association CEO John Maroney said: “These statistics reveal an SMSF sector that has not only performed well but provides a positive outlook for its future growth and strong performance.

“In the year under review, SMSFs made an average return of 10.2 per cent compared with a 9.1 per cent return for the APRA-regulated funds.”

“At the same time the total expenses for all SMSFs fell by nine basis points, of which five basis points can be attributed to lower administrative and operating expenses, highlighting the increased use of technology and software in SMSF administration services.”

Maroney said that the impact of improved adviser standards and trustee education could be seen in the statistics, pointing to an increase in SMSF assets at establishment. In 2015/16 new SMSFs had an average of $379,000, but by 2016/17 this had increased 38% to $521,000.

“From the Association’s perspective, this demonstrates that SMSF trustees are getting quality SMSF advice and that they understand the need for an appropriate-sized SMSF to ensure they get the full benefits from their fund.”

Maroney said the statistical releases by the ATO helped present an accurate picture of the SMSF sector.

“These statistics provide an important antidote to the many misconceptions about SMSFs, especially in relation to their performance and costs, as well as providing highly relevant information that can be used to improve our superannuation sector.”

Source: www.solepurposetest.com/news

Labor v Liberal: The key election policies impacting SMSFs

With the Federal election now just days away and superannuation and tax among the key policy issues, what is each major party proposing and how will it impact the SMSF sector?

LABOR POLICIES

Removal of refundable Franking credits

Labor is set to push ahead with its proposal to remove refundable franking credits, despite a recommendation by Standing Committee on Economics not to proceed with the policy, following the completion of its inquiry.

The policy is intended to apply from 1 July 2019 and based on estimates by the Parliamentary Budget Office, will impact 840,000 individual taxpayers, 210,000 SMSFs and 2,300 Australian Prudential Regulation Authority (APRA) regulated funds in the 2019/20 financial year.

The Financial Services Council has estimated that around 2.6 million Australians in APRA-regulated funds will be negatively impacted by Labor’s franking credit policy.

Industry and retail superannuation funds will generally be able to offset any franking credits received against the tax payable in each financial year. However, Colonial First State executive manager of technical services Craig Day points out that public offer funds and super wraps with a larger proportion of members in retirement phase would also be adversely affected.

“For example, a combination of a greater proportion of retirement phase members, a lower inflow of assessable contributions and increasing deductible costs combined with negative or reduced investment returns could result in a fund being in an overall net refund position in a particular year,” Mr Day explains.

In the SMSF context, SMSFs with member balances below $1.6 million, pension phase members only and no pension recipients will likely see the greatest impact from this policy.

While shadow treasurer Chris Bowen has framed the policy as one that will target the wealthy, analysis by SuperConcepts has suggested otherwise.

Following the introduction of the transfer balance cap, any excess pension balance above $1.6 million had to be transferred to an accumulation interest in the fund.

Given that investment earnings from assets supporting an accumulation interest are taxable, the existence of an accumulation interest results in the fund having some taxable income to use its franking credits rather than those credits being refunded, which means the policy will have less impact on those with larger balances, according to the analysis by SuperConcepts.

Labor has announced a pensioner guarantee for the policy which will enable every recipient of an Australian Government pension or allowance to still receive cash refunds for franking credits. This includes individuals receiving the Age Pension, Disability Support Pension, Carer Payment, Parenting Payment, Newstart and Sickness Allowance.

It has also announced that SMSFs with at least one pensioner or allowance recipient before 28 March 2018 will be exempt from the changes.

GEM Capital adviser Mark Draper says SMSF professionals and clients should be careful about overreacting to the proposed franking credits too early, with Labor still yet to win the election and their ability to pass the policy through both houses still very uncertain.

“What’s said in the lead-up to an election is not necessarily what gets legislated, and they’ve firstly got to win the election and whilst they’re favourite, it will still be a fair election for them to lose, so I wouldn’t be making changes right now based on what they’ve promised,” Mr Draper warns.

Reinstating the ten per cent test

If elected, Labor also intends to reintroduce the 10 per cent rule to restrict personal contributions.

The 10 per cent test, which has been scrapped since 1 July 2017, meant that individuals were only eligible to claim a tax deduction for personal super contributions if less than 10 per cent of their income was earned from employment.

The proposal to reinstate the ten per cent test has been meant with considerable backlash by the SMSF sector, as it will limit the ability of some members to contributed to super and cause additional complexity.

SuperConcepts non-executive director Stuart Forsyth said the removal of the 10 per cent test was very much welcomed by the ATO and everybody else because it essentially put everybody in the same position in terms of being able to make a concessional contribution provided you’ve got assessable income.

“I think it’s a policy that would be a retrograde step. I don’t see why it matters whether assessable income is from salary or wages or from other sources. It doesn’t seem to be material and it seems to be a decision to be motivated by the desire to reduce the cost of the concession,” Mr Forsyth said.

Mr Forsyth noted that it was difficult for the ATO to administer and that many people were inadvertently caught by the test.

“People would think they were under the 10 per cent but would just tip over, which meant that amounts that were put into super weren’t deductible which can have a big effect,” he said.

The reintroduction of the ten per cent test would be especially problematic now given he total superannuation balance rules.

It could lead to situations, he explained, where a member is forced to take an amount out of super because they don’t have a concessional cap, and because they’ve gone over the 10 per cent, it’s no longer a concessional contribution.

“It worries me because, from a policy point of view, it’s step in the wrong direction,” he said.

$3000 cap on deductions for tax affairs

Labor has also proposed a $3,000 limit on deductions for managing tax affairs, which is also expected to apply to SMSF trustees.

While Institute of Public Accountants (IPA) chief executive Andrew Conway said there has been little detail released about the measure, its likely that the cap on deductions for managing tax affairs would apply to SMSFs in much the same way it will to individual income taxpayers.

“It’s a concern for the integrity of the tax system because what we believe this measure would do is potentially restrict a taxpayer’s ability to engage the best possible advice they can and obtain private tax rulings. Private tax rulings are complex and time-consuming and generally best managed through a tax agent or specialist,” Mr Conway warns.

“If you’re going to restrict a person’s ability to get something like a private tax ruling, that actually then brings into question the integrity of the tax system itself.”

Insyt chief executive Darren Wynen agreed that the limit on the deductions available for tax advice will unfairly impact those in difficult or complex situations requiring tax advice with a high fee.

“They may have a situation where they need specific advice such as contesting an ATO audit claim or an objection,” Mr Wynen told SMSF Adviser.

“I think in those situations where there’s a lumpy claim in a particular year, I don’t think they should be capped, because I think, generally, individuals, small businesses and SMSFs are up against it anyway with the ATO because the ATO has unlimited resources at their disposal and often what’s needed if they’re going to have any chance of success is a well-constructed argument.”

Mr Wynen said that taxpayers, small business owners and SMSF trustees need the ability to be able to contest, and limiting the amount that can be claimed as a deduction makes it more expensive to contest.

“You don’t know if you’re going to be successful, so you’re taking a punt anyway, and removing the amount of tax advice that can be claimed as a tax deduction just increases the costs and also the likelihood that they might just decide to put up with what the ATO [is] saying or what they’ve issued,” Mr Wynen said.

DBA Lawyers director Daniel Butler notes that Australia has a reputation for being one of the most complex tax systems in the world and probably ranks second to the USA.

The constant ongoing complex changes to superannuation and tax rules will keep Australia as a leader in complexity, he says.

“In particular, responding to a relatively straight forward ATO review or audit can easily exceed a $3,000 threshold which is becoming increasingly likely for many,” he cautions.

Limiting pension exemption

In the policy document released in January, Positive Plan to Help Housing Affordability, Labor stated that it would look to moderate concessions for Australians with superannuation balances in excess of $1.5 million.

This aligns with a policy it announced back in April 2014 to tax superannuation earnings above $75,000 a year at 15 per cent.

At the time, Labor said that the measure would affect approximately 60,000 superannuation account holders with superannuation balances in excess of $1.5 million.

SMSF chief executive Aaron Dunn says that if the Labor government does win legislative control, they may might adjust the threshold at which the general transfer balance cap operates.

“We [could] see a reduction from $1.6 million to $1.5 million – maybe even lower,” says Mr Dunn.

Given that the total superannuation balance threshold is linked to the general transfer balance cap, Mr Dunn explained says if Labor does change the general transfer balance cap amount, this could also have flow-on effects for a range of other measures.

“When we think about the total superannuation balance, it has such a profound impact across a range of measures. At $1.6 million, [members] are limited in their ability to do things such as make non-concessional contributions, [for example],” he explains.

Contribution changes

Labor has also announced a raft of changes relating to contributions, including cuts to the contribution caps and rolling back the Liberal party’s carry-forward contributions.

If elected, Labor plans to lower the annual non-concessional contributions cap from $100,000 to $75,000. This will also see the bring-forward cap fall from $300,000 to $225,000.

The party has also stated that it will remove the five year catch up concessional contribution cap. Catch up contributions enable members who have a total superannuation balance of less than $500,000 and have not utilized their full $25,000 concessional contribution cap, to carry forward the shortfall for up to five years.

SuperConcepts executive manager of SMSF technical services Mark Ellem explained how they operate with an example.

“If you earnt $100,000 for the 2018/19 financial year and your employer contributed the compulsory super guarantee contribution of $9,500 (9.5 per cent of $100,000) you would have an unused catch-up concessional contribution of $15,500 ($25,000 – $9,500) which you can carry forward for the next five years,” said Mr Ellem.

“Assuming your total super balance at 30 June 2019 was less than $500,000, your concessional contributions cap for 2019/20 would be $40,500 (i.e. the standard $25,000 concessional contributions cap for the income year plus the carried forward amount of $15,500 from the previous income year.”

Labor also has some policy changes aimed at boosting the superannuation balances of women, particularly low-income earners.

It plans to remove the $450 minimum monthly income threshold for eligibility for the superannuation guarantee (SG). The $450 threshold will be gradually reduced by increments up to $100 each financial year between 2220 and 2024, Mr Ellem explained.

It has also announced another policy to pay superannuation guarantee contributions to parents while they are on government-paid parental leave. Recipients of Dad and partner payments will also receive super contributions under the measure.

BDO partner Mark Wilkinson said while these are both positive policies, he is concerned by about the impact of removing catch-up contributions on women’s superannuation balances.

“A lot of women have balances less than $500,000 and they can use those catch-up contributions where they receive an inheritance, a windfall gain, a gift from their partner or when they return to the workforce,” Mr Wilkinson said.

This may provide her the opportunity to top up her superannuation and return herself to a position of her male counterpart, he explained.

“There is no other piece of legislation that facilitates that anywhere else in the Labor Party policy announcements. I suspect that the Labor Party feels that by allowing the catch-up, it’s only the rich that are going to take advantage of it, but I think that misses the point as well,” he said.

“If the annual concessional contribution limit is $25,000, and we know that certain groups of society are leaving the workforce in order to provide care to children and ageing parents, then why wouldn’t you allow legislation to remain in place to enable them to take advantage of the ability to catch up, and if it’s only some women who can do it, then so be it, it’s better than removing the ability to be able to do it at all.”

Superannuation guarantee payments

Labor also plans to increase the rate of superannuation guarantee (SG) from 9.5 per cent to 12 per cent. It will also implement measures aimed at ensuring compliance with SG by employers.

One of these measures is to include the right to superannuation within the National Employment Standards, which will enable workers to pursue their unpaid superannuation through the Fair Work Commission and Federal Court.

Labor will also strengthen the ATO compliance regime and increase penalties for employers for underpayment or non-payment of superannuation.

Employers who underpay superannuation to their staff because of a false or misleading statement will face fines equal to 100 per cent of the unpaid super. Employers who fail to tell the ATO about unpaid superannuation when asked will face fines equal to 300 per cent of the unpaid super.

LRBA ban

Back in April 2017, Labor made it clear that if elected it would restore the general ban on direct borrowing by superannuation funds, as recommended by the 2014 Financial Systems Inquiry, as part of its plan for housing affordability.

The SMSF Association and some of the lenders in this space have flagged concerns about the impact the removal of borrowing could have, particularly for small business owners.

While Thinktank chief executive Jonathan Street acknowledged that there have been some issues in the residential LRBA area which was in genuine need of tighter regulation, limited recourse borrowing arrangements (LRBA) are an “important debt instrument that allow SMEs and self-employed owners the opportunity to dovetail their commercial and superannuation ambitions to very positive effect”.

The SMSF Association pointed out that LRBAs can be an important retirement savings strategy for small business owners who accumulate most of their retirement nest egg through their small business,” the association said in a submission.

“Any loss to the flexibility of business real property CGT exemptions through the funding of LRBAs, which allows small business owners the opportunity to work on premises owned by their SMSF, would significantly impact the ability for those individuals to save for retirement,” it said.

However, regulators have identified risks with SMSF borrowing, particularly in light of changing market conditions and the rise of on-stop shops.

A report assessing the risk of LRBAs was handed down by the Council of Financial Regulators and the ATO earlier this year. The Council of Financial Regulators is a non-statutory body comprising the Reserve Bank of Australia, APRA, ASIC and the Australian Treasury.

While the report ultimately found that borrowing by SMSFs was unlikely to pose systemic risk to the financial system, the regulators’ preferred option was still to remove the exemption allowing LRBAs.

LIBERAL POLICIES

Contribution measures

In the lead up to the election the Liberal party announced a number of small measures for superannuation contributions.

Treasurer Josh Frydenberg announced a change to the work test, which will enable Australians, aged 65 and 66, to be able to make voluntary superannuation contributions. There is no draft legislation for the measure yet, which was announced just before the Federal Budget in early April.

Currently individuals can only make voluntary contributions if they meet the work test, which requires that they work a minimum of 40 hours over a 30-day period.

Under the proposed measure, Australians aged 65 or 66 years who don’t meet the work test, because they may only work one day a week or volunteer, would be able to make voluntary contributions to their superannuation.

“This will align the work test with the eligibility age for the age pension, which is scheduled to reach 67 from 1 July 2023,” said Mr Frydenberg.

The Liberal party also announced that it would increase the age limit for spouse contributions from 69 to 74 years.

Currently, those aged 70 years and over cannot receive contributions made by another person on their behalf.

It also plans to extend access to the bring-forward arrangements to those aged 65 and 66. The bring-forward rules currently allow those aged less than 65 years to make three years’ worth of non-concessional contributions, which are capped at $100,000 a year, to their super in a single year.

 Increasing SMSF member limit

The Liberal Party has also stated that it intends to push ahead with its proposal to increase the SMSF member limit, despite the removal of the measure from the bill in which it was contained shortly before Parliament was dissolved.

The Morrison government first introduced the six-member bill into Parliament in mid-February this year, after announcing the measure in the lead-up to the budget last year.

In early April, however, the Morrison government agreed to remove the measure from the bill it was contained in, in order to pass other measures including an amendment to extend concessional rates of excise to craft beer brewers.

The measure to increase the SMSF member limit had mixed opinions, with some experts flagging the potential risks that additional members pose in terms of disputes between members and estate planning.

ECPI changes

The Liberal party also announced a couple of administrative changes with exempt current pension income (ECPI) in the Federal Budget this year, aimed at reducing some of the complexity in this area.

One of these was a proposal to allow superannuation funds with interests in both accumulation and retirement phases during an income year to choose their preferred method of calculating ECPI.

It also announced plans to remove a redundant requirement for superannuation funds to obtain an actuarial certificate when calculating ECPI using the proportionate method, where all members of the fund are fully in the retirement phase for all of the income year.

Chartered Accountants Australia and New Zealand (CA ANZ) has lobbied extensively for a return to the previous industry practice for ECPI that was in place prior to the ATO establishing that funds that have segregated assets at any point in the year must calculate their ECPI using the segregated method for that period.

Fitzpatricks Private Wealth head of strategic advice Colin Lewis said that the measure to remove the need to obtain an actuarial certificate when all members are in pension phase is a sensible, common sense outcome.

“It was a ridiculous requirement to have that anyway; it was a cost and burden on the fund,” he said.

It is unclear exactly how the first measure will operate, with the government having released very little detail so far.

Promises of “no new taxes for superannuation”

It has also guaranteed “no new taxes on superannuation”. However, there is no specified timeframe for this promise.

The Liberal party has implemented major changes to superannuation tax during its time in power, including the introduction of the transfer balance cap, total superannuation balance and changes to contribution caps. It also previously proposed a $500,000 lifetime cap for non-concessional contributions, which was later dropped.

The transfer balance cap, introduced as part of the 2016 Federal Budget, has applied from 1 July 2017 and limits the total amount of superannuation money that can be transferred into retirement phase. While the cap is currently set at $1.6 million, it is indexed periodically in $100,000 increments in line with CPI.

The total superannuation balance, currently set at $1.6 million, restricts those with balances higher than $1.6 million from making non-concessional contributions or using bring-forward arrangements.

It also determines whether an SMSF has disregarded small fund assets and therefore is prohibited from using the segregated method to claim exempt current pension income in the annual return.

The Liberal party reduced the concessional contribution cap from $30,000 or $35,000 for members aged 49 or over to $25,000 per year for all individuals regardless of age. It reduced the non-concessional contribution cap from $180,000 per year down to $100,000.

Source: https://www.smsfadviser.com/latest-issue/feature-articles

Average age for establishing SMSFs sitting at 48.9

The latest SMSF Benchmark Report from Class indicates that there is a continuing trend towards younger age groups setting up SMSFs, which follows similar findings from recent ATO statistics.

In its latest SMSF Benchmark Report for the March quarter, SMSF software company Class analysed 26,100 funds comprising 46,943 members, which were newly established on Class within a five-year period spanning from 2014 to 2018.

Analysis of the data found that the average age of members establishing SMSFs was 48.9, with a small difference occurring between gender.

While the average establishment age based on the data set did increase from 48.6 in 2014 to a high of 49.5 in 2017, it has now fallen back to 48.9, the report said.

“There is a continuing trend for members of new SMSFs to be from younger age groups,” the report said.

“One factor that may see this trend continue is the proposal to increase the superannuation guarantee from its current rate of 9.5 per cent by half a percentage point from July 2021, until it hits 12 per cent in 2025.”

This will enable the younger workforce to accumulate greater super balances at a younger age over time, Class said.

SMSF statistics released by the ATO last week similarly indicated that around two-thirds of all new SMSF entrants are under the age of 50. 

The Class report also showed that the while the average individual member balance of a newly established fund is around $225k, the average fund balance is nearly $406k, ranging from $355k for a single member fund, to over $500k for four member funds.

The analysis also indicated that males have a 42 per cent higher balance on average compared with females when funds are established.

However, the gap it significantly lower across all SMSFs at 21 per cent, indicating that the gender gap does narrow over time, the report said.

Source: https://www.smsfadviser.com/news

3 things I’ve learnt from starting an SMSF

I stumbled blindly into the world of self-managed super funds (SMSFs) the same way most people do – through their accountants.

My accountant asked for a meeting after I was hit with a sizable tax bill from my share investment and told me I was better off starting a SMSF. This was about six years ago and I was a full-time employee back then.

I’ve learnt a lot since, especially given that I knew nothing about SMSFs back then as I didn’t think I was well off enough for an SMSF to generate better outcomes than a retail fund.

As it turns out, starting my SMSF was the right thing to do but for the wrong reasons! On reflection, there are three things I’ve learnt that I think is relevant to anyone thinking of starting an SMSF.

How much do you need to start an SMSF

My SMSF should be a disaster, according to the recent Productivity Commission (PC) report looking into the failings of $2.7 trillion superannuation system.

The PC found that SMSFs with less than $500,000 perform significantly worse than retail funds (this includes industry funds). I certainly didn’t have half a million to pump into super as I was only an ordinary wage earner.

But I don’t think my accountant steered me in the wrong direction. I haven’t spoken to him in a few years after he sold his business and I’ve more than doubled my initial account balance in the SMSF over the past five years.

I think (or I like to think) he encouraged me to start a SMSF because he knows my track record as he personally prepared my tax return for many years. If you have a reasonably good history of investing in a personal capacity, then you shouldn’t be too flustered by the $500,000 target highlighted by the PC.

More than one superannuation account

Having multiple super accounts is a bad idea. You will have to pay fees on each account and that’s over a smaller account balance if you split your super between several funds. It’s death (of your super) by many cuts!

However, I have decided to keep my industry superfund when I stared my SMSF. The industry fund was my default super as an employee and I intentionally left it alone after I’ve set up my super.

I did this for two key reasons. My industry fund gives me access to investments that I can’t with my SMSF. This includes unlisted investments, direct property, international bonds, alternative investments, etc.

I also keep my industry fund for my life insurance. While I can probably do that through my SMSF, it’s just easier to get covered through the industry fund (as long as you trust the fund has partnered with the right insurer with the right product).

For the love of interest

The third takeaway from my experience is interest. I am not talking about bank interest but your level of interest in managing your investments.

I’ve long treated investments, particularly shares, like a serious hobby. I know it sounds sad as it probably means I don’t have much of a life given how much time I spend a day looking and reading about markets, but I think anyone who runs his/her own SMSF need to have interest in the subject.

This is particularly so for those with more modest balances as it doesn’t make a lot of sense hiring a professional to help you unless the fees make up only a very small percentage of your capital.

If you don’t have interest in investments, it is very likely you will neglect your SMSF. In such situations, you will more than likely be better off sticking to a retail or industry fund with a good track record of returns.

A final word, this isn’t meant to be tax or investment advice. The article is based on my personal experience and may not be relevant to your circumstances. You should always seek professional advice before making any decision.

Written by: Bendon Lau
Source: https://au.finance.yahoo.com

 

SMSF Association professional members learn to maximise super contributions and deconstruct the 2019 Federal Budget.

With over half a million self-managed super funds (SMSF) in Australia, accountants and other advisers are struggling to ensure their clients comply with constant changes to superannuation legislation.

Over the past two weeks Practical Systems Super has been proudly supporting a series of events held by the SMSF Association in a range of locations across New South Wales including Sydney, Port Macquarie and Newcastle.

Francis Waddell, Business Development Manager for Practical Systems Super has been speaking at these events to articulate how the company is dedicated to reducing the administrative and compliance burden of self-managed super funds.

“It’s been a pleasure to attend these events and support the SMSF Association and its professional members. Superannuation legislation is constantly changing and the recent Royal Commission has focused attention on compliance and the need for professional and trusted administration”, said Mr Waddell.

Francis joined Peter Hogan, Head of education and technical of the SMSF Association as he deconstructed the 2019 Federal Budget in these sessions and also provided an outlook on the Australian Liberal Party’s superannuation policy as we head to a federal election on the 18th May 2019.

The most significant policy change is ending the refunding of franking credits. SMSFs that receive franking credits for the tax paid by Australian companies will often receive a refund of the tax paid at the corporate level.

Under Labor’s proposed policy, SMSFs with a member receiving the age pension on March 28, 2018 will still be able to get a refund for franking credits received by the fund under Labor’s “pensioner guarantee”. Those who begin to receive the age pension after this date will not be eligible.

If elected, Labor has signaled it will cut the after-tax annual contribution limit to superannuation from $100,000 to $75,000.

Further, with Labor proposing to ban new LRBAs if elected, SMSF trustees who believe that a geared investment strategy is right for their fund should consider pursuing this before the next election. This should always be done with specialist SMSF advice and with a long-term investment strategy.

No one understands a clients’ needs like their accountant or financial adviser. Practical Systems Super employs SMSF professionals to support those professionals in ensuring their clients comply with superannuation legislation. Importantly, Practical Systems Super leaves that existing relationship in their hands.

To find out more about Practical Systems Super, contact us on 1800 951 855.

ATO issues reminder on upcoming TBAR deadlines

The ATO has reminded SMSFs that there are two upcoming deadlines for transfer balance account reporting over the next month.

In an online update, the ATO said that the next transfer balance account report (TBAR) deadline for SMSFs that report quarterly will be 29 April 2019.

The ATO explained that SMSFs will need to lodge a quarterly TBAR if their fund has any member with a total super balance (TSB) greater than $1 million and any member had a transfer balance account event occur between 1 January and 31 March 2019.

Annual TBARs, it said, are due at the same time as the SMSF annual return, which may be 15 May.

“You must lodge a TBAR for the 2018–19 financial year if all members of your SMSF have a TSB less than $1 million and any member had a transfer balance account event occur in the 2018–19 financial year,” the ATO said.

“You do not need to lodge a TBAR to report an accumulation phase value or a retirement phase value. If you need to report this information to us, you should include this information on your annual return. This information does not affect your member’s transfer balance account.”

The ATO also reminded SMSFs that if no transfer balance account event occurred, then there is nothing to report.

“Different reporting time frames will apply if your member has exceeded their transfer balance cap,” it said.

The ATO added that tax agents now have access to online TBAR lodgement.

“Online lodgement offers a number of advantages including prefilling of details and inbuilt verification rules to reduce reporting errors and reverse workflow,” it said.

It also said that it would continue to take an educative and supportive approach where routine quarterly or annual TBARs are lodged late.

“If you’re in this situation and can’t lodge by the due date, but are working towards lodging as soon as possible, you don’t have to seek a formal extension of time,” the ATO said.

“Be aware that late lodgement may affect your member’s transfer balance account and cause reverse workflow.”

Source: https://www.smsfadviser.com/news/17536-ato-issues-reminder-on-upcoming-tbar-deadlines

3 simple rules for related parties

Identifying related party transactions in an SMSF can be a complex process, but there are some simple rules to keep your funds compliant.

Trying to identify related party transactions in an SMSF can seem like pulling apart a set of Russian dolls: the first entity links to another entity, which, in turn, has another entity inside of it, and so on.

The question is how far do you continue searching to ensure that no related parties exist?

The reality is that when an ASIC search for an unlisted potentially related company reveals a group of shareholders that are companies or trustees for unit trusts, ASIC searches then have to be undertaken for each of those entities and when those shareholders are companies … well, it’s easy to see where this is going.

The basic rule of thumb is that related party transactions are rated high risk, so both the asset and any transactions will always be audited. The more information provided upfront will result in fewer queries and a more efficient audit — a win for everyone.

Here are 3 simple rules to help keep your funds compliant.

Acquisition of assets from related parties

It’s essential that all dealings between related parties are done in conjunction with the fund’s investment strategy and trust deed. Remember, too, that the only assets a fund can intentionally acquire from a related party under s66 SIS are money or cash, listed shares, business real property and certain in-house assets.

While the definition of cash and listed shares are easy to define, there are 2 necessary conditions that business real property must satisfy prior to acquisition:

  1. The SMSF or the other entity must hold an eligible interest in real property
  2. The underlying land must meet the business use test, e. the real property has to be used wholly and exclusively in one or more businesses carried on by an entity (refer SMSFR 2009/1)

All acquisitions must be made at market value under R8.02B SIS with business real property being subject to a market valuation at least three months before the acquisition. The ATO recommends the use of a qualified independent valuer where the value of the asset represents a significant proportion of the fund’s value.

Once the asset is in the fund SMSF trustees can provide a valuation of the property in future years, but the hurdles are difficult to clear. They must be able to demonstrate that the valuation has been arrived at using a ‘fair and reasonable’ process, which should include an explanation to a third party (i.e. the auditor).

Related party income

SMSF auditors are required to strap their professional scepticism hats on at the beginning of every engagement.

When there’s a related party transaction either in the fund or in a related unit trust, the auditor will look at the investment in a different light. They will start by questioning whether the rent is being paid at market value and whether the terms of the lease are conducted at arms-length. 

It’s best that an independent rental assessment is provided to confirm the rent is at market rates at the time of submitting the audit to avoid delays.

Any identified shortfall in rent may be a breach of s 109 SIS and reportable to the ATO. The timing of rent payments and all lease-related payments, such expenses, are also checked to ensure they’re in accordance with the terms of the lease and on an arms-length basis. 

Where related party transactions are not on commercial terms and the fund is not worse off, this may also be reported in an auditor contravention report for not complying with s 109 SIS.

The NALI effect

There can be significant tax implications for SMSFs from income-producing related party assets such as business real property, companies and unit trusts.

One of the most common examples is where the fund holds property, and the lessee is a related party. When rent is being paid at higher than market rates, a tax issue is generated as the investment is not being maintained on an arm’s length basis. 

As a result, all of the income that the fund receives from that asset may be deemed as non-arm’s length income (NALI). 

NALI is taxed at the highest marginal rate and applies regardless of whether the fund is in pension mode. Most importantly, it includes all of the income generated from the asset since the day of acquisition. Ouch.

From an audit perspective, NALI is not a compliance breach but a tax issue, which results in a management letter comment in most cases.

Conclusion

When related parties become part of the SMSF investment landscape, there are 3 simple rules that can help keep funds compliant.

The first one is to provide annual market valuation documentation demonstrating that all transactions are booked at current market value to comply with R8.02B SIS. The second is to ensure that all related party income is being paid at market rates and, finally, ensure transactions are undertaken on an arms-length basis to avoid NALI.

Of course, the legislative complexities surrounding related parties mean more onerous obligations and responsibilities for SMSF trustees and their advisers. Keeping on top of it all is the key.

Written by Shelley Banton, executive general manager, technical services, ASF Audits 

Source: https://www.smsfadviser.com/strategy/17522-3-simple-rules-for-related-parties

Government dilutes Work Test and extends bring-forward rule

The Government has announced it will remove the Work Test for people aged 65 and 66 from 1 July 2020 and extend access to the bring-forward arrangements for non-concessional contributions for the same group.

In an announcement released a day before the Federal Budget, Treasurer Josh Frydenberg also stated the current Government would increase the age limit for spouse contributions from 69 to 74 years.

According to a statement released by Frydenberg, under the Work Test change people aged 65 and 66 will be able to make concessional and non-concessional voluntary superannuation contributions without meeting the test from the middle of next year.

Frydenberg said the change to the Work Test would align it with the eligibility age for the Age Pension, which is scheduled to reach 67 from 1 July 2023, and that around 55,000 people aged 65 and 66 would benefit from the change in 2020-21.

The Treasurer also said the bring-forward arrangements would be extended from those aged less than 65 years to those aged 65 and 66, allowing the latter to make three years’ worth of non-concessional contributions, capped at $100,000 a year, to their super in a single year.

“The Government can deliver these reforms because our responsible budget management allows us to guarantee the essential services that Australians rely on,” Frydenberg said in the statement, which also referenced new laws to scrap exit fees and to reunite super fund members with low balance or inactive accounts.

Source: smsmagazine.com.au