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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.

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.

Early access to your super when the going gets tough

With the prolonged drought and bushfires affecting many farmers and rural businesses across the country, questions are often raised about accessing existing superannuation to ease their financial stress.

When going through difficult times, it may be frustrating that you aren’t able to access your superannuation account, especially when you need it the most. If you are experiencing severe financial hardship or have a medical disability you just can’t afford, you may have the right to apply to have some of your superannuation released before you retire.

Eligibility for early release of benefits

Superannuation is meant to be a long-term investment to provide benefits in retirement (or death benefits). To qualify for all the tax and associated benefits, a superannuation fund must have this as its “sole purpose”.

Once a person reaches the age of 65 (or dies), access to their superannuation is unrestricted. Prior to that time, one may be able to access the money before retirement if the person meets an alternative “condition of release,” often in dire situations such as a total and permanent disability or terminal illness.

However, the superannuation legislation also recognises that there can be other legitimate situations where the release of monies before the intended time may be appropriate, these include:

  • Compassionate grounds – to cover items such as; medical expenses, home modifications to cater for disability, housing loan payments to prevent foreclosure and funeral expenses of dependents
  • Severe financial hardship – for amounts up to $10,000 in any year
  • Transition to retirement – provided the person has reached their “preservation age”

Applying due to severe financial hardship

If you’ve spoken to a financial adviser/counsellor and are confident that early access to superannuation is the right course of action, you can apply for early release based on severe financial hardship. The rules for accessing super on the grounds of financial hardship are quite specific, limited in their application and are often misunderstood.

You are eligible for access under financial hardship if you:

  • Are unable to meet reasonable and immediate living expenses such as mortgage payments, rent arrears, medical expenses etc.
  • Are receiving an income support payment
  • Have been receiving income support payments for at least 26 weeks in a row

A super withdrawal due to severe financial hardship is paid and taxed as a super lump sum. If the condition is met, you will be limited to withdrawing a maximum of $10,000 within a 12-month period.

The eligibility rules are different if you’re over “preservation age” and haven’t retired. You must:

  • have reached your preservation age plus 39 weeks
  • not be gainfully employed
  • have received the income support payments for at least 39 weeks since reaching preservation age

How to apply

Applications for release of superannuation on compassionate grounds must be made to the Australian Taxation Office. Applicants need to provide appropriate documentary evidence to prove the intended use of the funds and demonstrate that the expenses could not be met from alternative sources. Importantly, the relevant expenses must not have already been paid. If approved, the Taxation Office will issue an authority to the fund concerned for a release of the funds.

Applications based on severe financial hardship are made to the trustee of the fund concerned. The general requirement is that the applicant must have been on some form of government support payment for a minimum of 26 weeks and can demonstrate financial hardship. In the case of self- managed superannuation funds, the trust deed of the fund should be checked to ensure that it allows for such payments.

Example – financial hardship:

Fred and Lucy are farmers in their early fifties whose financial situation has been severely impacted by the continuing drought. Their cash reserves have been exhausted by continuing feed bills for their remaining livestock. They have been receiving Farm Household Allowance for the past nine months and are struggling to pay for basic living expenses including food and school expenses for the children. They have a self-managed superannuation fund with balances of $350,000 each.

Fred and Lucy could apply to the trustee on the basis of severe financial hardship for the release of up to $10,000 each. This would need to be properly documented and their position verified with appropriate evidence.

Note that as Fred and Lucy are under their “preservation age”, any financial hardship payments would be treated as taxable lump sums – the final amount of tax applicable will vary depending on the taxable/tax-free components of their balances and their other taxable income – it could range from 0% to 22%.

Transition to retirement

Transition to retirement strategies can provide a legitimate means of accessing superannuation benefits before normal retirement. The important qualifier here is that the person must have reached their preservation age which will range from 55 to 60 depending on the year of birth. The following table illustrates this:

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

Example – transition to retirement strategy

John and Noelene are cattle graziers who have planned well for recurring drought conditions. In good years they have invested in additional superannuation contributions to their self-managed fund and both have accumulated Farm Management Deposits. The current severe drought conditions have placed considerable strain on the family budget. They are keen to maintain their breeding stock and plan to progressively draw down the FMDs to fund fodder and supplements. This will ensure that when the drought breaks, they will be well placed to quickly rebuild and generate solid cashflows. In the meantime, they estimate they will require up to $100,000 per annum to assist with living expenses and pay the fees for their twin boys who are in their final two of years at boarding school.

John is 60 and has $1 million in superannuation and Noelene is 54 and has $700,000 in her superannuation account. After taking appropriate advice, John decides to commence a transition to retirement pension with the full balance of his accumulation account. He will be required to withdraw the minimum amount of 4% ($40,000) and can draw up to the maximum of 10% per annum – that will allow for the withdrawal of up to $100,000 per annum. Note that Noelene could not follow this strategy as she has not yet reached her preservation age and therefore has not satisfied a condition of release. As John has turned 60, the receipt of the pension amounts from the fund will be tax-free in his hands.

Once the drought breaks and normal cashflows return, they plan to commute the transition to retirement pension back to accumulation phase and top-up contributions as their financial position improves

Risks of accessing your super early

While accessing your superannuation may seem like an easy solution when going through a financial crisis, it is important to consider all the associated risks and consequences. Individual circumstances vary and these can include:

  1. Tax may apply to withdrawals

If you are below preservation age, you may be required to pay tax on any money you get from your superannuation. The tax varies depending on your circumstances and the taxable/tax free components of your superannuation balance.

  1. Fees & charges

You may need to pay your super fund a fee to have your super released early.

  1. Reduced retirement benefits

Early withdrawals can have compounding effects on the future balance of your superannuation with consequential impacts on your retirement plans.

  1. Impacts on other government benefits

Changes to your income due to superannuation benefits received may affect your eligibility for other benefits such as Family Tax Benefit, childcare allowance, etc.

  1. Watch out for scams

In recent years there have been a number of so-called “early access” schemes that have been promoted to facilitate the illegal early release of monies from superannuation accounts. Appropriately, the regulators have acted promptly against these schemes and there are severe penalties for promoters and trustees who engage in this unlawful conduct.

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.

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.

Make the most of your super with a personal deductible contribution

personal deductible contribution

Would you like more flexibility with your superannuation but don’t have the option to salary sacrifice? You can now claim a tax deduction on your personal contributions. SMSF expert Bob Locke explains.

How much can you contribute?

Under the current rules, the maximum amount of “concessional” superannuation contributions that can be claimed as a tax deduction is $25,000.00 per person per annum. This is referred to as the “Concessional Contributions Cap”. This amount includes any super contributions paid by your employer; salary sacrifice contributions plus any other tax-deductible personal contributions you make to your super account.

On the other hand a “non-concessional” contribution is a payment made to superannuation after tax. It can be from a range of sources such as an inheritance, additional payment from your after-tax salary, property sale etc. The usual cap on non-concessional contributions is $100,000 per financial year.

Salary sacrifice vs PersonalContributions

Until 30 June 2017, only the self-employed, retirees or those who earned less than 10% of their income as an employee, could claim a tax deduction on a personal contribution.

This restriction meant that many employed individuals could not make deductible personal contributions to reduce their taxable incomes. The only way to maximize their total concessional contributions cap was to make arrangements with their employer for a salary sacrifice arrangement where they would reduce their gross salary in favour of the employer making a larger contribution (above the normal 9.5% of salary) to the employee’s super fund.

Now there’s an opportunity to give your super investment a boost and reduce your tax bill at the same time. With the changes effective from 1 July 2017, employees can make additional personal contributions and claim a tax deduction for the additional contributions, thus putting them on the same footing as self-employed people.

But how is that different from a salary sacrifice arrangement you may ask. Though salary sacrifice arrangements provide the same benefits one may not always be able to make such arrangements with their employer.

Compared to regular salary sacrifice contributions which can only be made prospectively a personal deductible contribution means you can make one lump sum contribution towards the end of the financial year. The additional flexibility of this system may be helpful in several different scenarios.

Take Mary’s case for instance. Mary works as a specialist teacher earning $110,000 annually. She has had an investment property for many years that she decides to sell in preparation for her impending planned retirement. On speaking to her accountant Mary finds out that based on the estimated sale price, there will be a taxable capital gain of $100,000 on the sale of the property which will cost her almost $45,000 in additional tax. She decides to make an additional contribution to superannuation of $14,500 and as a result, reduces her tax bill by around $7,000. Although Mary’s super fund will have to pay tax of $2,175 (15% of 14,500) on the additional contribution, she is still almost $5,000 better off.

Or take the case of Joe who is employed as a builder and earns $60,000 pa. In May, Joe receives a bequest of $25,000 from the estate of a recently deceased relative. He would like to retain around $6,000 of the money to take the family on a holiday trip and save the balance of $19,000. After talking to his financial adviser, Joe decides to contribute the full $25,000 to his existing superannuation fund;  $19,000 is claimed as a concessional contribution and $6,000 as a non-concessional contribution.

As a result of claiming the additional contribution, Joe receives an additional tax refund of $6,800, which he uses for the family holiday. After allowing for the additional tax in the super fund on the concessional contribution of $2,850 (i.e. 15% of $19,000), Joe has increased his net savings by $3,150 and also has an additional $800 spending money for the holiday!

Super contributions over 65

Turning 65 years of age is a life milestone, but unfortunately, it does make putting money into your super a bit more difficult.

If you are over 65 you will need to pass the  “work test” to continue making contributions – this means you will need to have worked a minimum of 40 hours in any 30-consecutive day period during the financial year.

Also, just like salary sacrifice superannuation contributions, Centrelink adds back any personal concessional contributions claimed when assessing entitlements that are subject to the “income test”.

Note that this age limit is proposed to increased to 67 from 01/07/2020.

Making extra contributions to your super

If you would like to make extra contributions to your superannuation, you can do it using either ‘before-tax’ or ‘after-tax’ money, keeping in mind that there are annual limits (caps) on how much you can contribute to superannuation.

Consider your financial situation and decide whether making extra super contributions is right for you across the short and long term.

Bob Locke – Chartered Accountant & SMSF Specialist


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.

Understanding SMSF Trustees

A Self-Managed Superannuation Fund (SMSF) is a type of “trust” and like any trust must be run by trustee/s. However, before setting up it is important to understand the SMSF trustee structure and rules.

Who is a Trustee?

An SMSF trustee is responsible for running the fund and making decisions that affect the retirement interests of each fund member. The Trustees are responsible for administering the SMSF duties including:

  • Establishing the Investment Strategy
  • Complying with all Super Laws
  • Maintaining all records of the SMSF
  • Lodging Tax and Regulatory Returns

Trustee Options

There are two SMSF trustee structure options available, one where the trustees work in their individual capacity and the second where a company is appointed as the trustee. Each option is detailed below.

In both cases, the members run the fund and as a general rule, all members are either trustees themselves or directors of the corporate trustee.

  1. Individuals as trustees: In this case, trustees who are individual people (as the name suggests) manage the fund and each trustee is a member. It is important to note that where an SMSF has individual Trustees, it is a legislative requirement to have a minimum of two Individual Trustees. In the case of a sole member fund, the member would need to appoint an additional person to act with them as joint trustees.
  2. A company as corporate trustee: In this option, if you have an existing established company you can nominate this Company to be the Trustee of the SMSF. If not, you can establish a company for a “special purpose”, where the sole purpose of the company is to act as Trustee for an SMSF.

Generally, all of the members will need to be directors of the trustee company. In the case of a sole member fund, that member can be the sole director of the trustee company

Trustee Rules & Exceptions

SMSF trustee rules state that:

  • Trustees (or trustee directors) cannot generally be in an employee/employer relationship (unless they are related).
  • Trustees cannot be paid by the fund for carrying out their trustee duties. However, they could be paid for professional services supplied such as bookkeeping, legal or taxation services.
  • Trustees need to be Australian residents as the place of central management and control of an SMSF must always be in Australia.
  • All trustees must sign a declaration acknowledging their roles and responsibilities.
  • People acting as trustees must not be “disqualified persons” – for example, those who have been convicted of an offence involving dishonesty or who are undischarged bankrupts.

In an SMSF, all members of the fund must be trustees and all trustees must be members. However, some exceptions to this rule are:

  1. Where a member is under 18 years of age – they will require a representative to act as a trustee on their behalf
  2. Where a member loses capacity – they will also require a representative to act for them
  3. In the case of a single member fund – where the trustee is not a company, they will require an additional person to act with them as trustees

Individual or Corporate Trustee: making the right choice

Statistics from the ATO indicate that as of 30 June 2017, the majority (58.6%) of all SMSFs had a corporate trustee.

The current “best practice” recommendation from most professionals in the industry is to use a trustee company and it is evident that more than 80% of newly established funds have a corporate trustee. The reasons for this are varied but include:

  1. Sole member funds. Single-member funds with a corporate trustee can have a sole director and no additional trustees are required. As the sole Director and Shareholder of the Company, this gives one total control of the SMSF.
  2. Administration simplicity. Members can move in and out of a fund through death, marriage, divorce, etc. Where this occurs when the trustees are individuals, the fund will be required to change all of the ownership details of its assets and investments and this can be a daunting and time-consuming task.

    On the other hand, changing the directors of a trustee company is very simple and no other changes are required to assets or investments

  3.  Continuity when members change. Unlike other types of trusts which have a limited life (80 years) due to the “rule against perpetuities”, a superannuation fund is exempt from this and can last for multiple generations. A company lasts until it is wound up or deregistered.
  4. Concessional tax guarantee. The rules for SMSFs provide that where the fund has individual trustees, its sole or primary purpose must be to pay old-age pensions. Where funds have both member pension accounts and accumulation accounts this could be brought into question.

    This may become more significant with the latest round of changes to superannuation law which limit the total amounts that can be held in pension accounts and may result in some cases where accumulation accounts are held long term. Having a company as a trustee will avoid these uncertainties.

  5. Asset protection. In the case of a fund being sued, individual trustees could potentially be liable but this would not normally be the case for directors of a trustee company.
  6. Borrowing. It is easier for an SMSF with a corporate trustee to borrow (via a limited recourse borrowing arrangement), as often lenders will insist that an SMSF has a corporate trustee.
  7. Reduced penalties. In the event that any super laws are breached, the ATO levies administrative penalties on each trustee per violation. If the fund has a corporate trustee and the trustee is charged a penalty, it is only charged one penalty amount and the directors of the corporate trustee are jointly liable to pay that penalty.

    However, where a fund has individual trustees a penalty would be imposed on each individual trustee. For example, if the fund has four members the penalty is four times that of the penalty imposed on a corporate trustee for the same superannuation law infringement.

It is also generally recommended that the trustee of an SMSF should be a “special purpose superannuation trustee company”. This means that the company only acts in that single capacity and does not operate a business or act as trustee of another trust (these conditions are set out in the company’s constitution). The advantages of this approach include that there is no possible confusion over the separation/ownership of superannuation fund assets and the annual ASIC filing fees are only around 20% of the usual fee.

The additional one-off set up costs for a company trustee will generally be less than $1,000 (with annual filing fees of less than $50) but this represents good value in light of the advantages outlined above.

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.

What is Salary Sacrifice and is it still relevant?

What is Salary Sacrifice and is it still relevant?

Under the current rules, the maximum amount of “concessional” superannuation contributions that can be claimed by an individual is $25,000.00 per annum. This is referred to as the “Concessional Contributions Cap”. Concessional contributions refer to those contributions that are claimable as a tax deduction by the person or entity paying the contribution. They include employer contributions, salary sacrifice contributions and personal deductible contributions.


A salary sacrifice arrangement is where an employee agrees with their employer to reduce their gross salary in return for the employer making a larger contribution (above the normal 9.5% of salary) to the employee’s superannuation fund. The benefit that arises is due to the difference in tax rates between that of a superannuation fund (which is 15%) and the marginal tax rate of the employee which is usually much higher. The following table illustrates the benefit from a typical salary sacrifice arrangement.

Note that in this example, the take home pay is reduced by $9,403 but the amount in the employees super fund has increased by an additional $13,175, an overall increase in after tax income/savings of $3,772 or 4.6%.

One of the obvious downsides of salary sacrificing is the reduction in take home pay. These arrangements are also “prospective” in that they must be put in place only in relation to future earnings and can’t be used to make lump sum contribution amounts out of past earnings such as accrued leave entitlements.

Up until 30th June 2017, the so called “10% rule” applied where you could only claim personal contributions if your income from employment was less than 10% of your total income. This restriction meant that for many employed individuals, the only way to make deductible personal contributions to reduce their taxable incomes was via a salary sacrifice arrangement. With the changes applying from 1/7/2017, employees can now make additional personal contributions to their superannuation fund at any time during the year and this can be an alternative (or supplement) to salary sacrificing. The important thing is to remember that total concessional contributions should not exceed the cap of $25,000 and this cap includes; superannuation guarantee contributions by the employer, salary sacrifice contributions and personal deductible contributions.

Bob Locke – Chartered Accountant & SMSF Specialist

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 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.

Withdrawing amounts above the minimum super pension requirement

Thinking of withdrawing extra amounts from your superannuation? Here’s what you should do.

Superannuation members with retirement phase pensions must withdraw money from their pension every year – but additional withdrawals can cause problems.

If you’re a superannuation member with a retirement phase pension, you must drawdown a minimum amount from your pension each year, based on your age and a percentage of your account balance.

While there is no limit on the maximum amount you can withdraw, additional payments can significantly affect your finances.

When contemplating any significant additional pension withdrawals (beyond the minimum requirement), it may be wise to arrange these as a commutation back to retirement phase, and then withdraw the lump sum.

Example: Annie

Let’s look at Annie’s case. Annie is 67. She started her retirement phase pension two years ago, with the full balance of her superannuation at $1.6 million. (Her Transfer Balance Cap was $1.6 million.) Annie still works on her family farm, helping her son, who runs the operation.

Minimum pension drawdowns and poor investment returns have reduced her account balance to $1.4 million.

Annie expects to inherit $200,000 next June; she intends to put the money in her superannuation fund as two non-concessional contributions of $100,000 spread over June and July.

She is also keen to help her daughter, who needs $200,000 to buy a home in the city.

Annie decides to withdraw an extra $200,000 from her superannuation now, and treat it as part of her daughter’s inheritance. This will be in addition to the usual minimum percentage drawdown which she uses for her general living expenses.

Annie can withdraw the extra $200,000 in two ways.

  1. She can take an additional pension amount of $200,000 from her retirement phase pension account;
  2. Or she can commute $200,000 of her retirement phase pension account back to accumulation phase, and then withdraw a lump sum of $200,000.

Both options provide the $200,000 for her daughter. Assuming she inherits the money next June, and that she continues to meet the “work test”, Annie should be able to contribute the $200,000 over June/July to build her superannuation fund back up to $1.4 million.

The outcome will, however, significantly differ, depending on which option she used to withdraw the $200,000.

If Annie takes the first option ($200,000 from her pension), her Transfer Balance Cap remains at $1.6 million. When she recontributes the $200,000, it will have to remain in accumulation phase; the related portion of income and capital gains derived from that portion of the fund’s total assets will be subject to ongoing tax. Annie will need an actuarial certificate each year to apportion the income between exempt current pension income and taxable income.

If she chooses the second option, Annie’s Transfer Balance Cap will reduce to $1.4 million when she makes the commutation. When she recontributes the $200,000, she can immediately start a further retirement phase pension, so that the entire fund is exempt from tax on all income and capital gains.

Annie’s best choice – and yours, too – would be to arrange a commutation back to retirement phase, and then withdraw the lump sum.

Remember that you must report pension commutations. You should also consider seeking professional advice where appropriate.

Bob Locke – Chartered Accountant & SMSF Specialist

 

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.

Beyond the contribution caps

Most professionals are aware of the general limits or “caps” on superannuation contributions. Despite there being no laws preventing fund members from making unlimited contributions, most understand that there can be significant financial consequences associated with exceeding those caps. It is important to remember that there are specific measures which allow for contributions beyond the usual maximum amounts permitted. These can present important planning opportunities which may otherwise be overlooked.

The general contribution caps

There are defined annual caps or maximum amounts that are prescribed for the various types of superannuation contributions. The applicable caps for the two major contribution types are:

  • Concessional contributions – $25,000 per annum. These include employer contributions, salary sacrifice and personal contributions claimed as a deduction.
  • Non-concessional contributions – $100,000 per annum and only available if the Total Superannuation Balance of the member is below $1.6 Million.

Consequences of exceeding the contribution caps

It is not possible to simply withdraw excess contributions from the fund (even if they were made by mistake) and the individual concerned will need to wait until the Australian Taxation Office issues a determination notice. Briefly, the consequences of exceeding the contribution caps can be summarised as follows:

  • Excess concessional contributions – the excess contributions will be taxed at the members’ marginal tax rate and there is generally an additional charge which is effectively interest on the additional tax payable. Up to 85% of the excess contributions can be withdrawn from the fund and any excess amounts not withdrawn will be treated as non-concessional contributions with possible flow-on effects from excess non-concessional contributions.
  • Excess non-concessional contributions – there are basically two options here; (a) elect to withdraw the excess in which case 85% of the associated earnings on the excess amount will be added to the member’s personal taxable income and taxed at their marginal rate of tax, or (b) elect not to release the excess and have the full amount of the excess taxed in the fund at the highest marginal tax rate of 47%.

Measures which allow contributions beyond the general caps

It is clear that making excess contributions will generally lead to a situation of paying additional tax and produce an overall negative financial outcome for the member concerned. However, there are a number of specific measures which allow for contributions beyond the usual maximums and these can be incorporated into strategies with significant benefits to the member. Here are some examples:

Example 1 – utilising the 5 year catch up provisions for concessional contributions

Fred is employed on a salary of $86,000 pa and has had employer contributions of $8,170 made each year from 1/7/2018. His current total superannuation balance is $250,000. Towards the end of the 2022/23 financial year, Fred sells an investment property and makes a gross capital gain of $200,000. His accountant advises that he will be up for additional tax of around $39,300. 

Fred could consider a concessional contribution to his superannuation fund of up to $84,150 which is the amount of his unused concessional cap since 1/7/2018. This would reduce the additional personal tax to $6,000 and after allowing for the 15% contributions tax on the $84,150 into the fund, Fred’s net saving would be around $20,600.

Example 2 – claiming 2 years concessional contributions using a contribution reserving strategy

Katie is self-employed and for the year ended 30/6/2019 estimates her net business income at $180,000. She has planned for some time to take a “year off” and travel, and has arranged this to commence in the following year and so is unlikely to have any significant income for that year. Katie currently has $750,000 in her Self-Managed Superannuation Fund and is about to sell an investment property which is expected to realise a gross capital gain of $100,000. The additional net capital gain will attract tax of around $23,500.

Katie decides to contribute two amounts of $25,000 to her superannuation fund; one in December 2018 and one in mid-June 2019. The effect of this will be to reduce Katie’s personal tax by $23,500 and after allowing for the 15% contributions tax in the SMSF, her net saving is $16,000 which is double the amount saved if she simply contributed the $25,000 cap amount.

Note that there are several essential elements for this strategy to be effective:

  • The “second” contribution of $25,000 has to be made in June as the SMSF will have to “reserve” this amount for a maximum period of 28 days i.e. when the contribution is received in June, it is allocated to a contributions reserve and then allocated to Katie’s account in the Fund in early July
  • Katie will need to complete a “Request to adjust concessional contributions” form to ensure that the Australian Taxation Office does not treat the additional $25,000 as an excess concessional contribution.
  • Generally, this strategy can only be used by those who have a self-managed superannuation fund.

 

Example 3 – using the CGT contributions limit for proceeds from the sale of a small business and combining with the home “downsizer” contributions and other measures

Rose took over the family farm  25 years ago and having reached the age of 66, decides to sell up and move to the coast to be near family. The farm is sold for $2.5 million and after taking advice, Rose decides to move the maximum amount possible into a newly established self-managed superannuation fund. Settlement of the farm is expected in May and she would like all the financial arrangements to be in place by 30th June.

Rose’s goal of achieving the maximum possible superannuation balance in the specified time frame could be achieved using a combination of available strategies as follows:

  • Make non-concessional contributions of $300,000 utilising the 3 year bring forward option (now available to those aged 65 and 66)
  • Make a CGT contribution up to the maximum allowed for 2018-19 of $1.48 million
  • Make a “downsizer contribution” of $300,000 (in relation to Rose’s home which was part of the farm). Note that these contributions are not treated as non-concessional and are not subject to the usual Total Super Balance Cap
  • Make a concessional contribution of $25,000
  • Make a second concessional contribution of $25,000 (as per example 2)
  • Total amount contributed is therefore $2,130,000
  • Rose then commences a retirement phase pension with a balance of $1.6 million, leaving $530,000 in accumulation phase.

 

Take out point

Even though there are basic defined caps for the main contribution types (as well as the general overriding Total Super Balance Cap of $1.6M restriction), there are specific measures that may suit particular circumstances where additional contribution strategies may be relevant and beneficial. Always consider the particular circumstances of the individual and look beyond the basic contribution caps.

 Bob Locke – CA SMSF Specialist – CEO of Practical Systems Super

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

How much do you need to set up a self-managed superannuation fund?

This is a common question for anyone considering setting up their own superannuation fund.

It is important to note that there is no mandated minimum amount required to establish a Self-Managed Superannuation Fund (“SMSF”). However, the Australian Securities and Investment Commission (“ASIC”) has issued guidelines to financial advisers on this matter which includes the following points:

  • It is important to consider if a client’s likely balance in an SMSF makes it “cost-effective”. If it is not cost-effective, an SMSF is unlikely to be in the client’s best interest,
  • Establishing an SMSF with a balance of less than $200,000 is not likely to be cost-effective – this is based on a 2013 study by Rice Warner which indicated that the average cost of a superannuation account in Australia was just over 1%,
  • There may be circumstances where starting a fund with less than $200,000 would be in the client’s best interest – for example, where the trustees are prepared to take on as much of the administrative work as possible or when members plan to roll in additional funds in the short term from say another fund or sale of a business.

All savings/investment plans have to start somewhere. Costs are not the only consideration as investment returns are likely to have a much greater effect on fund balances over time. The particular circumstances and plans of the individual/s concerned will be critical to the decision to set up an SMSF and are a far more important consideration than any arbitrary dollar balance.

Take for example the following cases:

Case 1

Bill has operated a very successful small business for many years and has considerable cash reserves but only a modest superannuation balance of $60,000. After taking appropriate advice and undertaking some financial planning, he decides to establish an SMSF. He rolls his existing $60,000 into the SMSF to start it off and then has a plan to make maximum contributions to the fund over the following years i.e. currently $125,000 per annum. He has very particular views on how his retirement savings should be invested. Even though Bill would not make the $200,000 “threshold” for at least a couple of years, the establishment of an SMSF is clearly justifiable based on Bill’s requirements and future plans.
Case 2

Ann has operated a beef cattle business with her husband for more than 30 years and tragically lost her husband in a farming accident. They have no superannuation and after taking advice, Ann decides to establish an SMSF with an initial small cash amount and then prepare the farm for sale with the aim of making a maximum Capital Gains Tax contribution from the sale proceeds. The sale is expected to be at least a couple of years away but Ann wants to get everything in place while she has the help of her only daughter who is due to go back to her overseas employment in the next few months. Again, not meeting the initial $200,000 threshold can be seen as irrelevant to Ann’s longer term interests.
Case 3

Ben and Josie have just been given some of the family farmland to start their own sheep and cattle business. In conjunction with their accountant and financial planner, they have mapped out a medium-term financial plan which includes significant superannuation contributions. They are likely to have variable incomes but aim to be consistent with their contributions and to make significant additional contributions in the better years. They are keen to be involved in the running of the fund and take a close interest in the performance of their investments.
Whilst there is no hard and fast rule for a minimum amount required to justify setting up an SMSF, it is important that the personal circumstances and plans of the individuals concerned be carefully considered and professional advice sought from experienced and licensed professionals.

For any adviser to recommend the establishment of an SMSF to a client, it should be clear that such an action is demonstrably in the client’s best interest. This applies regardless of the amount of the planned initial investment in the fund.


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Don’t Forget Your (Superannuation) Cap

My coat stand at home has a lot of caps on it; baseball caps, old school caps, cricket caps, a memento of the Sydney Harbour Bridge Climb and the list goes on! There are also a lot of “caps” for superannuation funds, but they are not the sort you wear on your head.

In the context of superannuation, a “cap” is an upper annual limit or a ceiling that is permitted within the superannuation laws. The more important caps include:

  1. Concessional Contributions Cap – this is the maximum “concessional” type contribution allowable for each member in a financial year. This cap is currently $25,000. Concessional contributions are taxable at 15% in the fund as the contributor has claimed a tax benefit and this type of contribution can include; employer contributions, salary sacrifice, self-employed and personal contributions. Note that as from 1/7/2018 there will be an option available to carry forward unused concessional contribution limits for individuals who have less than $500,000 in superannuation. There is also an option available to those with Self Managed Superannuation Funds to claim 2 years contributions in the one financial year.
  1. Non-concessional Contribution Cap – this is the maximum “non-concessional” type contribution that can be contributed personally by each member. These contributions types are not claimed for tax purposes and the fund does not have to pay any 15% contribution tax on the amounts received. The current cap is $100,000 pa but there is an option to “bring forward” up to 3 years contributions in one year (i.e. $300,000) for those individuals who are under 65 years of age.
  1. Total Superannuation Balance Cap. As from 1/7/2017 each member has a total superannuation balance cap of $1.6 Million. This refers to the total amount that a person has in all superannuation accounts. Once that cap is exceeded, no further non-concessional contributions are allowed for that individual unless this cap falls below the $1.6M (as measured at the start of each financial year). Note that concessional contributions can continue regardless of the total superannuation balance.
  2. Transfer Balance Cap. This is the maximum amount that an individual can transfer to retirement phase pension accounts and is currently also $1.6 Million. The income and capital gains derived from assets supporting retirement phase pension accounts are exempt from income tax and capital gains tax. This contrasts with other superannuation assets in “accumulation accounts” which are taxed at the rate of 15% on income and 10% on capital gains. The Transfer Balance Cap should not be confused with the Total Superannuation Balance Cap as it does not restrict the amount you can contribute to superannuation but rather how much of your superannuation you can move to the tax free retirement phase. To determine where an individual is relative to their Transfer Balance Cap, an account will be maintained that tracks all the relevant transactions that affect this balance. This account is referred to as the Transfer Balance Account (“TBA”). As an example, let’s say Fred has an accumulated superannuation balance of $2 Million and upon retirement at age 65, decides to move the maximum $1.6 Million into a retirement phase pension account and leave the other $400,000 in an accumulation account. The following table illustrates the effects of various transactions over the following years: As Fred’s TBA has been reduced to $1.1 million, he could transfer up to a further $500,000 into retirement phase pension. He could therefore transfer the full balance of his accumulation account ($485,000) into pension mode and his total superannuation balance of $1.75 million would then be entirely in pension phase and the fund would pay no income tax or capital gains tax thereafter. Note how many of the transactions that affect the superannuation account balance, such as income earned and pension withdrawals, do not affect the TBA. Also, if Fred had simply withdrawn the $500,000 he wanted to make the family gift as additional pension payments (rather than commuting back to accumulation and then paying the $500,000 from there), he would still have a TBA of $1.6 even though his pension account balance is only $1.265 million. He would then be stuck with having to leave the $485,000 in accumulation mode and the fund would pay tax on the income and capital gains generated from that account.
  1. Division 293 Cap. This is calculated as the personal income of a taxpayer plus concessional superannuation for that individual for a financial year. If this figure exceeds $250,000, the tax rate payable on the contributions if increased from the usual 15% to a penalty rate of 30%.
  2. CGT Concession Cap. This refers to an additional contribution amount that is allowed from the sale of a small business. This cap is currently $1.445 Million per person and is in addition to the other contribution caps and is not constrained by the Total Superannuation Balance Cap.
  3. Low Rate Cap. This is an amount up to which superannuation lump sum payments paid to individuals over preservation age but below 60, are not subject to tax. Lump sums above this cap paid to such individuals, attract a rate of 17% tax. The current low rate cap is $200,000.
  4. Pension Withdrawal Cap. This refers to the maximum annual amount that can be withdrawn from a Transition to Retirement Pension Account. This is currently 10% of the balance of the account at the start of the financial year (or at pension commencement). Note that this should not be confused with the minimum pension withdrawal requirements which apply to all types of superannuation pension accounts.

    The following table summarises the caps referred to above – current for 2017/18 financial year:

Exceeding a superannuation cap can have serious consequences. This would generally include paying extra tax and charges and can be as high as 47% of the relevant amounts depending on the circumstances.

It is also important to effectively manage your superannuation caps. As an example of this, assume you start a retirement phase pension with $1.6 Million and start by withdrawing just the minimum required pension of $64,000 pa. A few years down the track, you decide to help out a family member with a loan of $250,000 and provide this by simply drawing an additional pension amount. A year later, the loan is paid back and you go to contribute it back into your retirement phase superannuation account but to your horror, discover that this is not possible as your TBA is still at the cap amount of $1.6 Million! This could have been avoided by covering the $250,000 with a commutation of your pension account (back to accumulation phase and then paid as a lump sum amount) which would have reduced your TBA to $1.35 Million, thus allowing the $250,000 to be transferred back to pension phase later without exceeding your cap.

Timing can be important in the context of managing caps, particularly those relating to contributions. As a simple example, assume that a 66 year old person has an existing superannuation balance of $1.58 Million and has just sold a small business and wishes to contribute; $25,000 concessional contribution, $100,000 non-concessional and $1.445 Million CGT contribution. If the timing of these contributions is not handled correctly, it could result in the person not being able to contribute the $100,000 non-concessional amount.

Most of the superannuation caps are subject to some form of indexing. Therefore, over time we will expect to see the monetary amounts of the caps increase