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Heffron's experts provide a regular stream of thoughts, hints, tid-bits and technical articles to the SMSF industry at large. You can find these below.

The Audit Report for my SMSF has been qualified.  What does that mean?  Should I be worried?

All SMSFs trustees are required to appoint an approved auditor to audit the operations of their fund each year.  This annual audit must include both a financial audit and compliance audit.

The auditor is required to report their findings to the trustees in the form of an audit report.  The audit report consists of two parts, Part A and Part B.  The consequences of receiving a qualified audit report are quite different, depending on whether it is a Part A or Part B qualification.

Adding my adult children as members of my SMSF – what are the pros and cons?

As part of the 2018/19 Federal Budget announcements, the Government confirmed that they intend to legislate to increase the maximum number of members that can belong to a single SMSF from four to six. This change is to apply from 1 July 2019 but has not yet been legislated.

This announcement has prompted many to think about whether it can be beneficial to add adult children as members of their parent’s SMSF or is this a strategy to be avoided.

A new opportunity to top up super for those over 65 – downsizer contributions

From 1 July 2017 it became much harder to build up more superannuation thanks to a tightening of the limits on contributions.  The maximum “concessional contributions” (employer, salary sacrifice contributions or contributions made by someone who claims a tax deduction for them) reduced to $25,000 pa.  At the same time caps on “non-concessional contributions” (contributions made from someone’s own money for which they do not claim a tax deduction) reduced from $180,000 pa to $100,000 pa and even $nil for anyone with more than $1.6m in superannuation.

Quirkily, at the same time, legislation was underway to introduce a brand new type of contribution that provides far more freedom for older Australians to make contributions.  These new contributions are known as “downsizer contributions” and they started from 1 July 2018.

Work Test Exemption for Recent Retirees – Who Will Benefit?

In the May 2018 Federal Budget, the Government announced plans to extend the ability for recent retires to make contributions to superannuation from 1 July 2019.  This change has now been legislated.

In a nutshell, the rules in the current year only allow superannuation contributions for someone over 65 if:

  • the contributions are legally compulsory (eg required by an award or the Superannuation Guarantee rules), or
  • the member has met a “work test”.  (The work test is, broadly speaking, completing 40 hours of paid work over no more than 30 consecutive days at any time in the financial year and before the contribution is made).

What’s the change?

Is segregation really just about pension accounts or can accumulation accounts be segregated too?

When we use the term “segregation” or refer to an asset as being “segregated” in a superannuation fund, we are generally referring to a tax concept which relates to funds providing retirement phase pensions.

In a nutshell, if a fund has assets that are purely supporting one or more pension accounts and those assets are classified as “segregated” for tax purposes, the fund claims a tax exemption for all investment income earned on those assets (known as exempt current pension income or ECPI).  Providing the fund doesn’t provide any defined benefit pensions, it doesn’t even need an actuarial certificate to claim this tax exemption.  Other funds with pensions – where the assets supporting those pensions are not classified as segregated – claim their tax exemption using a different method often referred to as the “actuarial certificate method”.

But the Income Tax Assessment Act 1997 also allows trustees to set aside assets exclusively for precisely the opposite purpose – ie to support accumulation (non pension) benefits.  Providing the fund is allowed to have segregated assets (see below), assets set aside in this way can be treated as “segregated non-current assets”.

Not surprisingly, earnings on segregated non-current assets are subject to the usual tax rate of 15%.  So why would anyone bother – why would a fund choose to isolate some of its assets for the sole purpose of supporting an accumulation account?

Data is an asset - right?

The title to this blog is a common refrain these days and most of us don’t blink an eyelid when someone says data is an asset.

However, if it really is an asset why don’t more of us treat it like one?

Quarterly TBAR reporting – does every fund need to lodge?  What if I can’t lodge on time?

With the 1 July 2017 introduction of the $1.6m Transfer Balance Cap came a new obligation on superannuation fund trustees to report certain member “events” to the ATO. These events are reported using a “Transfer Balance Account Report” or TBAR.  For TBAR purposes, SMSFs are either annual or quarterly reporters with the first TBARs under the quarterly system due on 28 October 2018.

SaaSy for some

My previous blog on data flagged that the digital revolution enables great masses of data to be generated, collected, stored and analysed relatively quickly and cheaply.

At the start of this process of digitization, data was stored on-site on tapes, discs and then hard drives sitting inside specialised computers called servers. In the dim and distant past (1994) I remember buying a new server for my employer with (wait for it) 1 whole gigabyte of storage.  At the time this seemed excessive and I never expected the space to be used. However, twenty-four years later, our family of four have hand held devices with around 12,800% more storage space than that – most of it already used.

Resolving the Kitchen Bench Dilemma - why Heffron uses electronic signatures

Like any business that wants to thrive and remain relevant to its clients, Heffron is always looking for ways to improve how we do our work.

Naturally we look for ways to get more efficient (clients love things to be done more quickly or at a lower cost) but we also have to calibrate that against the fact that most changes we make affect two very different client groups – the trustees of the SMSFs we look after and the advisers who referred them to us and who manage the delivery of our service to their client. 

That can be tricky – what’s great for the adviser may not be great for the trustee, and vice versa.

So we started using an electronic signing platform (Docusign) with some trepidation.

Event Based Reporting

With the 1 July 2017 introduction of the $1.6m Transfer Balance Cap (or “pension cap” as some people call it) came a new obligation on superannuation fund trustees to report certain member “events” to the ATO.  These events are reported using a “Transfer Balance Account Report” or TBAR. 

Re-think Treatment of Amounts in Excess of Minimum

Prior to 1 July 2017, as a general rule, where an individual was age 60 or over and wanted to draw monies from their pension account in excess of their minimum pension requirements, the excess was simply treated as an additional pension payment.  This is because, whilst the payment was tax free regardless of whether the amount was treated as a pension payment or a lump sum commutation, pension payments didn’t necessitate any additional paperwork whereas lump sum commutations did.

Three Yearly Audit Proposal

In the May 2018 Federal Budget, the Government proposed that SMSFs with three years of clean audit reports and returns lodged in a timely manner would be eligible to move to a three-yearly audit cycle rather than being audited every year. 

Not unexpectedly, this announcement led to a number of questions by SMSF trustees and their auditors.  Thankfully, the Government has now released a discussion paper on this proposed change which gives us a bit more of an idea of how it may work.

Daughter’s rental of residential property connected with SMSF didn’t breach sole purpose test but that’s not the end of the story

Last month’s Full Federal Court decision in the Aussiegolfa case [Aussiegolfa Pty Ltd (Trustee) v Commissioner of Taxation [2018] FCAFC 122] may have resulted in a significant setback to the ATO in its thinking on the sole purpose test but it doesn’t mean SMSFs are free to lease residential property to related parties without restriction.

Data – bringing it back home

Data is the mother of all knowledge and as we all know - knowledge is power.

Humanity is defined by data. It is the currency through which we are revealed both individually and collectively. The data that defines us is our most private thing. Human data provides the collectors and possessors of that information with power that can be used to influence and impact us for many purposes.  

Can an attorney under an Enduring Power of Attorney (EPOA) make or renew a binding death benefit nomination (BDBN) for a member?

Historically this question has been difficult to answer.  While there does not appear to be any restriction in the Superannuation Industry (Supervision) Act or Regulations (SIS) which would prevent a person acting under an EPOA from completing and signing a BDBN, until recently there has been no legal authority confirming the situation.

However, in a recent case, the Supreme Court of Queensland has confirmed that an attorney has the power to make, renew or extend a BDBN on behalf of a member [Re Narumon Pty Ltd [2018] QSC 185].

Eeeek! My client just got an Excess Transfer Balance Determination!

The majority of SMSFs lodged their Transfer Balance Reports to report the 30 June 2017 value of the members’ pension accounts in the final days of the 2018 financial year.  In what must surely be a record for the ATO, excess transfer balance determinations then began issuing three to four days later.

So, if you’ve received a determination you didn’t expect, what went wrong?

A new year, what happens with pension balances that have grown?

A great many retired SMSF members with large superannuation balances adjusted their pension accounts back to $1.6 million on 30 June 2017.  This was done to reflect new rules at the time that placed a limit, called the Transfer Balance Cap, on pension accounts.

Twelve months on, at least some of these pension accounts have grown above $1.6 million.  It’s a natural consequence of taking as little as possible out of the pension account and investing in assets that produce a lot of income, growth or both.  Particularly for younger retirees, it is entirely possible that the combination of income and growth can be enough to completely replace (and more) the amounts that have been drawn out as pension payments.

Super Thresholds for 2018/19 Financial Year

With a new financial year upon us, it is time to make ourselves familiar with the various superannuation related thresholds applying for the 2018/19 financial year.

Our 2018/19 Facts & Figures publication will be available for our Super Insights subscribers shortly, but in the meantime, some of the more commonly used thresholds are detailed below:

New and interesting scenarios where an actuarial certificate is required for ECPI

From 1 July 2017 some funds providing retirement phase pensions are no longer allowed to be classified as segregated when it comes to claiming a tax exemption on some or all of their investment income (exempt current pension income or ECPI).  We have explained who, how and why in our blog Segregating in SMSFs beyond 1 July 2017.

This does create some new scenarios where these funds will now need actuarial certificates to claim their ECPI.

Adding Back LRBA balance to Total Super Balance

In the lead up to 30 June 2017 you may recall the Government announcing that they intended to amend the Total Superannuation Balance provisions in situations where an individual was a member of an SMSF with a limited recourse borrowing arrangement (LRBA) in place.  Specifically the Government had intended for a share of the fund’s outstanding loan balance to be apportioned to each affected member and counted towards their Total Superannuation Balance.

Pension planning for 30 June 2018

Winter has arrived and that means it is time to get all our pre-30 June planning finalised.

One area which is always worth addressing early is pensions – have we done everything we need to do and is there anything extra we should be thinking about for 2017/18?

In this article, we provide a few tips.

Market linked pension update

One of the more crazy elements of the 1 July 2017 superannuation changes was the treatment of market linked pensions.

Recent press articles have highlighted that there is a problem without necessarily explaining what it is.  The key lies in understanding how amounts are added to or subtracted from the Transfer Balance Account for these pensions.

My client’s wife died in August 2017. On her death, her acc based pension automatically reverted to him. When do I need to complete a TBAR to report the reversion of the pension and what do I show?

The TBAR system revolves around the reporting of “events”, hence the name “events-based reporting”. 

The reversion of the pension will not count towards your client’s Transfer Balance Cap until the first anniversary of his wife’s death (ie August 2018).  However, the “event” which triggers reporting is not the counting of the pension towards the cap but rather the reversion of the pension in August 2017.

My client’s husband died in March 2018.  On his death, his account based pension automatically reverted to her.  When will the value of this pension count towards her Total Superannuation Balance?

Your client became the “owner” of the pension on the day of her husband’s passing.  This means the value of the pension counts towards her Total Superannuation Balance immediately in March 2018 (although remember that Total Superannuation Balance isn’t actually used for anything other than as at the end of a financial year).

Increasing Maximum SMSF Members from Four to Six

As part of last week’s Federal Budget, the Government confirmed that they intend to legislate to increase the maximum number of members that can belong to a single SMSF from four to six, with this change to apply from 1 July 2019. 

In this article, Lyn touches on some of the things to consider in relation to this proposal.

Transfer Balance Account Report update

We learned something new – and weird – about the new Transfer Balance Account Reports (TBARs) last week.

In a nutshell, the TBAR prepared to report pre-existing pensions at 1 July 2017 will also need to include accumulation balances in almost all cases.

If these accumulation balances are not reported, there is a risk the ATO will unintentionally double count any retirement phase pension reported on the TBAR when it comes to calculating the individual’s Total Superannuation Balance (TSB).  This is not consistent with the current instructions for the TBAR and the ATO is in the process of updating these.

The issue has now been reported in a couple of online publications but this article puts a little more flesh on the bones.

Could children in the fund help beat the ALP proposal to remove franking credit refunds?

As the Bank Inquiry dominated news headlines in recent days the government announced a change that will certainly be very welcome for some families with Self Managed Super Funds (SMFS). Until now the most people allowed in an SMSF fund was four – the government has announced it intends to allow the limit move to six people.  The timing is especially useful since some families are reviewing their SMSF arrangements in the light of the ALP plans to scrap cash refunds for franked dividends.

One way to mitigate the impact of the ALP proposal is to include adult children in the SMSF so that the franking credits generated by the parents’ share portfolio can at least be used to pay the tax generated by the children’s super rather than being wasted.

But there are some problems with this idea

When super policy becomes a crazy game

Sometimes the lunacy of politicians (both sides) amazes me when it comes to superannuation policy.  Although perhaps that fact in itself is amazing since I have been working in superannuation for nearly 30 years and should have learnt better by now.

The Opposition Treasury Spokesman recently re-iterated some of Labor’s superannuation policies which were reported here but the full explanation is readily available on their website here.  These reports don’t specifically cover their earlier announcements about changes to franking credits to make them non refundable but this is also clearly part of the mix.

SMSFs and reserves - new guidance from the ATO

The ATO has recently issued its first guidance on reserves in SMSFs via a brand new series of publications called "SMSF Regulator's Bulletins".  The new Bulletins (SMSFRBs) allow the ATO to flag compliance issues it is concerned about or actively monitoring relatively quickly without the formality of other publications such as SMSF or Tax Rulings etc. It also explains how the Commissioner would apply particular legislation if asked via a formal process such as a private binding ruling. In that sense it is perhaps similar to a Taxpayer Alert but with a regulatory focus as well as a tax one.

This first publication (SMSFRB 2018/1) provides some contentious views (and reversals of previous views) on reserves in SMSFs.

Company Directors & Gainful Employment

It is a well established principle that company directors are not considered common law employees, unless they are also engaged under a contract of employment to provide non-director duties.

So, if a director is not a common law employee, can they ever qualify as “gainfully employed” for the purpose of making superannuation contributions after age 65? Conversely, if they cease to be a director after age 60, is that sufficient to satisfy the retirement definition?

We recently sought clarification of these issues from the ATO and can now confirm:

CGT relief – five traps emerging at the pointy end of the year

We are definitely at the business end of 2017/18 when it comes to discovering just where the submerged rocks lie for CGT relief under the 2017 Superannuation Reforms.

We have written more broadly on this before - see our previous publication, Heffron Super News, Issue # 142 and for subscribers to McPherson Superannuation Consulting’s SuperTech newsletter, the December 2016 edition.

However, as is always the case, new tips and traps emerge all the time and we’ve shared below just five that have come to our attention as we help advisers, accountants and trustees navigate the rules and lodge their 2016/17 annual returns.

Super Concepts buys More Super

It was pretty big news in SMSF circles today when SuperConcepts announced they had bought More Super.

SuperConcepts (AMP) is probably the country’s largest SMSF administrator.  Perhaps not surprisingly given the dollars at their disposal, the AMP business has everything – they own their own software (SuperMate), offshore processing operations, multiple SMSF administration brands, financial / investment products (via the AMP business), Australian financial services licensee for accountants (SMSF Advice), financial planning network and no doubt many other components I haven’t even imagined.

More Super just adds “more” to an already big story.  Compared to others in this industry it was already a sizeable business and when combined with AMP the result is just … huge.

But there is one fascinating thing about the SMSF industry that this change highlights : even in an environment where the largest one or two players dwarf everyone else, AMP still only administers around 5% of the country’s SMSFs

Government moves to fix TRIS complexity

Traditionally when a transition to retirement income stream (TRIS) reverted to a spouse on the death of the original pensioner, the TRIS status of the original pension was academic.  Regardless of how the pension started, the surviving spouse inherited a pension unencumbered by the usual restrictions associated with a TRIS because the death of the original pensioner effectively ‘freed up’ the entire balance to become ‘unrestricted non-preserved’ superannuation. 

However, the addition of the ‘retirement phase’ concept on 1 July 2017 added some complexity which currently causes some constraints to remain even after death and changes the position for those transition to retirement pensions that revert to another beneficiary on death.

SMSF. Crypto. Bitcoin.  What’s all the fuss?

Why is there so much focus on SMSFs and Bitcoin?

Mainly because it’s new and sexy.  Whenever there is a new and exciting investment, early movers want to get started.  These days, the largest pot of potential investment cash is often an individual’s superannuation.  Thanks to compulsory superannuation at a relatively high level for a long time now, even youngsters in their 30s and 40s potentially have large sums locked up for retirement.

(Did you know that someone with a salary of $50,000 ten years ago who has experienced wage increases of only 3% each year could have grown their superannuation to around $50,000 today if their fund earned even just 2% more (ie 5% pa) over that period?)

But how does one invest superannuation money in Bitcoin?

ECPI - capital gains and losses in funds that cannot be “segregated”

One of the many benefits traditionally enjoyed by funds entirely in pension phase was that when an asset was sold, any capital gain was completely disregarded.  Not only was there no tax paid on that particular capital gain but the fact that the gain was ignored entirely meant it also did not “use up” capital losses that the fund might have been carrying forward from previous years.

But what does the future look like on this front?

Death and transfer balance cap reporting

A question that has already come up in our practice several times relates to clients who died before 1 July 2017.

In particular, if the deceased had a retirement phase pension, what (if anything) should be reported for that pension when the Fund’s first TBAR (Transfer Balance Account Report) is lodged later this year.

Like most superannuation issues, it depends.

First Excess Transfer Balance (ETB) determinations to be issued in January 2018

Well we know what the ATO will be doing over Christmas. 

While we expect few SMSFs have lodged any reporting for the new Transfer Balance Cap (the $1.6m limit on transfers to retirement phase pensions), the ATO plans to start issuing its first excess transfer balance determinations from January 2018. These are the new notices that will alert individuals that they have exceeded the limit and set a deadline for taking action.  Those who don’t do so within the required timeframe will effectively have their entire pensions cancelled.

Segregating in SMSFs beyond 1 July 2017

Understanding when a fund is "segregated" for tax purposes is critical in applying the tax rules to SMSFs providing pensions.  An important rule change from 1 July 2017 means that some funds are no longer classified as segregated even if they very much look like it - for example, they are entirely in pension phase.  In this article we explain which funds are actually no longer allowed to segregate for tax purposes and what that means when it comes to their tax exemptions.

BGL Simple Fund 360 Actuarial Certificate integration now live

Accountants who use BGL Simple Fund 360 for their SMSF clients can now request actuarial certificates from Heffron with no re-keying, no hassle and an immediate certificate where the fund passes all our automated checks and balances.  We have also taken this opportnity to review the way we bundle our services to construct a range of special offers for BGL 360 users to celebrate our integration.

CGT Relief help

If there is one aspect of the 2017 superannuation reforms that has caused many practitioners some challenges it is the special relief provided on capital gains tax for those affected by the changes to pensions.  We have recently introduced a service specifically to help deal with these rules.
 

What do the 2017 super changes mean for SMSF accountants & administrators?

The current superannuation changes present the most profound adjustment to the strategic landscape for SMSFs since 2007.   Like any change, they highlight the importance of good guidance from accountants and advisers for all trustees.  In the coming months, there will be a lot of questions asked of anyone advising trustees but also of those of us implementing the new strategies via a compliance or fund administration role.

What will you tell clients who’d planned large non concessional contributions this year?

It has already been widely reported that last night’s budget saw a lifetime cap of $500,000 announced for non-concessional contributions.  There is a distinct element of retrospectivity in this measure in that contributions right back to 1 July 2007 will be counted in working out whether someone has exceeded the cap.  I imagine the Government will argue that this is not retrospective because those who had already exceeded the new limit at 3 May 2016 will not be penalised.

Tax expenditure – what’s in a name?

According to Wikipedia, an oxymoron is a figure of speech that juxtaposes elements that appear to be contradictory. Anyone paying attention to the political debate in Australia will recognise its utility in the hands of a skilled (or not so skilled) politician. Unfortunately, some of these political oxymorons make their way into wider community conversations as an accepted and serious economic truth where they have the potential to cause a lot of damage.

The role of professional bodies

Last week saw CPA Australia announce the establishment of CPA Australia Advice Pty Ltd.

This wholly owned subsidiary of CPA Australia will apply for an Australian Financial Services Licence (AFSL) with the intention of effectively providing dealer services to interested members of the association (you have to be a CPA to operate under the new licence).