Australians not prepared for ‘largest’ transfer in history

Despite being the largest transfer of intergenerational wealth, the vast majority of Australians are not prepared, according to new figures.

Perpetual has revealed that 76 per cent of Australians do not have a current will, while 53 per cent of parents have not discussed their will and legacy with their children.

Perpetual Private’s Andrew Baker, general manager of private clients, believes the majority of parents wish their children would use their inheritance wisely and build for the future, but research shows the opposite is happening.

He conceded, however, that the rising costs of living, slow wage growth and a volatile property market is painting a different picture of wealth today than it was 30 years ago.

“It is estimated that 70 per cent of families will lose their wealth by the second generation and 90 per cent will lose it by the third,” said Mr Baker.

To offset risks of families losing their wealth, Mr Baker advocates for discussions around wills and inheritance be broken down so all parties can be prepared and have a plan in place.

“As humans, we tend to shy away from discussing money amongst our families and friends.”

“However, as we approach the largest intergenerational wealth transfer in history with more than half of Australians expecting to inherit, why have only just over a third discussed their wishes with their children?” Mr Baker said.

The wealth manager believes normalising discussions around money and the future can preserve wealth across generations.

Source: SMSF Adviser

Tax Institute calls for delay to enforcement of NALE rules

The Tax Institute has called for enforcement of changes to non-arm’s length expense (NALE) rules to be delayed until 1 July 2020, suggesting the ATO’s interpretation of the laws should be referred to its General Anti-Avoidance Rules (GAAR) panel as the powers handed to the regulator are too broad.

In a submission to the ATO this week in response to its Draft Law Companion Ruling 2019/D3, which outlines the ATO’s interpretation of the NALE laws, The Tax Institute suggested compliance guidelines released with the ruling, which indicated resources would not be allocated to policing the general expense provisions until the 2021 financial year, should be extended to all SMSFs caught by the changes.

“The PCG should apply across the board to any taxpayers where the ATO seeks to apply the new NALI/NALE provisions for any of the FY2019 and FY2020 periods,” the institute said.

“The Tax Institute rejects the ATO’s position that the PCG be limited so as to apply only in the instance where a general expense taints all the fund’s income.

“We recommend that given the delay in introducing the NALE reforms, the ruling in relation to the NALE measures only take effect from 1 July 2020.”

The institute warned that the ATO’s ruling had “serious ramifications” for many SMSF trustees because of the degree to which “substantial adverse tax implications” could result from small matters, such as an accountant assisting with their own fund’s tax returns, and as such should be reviewed to the GAAR panel before it was applied to any taxpayer.

Tax Institute Superannuation Committee member and DBA Lawyers director Dan Butler said the ruling as it currently stood gave the ATO “very broad power” and could result in affected clients being caught up in costly long-term legal battles to fight excessive assessments from the ATO.

“In some circumstances, it takes years of information gathering and correspondence with the ATO to work through these matters, and it inflicts great costs on the taxpayer to prove that the NALI assessment is excessive,” Mr Butler told SMSF Adviser.

“We don’t like that the legislation has provided the ATO a lot of discretion. There is not much protection for a taxpayer, and to get the system right, there should at least be independent representation given to the ATO’s GAAR panel which then decides whether to pursue a NALI assessment, because of the costs and the consequences that follow.”

Clarification needed around who will be caught

The Tax Institute also suggested in its submission that the ATO provide more specific clarification around which trustees would be caught by the rules, by applying a “de minimis” principle and providing guidance around which activities constituted trustee and non-trustee services.

Mr Butler said the industry would benefit from guidelines about what constituted a “material” expense, which could also reduce the administrative workload required from the ATO to police the laws.

“Why are we talking about expenses at $100? The administrative side of it is too great,” he said.

“We need a guideline from the ATO to say we won’t go looking for bits and pieces, it’s material items. Let’s say an administration service may be $2,000 a year — I would consider that immaterial, so perhaps it should be above $20,000. You need a benchmark where people can say we’re above the limbo bar.”

Equally, while the ruling mentioned the distinction between services performed in a trustee capacity or an individual capacity as a key factor in whether an expense would be considered non-arm’s length, Mr Butler said there needed to be clearer guidance as to what these services were.

“In the ATO’s 2013 NTLG super committee minutes, the example they gave of when something becomes a non-trustee service was a builder, because it’s someone who’s got specific skills and they are adding a lot of material value to the fund,” he said.

“The ATO may say as an adviser you have investment skills, but because the adviser is a trustee and under trust law they have to do the best for the fund, it’s hard to start splitting hairs about what is their role as a trustee and what is their role as a planner.”

Catch-up contributions can release assets from defined benefit pensions

New catch-up contribution rules can be used to assist clients with large amounts of assets locked in to defined benefit pensions, according to Colonial First State (CFS).

Addressing SMSF Adviser’s recent SMSF Summit 2019 in Perth, CFS executive manager Craig Day said the new rules, which allowed fund members to access unused concessional contribution balances up to five years ago, could be used to reduce sometimes large reserves of assets stuck in defined benefit pensions for older clients.

“If the client’s got no other concessional contributions, you can allocate up to the cap, which is currently $25,000, but the interesting thing about the concessional catch-up rules is you get [access to] those rules regardless,” Mr Day said.

“If a client hasn’t worked for 20 years, what level of salary sacrifice and SG contributions has he got? Zero. So, all these clients are accumulating unused concessional cap amounts of $25,000 a year and a client’s concessional cap may be up to $100,000.”

Mr Day said CFS was receiving an increasing number of calls from advisers who were concerned about what to do with clients that were advancing in age and had large amounts of assets locked up in defined benefit pensions.

“If your clients did commence one of these fixed term defined benefit pensions, they could only be one of two types: a lifetime, and the people are dying; or a life expectancy, and you’re getting to the end of the term,” he said.

“The ATO has told us that if the person dies or the term comes to an end, the assets backing that pension don’t belong to that member, they simply fall into a reserve. If you want to get that back to the members, you’ve got to allocate it out of the reserve back to members’ accounts, and if it goes above 5 per cent, you have an amount counting towards the concessional cap.”

Mr Day said for some defined benefit pension types, part of the pension could be commuted into a term allocated pension without counting as a contribution.

“There’s a strategy that simply involves rolling over to commence a complying term allocated pension, and if you do that, the allocation will not count towards the concessional cap, but there are some catches here,” he said.

“If you’ve got one of the non-complying defined benefit pensions or a complying life expectancy, the commutation value is limited — it might give you $100,000, but the amount of assets you’ve got sitting on reserve is $200,000, so you can only allocate $100,000 that doesn’t count towards the caps.

“With the lifetime pensions, there is no commutation and that can make a massive difference.”

Source: SMSF Adviser

NALI ambiguity dealt with by ATO

Non-arm’s length income (NALI) determinations from the ATO must crop up now and then in SMSF trustee nightmares, particularly in regard to LRBAs.

While the NALI provisions are an accepted anti-avoidance measure designed to stop income that would otherwise attract the top marginal tax rate being directed to an SMSF, they are coming under more and more scrutiny from the regulator due to the tax revenue potentially skirting legitimate collection.

In this regard, trustees and practitioners should note that there is new legislation that seeks to draw even tighter the operating rules on NALI with a focus on the expenditure side of transactions.

Treasury Laws Amendment (2018 Superannuation Measure No. 1) Bill 2019 has now passed both houses of Parliament. This amends NALI provisions in the income tax law to specifically include non-arm’s length expenses. Note that LCR 2019/D3 and PCG 2019/D6 will aid understanding of the new rules greatly.

The EM to the legislation provides examples of where either an SMSF’s expenses are less than what would have been incurred had the parties been dealing at arm’s length, or there is no loss, outgoing or expense incurred by the SMSF where some would have been expected if the parties had been dealing at arm’s length. In these situations, the income earned by the SMSF is treated as NALI and taxed at the highest rate.

In short, the bill clarifies the operation of Subdivision 295-H to make sure that SMSFs and other complying superannuation entities cannot circumvent the NALI rules by entering into schemes involving non-arm’s length expenditure (including, as noted, where expenses are not incurred).

Note also that any capital gains from a subsequent disposal of an asset may also be treated as NALI. The former law might not have applied to net capital gains in line with the policy intent of Subdivision 295-H. For example, a fund acquires an asset at less than its market value through non-arm’s length dealings and then disposes of the asset for market value consideration.

The resulting net capital gain may arguably be the same as the gain that would have resulted had the parties been dealing with each other at arm’s length when the asset was acquired, due to the operation of the cost base market value substitution rules in section 112-20.

This meant that the former non-arm’s length income rules may have had no effect, even though the transaction diverts more wealth into the concessionally taxed superannuation entity than would have been possible had the relevant dealings been at arm’s length. The new bill aims to rectify this.

The EM provides an example of non-arm’s length expenses:

An SMSF acquired a commercial property from a third party at its market value of $1,000,000 on 1 July 2015.The SMSF derives rental income of $1,500 per week from the property ($78,000 per annum).

The SMSF financed the purchase of the property under limited recourse borrowing arrangements from a related party on terms consistent with section 67A of the SIS Act. The limited recourse borrowing arrangements were entered into on terms that include no interest, no repayments until the end of the 25 year term and borrowing of the full purchase price of the commercial real property (that is, 100% gearing).

The SMSF was in a financial position to enter into limited recourse borrowing arrangements on commercial terms with an interest rate of approximately 5.8%. The SMSF has not incurred expenses that it might have been expected to incur in an arm’s length dealing in deriving the rental income.

As such, the income that it derived from the non-arm’s length scheme is non-arm’s length income. The rental income of $78,000 (less deductions attributable to the income) therefore forms part of the SMSF’s non-arm’s length component and is taxed at the highest marginal rate.

However, there will be no deduction for interest, which under the scheme was nil. Non-arm’s length interest on borrowings to acquire an asset will result in any eventual capital gain on disposal of the rental property being treated as non-arm’s length income.

Source: Tax & Super Australia

ATO considers non-compliance notices for lapsed lodgers

The ATO may consider further action to spur on SMSF trustees to lodge their annual returns on time, including making funds non-complying where after repeated attempts to contact them they do not actively engage with the regulator around any problems preventing them from lodging.

Speaking at SMSF Adviser’s SMSF Summit 2019 in Brisbane on Tuesday, ATO assistant commissioner Dana Fleming said the regulator had written to all SMSFs who had failed to lodge a return for the first time and would take more serious steps if these funds did not engage with the ATO to rectify the situation.

“We have explained to them that by not lodging their return, their compliance status is at risk, and advising them of our early engagement and voluntary disclosure service, and to come forward if there’s a problem,” Ms Fleming said.

“If there is no response, we will consider writing to them and making them non-complying, and we are hoping that is a way for us to get them to engage.”

Ms Fleming pointed out that the non-complying status would not be permanent and would hopefully act as a more serious impetus for affected trustees to lodge their returns on time. If they subsequently engage and lodge, the notice of non-compliance would be immediately revoked.

“If we issue a notice of non-compliance, it only applies to the year in which you are made non-complying, so it would enable the person to come forward and rectify that situation before the next return is due,” she said.

Ms Fleming said “lapsed lodgers”, or those that had fallen behind after initially lodging their annual returns on time, made up over 10 per cent of the SMSF population, totaling 71,000 funds.

“They represent $44 billion of super according to their last return lodged, that we don’t know what is happening with,” she said.

She added that the reasons for lapsed lodgement commonly included the trustee encountering a “regulatory hurdle” by realising they had made a compliance breach and not being sure what to do next, or the more active member of the SMSF having passed away.

“We had one case where the trustee didn’t even know they had an SMSF, so it’s important to emphasise that all trustees are engaged with their SMSF, not just one,” Ms Fleming said.

Source: SMSF Advsier

Downsizer contributions offer more than meets the eye

Retiree clients looking to sell their property can often contribute more to their SMSF than expected through the government’s recently introduced downsizer contribution rules, due to the flexibility to split contributions between spouses and use them in conjunction with other contribution rules, according to Fitzpatricks Private Wealth.

Speaking at SMSF Adviser’s SMSF Summit 2019 event in Brisbane, the advice firm’s head of strategic advice, Colin Lewis, said it was possible for clients approaching their 65th birthday in particular to double their contribution amounts by making use of the downsizer and bring-forward contributions and potentially splitting contributions with their spouse.

“Clients must be age 65 at the time of contribution [to use downsizer], not when they sell the house, it’s when they wish to contribute the proceeds into super,” Mr Lewis said.

“So, when they sell the house they can be under 65, but if within a 90-day period they turn 65, they can make contributions, so it’s the timing that is the essence here if you are dealing with a client that is 64 and thinking of selling their home.”

Mr Lewis gave the example of Ron and Paula, who were 76 and 64, respectively, and planning to sell their $1.5 million home before Paula’s 65th birthday in December 2019. Ron had an existing account-based pension worth $1.6 million while Paula had $1 million in accumulation phase, and the couple had a joint investment portfolio worth $1.5 million outside super.

“On 16 October, they enter into a contract to sell their home for $1.5 million with settlement on 27 November,” he said.

“From the proceeds, Ron and Paula make the following contributions within 90 days: Ron makes a $300,000 downsizer contribution; prior to her 65th birthday, Paula makes a $300,000 non-concessional contribution; and after turning 65 she makes a $300,000 downsizer contribution and commences an account-based pension of $1.6 million.

“So, they’ve rearranged their affairs, they’ve now got a new house worth $1.6 million, Ron’s got an accumulation benefit worth $300,000, Paula’s got an account-based pension of $1.6 million, and their money outside super is $500,000. So, what they’ve been able to do is upsize, put more into super and make a downsizer contribution.”

Mr Lewis added that splitting contributions between a couple was another good way to make the most of the downsizer rules, given that a client’s spouse did not need to have been an owner of the property to use the proceeds for their contribution.

“The spouse doesn’t have to be on the title to contribute — with spouses, it all hinges on whether the owner of the property is eligible, and if they are, the spouse can contribute too provided they’re 65 or above,” he said.

Source: SMSF Adviser

ATO urges quick action on transfer balance caps

The ATO is urging SMSF trustees to take quick action around any excess transfer balance determinations or commutation authorities received in October to avoid any accidental non-compliance that could occur over the Christmas holiday period.

In an update posted to the ATO website on Monday, the office noted that any excess transfer balance determinations or commutation authorities issued to trustees in October would have due dates during the Christmas/New Year period, increasing the risk that trustees could accidentally fail to comply with such notices due to the holiday shutdown.

“We encourage SMSF trustees and members to respond early to this correspondence to avoid adverse consequences,” the ATO said.

“Commutation authorities need to be actioned by the due date to avoid losing access to the income tax exemption on the assets supporting the pension.

“If SMSF members don’t respond to excess transfer balance determinations by the due date, we’ll send a commutation authority to the fund specified in the determination.”

The office added that if an SMSF member had concerns about a determination issued, they or their tax agent could view the events making up their transfer balance account through the ATO’s online services.

“If any information is missing or incorrect, provide it or correct your reporting as soon as possible to allow us to revoke the determination,” the ATO said.

“If your member is concerned about information reported to us by another fund, they should discuss this with the fund.”

While the commissioner did not have discretion to grant an extension of time to respond to a commutation authority, members could contact the ATO by phone to request time extensions around excess transfer balance determinations.

Source: SMSF Adviser

Morrison dumps associations on code monitoring

The federal government will introduce a single disciplinary body for financial advice, forcing the FPA and AFA to abandon their attempts to become a code monitoring body for the industry.

On Friday, the Morrison government announced that it is accelerating the establishment of a new disciplinary system and single disciplinary body for financial advisers, as recommended by the royal commission.

The government will work towards establishing the new body in early 2021, subject to the passage of legislation that will be introduced into the Parliament next year.

A long-term sustainable solution based on commissioner Kenneth Hayne’s recommendations will replace the role of code monitoring bodies, which were due to be established by industry associations under professional standards reforms.

Following the government’s announcement, the FPA wrote to members informing them that it has withdrawn from code monitoring following concerns about member cost and compliance duplication

“Despite receiving conditional in-principle approval from ASIC, the FPA has made the decision to withdraw the application for Code Monitoring Australia (CMA),” FPA chief executive Dante De Gori said.

The FPA had been working on a joint initiative with five other professional associations to establish CMA. Following 18 months of development, a final application was lodged with ASIC on 16 August 2019 for CMA to become an approved code monitoring scheme for the FASEA Code of Ethics.

“The driving force behind CMA was our strong belief that it’s in the best interests of the profession and consumers to have one compliance scheme run by financial planners for financial planners, rather than a commercial provider,” Mr De Gori said.

“However following recent discussions, the government has now confirmed that it will progress a single disciplinary body as recommended by commissioner Hayne in the financial services royal commission in place of code monitoring.

“Given this, we do not think that it is prudent to establish CMA as a new monitoring scheme that will be superseded within a short period, resulting in a duplication of costs and compliance obligations for our members and the financial planning profession broadly.

“Though we are extremely disappointed that code monitoring will not proceed with CMA, we continue to strongly support the introduction of a comprehensive, compulsory Code of Ethics for financial planners to ensure consumer protection.”

The AFA also informed its members that it was important to avoid uncertainty and unnecessary duplication of costs.

“Financial advisers and their clients have been subjected to enormous demands and uncertainty. We need to avoid adding complexity, further duplication and cost to the regulation of financial advice,” AFA CEO Phil Kewin said.

“The AFA continues to have concerns about the current wording of the FASEA Code of Ethics as it stands, and has voiced those concerns to both FASEA and the government. We are expecting further guidance from FASEA in this regard.”

While the FPA and AFA expressed their disappointment, AIOFP executive director Peter Johnston praised the decision, saying that the association never attempted to be a code monitoring body.

“Our board thought the AIOFP should be acting in the best interests of members and their clients at all times. The royal commission debacle over Sam Henderson clearly demonstrated that associations are not equipped to become a code monitoring body. It was embarrassing,” Mr Johnston said.

Written by James Mitchell 

SMSF numbers triple in 20 years

SMSF numbers have tripled over the past two decades and assets held within them now represent a third of Australia’s total superannuation pool, according to new ATO statistics.

The data, released to mark 20 years of the ATO regulating the SMSF sector, revealed that SMSF numbers had grown from 197,000 in October 1999 to 600,000 in June 2019, while SMSF membership had more than tripled in that time from 387,000 members in 1999 to 1.125 million in 2019.

SMSF assets were now valued at $748 billion, or approximately a third of Australia’s $2.76 trillion super sector, according to the office’s statistics.

The data also looked at the ATO’s recent regulation performance, revealing that it had referred 145 auditors to ASIC over the past six years, with 51 of those having been referred in the 2019 financial year.

The office had also seen an upsurge in voluntary disclosures of breaches by super trustees, with 353 having come forward in the 2019 financial year compared to 246 in 2018 and 265 in 2017.

ATO assistant commissioner Dana Fleming said the office would continue to take its role as an SMSF regulator seriously.

“The importance of good governance in the SMSF sector cannot be underestimated. As the sole regulator of SMSFs, we are conscious of the significant responsibility of safeguarding 1.1 million Australians’ retirement savings,” Ms Fleming said.

“Our aim is to help trustees to be able to make informed decisions by understanding their responsibilities and, of course, where necessary we will take action to maintain the integrity of the SMSF sector for all other SMSF members.”

Source: SMSF Adviser

Retirement alliance endorses government review

The Alliance for a Fairer Retirement System (the Alliance) has welcomed the federal government’s Review into the Retirement Savings System and has put forward five questions the process should answer.

The first question the Alliance would like answered as part of the review is how can the retirement income system include incentives to encourage Australians to save enough for an independent retirement without introducing savings disincentives along the way.

“At present, only 30 per cent of the population over 65 is independent of government support. The remaining 70 per cent is comprised of 42 per cent on the full age pension and 28 per cent on a part age pension,” Alliance spokesperson John Maroney noted.

“As the superannuation system reaches maturity and balances at retirement increase, reliance on the age pension will reduce. Over the same time period, the number of people and the proportion of the population, in retirement will increase,” he added.

“The Alliance calls on the Review to consider the adequacy of super to support retirees into the future.”

Another question the Alliance has asked of the government in its review is what the defined objectives of superannuation and the age pension are and how can these two elements complement each other to ensure sustainability and intergenerational equity in the retirement system.

To this end the Alliance pointed out constant change to the system erodes confidence in it and can result in unintended consequences that threaten the retirement income system’s viability.

As such the group has called for any future changes to the system be made only after a full regulatory impact statement has been prepared that will consider the effects the change will have on the other components of the system and assess appropriate grandfathering provisions that will allow retirees to change their strategies over a reasonable timeframe.

Other questions the Alliance would like to addressed during the review are:

  • What is an adequate level of retirement income commensurate with their pre-retirement standard of living that older Australians should seek to attain?
  • How can retirement income policy settings ensure the maximum degree of certainty for those planning for retirement over decades?
  • Where are there gaps or issues that indicate a lack of fairness in terms of either horizontal (between people with similar circumstances) or vertical (between different generations) equity in the existing three-pillar retirement system?

The Alliance also took the opportunity to congratulate its former spokesperson Deborah Ralston on her appointment as a review panellist.

The federal government formally announced its intention to hold a review of the current retirement savings system and revealed the terms of reference to be used late last week.

The Alliance is made up of 11 industry bodies being the Association of Financial Advisers, SMSF Association, Australian Investors Association, Self-managed Independent Superannuation Funds Association, Gold Coast Retirees Inc, Association of Independent Retirees, Listed Investments Companies and Trusts Association, Australian Shareholders Association, National Seniors Australia, Stockbrokers and Financial Advisers Association, and WA Self Funded Retirees.

Written by Darin Tyson-Chan
Source: smsmagazine.com.au