Contributions level out after 2017 reforms

Contributions reverted to normal during the 2018 financial year, following an atypical jump in contributions in anticipation of the July 2017 superannuation reforms, the latest ATO SMSF figures have revealed.

According to the ATO statistical overview for the sector regarding the 2018 financial year, total contributions to SMSFs increased by 32 per cent to reach a high of $41.8 billion in 2016/17, with total SMSF benefit payments increasing by 31 per cent to $46 billion in the same year.

During the 2018 financial year, however, total contributions dropped to $17.4 billion and total benefit payments decreased to $37.7 billion.

In its analysis of the figures, the SMSF Association noted: “[The 2016/17 figures] were significant increases over the previous financial years, most of which can be attributed to a behavioral change resulting from the introduction of the superannuation reforms taking effect on 1 July 2017.

“With the release of the 2017/18 statistics, we now have a reversion to the norm.”

The association pointed out member contributions declined the most during the 2018 financial year, falling to $11.6 billion after peaking at $33.9 billion in 2016/17.

“This is likely due to the fact many SMSFs would have used their three-yearly contribution bring-forward rule in the previous financial year,” it noted.

As part of its analysis, the industry body also highlighted a sharp increase in lump sum withdrawals from SMSFs during 2017/18, which it attributed to the introduction of the transfer balance cap (TBC).

“As SMSFs moved money into accumulation phase and the TBC took effect, they took the opportunity to withdraw funds as a lump sum to keep a larger amount in retirement phase,” it said.

“If lump sums were taken from the retirement phase, this would create debits to their TBC.”

The ATO’s report also revealed the growth in the number of SMSFs reporting limited recourse borrowing arrangements had steadied and is increasing at a manageable rate.

In addition, the ATO found the level of SMSF wind-ups hit a record high during the 2018 financial year, while new establishments fell away.

Source: SMS Magazine

ATO outlines tax return changes for SMSFs this year

The ATO has highlighted some of the new measures and changes to be aware of when completing tax returns for clients this year.

In an online update, the ATO provided an outline of some of the specific measures and support available for individuals impacted by COVID-19 as well as some changes specific to SMSF clients.

Updated SMSF instructions

The ATO said that the instructions for “Section A: SMSF auditor Part A” have been updated to help clarify the requirements for the fund. 

“This question can now be answered as ‘No’ if the audit report was qualified only in relation to insufficient audit evidence under Auditing Standard ASA 510 Initial Audit Engagements – Opening Balance,” the ATO explained.

Question 6D also no longer includes Part A qualifications, the ATO said. This question relates only to rectifying to Part B of the audit report.

A new label, J7 Property count, has been added to section H: Assets and liabilities at 15b.

“If your SMSF holds investments in real property that was held in trust as a security under a limited recourse borrowing arrangement, this information must be reported at J7 Property count,” the ATO explained.

Label G1 Death benefit increase at Section C, Deductions and non-deductible expenses has now been removed.

“If a fund member died on or before 30 June 2017, the fund must have paid the benefit before 1 July 2019 to be eligible to claim a deduction. From 1 July 2019, the deduction is no longer available,” the Tax Office stated.

NALI changes

The ATO reminded SMSF professionals that from 1 July 2018, NALI was expanded to also include income derived by an SMSF from a scheme in which the parties were not dealing with each other at arm’s length.

“This is where the fund incurred expenses (including nil expenses) in deriving the income that are less than those which the SMSF would otherwise have been expected to incur if the parties were dealing on an arm’s-length basis,” it explained.

“The expenses may be of a revenue or capital nature in the same way that NALI may be statutory or ordinary income.”

From 1 July 2018, income derived by an SMSF in the capacity of beneficiary of a trust through holding a fixed entitlement to the income of the trust will be NALI where both:

  • The SMSF acquired the entitlement under a scheme or the income was derived under a scheme in which parties weren’t dealing with each other at arm’s length.
  • The SMSF incurred expenses in acquiring the entitlement or deriving the income that are less than, including nil expenses, what the SMSF would otherwise have been expected to incur if the parties were dealing on an arm’s length basis.

Source: SMSF Adviser

ATO clarifies stance on in-house asset breaches

The Tax Office has sought to clarify how it will approach concerns from SMSFs that they may be breaching in-house asset rules due to the economic impact of COVID-19.

On its SMSF FAQ page updated on 8 May, the ATO addressed concerns from SMSFs that the recent downturn in the sharemarket may result in the fund’s in in-house assets being more than 5 per cent of the fund’s total assets, thereby breaching in-house asset rules.

The ATO updated its response on its SMSF FAQ page on 8 May, stating:

If, at the end of a financial year, the level of in-house assets of an SMSF exceeds 5 per cent of a fund’s total assets, the trustees must prepare a written plan to reduce the market ratio of in-house assets to 5 per cent or below.

This plan must be prepared before the end of the next year of income.

If an SMSF exceeds the 5 per cent in-house asset threshold as at 30 June 2020, a plan must be prepared and implemented on or before 30 June 2021.

However, we will not undertake compliance activity if the rectification plan was unable to be executed because the market has not recovered or it was unnecessary to implement the plan as the market had recovered.

This compliance approach also applies where the SMSF exceeded the 5 per cent in-house asset threshold as at 30 June 2019 but has been unable to rectify the breach by 30 June 2020.

Speaking at a recent webinar run by the ATO and the SMSF Association, ATO director Kellie Grant said the regulator has taken this approach because it understands that rectification plans may also be currently impacted in 2019–20 as a result of COVID-19.

Further, Ms Grant said it also means the ATO will also be updating its 2020 Auditor/Actuary Contravention Report (ACR) instructions to let auditors know not to report these sorts of in-house asset breaches as well.

Cooper Grace Ward Lawyers partner Scott Hay-Bartlem said that, in his experience, the ATO usually enforces in-house requirements quite strictly.

“If the trustee does not implement the rectification plan and reduce the in-house asset level below 5 per cent before the end of the following financial year, the SMSF has compliance issues,” Mr Hay-Bartlem said.

Source: SMSF Adviser 

Minimum super withdrawal reduced by 50% for retirement phase pensions

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

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

Age Default minimum drawdown rates (%) Reduced rates by 50 per cent for the 2019-20 and 2020-21 income years (%)
Under 65
95 or more

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

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

ATO investigating errors in SMS alert service

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

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

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

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

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

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

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

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

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

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

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

Source: SMSF Adviser

ATO cuts six-member fund work

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

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

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

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

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

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

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

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

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

Source: smsmagazine.com.au

Inflation figures confirm TBC won’t be indexed in 2020

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

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

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

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

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

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

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

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

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

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

Source: SMSF Adviser

Retirement income worry: Who worries and why?

Most older Australians – 53% – worry they’ll run out of money in retirement, research by National Seniors Australia has found.

The survey also found that women are more worried about outliving their savings, 59% compared to 47% of men.

The research report from National Seniors – titled Retirement income worry: Who worries and why? – suggests several reasons for these differeing levels of concern, including the longer life expectancy of women, along with gender inequality in earnings and expected roles, such as caring. The demographics of the survey sample may also be a factor, with partnered men most represented in the sample, followed by unpartnered women.

National Seniors notes that women are more likely to be relying on the age pension, and to have less than $500,000 in retirement savings – below the ASFA ‘comfortable’ retirement standard.

Having superannuation to draw upon reduced worry, with 39% of people receiving income from super being ‘unconcerned’ compared to 27% of those not receiving any money from super, the survey found. This latter group was also the most likely to worry frequency – 23%.

Analysis found that the “gender effect” on the risk of worrying was “strong” – a 47% increase – but less than the effect of not yet being retired – 68% increase – having under $500,000 in savings – 65% increase – or having the age pension as the main source of income – a 53% increase the in risk of worrying.

“Australia has one of the best pension systems in the world, yet Australian retirees are still showing high levels of worry that they will outlive their savings,” said National Seniors CEO, Professor John McCallum.

“This shows a need for better advice and education to help older Australians manage their savings so they can have the confidence to spend their money and enjoy retirement.” 

Jeremy Cooper, Challenger’s Chairman of Retirement Income and formerly Chair of the Super System Review, noted that while women live three years longer than men, on average, the “super system doesn’t cater for this difference in longevity”.

“What this and other National Seniors research clearly highlights is that people treat the age pension and their own savings differently. They fear running out of their own money, even though the safety net of the age pension will be there for them. This sends a strong signal that people worry about being solely reliant on the age pension. It’s therefore important that super funds explore ways of providing more lifetime income to their members.”

The report concludes that “an obvious way to relieve the worry of those in retirement is to stabilise the system which has been under constant change or threat of change for over a decade”.

The research was based on a survey of 3,584 Australians aged over 50.

Source: Sole Purpose Test

SMSF-specific education crucial

Advisers wishing to provide SMSF advice should be required to complete an SMSF-specific qualification, the SMSF Association (SMSFA) has said.

In its budget submission for 2020/21, the SMSFA called out the Financial Adviser Standards and Ethics Authority (FASEA) for failing to recognise specific SMSF education as part of its training requirements for advisers looking to provide SMSF advice.

“It is unfortunate new advisers are able to reach the required FASEA threshold to give financial advice and be able to give SMSF advice without specific SMSF knowledge being part of the required learning outcomes,” the association stated.

“This is problematic given that SMSFs are a specialised retirement savings vehicle and are distinctly different to large superannuation funds.”

FASEA’s current “broad, high-level” approach did not provide advisers with the necessary insight to give advice on complicated SMSF matters, it added.

“This is especially pertinent when SMSF trustees, due to the self-directed nature and complexity of SMSFs, are susceptible to poor financial advice with potentially significant detrimental outcomes to individuals,” it said.

“Complex SMSF limited recourse borrowing arrangements, business real properties and related-party transaction issues are not discussed in any material detail in the current education standards for advisers, but involve significant strategic and compliance issues for SMSF trustees.”

It pointed out that in addition to increasing advisers’ knowledge in terms of complex SMSF legislation, raising the bar for the qualification of SMSF advisers would have the knock-on effect of promoting higher standards among new advisers interested in providing SMSF advice.

“There will be many situations where financial advisers who are licensed to give advice may not have many SMSFs in their portfolio of clients,” it noted.

“An SMSF education licensing requirement to provide SMSF advice in this situation will either force the adviser to complete requirements to advise their SMSF clients or force SMSF members to seek licensed advisers whom deal with SMSFs and the specialist issues involved on a regular basis.”

Source: smsmagazine.com.au

SMSFA calls for phase-out of limited licensing

The SMSF Association has called for the phasing out of the limited licensing system for accountants, saying it forces SMSF clients to pay fees that are significantly out of proportion to the complexity of advice being provided.

SMSFA chief executive John Maroney said the association had called to scrap limited licensing in its 2020 budget submission, as the system was preventing SMSF trustees from getting basic SMSF advice at a reasonable cost.

“If an SMSF trustee wants to seek advice regarding the establishment of a pension from their accountant, unlicensed accountants are unable to provide this simple advice,” Mr Maroney said.

“Licensed advisers can provide this simple advice, but it involves costly documentation disproportionate to the advice sought.”

He added that the SMSFA would be pushing for reform in the advice space that “reduces complexity, improves efficiency and drives harmonisation to better enable the provision of affordable, accessible and quality advice to business[es] and consumers”.

The association’s submission suggests the abolishment of limited licensing in favour of “a new consumer-centric framework that raises advice standards and rectifies the advice gap to allow appropriately qualified SMSF advisers to provide low-cost, simple advice”.

“The desired policy outcomes from introducing limited licensing have not been achieved,” the SMSFA’s submission said.

“Individuals have unmet needs, advisers face high regulatory costs and accountants are strangled by regulation. What we’re proposing is a new consumer-centric advice framework, with improved SMSF advice a critical element of this project.”

In addition, the association’s submission called for advisers to be given access to their clients’ tax information on the ATO’s online services.

“Currently, only registered tax agents (typically accountants) are able to access [the ATO’s] portal to get total superannuation balance and transfer balance cap information that is crucial for SMSF advice,” the SMSFA said.

“Ironically, these individuals are generally not able to provide SMSF advice as they are not licensed with ASIC. Incongruously, those licensed advisers who can provide SMSF advice (such as financial advisers) have no reasonable way of sourcing ATO portal information directly from the ATO as they are not, generally, the member’s personal tax agent.

“The move to open data and increased access to the ATO portal is an essential step for the $750 billion SMSF industry and the only means by which the sector can institute commercially viable operational surveillance to the standard the ATO rightly requires, and we encourage the government to make this an ATO priority project.”

Source: SMSF Adviser