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COVID-19 and early access to super

People financially affected by the coronavirus pandemic can access some of their super, but what will it cost long-term? 

Who is eligible to access super early?

In response to the disruption to the job market caused by COVID-19, the government has eased the rules around early access to super.

Several new groups of people are now eligible to access their super early:

  • unemployed people
  • those eligible to receive JobSeeker payment, Youth Allowance for job seekers, Parenting Payment, Special Benefit or Farm Household Allowance
  • those who’ve been made redundant or had their working hours reduced by 20%, or sole traders whose business has been suspended or faced a reduction of 20% or more since 1 January 2020.

However, just because you can access your superannuation doesn’t mean you should. 

We’ll help you weigh the pros and cons before deciding to dip into the funds meant to provide for your future and long-term financial security.

What are the risks of accessing your super early?

Taking out money before retirement means losing the benefit of compound interest over a number of years. Depending on how old you are, withdrawing money now could see you miss out on more than double that amount by the time you retire.

With this in mind, Super Consumers Australia director Xavier O’Halloran says you should weigh all of your options before dipping into your retirement savings. 

“There are a number of financial assistance options to help people through these tough times. Super will be the right option for some, but you should be looking at what else is available and possible cuts to discretionary spending before raiding the cookie jar.”

Although making a withdrawal now and/or next year will eat into your retirement savings, don’t forget that you may also be eligible to receive a pension.

The Moneysmart retirement calculator lets you enter in your details (including any breaks from the workforce) to see how much you would get in retirement from your super and/or the pension.

How will early access affect my savings?

An important point to consider is that the amount you withdraw from your super will no longer be invested. This means you may miss any eventual recovery in the market.

Super Consumers Australia modelling found that, for a 30-year-old, the impact of withdrawing $20,000 would be $49,823 by retirement age.

People with lower super balances will be more impacted by early withdrawal of the allowable amount, as it will be a larger proportion of their savings.

Super Consumers Australia has previously highlighted that women generally retire with lower super balances. The median superannuation balances for people approaching retirement age (60–64 years) was 26% higher for men ($154,453) compared to women ($122,848). Women also have greater needs in retirement due to a longer life expectancy.

Taking your super out early may mean you miss out on the market recovery

Experts like to say that ‘time in the market’ beats ‘timing the market’. This means that simply staying invested in the share market over the long term has historically produced higher returns than attempting to move in and out of the market to capitalise on fluctuations.

Analysis from finance publisher Firstlinks illustrates this point. It found that if you were invested in the S&P 500 (a US stock market index) between the start of 1999 and the end of 2018, the return was 5.6%. 

But if you weren’t invested for the best 10 days during that 20-year stretch, your returns fall substantially – to 2%. 

And if you missed the best 20 days, your returns would actually be negative.

This shows that missing out on being invested when the market surges, which can happen without notice over a very short period of time, can be very costly indeed. 

Trying to ‘time’ the market or pick the right point to put your money back in is extremely difficult. Most experts can’t consistently beat the market with timing or investment picking.

In the event that you do access your super early, you can make extra contributions to your super once back in secure work, in order to catch up. But you may not be in a position to start making those extra contributions before the recovery begins.


 

Many people are finding themselves in a financial situation they have never experienced before; if considering early access to your superannuation it is important to get independent advice about all of your options. 

Source: Super Consumers Australia & CHOICE 

How is your SMSF performing?

With over 600,000 funds and an average balance of around $1.2 Million, Self-Managed Superannuation Funds (SMSFs) make up for a significant portion of total superannuation assets in Australia.

One of the main reasons that SMSFs are  a popular choice for Australians in their retirement planning, is that individuals feel they have control over their retirement savings. However, with this decision making power comes responsibility. Some SMSF trustees manage all of the fund investments while others use an investment adviser to provide this service. Many also use a combination of both approaches – for example, they may attend to direct property themselves and use an investment adviser to look after the equities portion of the portfolio.

While some Trustees would have a very good knowledge of the investment returns and costs of their fund, many are left to interpret their statutory annual reports for this. These reports are often directed at compliance experts and it can be difficult for Trustees to fully understand how their investments are tracking relative to other indicators such as industry funds or investment benchmarks.

Calculating your SMSF performance

The idea of analysing the statutory report and extracting the performance information may seem daunting but can be quite simple. It’s just a matter of applying a formula to the relevant set of numbers.

Here’s how a Trustee could calculate the investment performance by using the Fund’s annual Operating Statement and Balance Sheet reports.

From the Operating Statement:

A. Calculate Gross investment income – be sure to leave out member contributions and any amounts rolled into the fund

B. Calculate investment related expenses – leave out member withdrawals, life insurance premiums and general administration expenses such as audit & accountancy fees

C. Net investment return (before tax) = A – B

D. Calculate the income tax expense (or refund) that relates to the net investment income – exclude the tax (15%) applicable to any concessional contributions

E. Investment return after tax = C – D

From the Balance Sheet:

F. Calculate average assets for the year – this will usually be the opening and closing net assets divided by 2 but a more sophisticated approach would be to use say a monthly weighted average of net assets to recognize significantly contributions/withdrawals during the year

The after-tax return % = E divided by F x 100

The practical application of this relatively simple process can be illustrated in the following example

Applying the formula to the above example, the components are:

A (investment income) = $20,000 + $15,000 +$30,000 = $65,000

B (investment expenses) = $10,000

C (net investment return) = $65,000 – $10,000 = $55,000

D (tax related to investment return) = $4,225 credit ($7,500 relates to concessional contributions less $4,225 = $3,275)

E (investment return after tax) = $55,000 + $4,225 (tax credit) = $59,225

F (average assets) = ($1,186,725 + $990,000) / 2 = $1,088,363

E (investment return after tax) = ($59,225 / $1,088,363) x 100 = 5.44%

Another important ratio that trustees may be interested in, is administration expenses as a percentage of average assets. Using the above sample data this would be calculated as:

  • Administration expenses = $2,500 divided by average assets $1,088,363 x 100 = 23 %

Having calculated these ratios, the obvious question is; “how do these compare to other superannuation funds or alternatives?”. There are several “benchmarks” that a fund could choose to look at for comparison purposes. The Australian Taxation Office does provide some data, but this is limited and tends to be quite dated by the time it is released.

Some other possible benchmarks might include:

  • All Ordinaries Accumulation Index: this provides the return from a theoretical basket of investments representing the All Ordinaries Index on the Australian Share Market including growth in value and dividends (grossed up by franking credits). It is, therefore, a useful benchmark for portfolios of listed Australian Shares. As an example, this index rose by 11.03% for the year ended 30th June 2019.
  • Indices relating to specific investment sectors such as property, fixed interest, etc.
  • Returns from the large Industry Funds: these are published and available for various member-selected investment mix options. As an example, the return for the “balanced fund” option of Australian Super for the year ended 30th June 2019 was 8.67%
  • Returns compiled by investment research firms such as Chant West or MSCI
  • Returns achieved by various index funds and Exchange Traded Funds

When comparing SMSF returns and costs to benchmarks and other alternatives it is important to take account of unique and particular issues that may affect the data in the different sectors. Some examples of these issues include:

  • SMSFs would rarely revalue direct property investments every year
  • An SMSF fully in pension mode with a significant share portfolio paying franked dividends would be expected to have a higher after-tax return than if the same fund was in accumulated phase.
  • Some administration cost of industry or retail funds may be “hidden” in net investment returns.

To get a quick comparison of the administration cost structure for your SMSF, complete the form below and a Practical Systems Super representative will be in touch.

The information provided in this article is general in nature and does not take into account your personal circumstances, needs, objectives or financial situation. This information does not constitute financial or taxation advice. Before acting on any information in this article, you should consider its appropriateness in relation to your personal situation and seek advice from an appropriately qualified and licensed professional.

BOB LOCKE – CHARTERED ACCOUNTANT & SMSF SPECIALIST

Mr Locke has been an accountant and taxation expert for 35 years. His company, Practical Systems Super, provides an all-in-one SMSF solution with a full administrative service, SMSF management software, and independent, licensed advice, tailoring their package to meet the individual needs of trustees and SMSF professionals.

To find out more about Practical Systems Super, visit www.pssuper.com.au, or call 1800 951 855.

Minimum super withdrawal reduced by 50% for retirement phase pensions

IMPORTANT: Minimum super withdrawal reduced by 50% for retirement phase pensions

In response to the COVID-19 pandemic, the Federal Government recently announced that the minimum superannuation drawdown rate would be halved for the 2019/20 and 2020/21 financial years. This measure is designed to benefit retirees by reducing the potential need to sell investment assets into a depressed market to fund their minimum drawdown requirements. See the following table for details:

Age Default minimum drawdown rates (%) Reduced rates by 50 per cent for the 2019-20 and 2020-21 income years (%)
Under 65
4
2
65-74
5
2.5
75-79
6
3
80-84
7
3.5
85-89
9
4.5
90-94
11
5.5
95 or more
14
7

Please note that if you have already drawn more than your reduced minimum for this financial year, you are unable to return the excess amount.

The information provided in this article is general in nature and does not take into account your personal circumstances, needs, objectives or financial situation. This information does not constitute financial or taxation advice. Before acting on any information in this article, you should consider its appropriateness in relation to your personal situation and seek advice from an appropriately qualified and licensed professional.

Transition to retirement pensions – are they still effective?

As people age, the everyday grind of full-time work can become increasingly tiresome. At the same time, many still enjoy the interest and challenges of the workplace. One way to help with this “work-life balance” at this stage of life is a Transition to Retirement (TTR) strategy.

Transition to retirement strategy explained

If you have reached your preservation age, (between age 55 and age 60 depending on your date of birth) this strategy allows you to reduce working hours and at the same time, commence a special type of pension withdrawal arrangement from your superannuation fund.

This means your take-home pay does not have to be reduced (and potentially increased) but allows more time away from work to experience other aspects of life whilst you’re still active and healthy.

Sometimes these arrangements are coupled with a “re-contribution strategy” where concessional contributions into the fund are maximised using a combination of pension withdrawals and tax savings to cover any shortfall in disposable income.

The table below outlines the preservation age applying to an individual:

Date of Birth Preservation age
Before 1/7/1960
55
1/7/1960 to 30/6/1961
56
1/7/1961 to 30/6/1962
57
1/7/1962 to 30/6/1963
58
1/7/1963 to 30/6/1964
59
After 30/6/1964
60

Transition to retirement strategy options

  1. Cut your hours, not income

This strategy focuses on using income from your transition to retirement pension so you can reduce your work hours, enjoy the same level of after-tax income and still maintain your lifestyle. The downside? Your super savings may decrease earlier than expected.

2. Ramp up your super

Choosing this option means you can continue to work full time, make additional super contributions via salary sacrifice and draw an income from your TTR pension to help fund your living expenses.

Remember that your salary sacrifice super contributions are taxed at 15% provided your concessional contributions fall within the applicable super contribution caps, while an additional 15% tax may be applicable for higher-income earners.

While still working full time, the 15% tax rate may potentially be lower than your marginal tax rate had you received this money as salary – this can help to reduce your tax bill and give your retirement savings a boost.

In a nutshell, this transition to retirement strategy allows you to contribute more to super than you draw as an income stream, while keeping your after-tax income the same.

Transition to retirement strategy – is it still relevant?

In the past, one of the significant advantages of a so-called “Transition to Retirement Income Stream” (TRIS) was that the income and capital gains derived in the superannuation fund from assets supporting the TRIS were exempt from tax in the fund.

This concession was removed with the raft of changes that applied to all superannuation funds from 1st July 2017. Note that the receipt of a TRIS by a member over the age of 59 is exempt from income tax and partially exempt for members between preservation age and 59. This aspect has not changed.

A question often asked is, “are transition to retirement strategies still relevant?”. The answer is clearly yes but it also depends on individual circumstances!

The following table summarises Peter’s position regarding annual net salary and annual net increase in his superannuation in three different scenarios.

(a) Current position working full time

(b) Reducing to 3 days a week and not altering existing superannuation arrangements

(c) Reducing to 3 days a week, paying additional concessional super contributions (to max $25,000) and using a transition to retirement strategy to fund these changes and ensure net disposable income remains unchanged..

We can see in (a) that Peter’s current disposable income is $97,903 pa and his annual super balance increase would be expected to be $53,805 – an overall total of $151,708. If he reduces to 3 days per week as in scenario (b), his disposable income reduces by around 35% to $64,553 and his combined total reduces by $37,822 and this would be the effective “cost” (in the first year) of reducing work hours from full time to 3 days per week. On the other hand, scenario (c) illustrates that if Peter implemented a TRIS and withdrew $44,498 from his superannuation to cover the reduction in income and maximize concessional contributions, he could maintain his current disposable income and reduce the overall “cost” from $37,822 to $34,553.

The above example illustrates how a Transition to Retirement Strategy can be used to maintain disposable income where work hours are significantly reduced. Other strategies can revolve around objectives such as paying down debt as a member is approaching retirement, equalizing superannuation balances between partners, reducing the relative taxable component of the total superannuation balance and others.

The clear takeout from the above is that although the after-tax effectiveness of a Transition to Retirement Strategy has been reduced by the changes applying from 1/7/2017, there are still potential financial benefits. These benefits are of course, in addition to other non-financial benefits that can flow from such strategies.

Things to consider

Keep in mind there are some technical issues around Transition to Retirement Strategies that should be fully considered in the light of the personal circumstances of the individual including:

  • Member age: Not everyone can access a TTR pension – it is only accessible when you reach preservation age, which for most is the age of 60.
  • Withdrawal cap: The amount that you withdraw each year is capped at 10% of the balance of the pension. This means you may need to top up this account through contributions in the years prior so that you have smooth cash flow.
  • Total superannuation balance: Accessing a TTR pension can mean that you exhaust your retirement savings earlier. Your savings may need to last for up to 30 years and withdrawing these funds early may have a significant impact in later years. Plan carefully and calculate the funds available to you today and how this may impact your retirement savings.
  • Income level: A TTR pension is not a ‘set and forget’ strategy. An annual review of your plan should be done so that income streams and contributions can be fine-tuned to fit your situation.

Lastly, not all super funds offer TTR pensions, so speak to an adviser and seek appropriate personal advice before making any decisions.

The information provided in this article is general in nature and does not consider your circumstances, needs, objectives or financial situation. This information does not constitute financial or taxation advice. Before acting on any information in this article, you should consider its appropriateness concerning your personal situation and seek advice from an appropriately qualified and licensed professional.

BOB LOCKE – CHARTERED ACCOUNTANT & SMSF SPECIALIST

Bob Locke has been an accountant and taxation expert for 35 years. His company, Practical Systems Super, provides an all-in-one SMSF solution with a full administrative service, SMSF management software, and independent, licensed advice, tailoring their package to meet the individual needs of trustees and SMSF professionals.

To find out more about Practical Systems Super, visit www.pssuper.com.au, or call 1800 951 855.

SMSFs continuing to diversify

It’s time to call a spade a shovel.

When the two latest controversies surrounding Self-Managed Super Funds (SMSFs) – single-asset funds (typically property) and the release of an Australian Securities and Investments Commission fact sheet with a focus on risks and red flags – got a public airing, it gave critics the ammunition they needed to disparage this popular form of superannuation.

However, what was quietly overlooked was the release of the 2019 Vanguard/Investment Trends SMSF Report that painted a far different – and healthier – picture of SMSFs.

Although the report showed the pace of SMSF establishments was slowing, there remains keen interest in SMSFs among large super fund members.

More significantly, those setting up SMSFs are doing so at a younger age – a sign that people are taking their retirements more seriously in an era where many will live well into their 90s. It remains essential that they receive specialist SMSF advice and that an SMSF is suitable for them.

The SMSF sector represented about $747 billion in retirement savings as at March, 2019, compared with $1.8 trillion invested with APRA-regulated super funds.

The total number of SMSFs grew to almost 600,000, with an average balance of $1.2 million.

Perhaps the most positive sign drawn from the report was that investing patterns have changed.

Considering the volatile geo-political climate and strong concerns about the health of the Australian economy, it’s not surprising that more than one in three investors adopted a more defensive strategy.

Holdings of cash – even at today’s miserly interest rates – were the major beneficiary.

However, there was no rush to exit growth assets. After peaking in 2013 at 45 per cent, investment in direct shares – mostly Australian equities – has slowly declined.

Direct equities investments in 2019 stood at about 35 per cent.

Significantly, too, and despite recent scaremongering about the dangers of SMSFs piling into direct property, investors’ allocations to this asset class has risen from just 11 per cent in 2017 to 13 per cent in 2019. In 2008, it stood as high as 22 per cent. So much for the argument of SMSFs overheating the residential property market.

The other significant trend to emerge in the report is a growing appetite for overseas assets, the lack thereof in the past often being a point of criticism of SMSFs.

It’s still not excessive, at 11 per cent, but the evidence shows they are set to grow, with the report estimating they will hit 16 per cent of all SMSF assets by 2020.

That SMSFs have been wary about putting their toes in overseas markets is hardly surprising. Their liking for Australian equities, cash, term deposits and property reflects a preference for assets they understand.

However, the diversification message is clearly being heard, and SMSFs are seeking exposure via a variety of investment vehicles, with Exchange Traded Funds (ETFs), managed funds and Australian shares with overseas revenue heading the list. It’s a mix that reflects a more conservative mindset.

In the aftermath of the Global Financial Crisis, some in the industry believed SMSFs would be a major casualty, with volatile times requiring specialist input that only large APRA-regulated super funds with professional investment managers could deliver.

The reality is quite the opposite. SMSFs, often with advice from specialists, have flourished.

Written by John Maroney, CEO, SMSF Association 

The do’s and don’ts of property investing for SMSFs

Self Managed Super Fund trustees are no different to many other Australians – they relish the opportunity to invest in direct property.

Australian Taxation Office figures show property comprises about 13 per cent of SMSF assets of about $750 billion – third on the list of investments behind Australian equities and cash and fixed deposits.

Investment is split between commercial and residential direct property, with the former comprising about 9 per cent and the latter 4 per cent.

The heavier weighting in commercial property in SMSF portfolios should not be a surprise.

For many small-to-medium-size businesses (SMEs), the opportunity to transfer their business premises into their SMSF and then lease them back at the market rate has two attractions – the fund has an asset that, in all likelihood, will appreciate in value, and it removes any risk from the “landlord-tenant” relationship.

For other SMSFs owning direct property, the benefits are rental income and a lower capital gains tax rate when the property is sold.

The rental income adds to a super balance and it comes with an added bonus of incurring only a 15 per cent tax rate (or zero tax for members in the pension phase). And, like any rental property, expenses are tax-deductible.

The cream on the cake comes if a property is held for more than 12 months before sale, with just two-thirds of any capital gain taxed at 15 per cent (nil tax for those in the pension phase).

However, SMSF trustees must be fully aware of some specific rules about owning and renting property in their fund, with the ATO taking a dim view of those who breach them.

In particular, there are restrictions on how you or a related party can buy and use the property. For example, the law prohibits an SMSF acquiring residential property from any related party to the fund (such as fund members or their relatives).

Investment issues

It is important to note that commercial property is exempt from this ruling, provided the ATO is satisfied it falls within the definition of business real property. A commercial office, factory or productive farm land are prime examples.

It is not just about the regulations; there are investment issues involved.

 

Acquiring a property can result in an SMSF’s investment portfolio lacking diversification.

Although there are no golden rules about portfolio diversification, both the Australian Securities and Investments Commission and the ATO have raised concerns about SMSFs having the bulk of their investments in a single asset, notably retail housing.

The regulators’ concerns are magnified if an SMSF has used a limited-recourse borrowing arrangement (LRBA) to acquire the property.

Trustees also have to ensure the acquisition of direct property falls within the guidelines outlined in the SMSF’s investment strategy – a legal document. It will detail how much exposure the fund should have to the property market, the form that exposure should take, and whether it is appropriate in the circumstances for the fund’s members.

 

The investment strategy document is not something that can be allowed to gather dust at the bottom of a drawer.

All investments must fall within the guidelines devised by trustees and set out in the strategy.

One of the duties of an SMSF auditor is to ensure there is an investment strategy in place and the trustees adhere to it.

One final cautionary note relates to property’s lack of liquidity. Unlike shares, selling a property takes time so if there is an unforeseen circumstance, such as the early death of a member or a divorce, it can cause complications.

 

None of these warning signs is reason not to buy direct property – whether it be commercial or residential. The long-term returns can justify the investment.

However, seek specialist advice before acquiring this asset class, especially if it involves debt (LRBA) or will comprise the bulk of a portfolio.

Written by John Maroney, CEO, SMSF Association 

 

ATO investigating errors in SMS alert service

The ATO is investigating system errors in its newly launched text message alert service for SMSF trustees which were mistakenly triggering alerts for trustees upon lodgement of their 2019 annual return.

The errors, which have been flagged by a number of SMSF industry professionals this week, are being investigated “as a priority” by the ATO, with a fix to be deployed shortly, a spokesperson for the regulator told SMSF Adviser.

“This matter came to our attention late yesterday and we took steps to stop new SMSF alerts going out and identified the reason for the incorrect alerts,” the spokesperson said.

“The SMS alert is intended to advise SMSF fund trustees [when] we believe there has been changes to some client account details. It should be noted that there is no impact on SMSF account balances or fund details.”

According to reports from SMSF practitioners, the errors appeared to stem from lodgement of SMSF annual returns, which triggered a change in the SMSF’s electronic service address (ESA) that then generated a mistaken alert to the affected trustees.

“The ATO is now issuing alerts directly to trustees via email and/or text messages when any changes are made within their SMSF. Unfortunately, one of those communications may involve an error in the ATO’s own database concerning a change of ESA,” SMSF Alliance principal David Busoli said in an email to clients on Wednesday.

“If your clients receive such a notification, you should first check to see if it is correct as, in the short term, it is likely that it’s not.”

Vincents director of SMSF advisory Brett Griffiths also identified the issue, which was generating mistaken alerts for SMSF clients whose annual returns were lodged through Class, in a LinkedIn post this week.

“Trustees of SMSFs administered on Class may start to receive notices, thereby adding extra time constraints on tax agents answering questions of trustees due to an ATO error,” Mr Griffiths said.

The ATO said upon discovering the issue, it had stopped the SMS alert service incorrectly triggering to impacted funds.

“We will provide an update as soon as the fix has been deployed. SMSF trustees can be assured that any alerts received are being correctly triggered,” the ATO spokesperson said.

Source: SMSF Adviser

ATO cuts six-member fund work

The ATO has signalled it will not be preparing for the introduction of six-member SMSFs or the three-year audit cycle after it dropped them from its roadmap for changes within the superannuation sector.

In an update to its website released earlier this month, the regulator stated that in regards to an increase in members from four to six for SMSFs and small Australian Prudential Regulation Authority (APRA) funds, it would “remove this outcome as the legislation has not been reintroduced following the federal election”.

The increase in SMSF members was introduced as part of the 2018 budget, but was removed from legislation in April 2019 to ensure the bill passed through parliament.

The ATO used the same phrasing to describe its work on the SMSF three-year audit cycle, noting it took the action on both matters from 11 November 2019, a year after they were first added to the roadmap.

The updated list of changes being undertaken by the ATO also includes rolling changes to its SuperStream rollover service, and amendments to total superannuation balance (TSB) calculations that will include the value of an outstanding limited recourse borrowing arrangement (LRBA) in an individual’s TSB.

In the area of SuperStream rollovers, the ATO indicated it was currently deploying and testing an SMSF verification service for APRA funds to obtain verified SMSF details prior to making rollovers via SuperStream, as well as an SMSF member verification service that allows funds to match member details to ATO information to assist in rollovers.

The deployment phase, which includes engagement with the superannuation sector, is due to run from November 2019 to December 2020 ahead of the onboarding process in January 2021 and industry compliance with the SuperStream standard by the end of March 2021.

The roadmap also indicated the ATO’s work in relation to TSB calculations related to the value of an outstanding LRBA will move from the build phase to the testing phase with the superannuation sector at the end of February 2020.

The ATO noted the deployment of the TSB calculations had taken place from July 2019 after the amendments enabling the calculations received royal assent in October, but with a retrospective date of effect of 1 July 2018, making the 30 June 2019 TSB the first TSB to be affected by this change.

Source: smsmagazine.com.au

Inflation figures confirm TBC won’t be indexed in 2020

SMSF practitioners can breathe a sigh of relief following the release of official inflation figures for the December 2019 quarter, which did not reach the threshold required to necessitate indexation of the transfer balance cap on 1 July this year.

The Australian Bureau of Statistics’ CPI figure for December, released on Wednesday, revealed the index had reached 116.2 in the final quarter of 2019, which, while slightly higher than expected, was 0.7 point below the required level for TBC indexation.

The new data means indexation of the TBC, which will require each super fund member to calculate their own TBC level between $1.6 million and $1.7 million, will now happen on 1 July 2021.

Commenting on the news, AET senior technical services manager Julie Steed said the delay to indexation would provide welcome relief to SMSF professionals already struggling with administrative issues around the existing TBC system.

“Many practitioners are still experiencing difficulties dealing with TBC issues — indexation will add a significant additional layer of complexity, so we have another year to help advisers and clients understand the mechanics of the cap before it gets even harder,” Ms Steed said.

The potential indexation of the TBC on 1 July 2020 had been a cause for concern among the industry, as it would require the calculation of a personal TBC for each fund member based on the level of assets they had previously had in their transfer balance account.

“An individual who already had a TBC account and had equalled or exceeded the $1.6 million TBC at any stage won’t be entitled to indexation and their personal TBC will remain at $1.6 million,” ATO deputy commissioner James O’Halloran said when explaining the new system in August last year.

“For everyone else, we’ll identify the highest ever balance in their transfer balance account and use this to calculate the proportional increase in their TBC and apply the new personal TBC to their affairs going forward.”

Commenting on the changes earlier this month, Accurium head of technical services Melanie Dunn told SMSF Adviser it was still useful for practitioners to start thinking about potential changes to their client’s TBC if indexation did not occur until July 2021.

“A client’s estimated transfer balance cap versus their current cap can be taken into account when setting pension strategies for the coming year, as it could impact decisions around pension commencements and commutations,” Ms Dunn said.

Source: SMSF Adviser

What expenses can an SMSF deduct?

Self-managed super fund (SMSF) expenses can be tax deductible provided that they comply with Australian taxation legislation.

It’s important to understand that SMSFs should only pay expenses that are:

  • Allowed for under superannuation legislation and the SMSF’s trust deed
  • Consistent with implementing the SMSF’s investment strategy

What are the general principles to follow?

Some SMSF expenses are tax deductible and some are not. It depends on whether the expenses relate to the fund gaining taxable income or not.

Expenses are tax-deductible if they relate to the fund gaining taxable (i.e. assessible) income. Superannuation funds (including SMSFs) are taxed on member contributions and their investment earnings. These contributions and earnings are taxed at the concessional super rate of 15% in Australia, up to certain contributions limits.

SMSF expenses are not tax deductible if they are capital expenses, such as the cost or purchasing fund assets.

Does it matter whether the SMSF members are in the accumulation or retirement phases?

Yes. SMSF expenses are not tax-deductible if they relate to the gaining of any non-taxable (i.e. non-assessable) income. Non-taxable SMSF income includes earnings form assets held to support member retirement phase income streams.

If an SMSF has members that are in both the accumulation and retirement phases, its expenses must be split appropriately between its taxable and non-taxable income. SMSFs in this situation should hire the services of an actuary to determine their non-taxable income. Only the expense amount that is apportioned to taxable income is tax-deductible.

No expense-splitting is necessary for any costs associated with collecting and processing fund member contributions or on the insurance premiums paid on behalf of members. However, splitting is necessary for most other types of SMSF expenses.

What SMSF expenses are tax deductible?

SMSF tax-deductible expenses can be grouped into the following categories:

  • Operating expenses
  • Investment-related expenses
  • Tax-related expenses
  • Insurance premiums
  • Statutory fees and levies
  • Legal expenses
  • Collectables and artwork expenses

We’ll now look at each of these categories in more detail.

Operating expenses

Operating expenses include:

  • Fund management and administration fees that trustees incur in carrying out their obligations. For example, collecting and processing member contributions.
  • Audit fees. SMSF trustees are legally obliged to appoint an approved SMSF auditor to examine their fund’s operations each year to ensure its compliance with super legislation.

Investment-related expenses

Investment-related expenses include:

  • Fees paid to fund investment advisers, provided that these fees are directly related to an investment that earns assessable income for the SMSF. Financial advice fees that do not meet this requirement include any of the following situations:
    • General financial advice
    • Financial plan preparation
    • Initial or upfront adviser fees
    • Ongoing advice fees for accumulated super in the fund
    • Advice for non-assessible pension income.
  • Bank fees.
  • Rental property expenses if the fund holds one or more investment properties in its portfolio of assets.
  • Brokerage fees (e.g. for share investments).
  • Interest on any SMSF funds borrowed for investment under a limited recourse borrowing arrangement.
  • Depreciation on investment assets (such as the plant and equipment in a commercial property owned by the fund).
  • Claiming subscriptions and attending seminars.

Tax-related expenses

Any expense associated with preparing and lodging an SMSF’s financial statements and annual return to the Australian Taxation Office (ATO) is tax deductible. In addition, funds can deduct any actuarial costs that they incur to determine the amount of tax-exempt income for any of their members.

Insurance premiums

Insurance premiums that SMSFs pay on behalf of their members are tax deductible. SMSFs are legally entitled to take out the following types of insurance for their members:

  • Life
  • Income protection
  • Total and permanent disablement
  • Terminal illness

Other types of insurance (such as trauma or health insurance) can’t be taken out by SMSFs on behalf of their members.

Statutory fees and levies

SMSFs must pay an annual ATO supervisory levy and this amount is tax deductible.

In addition, SMSFs that have a corporate trustee structure must also pay an initial Australian Securities and Investments Commission (ASIC) registration fee, as well as ongoing annual fees. All of these ASIC fees are also tax deductible.

Legal expenses

Some SMSF legal expenses are deductible, including costs associated with:

  • Amending the fund’s trust deed so that it remains compliant with any changes to super legislation.
  • Ensuring the fund’s compliance with its tax obligations.

Collectables and artwork expenses

Storage and insurance costs for any collectables and artwork that are owned by an SMSF are tax deductible. The insurance for these assets must be in the name of the fund and it must be taken out within seven days of them being acquired.

What is the process for claiming these expenses and deductions?

Tax-deductible SMSF expenses can generally be claimed in the year that they are paid. The only exception are any depreciation claims, which are “non-cash” expenses that are claimed over the estimated life of their associated assets.

All SMSF tax-deductible expenses should be claimed in the annual ATO return so that the appropriate tax debt or refund each year can be determined. Fund trustees should ensure that:

  • All tax-deductible expenses (excluding depreciation) are paid directly from their fund’s bank account.
  • All receipts and invoices are in their fund’s name.
  • They retain all their receipts and invoices for at least five years after their annual returns have been submitted to the ATO.

What expenses can’t you claim?

SMSF expenses that you can’t claim (and which you might expect that you can) include:

  • Any expenses associated with non-taxable income.
  • Travel expenses relating to residential investment property.
  • Legal expenses, such as those involved with preparing an SMSF’s initial trust deed (or significantly amending it a later date).
  • Any other costs associated with establishing the fund, as these are regarded as capital expenses.

In addition, if the trustees of the fund incur any administrative penalties from the ATO for non-compliance, these expenses cannot legally be paid by the fund. The trustees also cannot legally be reimbursed by the fund for the payment of these penalties. Administrative penalties are therefore not paid by SMSFs and accordingly are not tax deductible.

The bottom line

SMSF expenses that relate specifically to the fund’s taxable income are tax deductible. Some SMSFs have both taxable and non-taxable income. In this situation, fund expenses must be split between these two types of income, and the amount apportioned to non-taxable income is not tax deductible.

Source: superguide.com.au