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Make the most of your super with a personal deductible contribution

Dec 19,2019 Comments Off

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

Dec 12,2019 Comments Off

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.

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.
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:

Where a member is under 18 years of age – they will require a representative to act as a trustee on their behalf
Where a member loses capacity – they will also require a representative to act for them
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:

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.
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
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.
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.
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.
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.
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.

What is Salary Sacrifice and is it still relevant?

Oct 21,2019 Comments Off

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 30^th 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

Jul 31,2019 Comments Off

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.

She can take an additional pension amount of $200,000 from her retirement phase pension account;
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

Jun 5,2019 Comments Off

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 30^th 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.

Click the below button to access the published article in the SMSF Adviser magazine.

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

Mar 21,2019 Comments Off

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

Mar 21,2019 Comments Off

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:

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.

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.

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.
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.

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%.
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.
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.
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

What software should I use for my SMSF?

Mar 21,2019 Comments Off

Self-Managed Superannuation Funds (“SMSF”) have a number of unique aspects which mean that standard business software is not suitable for maintaining the relevant accounting records and tracking the various compliance aspects. For example, it is necessary to track individual member balances including allocation of a proportionate share of income and taxes. There are also annual contribution limits and minimum pension withdrawal amounts that need to be tracked and reported. What should I look for when trying to assess a software application to help manage my SMSF?

There are a number of software solutions available that have been designed specifically for SMSF’s, however most have been designed to be used by professionals for delivering compliance services to their SMSF clients and are generally not suited to fund trustees who wish to take a more active role in maintaining the financial records and managing the operations of their fund.

For these trustees, Practical Systems have developed a specialized and easy to use solution Practical Systems Super. The Company has been successfully developing and supporting software solutions for farmers and small business for more than 25 years.

Practical Systems Super has been developed using the latest cloud based technology making it ideal for collaborating between all members of the SMSF “team” including; auditor, tax agent, financial adviser and fund members. The system is operated from any web browser and does not require any installation of software or set up.

The software is backed by a support network of professionals who understand self-managed superannuation and have significant industry experience. All software development, help desk & professional support and all administration is conducted from the Company offices in Armidale in regional NSW and they do not use any overseas outsourcing. All data is stored on secure servers within Australia.

Some of the features of the Practical Systems Super application include:

Simple financial transaction entry including automated bank data feeds and a “transaction wizard” for those who may struggle with accounting jargon and double entry bookkeeping concepts
Complete investment tracking including real-time valuation of portfolios
Easy viewing of real time member balances, investment listings, etc. with extensive use of graphs and simplified presentations
Free set up of all initial fund information and opening balances – simply provide the information to Practical Systems on the standard forms supplied and your fund will be fully set up and ready to use from your first log in.
Automated year-end close off including automatic tax calculations and allocation of income and tax between members
Extensive range of reports for all management and compliance purposes
Additional users can easily be added and access rights to various parts of the software customized for each user. These additional users might include; auditor, accountant, financial planner, etc.
Access is available via other devices such as mobile phones and tablets
Future capability to create and store all relevant fund documents such as minutes, trust deeds, trustee declarations etc. integrated with electronic signing

Another unique aspect of Practical Systems Super is that all of the data within the system remains under the ownership and control of the fund trustees. This means that if the trustees at any stage wish to change a professional adviser such as auditor, tax agent or financial adviser, they can make the change instantly without any delays waiting for records to be transferred. All of the fund records are instantly available to the newly authorised user.

The software is also suitable for professional accountants and has specific provision for efficiently managing multiple funds within a single “group” of fund clients.

The software is provided on the basis of an annual subscription and will be constantly updated to reflect the latest tax rates and superannuation laws. These changes will be automatically available to all users without the need to download or install upgrades.

The people behind the software have a keen interest in self-managed superannuation and are passionate about helping individuals secure their financial futures using the SMSF concept. The professional and personalised support provided is a key element of the Practical Systems Super solution.

Deferred farm income – The sleeping giant?

Mar 21,2019 Comments Off

USING SUPERANNUATION TO SLAY THE SLEEPING GIANT OF DEFERRED FARM INCOME

Farm businesses can often accumulate “deferred income”: income that would usually be taxed in the year it is earned or generated, but is deferred or delayed to a future year through various mechanisms available to primary producers.

Over time, these deferred amounts can become substantial, with the potential for unexpected tax consequences arising from an unplanned event.

Even with good planning, “deferred income” could build up significantly over time – and reducing it could be expensive, due to tax paid at higher rates.

Superannuation could be the slingshot to bring down this Goliath.

Types of deferral

Deferrals can be either deliberate (for example, depositing funds into a Farm Management Deposit), or simply occur in the normal course of events (such as when market values for livestock rise above their current book value).

Deferred income can be generated through:

Farm Management Deposits (“FMDs”).
Using this scheme, primary producers can reduce their taxable incomes in “good” years by depositing cash in special types of bank deposits. These deposits can be redeemed in “bad” years; they are included with taxable income in those years, but are often offset by additional expenditure, such as fodder. In this way, FMDs can be a very effective tool as part of a drought management strategy. However, they can also become a risk if they build up to a level beyond reasonable requirements. Farming families can accumulate significant amounts in these facilities: up to $800,000 per person.

Deferral of livestock profits arising as a result of loss or destruction of pastures – often referred to as “Drought Forced Sales”.
This popular technique is used in drought periods or dry spells when farmers have to sell livestock because of poor pasture conditions. This strategy effectively reduces taxable income in this situation, and does not involve the outlay of any cash. One risk is that deferrals can only be made for up to five years; sometimes farmers use the cash from the proceeds of the “forced sales” for other purposes, and a build-up of deferred sales can create problems if a run of “good” years follows dry spells.

Unrealised profit in livestock inventory.
Many farmers will use the “average cost” method for valuing year end livestock inventories for taxation purposes. This means – particularly for those who breed (rather than trade) livestock – the taxation value of inventories over time can be considerably lower than market value. If the farm or other assets are sold, that difference between average cost and market value is realised, and can significantly increase taxable income.

Excess depreciation claims.
The depreciation provisions are generally fairly generous, enabling farmers to claim large proportions of plant and equipment capital expenses against taxable income. (For instance, the 100% write off option for assets costing less than $30,000.) Over time, the total “written-down value” of farm plant can be much lower than the value that would be realised at a clearing sale. Any excess received on the sale of plant (over taxation written-down value) will be taxable income, and not subject to the CGT exemptions – unlike the sale of farm property, which is a capital gain event, but often exempt from any tax due to the Small Business Tax Concessions.

These examples are not exhaustive, and other provisions can defer farm income.

Consequences of deferred income

An unplanned tax event can have unexpected – and expensive – tax consequences.

For example, when a person dies, any FMDs or drought deferred sales related to them automatically becomes taxable income in the year of their death. Depending on their circumstances, this can create a significant tax bill.

The same is true if the taxpayer ceases to be a primary producer – for example, if they retire or exit the family business to allow a family member to take over. If the farm is sold, deferred income can be realised from livestock dispersal (at market value) and the sale of plant and equipment at the farm clearing sale.

The key here is (a) to be constantly aware of the accumulated amount of “deferred income” you are carrying forward; and (b) to ensure that you include this aspect in your succession and retirement planning.

A superannuation contribution strategy can “chip away” at deferred income by moving the deferred income into a retirement savings vehicle, using the applicable tax concessions to improve the result.

Example

A farming family of two parents and their son and daughter have accumulated $1M in “deferred income”, mainly in FMD’s. After a run of “good” years, they now feel the amounts in FMD’s are excessive to their needs. They also need to return drought deferred sales as income over the next couple of years.

They could make concessional superannuation contributions to the allowable cap of $25,000 per person (i.e. a total of $100,000 pa), funded either in part or in full by redemptions from the FMD’s.

Each year, they could reduce deferred income by $100,000 at an effective tax rate cost of 15% (the rate the superannuation fund must pay on the contributions received).

Depending on the family’s other incomes, this rate may be considerably less than they would pay if they simply returned the income with no offset and tax paid at that personal marginal or average rates.

Over time, they could save tens of thousands and possibly more, particularly in the case of an unplanned event or death situation.

Another advantage of this strategy is that the family starts to accumulate a significant off-farm asset in a tax-effective environment, which could be a future source of tax-free retirement income.

Should they wish to maintain “control” over their investment assets, they could use a Self-Managed Superannuation Fund structure.

Why Choose a Self-Managed Superannuation Fund (SMSF)?

Mar 21,2019 Comments Off

Roughly one-third of all superannuation monies in Australia are contained in self-managed funds and these have continued to increase in popularity with consistent growth over the past 10 years. There are currently around 600,000 SMSF’s in Australia. This fact sheet discusses some of the reasons you might choose to manage your own superannuation fund.

For an employee in the private sector or a business person, the options for superannuation can include:

Industry Funds – these are so called “profit for members” funds usually designed for people in a particular industry – for example, cbus in the building industry and HESTA for the health and community services sector
Retail Funds – open to the public and run by financial institutions such as banks and insurance companies
Corporate Funds – established by a particular employer and only open to their employees
Self-Managed Superannuation Funds (“SMSF”) – “do-it-yourself” funds controlled by the members

The reasons for choosing the self-managed route are varied but can include:

A. Control. The members of the fund are also the trustees of the fund and therefore have ultimate control over all aspects of the operation of the fund including investment policy and administration.

B. Flexibility. SMSFs can be far more flexible and personalised in their operations. For example, SMSFs have the ability to:

Transfer business real property and listed securities owned by members to the fund
Invest in projects in conjunction with business associates or in other non- traditional asset types
Take advantage of the of the provisions that effectively allow the “bring forward” of next year’s concessional contribution cap and enabling the member to claim 2 years contributions for tax purposes
Customise life insurance arrangements to the precise requirements of individual members
Loan (up to 5% of assets) to related business entities

Note however, that SMSFs cannot generally run a business as that could be taken as not meeting the “sole purpose test”.

C. Convenience. As members are the decision makers and administrators (including controlling the fund bank account) they can effect transactions instantly – such as short notice changes to pension payments, contributions, commence a transition to retirement income stream, implement contribution splitting, etc.

D. Administration Costs. Generally, industry and retail funds can charge between 1.0% and 2.0% of account balance in administration type fees and often there are other fees “hidden” within investment returns. The administration costs for an average SMSF would be typically less than 5%.

E. Effective succession planning. A self-managed fund provides more options for leaving account balances in the fund for the benefit of surviving dependents and members can effectively create a strategic estate plan outside the member’s will. This can include using the fund as a so called “family superannuation fund” involving other family members (subject to the limitation of the number of members).

F. Ability to utilise borrowings for investment “gearing”. This can be for the purchase of property and shares and unit trust investments via a “Limited Recourse Borrowing Arrangement”. Note that these arrangements can be complex and appropriate professional advice should be sought before considering this.

Note that there are a range of responsibilities associated with running an SMSF. For some people, being more engaged with their retirement fund can be very rewarding while others may find it a burden. It is therefore important that individuals get appropriate professional advice and fully consider all aspects before deciding on the self-managed option.

BOB LOCKE – CHARTERED ACCOUNTANT & SMSF SPECIALIST

Bob’s career spans more than 40 years in accounting, taxation and financial services. His specialty is self- managed superannuation funds and the development and management of financial accounting software.

Bob has experience as a partner in a large accounting firm, as administrator of a large corporate superannuation fund with more than 1000 members and as owner/founder of Practical Systems.

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

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Category Information Centre

Make the most of your super with a personal deductible contribution

Understanding SMSF Trustees

Who is a Trustee?

Trustee Options

Trustee Rules & Exceptions

Individual or Corporate Trustee: making the right choice

What is Salary Sacrifice and is it still relevant?

Withdrawing amounts above the minimum super pension requirement

Beyond the contribution caps

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

Don’t Forget Your (Superannuation) Cap

What software should I use for my SMSF?

Deferred farm income – The sleeping giant?

USING SUPERANNUATION TO SLAY THE SLEEPING GIANT OF DEFERRED FARM INCOME

Why Choose a Self-Managed Superannuation Fund (SMSF)?

BOB LOCKE – CHARTERED ACCOUNTANT & SMSF SPECIALIST