With 30 June fast approaching, time is running out to make any last super contributions before a raft of important rule changes from 1 July 2017.
From 1 July 2017, the concessional (deductible) contributions cap is reducing to $25,000 for everyone. Previously, it was $35,000 for people 49 years and older at the end of the previous financial year and $30,000 for everyone else. These caps include Super Guarantee employer contributions and salary sacrifice. If you are self-employed and looking to maximise your contributions for this financial year, so it’s important to check what concessional contributions have been made to all your super funds from 1 July 2016 to ensure you are not in excess.
Maximising the non-concessional bring forward rules
Non-concessional contributions are made after-tax where no deduction is made. Under the current rules, these contributions can be made at $180,000 per year or 3 years at once brought forward to $540,000.
From 1 July 2017, the annual non-concessional contribution cap will be reduced from $180,000 to $100,000 per year. This will remain available to individuals aged between 65 and 74 years old if they meet the work test.
If you have triggered the bring-forward period in 2015–16 or 2016–17 but you have not fully used your bring-forward amount before 1 July 2017, transitional arrangements will apply. This means that the maximum amount of bring-forward available will reflect the reduced annual contribution caps. Note that your maximum bring-forward amount in 2016–17 has not changed. It is still $540,000 if you have not triggered the bring-forward rules in 2014–15 or 2015–16. Besides any large lumps sum non-concessional contributions, it is important to take into account any smaller contributions that may have been made over the past 3 years (eg. To qualify the Government co-contribution), which will form part of the cap.
From 1 July 2017, your non-concessional cap will be nil for a financial year if you have a total superannuation balance greater than or equal to $1.6 million. In this case, if you make non-concessional contributions in that year, they will be excess non-concessional contributions.
Those looking to qualify for the Government Co-contribution should look to make a non-concessional contribution before 30 June 3017.
To receive the maximum co-contribution of $500 you must contribute $1,000 of after-tax money and earn less than $36,021 during the 2016/17 financial year. If your income is greater than $36,021, the maximum entitlement will gradually reduce to zero at $51,021 per year. Age and work tests apply to those between age 65 and 71.
Minimum account based pension payments
For those people with Self Managed Super funds who are drawing an account based pension, remember to make the minimum age-based pension payment before 30 June. Failure to do so may mean losing the tax-free earning status within the fund.
We strongly recommend seeking advice before making any ad-hoc contributions to super to ensure it is appropriate to your situation.
Bob Budrieka has again been quoted as a subject matter expert in a recent Daily Telegraph article highlighting how improper use of your super fund can result in a big fine or even a prison sentence.
Large penalties for misuse of SMSF
Anthony Kean reports that “SELF-managed super funds are being illegally used to pay household bills, lend money to family members and even buy groceries.” Those who break strict super rules are risking hefty tax penalties: $10,000-plus fines and potentially jail.
Planning for Prosperity senior adviser Bob Budreika said it was common for people with several online banking accounts to accidentally use their SMSF account for personal spending, or deliberately withdraw money without realising the potential penalties.
“They see it like a business and think ‘I will pull the money out and just pay it back later’,” he said.
“Many people treat the legislation with disrespect.”
WHAT YOU CAN’T DO WITH A SMSF
Pay personal expenses
Lend money to yourself or a relative
Buy a holiday home
Use an SMSF as bank account for business or household transactions
Buy real estate from yourself or a relative
Rent a property to a relative
Buy art or other collectibles to display in your home
Withdraw money before retirement
The ATO and SMSF
The ATO are very clear on your responsibilities as an SMSF operator. Read more here
Here is an informational video from the Australian Tax Office on this subject:
Some of you may have heard in the news about the Government having an inquiry into our financial system – aptly called the Financial System Inquiry or FSI for short. The purpose of this inquiry, led by David Murray, was to establish a direction for the future of our financial system by laying out a blueprint over the next decade. The inquiry then produced a big fat report with a list of recommendations for the Government to implement. After 12 months from the report release date, the Government has formally responded with the recommendations it has endorsed.
Report Suggests Ban SMSF Borrowing
One of the most contentious recommendations from the report was to ban limited recourse borrowing within Self Managed Super Funds (SMSFs).
For those who are unaware, SMSFs have been able to borrow to purchase assets, such as residential and business real property. The term ‘limited recourse’ simply means that the loan is secured against the asset being purchased and is contained within the super fund (in a special trust). If the loan defaults, the lender’s rights are limited to the asset held in the separate trust. This means there is no recourse to the other assets held in the super fund.
FSI Concerned by SMSF Uptake Impact
The FSI report was concerned that the growth in super funds borrowing could increase risk to the financial system. More specifically, they noted the amount of borrowing within super funds has increased by over 18 times during the past 5 years. While there are valid arguments for why borrowing in super should be banned (for example, it has contributed partly towards house price unaffordability), we believe this blanket recommendation to ban borrowing in super would be bad news for farmers and small business owners who wish to expand their businesses by purchasing more land or property. We have found this to be a very popular strategy for new and existing clients on the Eyre Peninsula, particularly during above average seasons where tax has been a problem. In short, the SMSF arranges a loan to purchase the land and leases it to the farm. Tax deductible contributions and lease payments are then made into the SMSF, which are used to repay the loan.
Govt Rejects SMSF Borrowing Recommendation
Fortunately, for our farming and small business clients, the Government rejected this recommendation and has allowed limited recourse borrowing in super to continue. As a note of caution, they are planning on reviewing this decision in three years’ time. If the rules did happen to change at that point, we would hope that existing arrangements become grandfathered.
When the inquiry talks about risks to the financial system, we believe that using one’s super to grow their business is quite different and much lower risk when compared to the many eager property spruikers who are keen sell investment properties to naïve mums and dads. It is certainly not a ‘get rich quick’ scheme that suits everyone.
In my earlier posts Divorce and Self Managed Super Fund – Part 1 and Part 2 I have described two potential situations that could eventuate if you decide to split with your spouse with whom you share a Self Managed Super Fund. From the beginning, those are:
to do nothing and keep operating the super fund with that person and pretend as if nothing happened or
one person rolls their money out and the other keeps it going.
My final and perhaps most obvious remaining option is winding up the SMSF
Winding up the SMSF
Closing or winding up the super fund implies that each spouse goes their separate ways and member balances are rolled over to new super funds. The basic process involves:
Realise or value all assets (keep in mind that illiquid assets such as term deposits or property could hold the process up)
Pay any outstanding fund expenses
Adjust the member accounts accordingly (including any super splitting)
Roll out member benefits
Address any residual liabilities and payments
Make any final distributions
An important thing to remember is the requirements to retain records after the fund has been wound up. The table below outlines how long each record needs to be kept.
This also poses the question as to which person will be responsible for keeping these records and whether ex-spouses would trust one another to do this.
My previous post explored some of the things to be aware of if you decide to keep a SMSF running with your ex-spouse. This next topic also looks keeping the fund open with one member.
Retaining the SMSF with one member
One member may opt to keep the fund running while the other decides to roll their balance out to an alternative super fund. Firstly, for this to occur there needs to be enough cash or liquid assets that can be sold in order to release the necessary funds. This becomes a particular problem if the fund is invested in a lumpy asset, such as a fixed term deposit or investment property. In the latter case, the property may need to be sold, which could incur fees and capital gains tax. Keep in mind that if a property was bought by pooling together two people’s super balances – and one of those members decides to leave, it may not be viable to keep the property any way.
An important point to note is that super monies are able to be split as part of a settlement, so the amount a member eventually rolls out or ends up with may not necessarily be the balance they started with.
Before any money should exit the fund, special consideration needs to be given to the type of trustee in operation (individual or corporate) and whether any changes will need to be made. This matters particularly if the fund will be left with just one member. To satisfy as a single member fund, either a corporate trustee must be installed with the remaining member as sole director – or if an individual trustee, another non-member trustee must be brought in. This can get complicated for most people so it’s vital to seek advice before any changes are made.
Assuming the fund has liquid assets to sell and a plan has been put in place to ensure the SMSF can continue with one member, the next important issue is ensuring that the exiting member actually exits the fund properly. Unlike an APRA fund (such as a retail or industry super fund), which automatically closes when you roll your money out, a Self Managed Super Fund requires you to resign as a member and trustee. A member of a SMSF with a $0 account balance still has the same roles and responsibilities as anyone else in the fund. This risk cuts both ways for the remaining member and the newly exited member so it’s important that this process is completed in entirety for everyone’s peace of mind.
As the boom of new Self Managed Super Funds (SMSF) continues, many will face a time when the once seemingly perfect retirement savings vehicle turns out to be a headache. In all likelihood this would arise from any number of complications around remaining compliant with the strict rules that fall on members and trustees. One other instance is when a de-facto or married couple split up. In this situation the newly single members have several few options, depending on their circumstances and nature of the relationship. The next few articles will explore some of these options to highlight what is involved and what to look out for if you find yourself in this situation.
Keeping the SMSF with both members
The default option if nothing else has been decided upon is to do nothing and both remain as members of the super fund. This is a highly unlikely solution, particularly if the relationship has broken down, but the fund will remain compliant.
The downside to common SMSF members who have split from each other but choose to remain in the same fund is that it becomes extremely messy. The ATO still requires you to have trustee meetings with minutes on all decisions and documents to be signed. This is quite difficult if the situation is volatile and all communication has broken down.
Even though all members of the fund are equally responsible and liable in maintaining the fund, it is not uncommon for these duties to be looked after by one of the members. In this scenario, the ‘controlling’ member may not feel comfortable doing this work any longer for their ex-partner. Alternatively, the other member who has (up until that point) relied upon their partner to keep everything up-to-date is often left playing catch up with no understanding of what has been done or what is required going forward. In short, this is a bad option and obviously should be avoided. Relationship breakdowns are horrible experiences to go through on their own without the ATO breathing down your neck.
Last week I attended an annual conference for participants in the self managed superannuation industry. This is an area that we specialise in so keeping abreast of changes is of great importance to us.
While many of the sessions focused on legal, legislative, tax and industry issues, there was a speaker who discussed the vital role of industry professionals that provide advice and service to those people and families who operate self managed super funds. He stated a point that really made good sense to me, which I’d like to share with you.
One of his key points was around ‘acting in clients’ best interests.’ For those who aren’t aware, there was a raft of legislation passed through Parliament last year by the Labor Government that focused on roles of the financial planning industry. It was given the abbreviated title of FOFA which stands for the Future of Financial Advice in Australia. The legislation was in direct response to the collapse of several major financial institutions including Trio, Westpoint and Storm. With the change in Government late last year, there has been a review of the legislation and it seems that their intent is to ‘water down’ it down.
One of the amendments the Government is seeking to change is around financial planners having to abide by ‘acting in a client’s best interests.’ You might wonder why this is on the Government’s agenda when it seems that this is what you’d expect from someone who is providing financial advice.
The difficulty, it seems, is in legally clearly defining what this means and how it would be enforceable. Back to the speaker who was discussing this subject. He said that it doesn’t matter if the legislation is passed or not because for the financial planning industry to be recognised as a credible profession and trustworthy provider of advice, it must always act in the clients best interests. Exactly. His comments resonated with me. Financial advice is very different to most other advice service industries because it’s very difficult to know if the advice you are getting is in your best interests.
This brings me onto another legal requirement of financial planners and which dove tails with ‘acting in your best interests.’ This requirement is known as ‘know your client’ rule and has been around for many years. The purpose of this rule is that in order to provide advice you must know your client – and this can only be achieved when you have asked questions and gathered all the relevant information. This then forms the foundation and basis for recommendations that clients should be able to rely and act upon. Quality financial advice is based on understanding the client, defining the objectives or outcomes they are seeking and then providing strategies and solutions that are meaningful and in their best interests.
In other articles I’ve written about buying land through superannuation, the focus has been on the huge savings in tax. While this is a motivating factor and good reason to use this strategy, it’s not the only major advantage.
There’s an old adage that says ‘only buy investments you understand.’ For a farmer who is looking to buy land this makes perfect sense. Why? Because they get to choose their investment and act as their own investment manager.
Farm land is an asset they know, trust and understand. In addition, they get to use the land in their business. When you combine this with the significant tax advantages of superannuation, it’s a win win outcome. There’s no doubt that making investment decisions like this gives greater confidence, meaning and peace of mind.
Some of the most influential reasons for operating your own super fund (SMSF) is that it provides greater flexibility and investment choice. This is what makes a self managed fund so attractive and exciting.
What’s often over looked though are the regulatory and compliance requirements which come with managing your fund. Breaching these legal requirements can be quite onerous and is the sole responsibility of the fund trustees. The key compliance areas relating to investments include:
Meeting the ‘Sole Purpose Test’
In-house asset rules
Conducting all transactions at arm’s length
The prohibition of acquiring assets from related parties (unless real business property)
No financial assistance or benefits to fund members and their relatives
The primary reason why the regulators have in-forced legislation around superannuation investment restrictions is because superannuation is designed to provide retirement benefits. The thinking behind this is that getting tax advantages from superannuation now could disadvantage the final result at retirement. Perhaps this is where sound professional advice and support could make a meaningful difference in operating an effective and compliant retirement fund.
From our experience most people don’t take an active role in their superannuation because it is ‘out of sight, out of mind.’ We know this isn’t done intentionally and is really a consequence of our way of life.
There’s always too much to do and just not enough time to get everything done. Also superannuation is seen as complex and something that’s for the future so generally there is less urgency and importance when compared to other investments.This is quite sad because not being aware of the unbelievable benefits of time and compounding can disadvantage an investor and we all know you can’t bring back time.
We’ve found that when people take a greater interest in their investments they become more passionate and committed to their strategy. This is why for some people a self managed super fund is an ideal wealth creation tool. They have control and make decisions that are in their best interests. This isn’t to say that their investments will return a better result than retail or industry funds but there is greater satisfaction and confidence because they are taking responsibility for their future.
Operating your own fund is not suitable for everyone and you should own go down this path once you are aware of the pros and cons. Ultimately, the basis of any investment or strategy decision should be based on your objectives and what you want to achieve.
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This information is of a general nature only and neither represents nor is intended to be specific advice on any particular matter. We strongly suggest that no person should act specifically on the basis of the information contained herein but should seek appropriate professional advice based upon their own personal circumstances. You should read the PDS and consider whether the product/s is right for you. Past performance is not a reliable indicator of future performance.
Strategic Advice Solutions Pty Ltd (ABN 86 619 221 662) t/as Planning for Prosperity is a Corporate Authorised Representative of Infocus Securities Australia Pty Ltd (ABN 47 097 797 049) AFSL and Australian Credit Licence No. 236523