Opinion Archives - Practical Systems Super

Deciding who gets your super after you die? Follow these three steps.

Oct 18,2022 Comments Off

The High Court has spoken. In its decision in Hill v Zuda Pty Ltd, it has given self-managed super fund trustees much-needed clarity around a binding death benefit nomination (BDBN). The debate over how long a BDBN can last has been put to bed – it is indefinite.

The Court’s ruling also gave trustees – and their advisers – greater clarity around reversionary pensions and established that a BDBN can override pension documentation. For trustees, this good news comes with one overriding message – the trust deed is paramount, and they need to ensure it is always up-to-date.

But before going into detail, a quick backgrounder on the High Court case is necessary. [Incidentally, legal minds were puzzled it took on this case considering previous state court decisions were in unanimity on this issue.] A married couple with an SMSF inserted a BDBN in their trust deed in December 2011 to the effect that when one died, the trustee (Zuda Pty Ltd) was to distribute the whole of the deceased member’s balance in the SMSF to the surviving member.

When the husband died in 2016, his biological child (Ms Hill) from another relationship challenged the BDBN on the basis that a notice binding a trustee on how to pay superannuation death benefits expires after three years, arguing that Regulation 6.17A of the Superannuation Industry (Supervision) Regulations 1994 applies to SMSFs. [This regulation stipulates how a super fund member can direct their fund trustee to handle their death benefit. It also says that a BDBN will expire three years after the day it was first signed.]

The High Court begged to differ with Hill, stating this regulation did not apply to an SMSF and dismissed the appeal.

The consequences flow far beyond abolishing the three-year time limit. It means a BDBN can make a pension reversionary mid-stream. It also means a BDBN can override pension documentation, and that has definite benefits for trustees.

Both pension issues have been a source of conflict for the industry for some time.

The ability to add or remove a reversionary beneficiary can often require a pension to be stopped and restarted. This involves some administration and cost and can also trigger unintended consequences. Issues have also arisen where the pension documents have instructions to be reversionary, yet a new BDBN says the benefits are to go to someone else.

This court decision provides clarity that a BDBN can be everlasting and that they can be the ultimate estate planning document, trumping instructions in the pension documents. This provides certainty and clarity on how a member’s benefits are to be dealt on their death. More importantly, the Hill v Zuda case highlights the importance of what your SMSF trust deed says. It is the ultimate law, setting out the rules on what the fund can and cannot do.

Although the court’s ruling has established the primacy of the BDBN, it does not give trustees carte blanche to do what they like with their superannuation death benefits, with the legislation still requiring these benefits to be paid in a prescribed way. In essence, this means it can be paid to your spouse or de facto spouse, any child of the deceased or a person who is dependent on the deceased at the time of their death (interdependency is defined as having a close personal relationship, living together, financial support and/or providing personal care).

For those who want to step outside this legislative stricture and leave their death benefits to someone else, there is an option. They can make their legal representative (executor) their beneficiary, allowing the super proceeds to be distributed according to their wishes via their will. You will need a valid BDBN in place to direct your super into your estate and your will needs to then direct what is to happen to your superannuation benefits. The person’s will alone will not be enough for this to work.

Do look before you leap. Directing your super in this way will mean that your superannuation will be caught up if there are any estate disputes.

Whatever decisions SMSF members decide to take regarding their death benefits, there are some important guidelines to follow:

First, have your trust deed reviewed and, if required, updated. As the court ruling determined, the deed is all important.
Second, ensure there is no conflict between a BDBN and pension reversion documentation. If there is, use a BDBN as the vehicle for dictating your wishes about your death benefits.
Third, always ensure your documentation is up to date, and be prepared to make changes as personal circumstances change. When in doubt, seek professional legal advice. Remember, it’s too late after you have shuffled off this mortal coil.

Opinion piece written by John Maroney, CEO, SMSF Association.

Hottest new super strategies to help your kids and spouse

Aug 23,2022 Comments Off

Recontribution tactics made possible by rule changes are a game changer for older Australians and their families.

The 2021 federal budget introduced sweeping changes to superannuation, most of which have become law. Two changes – removing the work test requirement for non-concessional super contributions for people between 67 and 75 and extending the eligibility for individuals under 75 to make non-concessional contributions using the bring-forward rules – are rewriting the rule book for recontribution strategies relating to estate planning and spouse equalisation.

First, the changes. Under the old rules, the bring-forward arrangements were available only to individuals aged 67 or less. That has been extended to those aged 74 or less on July 1 of a financial year. But no other eligibility requirements to access the bring-forward arrangements have changed.

It means individuals must have a total superannuation balance at the previous June 30 of less than $1.48 million to be eligible for a three-year bring-forward period and can contribute up to $330,000 of non-concessional contributions. Those with balances between $1.48 million and $1.59 million are eligible for a two-year bring-forward period and can contribute up to $220,000 of non-concessional contributions. Individuals with balances between $1.59 million and $1.7 million cannot use the bring-forward rule but can still contribute up to $110,000.

Regarding changes to the work test requirement, it means those aged 67-74 no longer need to meet a work test to be able to contribute to super. Also, there continues to be no work test requirement to receive Super Guarantee or award contributions.

But there is a small catch. For individuals wanting to claim a tax deduction for their personal super contributions, there is no change to the work test definition. This means individuals must work at least 40 hours in 30 consecutive days in the financial year the contribution is made to be able to claim a tax deduction for their personal contribution.

So why are these two changes having such an impact? In simple terms, a recontribution strategy involves a member withdrawing a tax-free amount from their super account, and then recontributing it to their super account as a non-concessional contribution. It typically involves withdrawing an amount from super that comprises a taxable component, or a proportionate amount of taxable and tax-free amount, and then recontributing it as a non-concessional contribution. The result is the taxable component is converted to a tax-free component.

With the work test no longer being a barrier for individuals aged 67-75 making a non-concessional contribution, it means many can use this strategy.

Helping adult kids

Although the taxable and tax-free status of your super benefit may not matter much if you are over 60 (as a lump sum or super pension paid to you after 60 is typically tax-free), it does matter on your death. That’s because super death benefits that are paid to a non-tax dependant (such as an adult, non-financially dependent child), are subject to tax, with tax being deducted from the taxable component of your benefit.

As a recontribution strategy reduces the proportion of your benefit that is classified as a taxable component and increases the proportion that is classified as a tax-free component, it has the effect of reducing the tax that may otherwise be payable when the benefit is paid to a non-tax dependant.

Helping your spouse

Recontribution strategies can also be used to even up balances between spouses. This can be particularly useful if one spouse is getting close to the transfer balance cap and the other spouse is well under their cap. Removing funds from one and adding them to the other can maximise the combined amount that can be transferred to the pension phase when the couple retires.

However, it’s important to note recontribution strategies are subject to the same contribution caps and total superannuation balance limits that normally apply to non-concessional contributions.

It’s also important to be aware of the 75 age limit and whether the recontribution strategy involves the full commutation of an existing pension. If the latter is the case, you will also need to receive at least a pro rata pension payment before the commutation and, if you are receiving the age pension, before implementing the strategy you must consider what impact, if any, it could have on your age pension entitlements.

For SMSF members, if the withdrawal is likely to require the sale of one of more fund assets, it is also important to consider and factor in any potential CGT and other transaction costs such as brokerage and conveyancing costs.

A recontribution strategy can be a powerful estate planning and spouse equalisation strategy, but there can be many traps for the unwary. Seeking professional advice could be the smart option.

Opinion piece written by John Maroney, CEO, SMSF Association.

What the new super rules mean for those aged 67-75

May 26,2022 Comments Off

For self-managed super fund trustees, July 1 will usher in a new era. For the first time, individuals aged between 67 and 75 will no longer need to satisfy a work test to make voluntary super contributions.

Part of a package of superannuation reforms introduced in the federal budget last year and legislated in February, this is designed to give older Australians greater flexibility to top up their superannuation.

This reform acknowledges that many people retiring today have been receiving compulsory superannuation only since 1992. This initiative will allow them to continue making voluntary contributions long after they have retired.

So, what does this mean in practical terms? First, the definition of a “voluntary contribution” is not limited to salary-sacrifice. It can also include small business capital gains tax (CGT) contributions and personal injury contributions, with the former particularly relevant to business owners.

Second, this change has implications for contribution caps. In all the fuss about removing the work test, it is important to remember not to exceed the contribution caps. Otherwise, you may be liable for additional tax on the excess contributions.

These caps continue to apply regardless of your age or employment status. It is also worth noting that if your total superannuation balance is greater than or equal to $1.7 million at June 30, 2022, your non-concessional contributions cap for 2022-23 is zero. That means that if you make any non-concessional contributions in 2022-23, they will be treated as excess non-concessional contributions.

Two options available

If you made excess non-concessional contributions, the ATO will send you a determination explaining that you can either elect to withdraw the excess portion and pay tax on the deemed earnings associated with the excess at your marginal tax rate, including the Medicare levy (option one), or you can retain the excess amount in your fund and pay 47 per cent tax on the entire excess amount (option two) – hardly an enticing option.

Option one is the default if you receive a determination and don’t choose within 60 days because this option attracts the least amount of tax.

Third, it is important to note that contrary to popular belief, the work test has not been completely removed from the legislation. From July 1, individuals between the ages of 67 and 75 will still need to satisfy the work test to be able to claim a member contribution as a tax deduction.

To pass the work test, the member must have been gainfully employed for at least 40 hours over 30 consecutive days in the financial year in which the contribution is made. There is no requirement for the work test to be met before the contribution is made. This means the work test can be met in the same financial year, but after the contribution is made.

Removing the need, regardless of your age or employment status, to satisfy the work test when making voluntary superannuation contributions is arguably the most important superannuation reform from the 2021 federal budget. But there were other changes that also take effect on July 1 that trustees need to be cognisant of and may need to get advice on. Downsizing is probably the most relevant.

The law has been amended to reduce the eligibility age to make downsizer contributions into superannuation from 65 to 60. This change, combined with the proposals regarding the removal of the work test and ability to use the bring-forward rule later in life, will broaden the ability of SMSFs to contribute proceeds to superannuation.

It improves the flexibility for Australians to contribute to their superannuation savings and may encourage people to downsize sooner and increase the supply of family homes.

Remember, too, a downsizer contribution – it’s a one-off, applying only to the family home – does not count towards any of the contribution caps, meaning it can be made even if a person has a total superannuation balance exceeding $1.7 million or if they don’t meet the work test requirements.

In addition, a partner, provided they are 60 or older, can also make downsizer contributions to their own super of up to $300,000 from the sale proceeds even if they are not an owner of the property.

Written by John Maroney, CEO, SMSF Association
First published in the Financial Review on18 May, 2022.

Why poor SMSF planning will leave less for your heirs

May 11,2022 Comments Off

A well-considered estate plan will make life easier for any beneficiaries – the invaluable parting gift.

For self-managed super funds, now numbering around 600,000 and with assets approaching $900 billion, estate planning has never been more important. This is especially the case when the Productivity Commission estimate of a $3.5 trillion wealth transfer over the next 20 years is added to the mix. A sizeable percentage of this $3.5 trillion will reside in SMSFs.

Yet there is often confusion around this important aspect of SMSF planning, especially among trustees who don’t seek specialist advice in what can be a complex issue.

For those who don’t plan properly, the consequences can be disastrous – both for the intended beneficiaries and even the value of the inheritance. The instances where the lack of clear directions have resulted in bitter and costly disputes are well documented.

The result can be lengthy delays in settling an estate, divided families and the potential for higher taxes reducing the size of the inheritance.

The payment of a death benefit from an SMSF is a good example. The benefit needs to be paid as soon as practically possible but to whom? Under super law, a beneficiary includes a spouse (same sex, husband/wife or de facto), children of any age (including ex-nuptial, adopted or step) and any person with whom the person has an interdependency relationship.

The member may have made a death benefit nomination asking the SMSF trustees to pay the benefit to the nominated beneficiaries. Subject to the fund’s trust deed, a death benefit nomination can be either binding or non-binding on the trustees. Regardless of what type of nomination it is, the SMSF trustees must still ensure the nominated beneficiaries are entitled to receive the death benefit under the trust deed and super law.

It is possible for members to nominate that their death benefit be paid to their estate. The SMSF trustee may also choose to pay a member’s death benefit to the estate if the deceased member did not nominate a beneficiary. If the benefit is paid to the deceased member’s estate, the executor of the estate will then distribute the benefit according to the instructions in their will.

Payable as a pension

Then there is the issue of how they are paid. It can be paid as either a lump sum or as a retirement income stream – unless the beneficiary is an adult child of the deceased, in which case the benefit can only be paid as a lump sum. But if the child of the deceased is under 18 or is 18 or over but under 25 and financially dependent on the deceased or is disabled, it can still be paid as a pension.

When a death benefit is paid as a pension, it cannot be paid to an estate. Then there is the issue of reversionary or non-reversionary pensions. With the latter, it ceases being paid on the member’s death, so any remaining pension balance in the deceased’s super account will need to be paid as either a lump sum death benefit and/or as a new pension to the deceased’s dependants (subject to the rules explained earlier).

A reversionary pension, however, enables a dependant (generally a spouse or a child in the circumstances explained earlier) to be nominated to automatically receive the deceased’s super pension. A reversionary nomination makes it clear to the trustee of your super fund who you want to continue receiving your super pension on your death.

Be aware of tax benefits

There is no doubt that a reversionary pension comes with advantages, including giving the member certainty about who will receive their super benefit on their death. It is also a relatively seamless and easy way to transfer your benefit to your dependants and the assets remain in the super system to continue enjoying preferable tax treatment. But there can be a downside such as having a negative impact on social security benefits, and it eventually (12 months after your death) counts towards the transfer balance cap of the recipient of the reversionary pension.

There is also the issue of whether it is better for the death benefit to be paid directly to the beneficiary or the deceased’s estate. If paid directly, it is typically less complicated and a quicker process as there is no need to wait for probate or a letter of administration.

It also has the benefit of not exposing benefits to creditors of the deceased or notable estate claims, and there can be clear direction if there is more than one beneficiary.

Paying the benefit to the estate means there may be tax benefits as the Medicare levy does not apply and, as the benefit has been removed from the superannuation system, there are no knock-on transfer balance cap issues for the recipient of the benefit. If structured correctly, there may also be asset protection and capital preservation benefits.

All this suggests estate planning requires careful thought long before the inevitable occurs, especially as the sums involved are increasing exponentially. The added bonus is that a well-considered estate plan will make life easier for any beneficiaries – the invaluable parting gift.

Written by John Maroney, CEO, SMSF Association.
First published in the Financial Review on 27th April, 2022

Protecting your SMSF assets

Mar 10,2022 Comments Off

It is essential that self-managed superannuation fund trustees make sure that all the accounts and investments are held in the right name. It sounds obvious, but simple oversights can prove costly.

Included in the compliance obligations that apply to SMSFs are eight core trustee covenants. These include a requirement that trustees keep the money and assets of the fund separate from any personal assets. They are also required to act in the best interests of the fund’s beneficiaries and to exercise care, skill and diligence when making investment decisions.

If a covenant is breached, the trustees are at risk of being sued. A beneficiary of the fund who suffers a loss because of the breach can take action to recover those losses. This might not seem to be an issue for couples in an SMSF. However, in the event of a divorce, or on the death of a member, things can change. The beneficiaries of a deceased member may become an aggrieved party if things go wrong.

As a rule, the assets in your SMSF are protected from your creditors. For that protection to work, SMSF trustees must ensure that the accounts and investments of the fund are held in the correct name.

Where the fund has individual trustees, purchase contracts and assets must be held in the name of all the individual trustees as trustees for the super fund. Similarly, where a company is used, the assets must be held in the name of the company as trustee for the super fund.

Any time there is a change of trustee, it is important to ensure all the fund’s bank accounts and investments are updated. For bank accounts, often a new account will be required.

Any time an asset is acquired by the SMSF, the documentation must note the change of ownership and record the change of name or title. This includes where a member makes an in-specie contribution. In-specie contributions are where a contribution is made to the fund by transferring personal investments rather than depositing cash. Use of this strategy is restricted to specific types of assets and includes listed shares and business real property.

Changing the asset title can be overlooked where the SMSF has individual trustees. One common misunderstanding is where an asset is held personally, and the individuals are also trustees of the SMSF, that no further action is required.

Trustees must ensure that the appropriate contracts and transfer documents are completed. These must clearly show the change in ownership to the SMSF. Where property is concerned, stamp duty may also apply.

In WA, land titles only record the name of the trustees. The SMSF’s name will not appear on the certificate of title with Landgate. It is therefore important that documents such as a declaration of trust and caveats are put in place to register and protect the SMSF’s interests.

It is important that appropriate legal advice is obtained to ensure that all the essential documents are put in place, stamped (if applicable) and registered.

A recent case in WA highlighted several key issues surrounding the separation of personal and SMSF assets. These included the importance of not mixing super fund monies with personal proceeds and getting the documentation and registered name for the investment right. The court noted that minutes alone are insufficient. Further, registering the SMSF’s tax file number with a share registry or changing an account “nickname” in an online banking facility does not change the ownership of those assets.

It is essential that self-managed superannuation fund trustees make sure that all the accounts and investments are held in the right name. It sounds obvious, but simple oversights can prove costly.

Any time there is a change of trustee, it is important to ensure all the fund’s bank accounts and investments are updated. For bank accounts, often a new account will be required.

News of the cheques follows inquiries to Brookfield by Your Money after readers made contact about payments received from a share buyback program conducted by the infrastructure giant late last year.

It is important that appropriate legal advice is obtained to ensure that all the essential documents are put in place, stamped (if applicable) and registered.

In this case, several bank accounts, an online share trading account and several investment properties were held personally in the name of a member. These assets were of notable value and represented a significant value of the fund. The couple’s bankruptcy trustee sought to claim these assets for creditors and was successful.

The judge noted that while the “family nature” of an SMSF might suggest a less strict approach, the law imposes strict compliance obligations on trustees.

When it comes to your SMSF, details matter. So, what’s in a name means everything.

Written by Tracey Scotchbrook, SMSF Association

Common SMSF trustee mistakes that will trigger ATO action

Jan 28,2022 Comments Off

The Australian Taxation Office takes a dim view of non-compliance – penalties range from fines to freezing the fund’s assets.

While most self-managed super fund trustees don’t need to be reminded of the importance of complying with superannuation regulations, it’s worth looking at typical SMSF trustee contraventions and the penalties they attract.

The Australian Taxation Office takes a dim view of non-compliance: penalties range from an education directive to fines or, in more serious cases, to disqualification, imposition of civil or criminal penalties, the withdrawal of a fund’s compliance status, or freezing its assets.

No one pretends the regulatory system is simple. If it were, every inquiry into superannuation wouldn’t call for its overhaul to reduce complexity. But even with this degree of complexity, the latest annual ATO SMSF statistical overview to June 30, 2020 shows there were only about 2 per cent of SMSFs with reported breaches, a figure in line with the historical average.

Recurring areas of non-compliance

That said, given there are about 600,000 SMSFs, 2 per cent is still too high. The ATO overview highlights there are recurring areas of non-compliance where trustees – and their advisers – need to take greater care. Heading the list are breaches relating to in-house assets, separation of assets and loans or financial assistance to a member or relative.

A breach of the in-house asset rules commonly occurs when an SMSF invests in a related entity or leases an asset that is not a business premises to a related entity. Although an SMSF can hold in-house assets, the value of in-house assets cannot exceed 5 per cent of the market value of the fund’s total assets.

Breaches of the in-house asset rules and the rules around providing loans and financial assistance to members or relatives can result in an administrative penalty of up to 60 penalty units. Each penalty unit is worth $222 so the maximum administrative penalty that can be applied is $13,320 (note the value of a penalty unit is indexed over time).

That’s the strict letter of the law. But the ATO has the discretion to reduce a penalty depending wholly or partially on each case’s circumstances. Whether the regulator chooses to do so depends on several factors:

The compliance history of the trustee or director of a corporate trustee
Whether rectification has occurred, or the trustee is in the process of rectifying before being notified of a breach by the ATO

Whether a trustee made a voluntary disclosure before any ATO contact and

Whether there were circumstances beyond the trustee’s control that caused the contravention, affected their ability to comply with their regulatory obligations, or affected their capacity to rectify any contraventions.

For trustees who overstep the regulatory mark, it’s worth appreciating what the penalties could be. At the bottom end of the scale, the ATO can direct trustees to do an education course to improve their understanding of the regulatory obligations and reduce the risk of greater penalties in the future. Failure to comply with an education direction will incur an administrative penalty of five units.

Also at the lower end of the penalty scale are enforceable undertakings and rectification directions. With the former, trustees undertake to rectify a regulatory contravention. The ATO has the option to either accept or refuse this undertaking. It should include a commitment not to make the same mistake again, to outline the action being taken to rectify the problem and the timeframe in which it will be done.

The ATO requires trustees to take steps to rectify a contravention in a set time and then show proof of compliance.

With a rectification direction, the ATO requires trustees to take steps to rectify a contravention in a set time and then show proof of compliance. It also involves putting in place administrative arrangements to ensure there are no more similar contraventions. Failure to comply with an ATO direction can result in a trustee or director being disqualified or a fund’s complying status being removed, potentially resulting in a significant tax penalty.

Regarding administrative penalties, these cannot be paid or reimbursed from the assets of the fund, and directors of corporate trustees are jointly and severally liable. Individual trustees are each liable for the penalty and, as mentioned, the ATO does have the discretion to remit a penalty depending on a case’s circumstances.

Enforceable undertakings, rectification directions and administrative penalties comprise the bulk of the ATO’s compliance armoury. But it has other options. It can disqualify an individual from acting as a trustee or director of a corporate trustee if they contravene the SIS Act. In taking this action, the regulator considers the seriousness of the contravention, how often it has happened and how likely it is this behaviour will continue.

The ATO can also apply through the courts for civil or criminal penalties to be imposed where trustees have contravened provisions such as the sole purpose test, member loans, inhouse asset rules, arm’s-length rules for an investment and the promotion of illegal early release schemes. Other options are for the ATO to wind up an SMSF and roll over any remaining benefits to a fund regulated by the Australian Prudential Regulation Authority, to issue a notice of non-compliance (which can entail significant tax penalties) or freeze an SMSF’s assets.

Superannuation rules are complex and subject to constant change. To keep your SMSF on track, and avoid unwanted ATO attention, seek advice from a licensed professional who is an SMSF specialist.

Written by John Maroney, CEO, SMSF Association

What’s ahead for SMSF trustees in 2022

Jan 13,2022 Comments Off

An election year means super reforms could be scrapped with more changes on the cards if there is a change in government.

Election years are always fraught with potential superannuation changes, but in 2022 this looks set to be magnified by important super changes that were stalled in Parliament. There is still a possibility Parliament might pass the relevant bills early next year, but with few parliamentary sitting days before the election likely to be called, no one is holding their breath.

The sector was eagerly awaiting the passing of legislation – titled the Treasury Laws Amendment (Enhancing superannuation outcomes for Australians and helping Australian businesses invest) Bill 2021 – which, among other changes, provides greater flexibility for older Australians to contribute to superannuation.

Announced in the 2021 federal budget, these changes were set to start from July 1, 2022. They include removing the work test for non-concessional super contributions for those aged 67 to 74 (meaning they will no longer have to meet the work test when making non-concessional contributions) and, subject to meeting the eligibility requirements, extending the bring-forward non-concessional contribution rules for this same age group.

The government also wants to lower the age for downsizer contributions from 65 to 60 from July 1, 2022. For SMSF members nearing retirement, it will allow them to make a one-off, post-tax contribution of up to $300,000 per person (or $600,000 per couple) on the sale of a family home they have occupied continuously for a decade.

These reforms were not exclusive to the SMSF sector. But undoubtedly that is where they will have the biggest impact.

But for now, it’s all up in the air – and not only for these big reforms. There are some lesser known SMSF changes also announced in the 2021 budget that have not even been introduced into Parliament.

Included are the changes to the SMSF residency rules and a two-year amnesty for legacy pensions. The former will allow SMSF members to continue to contribute to their SMSF while temporarily overseas. Under the current rules, contributions are prohibited unless a complex active member test is satisfied.

The changes to legacy pensions are designed to simplify the retirement system by allowing super fund members in older complex pension products to move to more flexible, contemporary income streams.

No guarantees on timing

What compounds the uncertainty for SMSFs is that even if the legislation is introduced into Parliament before the election is called, it will lapse if it is not passed before the poll is called. It will then need to be re-introduced into the new Parliament or possibly scrapped if there is a change in government.

Even with a re-elected Coalition government there are no guarantees where these reforms will be in the legislative queue.

If Labor wins, changes in superannuation policy are almost inevitable. A tightening of the contribution caps and a lowering of the Division 293 income threshold for taxing super contributions might be on the cards if Labor’s previous super policy is anything to go by. The abolition of new limited recourse borrowing arrangements (LRBAs), now totalling $59 billion at June 30, 2021, is another possibility.

Irrespective of which party wins the election, there will be a new requirement for company directors, including all existing directors of an SMSF corporate trustee, to obtain a director ID by November 30, 2022, and new compulsory electronic data transmission rules to contend with for SMSFs rolling over funds to and from other funds.

That’s all on the regulatory front. It’s anyone’s guess what will happen with investment markets in 2022, with each new COVID-19 variant having the potential to unnerve markets. Although equity markets, in particular, recovered strongly in 2020 after the initial crash, past performance is never any guarantee of what will happen tomorrow. Volatility looks set to be the name of the game in 2022.

With so much uncertainty on the horizon, it has never been more important to seek advice from an SMSF specialist adviser. Whether you are contemplating setting up an SMSF, or you already have a DIY fund, an SMSF specialist adviser who is licensed to provide professional advice can provide valuable and timely information about the changes and their potential impact on your retirement planning strategies.

Amid all this uncertainty, one thing looks certain: the SMSF sector will continue growing strongly, with the number of funds expected to surge past 600,000 for the first time and the number of SMSF investors expected to surpass 1.13 million.

SMSFs are not an appropriate or preferred retirement savings vehicle for everyone, but it seems the more unpredictable super becomes, the greater the appeal for individuals to manage their own retirement savings and retirement income strategies.

Written by John Maroney, CEO, SMSF Association

Who is the expert steering your SMSF?

Oct 15,2021 Comments Off

If you’re not across non-arm’s length expenditure rules or whether a six-member fund would suit you, it’s probably time you got specialist advice.

While the Productivity Commission’s major report into super in 2018 focused on Australian Prudential Regulation Authority-regulated funds, there were two important findings about self-managed super funds.

First, SMSF members, along with those approaching retirement or with higher balances, were more engaged with their superannuation. Second, the quality of financial advice provided to some super fund members – including those with SMSFs – was questionable and often conflicted.

To quote the PC, “the need for information and affordable, credible and impartial financial advice for retirees will increase as retirement balances grow with a maturing system and given the rising diversity and complexity of retirement products”.

These are telling comments. The PC is saying that SMSF members are engaged with their super – but often can’t get the advice they often sorely need. Yet considering SMSF members total more than 1.1 million, the number of funds is about 600,000 and assets at June 30, 2021 stood at $822 billion, clearly there is an imperative for them to be able to do so.

Certainly, the PC thought so, making the following recommendation: “The Australian government should require specialist training for persons providing advice to set up an SMSF; require persons providing advice to set up an SMSF to give prospective SMSF trustees a document outlining ASIC’s (Australian Securities and Investments Commission) ‘red flags’ before establishment; and extend the proposed product design and distribution obligations to SMSF establishment.”

Three years later, the need for this advice has only grown. The legislation underpinning SMSFs is more complex (including temporary changes because of COVID-19) and, as trustees well know, is subject to constant change. This is why it’s critical that advisers providing SMSF advice have specific SMSF competencies.

Disagreement in numbers

To take three recent examples, the proposed introduction of a retirement income covenant, the Australian Taxation Office’s non-arm’s length expenditure (NALE) ruling and the increase in the maximum number of SMSF members from four to six are all timely reminders of the need for SMSF specialist advice – and why the PC’s recommendation has never been more relevant.

Being able to transact with related parties is one of the attractions of SMSFs – whether it be acquiring a business premise from a related party that is then leased back to a related party, doing your own fund’s bookkeeping or investing in related entities within the confines of the legislation.

Many funds have such transactions, explaining why they need to be fully cognisant of the latest ATO ruling on NALE after changes to the non-arm’s length income rules in 2019. Failure to do so can result in the imposition of significant tax penalties, with some or all of a fund’s income being taxed at 45 per cent.

On the issue of the recent increase in the maximum allowable number of SMSF members from four to six, it might sound like a great idea, but there are risks. For example, more decision makers around the table is likely to lead to more disagreements.

Before adding new members, consideration must be given to how any decisions will be made and whether enduring powers of attorney should be put in place to reduce the likelihood of disputes. In these circumstances, an SMSF specialist adviser is well-placed to tailor an outcome specific to a fund’s situation.

Including as a potential problem the proposed introduction of the retirement income covenant (which aims to increase member engagement with their superannuation and retirement planning) might seem odd considering SMSFs have been specifically excluded from the legislation.

But the absence of a legal requirement doesn’t mean SMSFs shouldn’t consider the retirement needs of their members and retirement products in the market – and this will be difficult to do without specialist SMSF advice.

This advice could include:

Developing specific drawdown patterns that provide higher incomes in retirement;
Providing tools such as expenditure calculators to identify income and capital needs over time;
Providing information about key retirement topics, such as eligibility for the age pension, the concept of drawing down capital as a form of income or the different types of income streams available; and
Providing guidance to beneficiaries early in accumulation about potential income in retirement through superannuation calculators or retirement estimates.

In its report, the Retirement Income Review said a simplification of the superannuation system should be a policy imperative. It’s a motherhood statement that everyone concurs with. The only problem is that most legislative and regulatory changes tend to add complexity to the system, making it progressively more difficult for SMSFs to navigate the system. Specialist advice would seem one way to stay inside the regulatory fence and avoid the onerous penalties that can befall those who stray outside.

Opinion piece written by John Maroney, CEO, SMSF Association.
First published in the Financial Review on 5th October, 2021

NALI, CGT & ECPI

May 11,2021 Comments Off

Over the past few years, the SMSF industry has been heavily focused on the application of the new non arm’s length expenditure rules and working with the ATO to ensure the application of these rules to general expenses is pragmatic and does not result in a disproportionate tax outcome.

Yes, these are big issues for the industry and the SMSF Association continues to strongly advocate for more clarity, however they can overshadow other, equally important issues such as the interaction of the non-arm’s length income (NALI) rules with the capital gains tax (CGT) and exempt current pension income (ECPI) provisions.

Many just presume that a non-arm’s length capital gain is intended to cause NALI, even if the gain relates to an asset supporting a retirement phase income stream. This view is correct from 1 July 2021, however due to a technical deficiency in the law, the law does not currently operate this way for SMSFs with segregated pension assets (i.e. where specific assets of the fund are set aside to fund one or more retirement phase income streams).

Here’s where it starts to get technical so we will try to keep it as simple as possible.

The ordinary and statutory income an SMSF earns from assets held to support retirement phase income streams is exempt from income tax unless it is NALI.

The technical deficiency is that NALI only applies to ordinary income or statutory income and a capital gain per se, is neither ordinary income nor statutory income. However, a net capital gain is statutory income and so only a net capital gain can be NALI.

However, before a capital gain can become a net capital gain, a number of provisions operate. One such provision is s118‑320 of the ITAA97, which states that if the gain is made from a segregated current pension asset the gain is simply disregarded. Therefore, if the gain is disregarded, it cannot become a net capital gain and it cannot become statutory income. Ultimately, it cannot become NALI.

On 17 December 2020, Treasury Laws Amendment (2020 Measures No. 6) Act 2020 (Cth) received Royal Assent to amend this defect in the law. Subsection 118-320(2) was introduced to ensure that non-arm’s length capital gains in relation to segregated current pension assets are no longer disregarded and are treated as NALI.

Not only is the technical issue complex but there was also confusion relating to the date of effect of the new provision. If you are like many and rely on legislation websites such as https://www.austlii.edu.au/ or https://www.legislation.gov.au/, the amendment is already showing as being operative so you would think that a non-arm’s length capital gain made from a segregated current pension asset currently causes NALI. On the other hand, if you refer to the relevant explanatory material, you would conclude that the new provision only has effect from 1 July 2021.

So which one is it? In determining the date of effect, the SMSF Association sought clarification from the ATO and has received confirmation that s118-320(2) applies from the 2021-22 income year.

Effectively, this means that if a non-arm’s length capital gain is made by a segregated current pension asset before 1 July 2021, it does not cause NALI. If a non-arm’s length capital gain is made by a segregated current pension asset on or after 1 July 2021, it does cause NALI.

Let’s look at an example

A number of years ago, an SMSF acquired an asset on non-arm’s length terms. More specifically, the asset’s market value was $500,000 but the SMSF only paid $300,000.

The SMSF is fully being used to pay an account-based pension and the asset is a segregated current pension asset. On 22 April 2021, the SMSF signs a contract to sell the asset. The capital gain is disregarded and is not NALI.

However, if the SMSF signs a contract to sell the asset on or after 1 July 2021, the capital gain would not be disregarded and thus would cause NALI.

So, from 1 July 2021, where an asset has been impacted by the NALI provisions, any net capital gain will be taxed as part of the fund’s NALI component at the highest marginal rate. This includes, SMSFs that are paying a retirement phase income stream to one or more members, regardless of whether the fund is using the segregated or proportionate method to calculate their exempt income.

Naturally, in addition to non-arm’s length income, there are other issues that should still be considered, including:

general anti-avoidance provisions (ie, part IVA);
deemed contributions and excess contributions tax;
promoter penalty laws; and
SIS regulatory issues (eg, arm’s length rules etc).

Understanding the interaction of the NALI, CGT and ECPI provisions is complex at the best of times. Add a layer of uncertainty in relation to deficient law and it highlights the importance of seeking specialist advice to ensure other super and tax laws are not at risk of being breached.

Written by Mary Simmons, Technical Manager, SMSF Association

SMSFs with collectables need to read the fine print

May 7,2021 Comments Off

Got art, jewellery or cars in your collection? Watch out how they’re insured, where you store them and who uses them.

The rules around the holding of collectables and personal-use assets owned by self-managed super funds are quite straightforward – and have been for more than a decade. Yet confusion still reigns, especially with insurance.

Since July 1, 2011, the rules have required trustees of SMSFs to insure these assets within seven days of acquiring them in the name of the fund. The only exceptions are memberships of sporting or social clubs – and yes, these can be owned by SMSFs.

Unlike other forms of insurance, it’s not optional. The Australian Taxation Office wants the items to be insured to “protect” the fund’s assets and therefore the members’ retirement benefits. So, in case of a mishap where the asset is damaged, the fund is not financially exposed.

The ATO also insists the insurance is in the fund’s name to ensure assets are kept separately from the trustee’s other assets, thereby giving the process more transparency and greater integrity.

It all seems quite simple. Yet it’s surprising how much confusion still surrounds the insuring of collectables and personal-use assets, particularly from an audit perspective.

Written by John Maroney, CEO, SMSF Association

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