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SMSFs getting increasingly comfortable with crypto

SMSFs have now seen an over 90 per cent increase in cryptocurrency trading across the year, with advisers urged to start getting acquainted with crypto as it becomes a growing alternative asset for clients, according to a report.

The BTC Markets’ Investor Study Report 20-21 has unveiled the data analysis of the crypto exchange platform’s 325,000 users to explore the “what’s” and “why’s” of their crypto investments.

Findings from the report found that the growth of SMSFs trading on the BTCM exchange during FY20-21 rose by 95 per cent.

Based on the data, there has been increased demand from SMSF investors driving crypto investment in a rapidly maturing market.

“We have noticed that SMSF investors are comfortable making significant purchases outside of the more well-known cryptocurrencies into projects such as Ethereum Classic (ETC) and Bitcoin Satoshi Vision (BSV) – indicating their confidence and commitment to research,” BTC Markets CEO Caroline Bowler said.

“Further, companies that invest and trade with us are generally in the small to medium-sized enterprise category and are invariably organisations where the founder is still involved.

“This is interesting because founders and entrepreneurs usually have a healthy appetite for risk and tend to be nimbler when it comes to decision-making – a trait that is beneficial for investing in crypto given its dynamic nature.

This result also indicates a longer-term investment timeline whereby Australians are looking to cryptocurrency to build and provide for their future, rather than using it as a “get rich quick” investment, according to Ms Bowler.

“It’s worth noting that cryptocurrency investments are being used for overall portfolio diversification. This is a role traditionally held by alternative assets such as REITs, hedge funds, art, precious metals such as gold, and other collectibles,” she noted.

“This indicates that cryptocurrencies are coming of age in playing an increasingly important role as an alternative asset in the portfolio construction process.”

Looking forward, BTCM said it expects more companies to follow suit in adding digital assets to their balance sheets, whether as a natural hedge against fluctuating fiat currencies or as part of a corporate strategy to embrace modern, open technologies.

Ms Bowler believes there is a clear avenue for SMSF accountants, financial advisers, tax lawyers and to lift their game in getting acquainted with the nuances of crypto, not only for their own business but also for their clients.

Nearly a quarter (23 per cent) of investors surveyed cited cryptocurrency as the only investment they held and 63 per cent were not deterred by its volatility, rather embracing it as a “risk they understood.”

“In order to stay relevant to this investing cohort, it is time for professional services to catch up with the comfort levels of these investors, rather than waiting for them to be convinced of the benefits of more traditional investment assets,” she stated.

While financial advisers may be investing in digital assets in a personal capacity, regulation prevents them from supporting their clients who are doing the same, as cryptocurrency is not considered a financial product in Australia.

“This lack of professional financial advice can be conducive to investors falling prey to unscrupulous scams and ‘finfluencers’ if they don’t do their due diligence.

“Further building the case for regulation of cryptocurrency in Australia, 28 per cent of respondents said that a lack of regulation was a challenge when investing, while 32 per cent said a lack of understanding on the tax treatment of crypto investment was a hindrance.”

Once crypto becomes a regulated financial instrument, which is currently being addressed by Senator Andrew Bragg’s select committee, Ms Bowler said investors and their advisers would likely gain greater confidence about operating in the crypto sector.

“In the meantime, educating professional services will be crucial,” she concluded.

However, this comes as the ATO had recently fired warning shots for advisers new to cryptocurrencies to be aware of the components that comprise a crypto asset’s cost base, and to encourage their clients to keep immaculate records.

Speaking at a cryptocurrency forum hosted by the Knowledge Shop on Tuesday, ATO assistant commissioner Adam O’Grady stressed the importance of “getting the cost base right,” which he said has emerged as a leading pain point in the tax treatment of cryptocurrencies.

One often overlooked element of a crypto asset’s cost base, Mr O’Grady said, are instances where an investor has borrowed money to invest in cryptocurrency.

“Generally, that is actually part of the cost base,” he said. “Unlike shares that are earning dividends on the way, those interest expenses may be claimable immediately as a deduction in the cryptocurrency space.”

“Because they’re generally not earning income alone, it does actually form part of the cost base.

“But a lot of other cost base elements such as your brokerage fees, or transfer costs, all those sorts of things are ones that you’d be familiar with.”

Source: SMSF Adviser

ATO Quarterly Statistical Report

The ATO has released the June 2021 quarterly statistical report revealing the total estimated assets of SMSFs have reached just over $822 billion, along with a record growth trend in establishments seen across the year.

The ATO has released its Self-managed super fund quarterly statistical report – June 2021, revealing the latest statistics on the SMSF sector.

The report shows that there are now approximately 597,900 SMSFs and an estimated 1,114,529 members. These figures point to increased growth in total fund numbers, which have increased to 4 per cent from the last financial year, compared with the yearly average of around 2 per cent each year over the last five years.

The total estimated assets of SMSFs increased from $787 billion in the March 2021 quarter to just over $822 billion in June 2021. The top asset types held by SMSFs (by value) are listed shares (28 per cent of total estimated SMSF assets) and cash and term deposits (18 per cent). 

 

This 2020-21 financial year saw more than 25,312 new SMSF establishments showing continued growth compared with previous years, while wind-ups have also hit record lows with 2,187 recorded, around an 80 per cent drop from previous year averages. 

Fifty-three per cent of SMSF members are male and 47 per cent are female, while 86 per cent of all SMSF members are 45 years or older.

Individuals aged 35 to 44 continue to make up the majority of most of the new establishments and have now risen to 10.7 per cent in total age distribution of members in SMSFs as at the end of June 2021.

The average assets per SMSF member were $696,000 and the average assets per SMSF were $1.3 million. The median assets per member was around $414,912, while the median assets per SMSF had increased up to $733,926. 

Meanwhile, member contributions into SMSFs were up to $12.6 billion, while employer contributions into SMSFs were around $5.4 billion.

A more detailed overview of the ATO statistical report can be found here.

Source: SMSF Adviser

SuperStream rollover events clarified

The ATO has released examples of rollover events to support SMSF trustees in adhering to the SuperStream rules set to take effect from 1 October.

In a website update, the regulator outlined the circumstances where a trustee or authorised agent will be required to process fund rollovers using the new service.

Family businesses within a fund will be among those not required to send contributions via SuperStream due to the link of ownership between the appropriate business and membership, which meets the related-party exemption.

However, funds that involve a self-employed member in a fund that also includes family members working for non-related employers will need to use SuperStream to gain access to employer contributions.

SMSF members initiating a rollover request from an Australian Prudential Regulation Authority fund will need to request the transfer using the service from 1 October, as will trustees rolling out any member funds or winding up an SMSF after that date.

“From 1 October 2021, where your SMSF cannot interact via SuperStream, you cannot roll money out of your SMSF, including at wind up,” the ATO said.

It noted SuperStream will be a faster service for funds seeking to release excess contributions, but use of the service is not mandatory in this circumstance.

In addition, it warned funds to ensure their SMSF messaging provider allows SuperStream rollovers and to inform the ATO if they change providers.

In a separate update, the ATO stated all contributions made by a SuperStream rollover had to be reported during the financial year via the SMSF annual return and funds were also required to complete a transfer balance account report to report the debit that arises in the member’s transfer balance account if they commute a retirement-phase income stream before rolling over the assets.

Source: smsmagazine.com.au

SMSF trustees warned on increasing exposure to compliance risks affecting collectables

SMSFs can be increasingly exposed to various compliance risks surrounding collectables, as the asset class requires continued consideration of administrative impacts on the fund.

In a recent update, an SMSF expert said that, since 2016, when the full implementation of the restrictive rules surrounding SMSF investments in collectables commenced, there has been a marked reduction in the number of funds holding this class of investment.

“We are now seeing some increased exposure as trustees look for alternative investment options, but I suspect that many are not also considering the restrictions and ongoing administrative ramifications involved,” he said.

Collectables and personal-use assets include artwork, jewellery, antiques, artefacts, coins, stamps, books, memorabilia, wine, cars, bikes, recreational boats and club memberships. Bullion is not included as its value is based on intrinsic weight and purity.

Mr Busoli noted collectables can’t be leased or used by a related party or stored in a private residence of a related party. Funds can only lease them to unrelated parties, so the SMSF can lease artwork to an art gallery provided the gallery is not owned by a related party and the lease is on arm’s length terms.

“If the SMSF owns a vintage car, related parties can’t drive it for any reason — not even for maintenance purposes or to have restoration work done — because this constitutes use of the asset,” he explained.

“Storage must be remote from the trustee’s private residence which includes any part of the land on which it’s situated. So, a vintage car cannot be stored in a purpose-built shed, and a record must be kept of the reasons for deciding where to store the items.”

They must also be insured in the name of the fund. If they constitute only a part of a policy held by another party, they must be specified, and the fund must be noted as the owner and beneficiary. If the fund is unable to insure them appropriately, they must be disposed of.

“Collectables and personal-use assets can be sold to a related party provided the sale is at market price as determined by a qualified, independent valuer, which is a more onerous requirement than for other asset classes,” he explained.

“I suspect that trustees will be less inclined to want to participate in this class of investment when made aware of the rules.”

Source: SMSF Adviser

Covenant pointless for SMSFs?

The imposition of a retirement income strategy on SMSFs under a new covenant will not create any benefit to funds members, but rather generate further costs undermining the intent of the strategy, a legal firm has warned.

Townsend Business and Corporate Lawyers said the federal government’s proposal for every superannuation fund to have a retirement income strategy under the Retirement Income Covenant would be unsuitable for SMSFs, which were only likely to pay it lip service.

The legal firm made the claim in a submission to Treasury in response to a position paper released by Superannuation, Financial Services and the Digital Economy Minister Jane Hume.

The paper stated the covenant will impose a duty for super fund trustees to develop and document a strategy to assist retirement or near retirement age members to maximise their retirement income, manage risks to the sustainability and stability of their retirement income and to provide flexibility in accessing super savings during their retirement.

In claiming the covenant and strategy would not generate any practical benefit to SMSF members, the law firm pointed out limited retirement income options were available to an SMSF.

“The only retirement income stream product which can be issued by SMSFs are account-based pensions,” it said.

“The only means of increasing retirement income is to dial up the pace of capital consumption or the adoption of investment strategies involving greater investment returns at the cost of higher increased investment risk.

“There is no scope for augmenting pension capital by the trustee issuing some form of pooled income stream product – as the membership base of SMSFs is too small for pooled products.”

It added that because pooled retirement income products were unavailable to SMSFs, they operated in a different way to non-SMSFs in ensuring retirement income was sustainable over the long term.

“Longevity risk can only be managed by moderating the pension drawdown rate; investment risk can only be moderated by a weighting towards defensive assets as against growth assets; and selection risk can only be moderated by having a cash component sufficient to support one or two years’ pension payments,” it said.

“The member could purchase, from a third party, a lifetime income stream. However, this is a decision best left to the individual member and their willingness to accept the significant capital cost of such guarantees.

“Finally, it should be noted that the current regulatory design features of account-based pensions are at cross purposes with the sustainability and stability goal set out in the paper and, also, the retirement consumption pattern noted in the Retirement Income Review.

“The age-related and increasing minimum drawdown requirement undermines management of the longevity risk and the requirement to make pension payments in cash rather than in specie asset transfers increases both investment and selection risks.”

It said given these limitations with SMSFs, and the small size of the membership of most funds, there was no scale within the funds for the expense of implementing a strategy on each member’s retirement savings.

“Compliance with the RI (Retirement Income) Covenant will be formalistic at best and the regulator will be required to challenge the performance of the RI Covenant, which will be beyond the regulator’s resources and skills,” it added

Source: smsmagazine.com.au

SMSF Association urges rethink on NALE

The SMSF Association is urging the Federal Government and the Federal Treasury to review the non-arm’s length expenditure (NALE) rules following an ATO ruling handed down last week.

Peter Burgess, Association Deputy CEO/Director of Policy & Education, addressing the organisation’s Technical Summit, says the ATO ruling is the outcome of changes made to the non-arm’s length income (NALI) rules back in 2019, which, “in our considered opinion, could have punitive consequences that we doubt are intended.”

“Today’s ruling confirms the ATO’s draft position that NALE can have a sufficient nexus to all the ordinary and/or statutory income derived by the fund.

“This means situations could arise where an SMSF, which does not incur a general expense on arm’s length terms, would have all its income taxed as non-arm’s length income (NALI) – regardless, it would seem, of the monetary value of the service provided.

“Even though the ruling makes it clear the ATO does not consider the general expenditure issue to be a significant compliance risk that would warrant a particular focus, we urge the Government to review these provisions to avoid any undue concern or confusion.”

Mr Burgess acknowledges the underlying policy rationale of the NALE rules is to ensure all SMSF transactions occur on arm’s length terms.

“Although we accept the underlying policy intent, the penalty imposed on SMSF trustees who may not see the harm in entering arrangements with related parties on favourable terms to their SMSF, can be very significant and grossly disproportionate.”

On a positive note, the ruling does provide several examples of situations where the trustee provides a service to their own fund for no charge that does not result in NALE.

“The ruling provides some wriggle room for SMSF members to provide services to their own SMSF using their own business skills and experience and they don’t need to charge their fund for that service.

“For example, a financial planner who has an SMSF can use their skills and knowledge in formulating an investment strategy for their fund and this service can be provided to their fund without charge.

“Even if they use their business assets in a minor or infrequent way, it will still not be classified as a service they need to charge their SMSF for.

“But the ruling does draw the line at services that can only be provided if the SMSF member holds a particular licence or qualification, or the service is covered by an insurance policy relating to their business”,

“In these instances, the SMSF member is required to charge their fund an arm’s length fee for the service provided, or risk some or all of the fund’s income being taxed as NALI,” Burgess says.

Source: SMSF Association

Trustees more open to advice

The latest sector research has shown the economic instability resulting from the COVID-19 pandemic has seen a shift in attitudes toward financial advice, with SMSF trustees now more open to receiving this type of guidance.

The “Vanguard/Investment Trends 2021 SMSF Investor Report” indicated this change in sentiment toward financial advice had mainly come from SMSF trustees defined as validators – individuals who would like a second opinion to affirm their decisions.

To this end, the study showed 56 per cent of this cohort was now open to receiving financial advice as opposed to 49 per cent expressing this opinion in 2020 and 47 per cent doing the same in 2019.

However, despite an increased interest in seeking financial advice, the report revealed the number of SMSFs using a financial planner fell from 185,000 in 2020 to 160,000 in 2021. Further, funds not currently using a qualified financial planner increased from 220,000 in 2020 to 245,000 in 2021.

SMSFs not engaging the services of a financial adviser nevertheless did identify some specific areas they would like to receive advice on.

“What really comes out strongly are SMSF pension strategies (100,000 funds) …inheritance and estate planning (75,000 funds) and contribution strategies (75,000 funds),” Investment Trends head of research Irene Guiamatsia said during a presentation of the report today.

This finding reflects the renewed priority given to these issues, with around 65,000, 58,000 and 48,000 funds respectively nominating these areas associated with advice gaps in 2020.

“Opportunities remain for advisers to demonstrate the value they can offer SMSFs, especially in areas such as SMSF pension and contribution strategies, as well as estate planning, where there exists an advice gap,” Vanguard Australia head of corporate affairs Robin Bowerman said.

The report was compiled from the results of an online survey conducted between March and April that garnered responses from 2523 trustees.

Source: smsmagazine.com.au

ATO offers interim six-member solution

The ATO has announced an interim solution for the creation of six-member SMSFs as it finalises the necessary changes to the Australian Business Register (ABR) that will allow funds to register more than four members.

The SMSF Association noted the solution being offered by the ATO was due to the Treasury Laws Amendment (Self Managed Superannuation Funds) Bill 2020 only receiving royal assent on 22 June, days before the end of the financial year and when the change took effect from 1 July 2021, despite the draft legislation being introduced into parliament in September 2020.

Updated information added to the ATO’s website in relation to registering an SMSF recommended fund registrations be postponed until the ABR was updated due to potential delays in registering funds or additional members.

Where that was not possible, to begin the process of including additional members, the regulator advised that an SMSF with up to four members should be registered using the existing process.

Afterwards, trustees can then lodge the new members’ details via the Change of Details for superannuation entities form (NAT3036), which is accessible through the ATO’s website.

The SMSF Association stated once this form was processed, the ATO would update its system to allow members to request rollovers into their new SMSF, and when the ABR functions matched the requirements of the new law, an SMSF’s details would be updated on the register and there will be no further action required from trustees.

“With approximately 93 per cent of SMSFs having either one or two members, we remain of the view that these changes are unlikely to affect many SMSFs. However, for the minority that cannot wait any longer, one last administrative hurdle remains,” the association said.

Source: smsmagazine.com.au

NCC bring-forward date confirmed

The Treasury has confirmed how the new bring-forward rules will apply for people aged 65 and 66 on or after 1 July 2020.

Last week, the Treasury Laws Amendment (More Flexible Superannuation) Bill 2020 passed through Parliament and achieved royal assent. The bring-forward measures will amend the Income Tax Assessment Act 1997 to enable individuals aged 65 and 66 to make up to three years of non-concessional superannuation contributions under the bring-forward rule.

In a recent update, the SMSF Association said it received confirmation from the Treasury that the More Flexible Super Bill extends the bring-forward arrangements to people aged 65 and 66 for non-concessional contributions (NCC) made on or after 1 July 2020.

“In this regard, an individual aged 66 who makes a $300,000 NCC today under the bring-forward rule would not breach the NCC cap (subject to their TSB and assuming no other NCC contributions have been made in 2020–21),” the SMSF Association said in a LinkedIn update.

 

“We were pleased to provide this update to SMSF Association members yesterday afternoon, a prompt response based upon member queries about when this measure will commence.”

A recent technical update by Colonial First State also noted that for most clients, there is no urgency to make additional non-concessional contributions before the end of 2020–21, as they can make additional non-concessional contributions in future years. 

However, there are some situations, such as when the client turns 67 in 2020–21, when it may be advantageous to make additional contributions prior to the end of 2020–21, as it is the last year they can trigger the bring-forward rule.

Previously, members under age 65 at any time in a financial year may effectively bring forward up to two years’ worth of non-concessional cap for that income year, allowing them to contribute a greater amount up to $300,000 without exceeding their non-concessional cap. 

Under the new rules, members can trigger a bring-forward period from 2020–21 onwards if they are under age 67 (previously age 65) on 1 July at the start of the relevant financial year.

These changes also complement previous actions by the government to improve flexibility of the retirement system that allowed people aged 65 and 66 to make contributions without meeting the work test.

Source: SMSF Adviser

Bring-forward measures and 6-member SMSF bill passes Parliament

The measures to extend the bring-forward age up to 67 and the bill to increase the number of members allowed in an SMSF have passed both houses of Parliament.

On Thursday, both the Treasury Laws Amendment (Self-Managed Superannuation Funds) Bill 2020 and the Treasury Laws Amendment (More Flexible Superannuation) Bill 2020 passed through the House of Representatives and the Senate.   

The bring-forward measures will amend the Income Tax Assessment Act 1997 to enable individuals aged 65 and 66 to make up to three years of non-concessional superannuation contributions under the bring-forward rule.

Previously, members under age 65 at any time in a financial year may effectively bring forward up to two years’ worth of non-concessional cap for that income year, allowing them to contribute a greater amount up to $300,000 without exceeding their non-concessional cap.

This is known as the “bring-forward rule”. The number of years that may be brought forward into the current financial year is determined by the member’s total superannuation balance at 30 June 2019.

This bill would amend sub-section 292-85(3)(c) of the Income Tax Assessment Act 1997 to allow the bring-forward rule to be used by members under age 67 at any time in a financial year. This amendment would be effective from 1 July 2020 onwards.

This initiative is implemented through three changes where the age at which the work test starts to apply for voluntary concessional and non-concessional superannuation contributions is increased from 65 to 67, the cut-off age for spouse contributions is increased from 70 to 75 and enabling individuals aged 65 and 66 to make up to three years of non-concessional superannuation contributions under the bring-forward rule.

Upon passing the bill, the government had also agreed to two One Nation amendments.

Amendments made by Pauline Hanson’s One Nation party included the removal of excess concessional contributions charge from 1 July 2021 and no deductions for recontributions of amounts withdrawn under COVID-19 early release, where recontribution is made from 1 July 2021 to 30 June 2030.

The removal of excess concessional contributions charge removes the application of an excess concessional contribution charge that applies to any additional tax liabilities that arise due to a member exceeding their concessional contributions in a year, according to Colonial FirstTech.

Meanwhile the re-contribution of COVID 19 early release amounts, would allow a member that released amounts from superannuation under the COVID 19 early release rules to recontribute those amounts without counting towards the non-concessional cap. The amendment also confirmed they cannot be claimed as a tax deduction.

CPA Australia external affairs manager Jane Rennie said allowing members to re-contribute COVID-released super savings will help restore their long-term financial security and mean they are less dependent on government support in retirement.

Another proposed amendment would also increase the cap at which a 15 per cent concessional tax rate applies to superannuation contributions by $5,000 to $32,500 for people aged 67. The cap then increases by $5,000 a year each year until a person turns 71, however this proposal was rejected by the government.

Meanwhile, the six-member bill amends the SIS ActCorporations ActITAA 1997 and SUMLMA to increase the maximum number of allowable members in SMSFs from four to six. This bill also amends provisions that relate to SMSFs and small APRA funds.

These amendments ensure continued alignment with the increased maximum number of members for SMSFs.

The Government said increasing the allowable size of these funds increases choice and flexibility for members. SMSFs are often used by families as a vehicle for controlling their own superannuation savings and investment strategies.

For families with more than four members, currently the only real options are to create two SMSFs (which would incur extra costs) or place their superannuation in a large fund. This change will help large families to include all their family members in their SMSF.

The SMSF Association in its Twitter update that whilst it doesn’t expect this change will lead to a significant increase in the number of SMSFs being established, it will provide greater investment flexibility, choice and lower fees for those in a position to utilise it.

The expansion of members creates different strategic considerations that can be both positive and negative for SMSFs, and preparation will be needed to see if the changes will be a good fit for the SMSF, according to technical specialists.

The amendments apply from the start of the first quarter that commences after the act receives royal assent.

Source: SMSF Adviser