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Software firm launches new SMSF administration service

By Miranda Brownlee | SMSF Adviser |
 
An accounting software firm has developed a new SMSF administration service aimed at accountants and financial advisers.

The new administration service, Practical Systems Super, has been developed by Armidale based software firm Practical systems, which has been offering specialised accounting and management software for small business and agribusiness clients since 1992.

Practical Systems chief financial officer Bob Locke said he decided to launch the new service in order to reduce the administration and compliance burden of SMSFs for financial professionals and trustees alike.

Over his 35 years of working as an accountant and taxation expert, Mr Locke said he has watched the increasing complexity in the administration and compliance of SMSFs in the face of ever-changing government regulation.

“From my previous experience with software development, it was clear that a good software platform would go a long way towards making the task much more efficient,” Mr Locke said.

“The cloud-based system allows all SMSF records and documents to be kept in the one easily-accessed location facilitating the sharing of information between stakeholders, such as accountants, auditors, advisers, and clients.”

Mr Locke said he expected an increase in the number of SMSFs being implemented by family and farming businesses.

“There are around 600,000 SMSFs in Australia and this number is steadily growing,” Mr Locke said.

“There is significant potential for rural and regional businesses to utilise self-managed superannuation. Often these businesses are family owned and SMSFs can be a great way to accumulate off-farm or non-business assets, thereby greatly assist with the succession process.

The use of SMSFs can allow family farms or businesses to be passed onto the next generation without the need for the sale of assets or the younger generation to take on debt to support the retirement of the previous generation, he said.

Currently, Practical Systems Super’s services are available to accountants and advisers.

The company plans to expand to software-only offerings in the next year and the platform is to be flexible in the face of future superannuation changes.

“Practical Systems Super sees opportunities to meet the needs of smaller accounting firms and financial advisers, as well as supporting individual trustees directly,” said Mr Locke.

New SMSF admin platform launches

A new one-stop-shop SMSF solution that aims to help financial advisers keep on top of administrative and regulatory burdens has launched.

Practical Systems Super meets the needs of small accounting and advice firms by providing services such as fund setup, financial recordkeeping and investment monitoring.

Founder Bob Locke said the cloud-based software solution provides an SMSF service to clients without the burden of keeping up compliance, licensing and auditing requirements.

“Practical Systems Super is completely independent of any financial institution or organisation and entirely Australian-based. One of our objectives is to achieve cost-efficiencies for the benefit of our clients through smart technology, rather than through lower labour costs via overseas outsourcing,” he said.

“Recent changes to superannuation regulations has resulted in the need for real-time administration and monitoring of SMSFs, particularly when fund members start to draw down on their accumulated benefits.”

Armidale-based Locke also created Practical Systems Super’s software Cashbook

Bob Locke examines the federal budget from his perspective.

2019/20 Federal Budget Overview

Bob Locke, founder of Practical Systems Super, examines the 2019 Federal Budget. 

Over my 35 years of working as an accountant and taxation expert, I have watched the increasing complexity in the administration and compliance of SMSFs in the face of ever-changing government regulation.

On the back of an improved fiscal position, the budget was clearly designed for an election year with no surprises or “hits” and where most people will benefit from tax cuts.

The slated tax reductions will increase consumer disposable income. In the context of the current lower than average consumer confidence, you could expect some of this to be saved (rather then spent) and some of these savings could flow into superannuation.

It’s good to see that the budget position is finally heading back into surplus but paying down the existing debt is going to require a sustained discipline on the part of current and future governments.

The 2019/20 Budget and superannuation

There were very few measures in this year’s budget relation to superannuation.

I think this is a good thing and very wise given the massive changes made over the last few years (i.e. changes to contribution caps, introduction of the Transfer Balance Cap and Totals Super Balance cap, etc.).

Any changes to superannuation arrangements tend to impact negatively on general confidence in superannuation – negative changes especially, but also positive changes can influence the general perception that “governments are always changing the rules and I can never be sure how my superannuation savings will be affected in the future”.

In my experience, younger people in particular are often skeptical about making additional contributions to super as constant changes undermine their confidence in a system where the government is supposed to be supporting and encouraging provision for their retirement.

To find out more about how the budget will impact on your SMSF call the office on 1800 951 855.

DBA Lawyers Annual Update Service

DBA Lawyers Annual Update Service DBA is a leading SMSF law firm that also advises on tax and related matters. Their main clients include accountants, financial planners, SMEs and high net worth individuals who need to access quality technical services and documentation in their practice areas. They are a progressive firm that presents regularly at seminars around Australia o pass on practical expertise to advisers and therefore also have an Australisn wide client base.

Updated Annual Update Service website coming soon!

The website for DBA Lawyers’ Annual Update Service will soon be updated with a number of improvements for subscribers.

In addition to an updated interface and ease-of-use features, the updated website will be fully integrated with DBA Lawyers’ online ordering platform and will have enhanced security features.

There will be a brief offline period for the website as part of the roll-out from 5pm AEDT Friday 22 March 2019 to 9am AEDT Tuesday 26 March 2019 to facilitate the transition.

Please contact DBA Lawyers if you have any queries or concerns regarding the new website.

What is the Annual Update Service?

The Annual Update Service provides a convenient and sound way of ensuring that SMSFs’ governing rules are kept up to date. This in turn gives SMSFs maximum strategic flexibility, compliance and peace of mind.

It works on the following basis:

  • Upon subscription, an SMSF is given a secure Homepage which you can log into from the DBA website.
  • Tailored resolutions can be downloaded from the homepage.
  • New governing rules (and accompanying PDS materials) for the SMSF are contained on the SMSF’s homepage. By executing the tailored resolutions, those governing rules will become the governing rules for the SMSF.
  • Every 1 July, the following will occur:
    • A new set of governing rules will be added to the SMSF’s homepage. This by itself has no legal effect.
    • Trustee resolutions adopting the new governing rules will be placed on the SMSF’s homepage and a reminder will be emailed out.
    • The resolutions are printed and executed by the relevant parties. Upon execution, the new governing rules will be adopted by the SMSF.

A reduced fee of $137.50 for updating the SMSF governing rules of a fund applies if payment is made via direct debit. If you do not choose direct debit, you will be sent an invoice each 1 July for $165 and will only receive access to your updated governing rules upon payment.

Advisers Advisers log in just like anyone else, but they have their own personalised adviser homepage. On the adviser homepage, advisers see a list of all of their SMSF clients who subscribe to the Annual Update Service. Advisers can drill down to the homepage of each SMSF, where advisers can access the current and all prior versions of the governing rules for each of their SMSF clients. Advisers can also upload scanned copies of executed resolutions as well as scanned copies of any prior documents (eg, deed of establishment). This way, each SMSF’s Homepage can become a repository for the SMSF deed documents. All SMSF clients will have the same governing rules each financial year. This means that advisers only need to familiarise themselves with one set of governing rules.

Trustees If you like, you can nominate that one or more of your advisers has access to your SMSF’s personalised homepage. Typically these advisers include accountants, auditors and financial planners. If you do not want to allow any advisers to have access to the homepage, this is also fine.

ATO targeting tens of thousands of late and non-lodging SMSFs

The ATO is targeting the tens of thousands of SMSFs it has identified as late in lodging their SMSF Annual Return, or having never lodged at all.

Dana Fleming, ATO Assistant Commissioner for Superannuation, told the SMSF Association National Conference that the ATO had identified 64,000 ‘lapsed lodgers’ and just under 30,000 ‘never lodger’ SMSFs.

Late lodging SMSFs

 SMSFs in the ‘lapsed lodger’ category had an average of 3.4 overdue SMSF Annual Returns. About 4,000 of these funds had an Auditor Contravention Report lodged with their last annual return.

 The ATO started chasing this group with a targeted mail out, coordinated with the Tax Practitioners Board, to the 2,728 tax agents and 570 SMSF auditors who have an SMSF with overdue lodgements.

“This group was the first cab off the rank in our lapsed lodger program because we have the highest expectation of tax agents and SMSF auditors, given their professional standing and role in maintaining the integrity of the system. We also know that poor compliance by this group tends is correlated with poor compliance by their clients,” Fleming told the conference.

30% of these professionals are now “back on track”. Fleming said the ATO would refer the remaining 70% for audit if they aren’t actively working with the ATO on their overdue lodgements.

 “We’ve also started to contact the full population of lapsed lodgers to encourage them to bring their overdue lodgments up to date. We’re encouraging them to contact us if they need assistance,” Fleming said.

 “We’ve also removed SMSFs with lapsed lodgments from SFLU [Super Fund Lookup], which means they can no longer receive contributions or rollovers.”

The ATO has also identified approximately 26,000 SMSFs of the 64,000 late lodging funds which are overdue in lodging their Annual Return for the first time.

“Given our finding that once SMSFs stop lodging for the first time, they often stop lodging all together, we have an increased focus on those SMSFs who have not lodged for the first time as a preventative action against potential long term non-lodgment.”

The ATO is contacting these funds to let them know that not lodging can put their compliance status at risk and they could be removed from SFLU.

 

Never lodged SMSFs

 Fleming said that the ATO was paying “very close attention” to the approximately 6,500 SMSFs which registered in 2017 but haven’t lodged their first Annual Return – which was due on 28 February 2018.

 “We’ve contacted all these funds. Where they received a rollover we’ve asked them to lodge or contact us if they need help. These may just be a group of the early ‘strugglers’ who are new to the system or there could be potential IER [Illegal Early Release].”

 “Where there was no rollover and it appears the SMSF has never operated, we’ve asked them to cancel their registration if this is the case.”

 “If we don’t get a response, we’ll take the fund off SFLU and for those where we can see there has been a roll over, take action on the basis there has been IER.”

 The same action will be taken for new SMSFs which had Annual Returns due on 28 February 2019.

 When it comes to long-term never-lodging SMSFs, Fleming said the ATO had uncovered some “sobering facts”. There has been a steady increase in the number of these funds over the last five years, with “just under” 30,000 SMSFs registered between 2013 and 2018 having never lodged (including the 6,500 SMSFs not lodging their first year Annual Return).

Over 50% of these SMSFs appear to have received a rollover from an APRA-regulated super fund. Also the average amount of these rollovers has been increasing, from $78,000 in 2013 to $140,000 in 2017.

The age of these never-lodging SMSF trustees also skews younger, with an average age of 36. This compares to an average age of 58 for the SMSF population as a whole, based on ATO statistics for the 2015/16 year.

 “We’ve undertaken a pilot of 200 funds to understand this population,” Fleming said.

 “Our analysis shows a variety of reasons for never lodging. Some trustees have never operated, some admitted to IER and some have brought their lodgments up to date. We’ll be doing a mail out within the next few months to the entire never-lodged population.”

 “As with first-year non lodgers, where funds haven’t received a rollover and it simply appears the individual never operated the SMSF, we will ask them to cancel their registration. Where they have received a rollover, we will ask them to lodge and take further action if they fail to do so.”

Source: https://www.solepurposetest.com/news/ato-late-non-lodging-smsf/

SMSFs and property

Mixing property and your self-managed super

You may want to set up an SMSF primarily to invest in residential property. Here we explain when you can use your SMSF to invest in property and what you need to consider before you do.

Self-managed super fund property rules

You can only buy property through your SMSF if you comply with the rules.

The property:

  • Must meet the ‘sole purpose test’ of solely providing retirement benefits to fund members
  • Must not be acquired from a related party of a member
  • Must not be lived in by a fund member or any fund members’ related parties
  • Must not be rented by a fund member or any fund members’ related parties.

However, your SMSF could potentially purchase your business premises, allowing you to pay rent directly to your SMSF at the market rate.

See the Australian Taxation Office’s webpage on self‑managed super funds for more information.

Case study: John and Barbara consider an SMSF

couple-on-pcExperienced property investors John and Barbara are in their early 50s and want to set up an SMSF to use their super to purchase another investment property. They have a property portfolio worth $1 million (with investment loans of $800,000), a combined $200,000 in super and no other investments.

After discussing their options with a financial adviser, Barbara and John decide that an SMSF is not right for them. They realise that a property investment through an SMSF would further increase their debt and reduce the diversification of their assets. Barbara is also concerned about the cost, time and responsibility required to run an SMSF, especially as they get older. Instead they decide to concentrate on paying off their debt and making extra contributions to their super.

What it will cost you

SMSF property sales may have many fees and charges. These fees can add up and will reduce your super balance.

You should find out all the costs before signing up including:

  • Upfront fees
  • Legal fees
  • Advice fees
  • Stamp duty
  • Ongoing property management fees
  • Bank fees

Be wary of fees charged by groups of advisers who recommended each other’s services as it is important to get independent advice. Anyone who gives advice on an SMSF must have an Australian financial services (AFS) licence. ASIC Connect’s Professional Registers will tell you if the company or person holds an AFS licence.

See investing in property for more information.

SMSF borrowing

Borrowing or gearing your super into property must be done under very strict borrowing conditions called a ‘limited recourse borrowing arrangement’.

A limited recourse borrowing arrangement can only be used to purchase a single asset, for example a residential or commercial property. Before committing to a geared property investment you should assess whether the investment is consistent with the investment strategy and risk profile of the fund.

Geared SMSF property risks include:

  • Higher costs – SMSF property loans tend to be more costly than other property loans which must be factored into your investment decision.
  • Cash flow – Loan repayments must be made from your SMSF which means your fund must always have sufficient liquidity or cash flow to meet the loan repayments.
  • Hard to cancel – If your SMSF property loan documentation and contract is not set up correctly unwinding the arrangement may not be allowed and you may be required to sell the property, potentially causing substantial losses to the SMSF.
  • Possible tax losses – Any tax losses from the property cannot be offset against your taxable income outside the fund.
  • No alterations to the property – Until the SMSF property loan is paid off alterations to a property cannot be made if they change the character of the property.

See borrowing to invest for more information on the risks of gearing.

Property developers and SMSFs

Property developers must have an Australian Financial Services (AFS) licence to provide financial planning advice. This includes advice on setting up an SMSF.

Property developers may have a pre-existing business relationship with the professionals they recommended. They may receive a referral fee or other benefits that could amount to thousands of dollars.

Don’t be pressured into making property purchase decisions for an SMSF. Watch out for sales tactics like competitions, free flights to sales meetings or being taken out for free meals. Make sure you get financial advice from someone who has an AFS licence. See questions to ask a financial adviser for talking points you can use to check for sales incentives.

Think twice about investing in property markets you are not familiar with, do your own research first.


Related links

Are you prepared for any decisions that need to be made when something happens?

An ageing population coupled with the sweeping changes to the aged care system, means that advice services targeted towards the elderly have never been more in demand.

With over one million Australians already receiving aged care services in Australia, and this figure expected to rise to $3.5 million by 2050, demand for advice on aged care is rapidly rising. The 2017 Investment Trends SMSF Report highlighted that aged care is already a significant gap in the advice market, with only half of all retired SMSF trustees having planned for aged care.

Dementia is the leading factor for requiring aged care services and the statistics for dementia are high amongst the 85-and-over age group. Aged Care Steps technical manager Natasha Panagis says a new case of dementia occurs every six minutes based on statistics from Alzheimer’s Australia. Amongst those over the age of 85, 30 per cent suffer with dementia, and this is the typical age for entering aged care, she says.

“Advisers without an aged solution may fall behind as the population continues to age, and people need aged care advice along the way,” she warns.

With greater numbers of Australians needing to access these sorts of services, speaking to clients early on is critical, she says. SMSF practitioners should check that clients have their retirement planning sorted, their estate planning in place and that they’re prepared for any decisions that need to be made when something happens.

PLANNING AHEAD

Ensuring clients have valid documents in place for wills, enduring powers of attorney and enduring guardianships is important for clients of all ages, says Ms Panagis.

“When the time comes, the client will need to delegate their financial decisions to someone else, and it’s easier if those types of attorneys and guardianships are in place because once they’ve lost legal capacity, it’s too late to set up those powers,” she explains.

“[If these powers are not set up] then their love ones will need to go to the guardianship tribunal of the state and try and seek financial management orders which can be time consuming and quite expensive.”

It’s never too early to address this with clients and put in place documentation because it’s uncertain what might happen in the future, she warns.

“Although most people who are in aged care are in that older age bracket, we’re starting to see a lot of younger clients that need to move into aged care. By younger I mean people in their 60s and some people even in their 40s as a result of a very traumatic accident or injury.”

For SMSF clients specifically, Ms Panagis says practitioners will need to make sure that their trust deed allows for an enduring power of attorney to become their legal personal representative and assume the trustee role or become a corporate trustee.

“It’s also about making sure that the enduring power of attorney is the right person, can be trusted, has the client’s best interests at heart, and will do the right thing by the person,” she stresses.

“ALTHOUGH MOST PEOPLE WHO ARE IN AGED CARE ARE IN THAT OLDER AGE BRACKET, WE’RE STARTING TO SEE A LOT OF YOUNGER CLIENTS THAT NEED TO MOVE INTO AGED CARE. BY YOUNGER I MEAN PEOPLE IN THEIR 60s AND SOME PEOPLE EVEN IN THEIR 40s AS A RESULT OF A VERY TRAUMATIC ACCIDENT OR INJURY” — Natasha Panagis, Aged Care Steps

SMSF clients she says also need consider what will happen with their fund as they become older.

“If they’re getting older and the administration side of things is becoming all too hard, then they can bring other members into the fund and move their benefits out, or they might want to wind it up and just for simplicity move to a wrap-type product or a retail fund,” she explains.

SMSF clients may choose to bring family members into the fund for estate planning reasons, where they want to keep everything within the family unit.

“It comes down to what their objectives are and whether they are happy to bring in other members of the family,” she says.

In some cases there might be an elderly couple where one of the members has dementia and needs to move into aged care.

“If they’re individual trustees, then in that situation, unless they have a corporate trustee, they really can’t remain a single member fund,” she says.

EXPLORING OPTIONS FOR RETIREMENT LIVING

Retirement villages

For clients who want to retain their independence but want the peace of mind of having someone on call in the case of an emergency, retirement villages can be a good option for retirees. TressCox Lawyers partner Christopher Conolly explains that retirement village accommodation is for anyone retired or over the age of 55 and is regulated by legislation in each state.

“They’re not required to provide care, but they are required to provide an emergency buzzer and someone who can respond to that,” says Mr Conolly.

There are a range of different providers and there can be substantial variations in cost depending on factors such as location and the quality of the unit.

“In NSW there’s a standard agreement for retirement village units which is prescribed by the Retirement Villages Act, but there’s usually additional clauses relating to the specific retirement village,” he says.

For clients who are considering moving to a retirement village, there are a number of financial aspects to consider.

“It will be a considerable investment because it is the equivalent to purchasing a new house. The financial planner will need to help the client figure out what assets they have available and how to fund it, and what will happen when the individual leaves the village,” he explains.

Residential aged care

Unlike retirement villages, retirement homes are funded by the government and provide a number of levels of care. The aged care system, Mr Conolly explains, is needs-based so individuals have to establish their need before they can access the funding for care services.

“You can’t go into an aged care facility unless you require it, so you might be immobile for example, or need 24-hour nursing care or suffer with dementia. All of those things qualify you for aged care,” he says.

Individuals who want to enter an aged care facility will need to go through an assessment process, he says, which involves a member of the aged care team visiting the person and undertaking a review of their ability to function. Based on that review they will then make a classification.

The costs associated with residential aged care are split into two parts, the cost of the accommodation and the ongoing fees for aged care.

Challenger technical services manager Sean Howard said if clients are looking in the metropolitan areas for aged care, then the average priceof accommodation will be around $350,000.

“That’s just to move into a facility, it doesn’t include ongoing care, that’s just to get into a room,” explains Mr Howard.

In wealthier areas like the eastern suburbs of Sydney, the average accommodation cost is closer to $2 million, he warns.

On top of this there is also a basic care fee that everybody pays, which works out to be around $50 a day, he says, and if the client has the means, they’ll pay additional fees in addition to this.

“If you want extra services on top of the care, things like wine with your meals or hairdressing, then you pay an extra services fee as well.”

Home care

In recent years, the government has placed a lot of emphasis on providing support for older Australians to continue living at home, says Mr Conolly.

“That’s provided as support packages for personal care, transport, food and preparation of meals, and nursing assistance at home,” he says.

Ms Panagis says home care tends to replicate the services that someone would receive in aged care, but in the comfort of their own home.

“The government encourages people to stay in the home for much longer because it’s one-third of the cost when compared to aged care, by way of all the subsidies that they pay for people,” she says.

“They need an assessment to be able to receive home care services and that will require someone coming to the home to undertake an interview where they ask questions about their lifestyle, what they’re struggling with around the home, and based on that assessment the team will determine whether the person is approved for basic, low, intermediate, or high care.”

“THE GOVERNMENT ENCOURAGES PEOPLE TO STAY IN THE HOME FOR MUCH LONGER BECAUSE IT’S ONE-THIRD OF THE COST WHEN COMPARED TO AGED CARE, BY WAY OF ALL THE SUBSIDIES THAT THEY PAY FOR PEOPLE” — Natasha Panagis, Aged Care Steps

Funding aged care

With the cost of accessing aged care services substantial, it’s important to plan how these amounts will be funded well before the need arises.

“A lot of advisers may not consider aged care as part of the retirement planning process. So

when they’re asking clients how much they need for retirement, a lot of the time that amount that they’re helping clients plan for doesn’t include what the aged care costs will be at that time,” says Ms Panagis.

One of the aspects that may need to be considered is how the client will fund the lump sum for their residential aged care accommodation. There has been a fair bit of change in this area in relation to means testing for aged care fees and Centrelink for pension purposes.

“In the past, there were concessions so that if a person kept their home and rented it out and paid their accommodation periodically, then rental income would be offset for Centrelink pension purposes as well as aged care fee purposes,” Ms Panagis explains.

“From 1 January this year it all got tightened up. So, for people who are keeping their home and deciding to rent it out, regardless of how they pay for their accommodation for aged care, that rental income will now count as income for aged care fee purposes and Centrelink pension purposes.”

In the past, advisers and their clients were less likely to consider selling the home, because the rental concession came along with it.

“However, these days, people are actually considering selling the home as an option because renting it out doesn’t carry the same concessions as it used to,” she says.

“YOU CAN’T GO INTO AN AGED CARE FACILITY UNLESS YOU REQUIRE IT, SO YOU MIGHT BE IMMOBILE FOR EXAMPLE, OR NEED 24-HOUR NURSING CARE OR SUFFER WITH DEMENTIA. ALL OF THOSE THINGS QUALIFY YOU FOR AGED CARE” — Christopher Conolly, TressCox Lawyers

Some clients may not want to sell the family home if it’s been in the family for the past 60 years, for example, or they want to leave it to the next generation.

If the majority of their wealth is tied up in the home, however, then the practitioner will need to consider other options with the client for funding their accommodation. One option for clients in this situation, Mr Howard explains, is for the client to borrow money for the accommodation from the provider and pay for their accommodation as a daily payment, instead of paying it as a lump sum.

“Essentially what happens is that you pay an interest-only loan to the provider, the interest rate on that is currently 5.7 per cent so that’s another way of funding your accommodation,” he says.

Another way of funding the accommodation is through an aged care loan where the individual borrows a lump sum against their home and uses that to pay for their accommodation. In order to compare which option is best for the client, practitioners should look at the interest rate of each type of loan.

“Keep in mind of course that the interest rate with the provider is 5.7 per cent. So unless the aged care loan has an interest rate lower than that, then you’re probably better off borrowing from the provider because it’s simpler and you’re just dealing with the one party.”

The client may also consider asking family to chip in, says Ms Panagis, if the family home is going to end up going to the family anyway.

Practitioners will also need to consider how clients are going to fund their ongoing care. The means testing for aged care fees consists of two tests.

“There is an income test and an assets test and they add the two tests together to work out how much you need to pay for your aged care,” Mr Howard explains.

“Now that’s a little different to Centrelink. There’s an income test and an asset test for Centrelink but they only use one of the tests, it’s the test that produces the lowest amount of Centrelink entitlement.”

In terms of the income and assets assessed, aged care uses the same assessments as Centrelink with a couple of additions.

“On the income side they also assess what Centrelink pays to the client, so there’s an additional amount of assessable income,” he says.

“Now on the asset side for aged care, once again they use Centrelink assessed assets, but they also assess the family home. Now that’s capped at about $163,000 if there is no protected person living in the home. A protected person could be a partner for example.”

What they also assess for aged care, which they don’t assess for Centrelink, he explains, is the lump sum amount they paid for their aged care accommodation.

Based on this means assessment, Mr Howard says the client may have to pay the means tested care fee in addition to their basic care fee. They may also choose to pay extra fees for additional services.

There are a range of options for funding these ongoing care fees. The most obvious and simplest method is to leave everything in bank and term deposits and draw down on the interest and capital to pay for the ongoing care. With interest rates relatively low for cash at the moment, however, they may also want to explore other options for generating income.

One of the strategies practitioners may want to consider with clients is staggered annuitisation.

CommInsure head of annuities George Lytas said this strategy involves buying tranches of annuities gradually throughout retirement, rather than investing the whole amount upfront.

The first tranche of lifetime annuity the client purchases might comprise 50 or 60 per cent of the amount they want to allocate to annuities, he explains.

“So, regardless of how long you live, you’re getting guaranteed income for life, but what this also means is that you can then purchase additional tranches later on because you haven’t used the whole 100 per cent that you’ve allocated to lifetime annuities,” he says.

The advantage of this strategy, he says, is that it can help the client generate increasing levels of income as their spending patterns change throughout retirement.

“The other benefit of this strategy is that if your circumstances do change and you need to access funds for aged care, because you haven’t allocated all of the money upfront into lifetime annuities you can then access that capital. So it’s actually quite a flexible strategy,” he says.

“So if your health is perfect, then you can continue buying lifetime annuities for example every five years. If your health changes, however, or your circumstances change, then you might say ‘well my income needs haven’t increased as much as I thought, so I don’t need to buy additional lifetime annuities’, and you can cash out your short-term annuities, and use that capital for other needs.”

Insurance bonds can also provide a flexible way of generating income, especially for those without any superannuation.

“Insurance bonds are simple tax-paid investments that allow you to set up automatic regular withdrawals,” he explains.

“If you’ve held those for 10 years, the income that you draw out is actually tax paid, and the other benefit is that you don’t have to complete tax returns because it’s a tax paid investment.”

PROTECTING AGAINST ELDER ABUSE

When providing advice to older clients, its also important that SMSF practitioners are always on the lookout for cases of elder abuse, warns Protecting Seniors Wealth chief executive Anne McGowan.

SMSFs have always been a target for elder abuse by unscrupulous family members or professionals, she says, due to the large balances sitting in some SMSFs and the fact that it’s a growing pool of money.

“As people age and become older, they become reliant on people to assist them, and those people who are genuinely assisting older people should be commended, and there are so many people that do, but there is a growing number of people with ‘inheritance impatience’ and they’re most often the family members,” she cautions.

The introduction of the recent superannuation reforms, she says, has increased the risk of elder abuse because there’s likely to be greater amounts of money sitting outside of the superannuation environment.

“With the new laws coming in, SMSF members can only keep a certain amount of money in pension phase, and then the rest will have to be relocated to other investments. So that in itself will also leave them open to financial abuse, because it may be easier for financial predators to access those other funds,” she explains.

Some of the red flags that advisers should watch out for she says are unusual withdrawals occurring frequently where there’s no explanation or one very large withdrawal. A different person appearing with a new power of attorney when someone else had been helping them previously could also be a sign, especially if the older client appears uneasy around them.

“SMSF advisers certainly need to be very aware of the many different ways that financial abuse occurs and just to be on the lookout for it,” she says.

Source: https://www.smsfadviser.com/latest-issue/feature-articles/17205-golden-years

SMSF Association calls for overhaul of TRIS rules

The government should allow transition to retirement income streams to convert to account-based pensions upon a condition of release, with the existence of two types of TRISs causing unnecessary complexity and compliance, says the SMSF Association.

In a pre-budget submission, the SMSF Association said that while it supports the recent amendments made by the government in respect of TRISs, there are still two types of TRISs — one with taxable earnings and one without — which make the law complex.

“An extension of this is that one type of TRIS will count towards the transfer balance cap, while the other will not,” it explained.

The submission also highlighted that the legislation also creates no real incentive for individuals on a nil cashing TRIS to ever convert to an account-based pension (ABP). In practice, these income streams will continue in the industry in more prevalence than ABPs.

“If an individual did want to convert to an ABP, they would have to do this via the method of commutation and re-commencement, and thus the amendment does not ease the compliance burden they normally face,” it said.

Having three types of pensions also creates additional complexity for the superannuation industry, the submission said.

“SMSF software and service providers must calculate the tax on differing TRISs and collect additional information on conversion date. Financial advisers will have additional burdens in determining the types of TRIS a client has when an adviser gains a new client or an existing client starts a TRIS,” it said.

“Moreover, the disclosure documents seeking to explain the difference between the three types of pension are very complex and lengthy. Actuaries will also need to determine types of TRIS and if a condition of release is met.”

The SMSF Association recommended amending the Superannuation Industry (Supervision) Regulations 1994, so that where a TRIS holder satisfies a nil cashing restriction condition of release their TRIS, they can automatically be converted to an ABP upon an acknowledgement from the member.

“This allows existing TRIS to still be grandfathered for Centrelink purposes if they started before 1 January 2015, as the income stream will not have ceased.

“Furthermore, having members decide when their TRIS converts will also allow them and their advisers to better plan for the transfer balance cap and various other retirement issues and also gives them control. This is an essential aspect of the new superannuation reforms.”

The submission also called for the government to remove the requirement to obtain an actuarial certificate when the fund is 100 per cent in retirement phase.

Under the current rules, the submission said that if an SMSF has at least one retirement phase income stream at any time of year, and a fund member has a total superannuation balance over $1.6 million immediately before the start of the relevant income year, then the SMSF will have disregarded small fund assets.

This means that it will need to use the proportionate method to calculate exempt current pension income for all members for the entire income year.

This requires the SMSF trustee to obtain an actuarial certificate that certifies the proportion of income that is exempt, it said.

“However, one possible outcome of this rule may result in a fund which is solely in retirement phase for a financial year being required to obtain an actuarial certificate in order to claim ECPI,” it explained.

“The actuarial certificate in this circumstance would state an actuarial tax-exempt percentage of 100 per cent.”

The submission said that this is an “unintended and costly consequence” of the disregarded small asset rules which provides no value to SMSF trustees.

“The requirement to obtain an actuarial certificate to confirm that all the fund’s income is exempt from tax when all the assets of their fund are supporting pensions is unnecessary,” it said.

The submission said that a simple fix to ensure that any fund that is in 100 per cent retirement phase is not required to obtain an actuarial certificate could be achieved by amending section 295-385 item 7 to ensure that disregarded small fund assets are not segregated current pension assets, unless section (4) applies in respect to an entire financial year.

“This will save SMSFs in this position the annual actuarial fee, which is typically between $100 and $200 and not impact government revenue,” it said.

The SMSF Association also called for an amnesty to allow SMSF trustees to convert their term allocated and legacy pensions to account-based pensions, a repeal of the work test and changing the residency rules for Australian superannuation funds that unfairly impact SMSFs.

Source: https://www.smsfadviser.com/news/17347-association-calls-for-overhaul-of-tris-rules

ATO to contact members about deductions for contributions

The ATO plans to contact around 11,000 taxpayers in February about claiming deductions for personal super contributions to ensure they claim correctly.

Earlier this year, the ATO reminded professionals about some of the common errors that can arise when clients claim deductions for personal super contributions.

Before lodging the client’s 2018 tax return, the ATO said that practitioners should check that their client is eligible to claim and that they made personal (after tax) super contributions directly to their super fund before 30 June 2018.

In order to be eligible for deductions on contributions made on or after 1 July, the contributions cannot have been made to a Commonwealth public sector superannuation scheme in which the client has a defined benefit interest, a constitutionally protected fund, or a super fund that notified the ATO before the start of the income year that it had elected to treat all member contributions as non-deductible.

The client also needs to meet the age restrictions. Clients aged between 65 and 74 may be eligible to use this strategy if they meet the work test.

Practitioners also need to ensure that their client has sent a notice of intent to claim or vary a deduction for personal super contributions to their super fund and has received an acknowledgement.

It also noted that members can only claim deductions for their after-tax personal super contributions and not from before-tax income such as the superannuation guarantee, salary sacrifice or reportable employer super contributions shown on their payment summary.

Source: https://www.smsfadviser.com/news/17344-ato-to-contact-members-about-deductions-for-contributions

Bill to increase SMSF member limit enters Parliament

The government has now introduced the bill to increase the SMSF member limit, but with the Labor Party unlikely to support it, the measure is still very much “up in the air”, says a technical expert.

In the lead-up to the federal budget last year, the government announced plans to increase the limit on the number of members allowed in an SMSF from four to six.

The government has now introduced Treasury Laws Amendment (2019 Measures No. 1) Bill 2019 containing the measure to change the SMSF member limit into the House of Representatives.

The bill makes amendments to the SIS Act, ITAA 1997 and Superannuation (Unclaimed Money and Lost Members) Act to increase the maximum number of allowable members in SMSFs from four to six.

SuperConcepts general manager of technical services and education Peter Burgess said that it was not surprising that Treasury has gone straight to introducing this measure into Parliament without first releasing draft legislation or a consultation paper given the time constraints.

The amendments contained in the bill seek to retain the same legislative concessions, exemptions and modifications that currently apply to SMSFs by omitting the term “fewer than 5” and replacing it with the term “fewer than 7” throughout the SIS and Tax Act, he explained.

“In other words, the proposed amendments contained in the bill seek to ensure the continued alignment with the increased maximum number of members for SMSFs,” he said.

“In particular, the amendments update the sign-off requirements in section 35B of the SIS Act to ensure at least half of the directors or individual trustees are still required to sign off the fund accounts and statements.”

Once the bill has been passed, Mr Burgess said that amendments to the SIS Regulations will still be required to accommodate these changes to the act.

“For example, SIS Regulation 13.22C and 13.22D are two regulations which come to mind that will need to be amended,” he said.

Mr Burgess also noted that, in some instances, the number of individual trustees that a trust can have may be limited to less than five or six trustees by state legislation and such rules could prevent all members of a fund with five or six members from being individual trustees.

“The explanatory materials say that in these situations a fund may consider using a corporate trustee to overcome this issue,” he said.

It is still uncertain whether Labor or the minor parties will support this measure, he said.

“In my view, it’s not a measure that the Labor Party would be inclined to support, so whether or not this measure is passed into law before the election is called is still very much up in the air,” Mr Burgess said.

The measure to increase the total SMSF members allowed to six has gained appeal among SMSF members following Labor’s announcement that it would scrap cash refunds for franking credits.

Some trustees plan to invite adult children with accumulation accounts into their fund so that they can increase the taxable income of the fund and offset franking credits.

SMSF members have also been warned on some of the investment risks and estate planning complicationsthat can arise from bringing extra members into the fund.

Source: https://www.smsfadviser.com/news/17340-bill-to-increase-smsf-member-limit-enters-parliament