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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 power of an investigative review

In any society that has seen an unprecedented and rapid increase in longevity, the ageing and retirement income policy settings are crucial. For this reason, the Government’s Review into the Retirement System is to be welcomed.

What does “Superannuation Guarantee opt-out” mean for SMSF members?

Treasury Laws Amendment (2018 Superannuation Measures No. 1) Bill 2019 was passed by the Senate on Thursday 19 September.

At long last, it allows certain people to opt out of receiving Superannuation Guarantee (SG) contributions from 1 July 2018 (which in practice, now, presumably means 1 July 2019).

The change deals with the current situation where high earners with multiple employers can be forced to exceed their concessional contributions cap because the total of all their compulsory SG contributions takes them over $25,000.

ATO focusing on investment strategy diversification requirements – what do trustees and auditors need to do?

The ATO recently identified approximately 18,000 SMSFs who hold 90% or more of their assets in a single asset or a single asset class.  The ATO is concerned that these funds may not have met their investment strategy requirements and has reminded trustees that failure to do so can result in an administrative penalty of $4,200. 

So, what do these trustees and their auditor need to do to avoid penalties being applied?

How quickly do death benefits need to be paid?

The term “as soon as practicable” appears several times in tax and superannuation law – it’s never defined and often has different meanings depending on the context.

One place it appears is in the timing of death benefit payments.  Death is one of the only times in superannuation law where a benefit must be taken from the fund.

Death of a spouse when both members of a couple have pensions – how are these managed?

The 1 July 2017 changes to superannuation pensions introduced a new rule of thumb – most people can only convert $1.6m to a retirement phase pension over their lifetime (this is the limit known as the Transfer Balance Cap or TBC).  Unfortunately the new rules also included provisions that ensured people who inherited their spouse’s superannuation as a pension would have this amount counted towards their $1.6m limit as well.  The timing and amount depends on whether the deceased spouse’s pension was reversionary or non-reversionary but one way or another it counts eventually if it is received by the survivor as a pension.

My SMSF owns premises which it leases back to my business.  What do I need to do to make sure the arrangement complies with the superannuation law?

Approximately 10% of SMSFs own commercial property and often this commercial property is leased to a related party (eg a business owned by the members of the fund).  If you have employed a similar strategy with your SMSF, there are a number of rules to follow to ensure the arrangement complies with the superannuation/tax laws.

I have never worked – can I access my superannuation?

Normally any conversation about accessing superannuation is linked to retirement. But in superannuation, only people who have worked at some point can actually retire – the definition of retirement hinges on ending what’s known as “a gainful employment arrangement” (basically paid work). This quirk means that to retire, one must work first. 

Super Thresholds for 2019/20 Financial Year

With a new financial year almost upon us, it is time to make ourselves familiar with the various superannuation related thresholds applying for the 2019/20 financial year.

Our 2019/20 Facts & Figures publication will be available shortly, but in the meantime, some of the more commonly used thresholds are detailed below:

To tax, or not to tax – that is the question?

As the dust settles on the election and everyone steels themselves for the 46th Parliament to commence, it gives us some space and time to reflect on some of the important issues that were thrown around in the heat of the election campaign but not really debated.

For example, is Australia a high taxing country or not?

What is it with politicians and policy reviews?

Is it just me or do we have a policy review on some topic or another announced every five minutes?

In addition, every other review announced seems to be retirement income related. One of the first things Josh Frydenberg did after the Coalition’s shock election win last week was to express his support for the Productivity Commission’s recommendation of (yet another) review into our retirement incomes system.

Whilst the industry’s collective sigh and eye roll could be heard in all four corners of our great southern land, it is clear to me that many things could be improved. Unfortunately, however, a review into retirement incomes in isolation is at risk of missing the point.

The societal challenge of an ageing population is well known and has been widely discussed. However, I think it’s also fair to say that despite all of this, few countries around the world have effectively nailed a portfolio of adequate policy responses.

Federal Election 2019 - where are we now?

It seems few are more surprised than Scott Morrison that the Liberal / National Coalition will be forming Government after the 18 May election.

However, the ALP’s policies which have worried many superannuation savers would appear off the table for now.

The campaign was largely characterised by negativity on both sides.

Banning franking credit refunds - is there another way

With the Federal election looming, the Australian Labor Party’s policy to prevent many taxpayers from receiving a refund for their franking credits has certainly become a dominant issue for many retirees, particularly those with SMSFs.  

While we have no idea how easy it will be to get it passed, it does seem likely to remain firmly on the agenda unless the ALP is defeated.

The logic for this policy is, broadly speaking, “rich people shouldn’t get tax refunds, they should effectively pay more tax” on their personal and SMSF investments.  Importantly, the language supporting the policy is about people paying tax but the proposed changes would implement it via the entities in which their assets are held.

Division 293 tax – when is it paid?

Division 293 tax is the name given to a special extra tax (15%) paid on some or all of the concessional superannuation contributions made for high income earners.  For this purpose, a high income earner is anyone who earns $250,000 or more and this amount includes their concessional contributions within the concessional contributions cap.

While the tax relates to superannuation contributions, it is actually levied on individuals rather than their superannuation funds.  They are, however, allowed to access money from their superannuation to pay it.

An emerging challenge for those subject to this tax is : when can money be withdrawn from superannuation to pay it?

Election Special: The key differences in policies when it comes to retirement savings

And they’re off!  The long-awaited election campaign is now finally in full swing and babies are being kissed, working families praised and the nightly news shows too many politicians.

Both of the major protagonists believe they have a portfolio of policy promises that will build a strong economy and deliver on the much referenced but never specifically defined “fair go” for Australians.  However, the means by which these two goals are to be achieved are starkly different between the two parties at almost every level, from climate change to taxation.

But what are the key differences between the two majors when it comes to retirement savings?

My client has excess concessional contributions and their Total Super Balance exceeds $1.6m.  What happens now?

While the rules surrounding excess contributions have remained relatively stable for some time now, the 1 July 2017 changes to non-concessional contribution limits for those with large superannuation balances have understandably muddied the waters.

In particular, what happens when excess concessional contributions are made for someone whose Total Superannuation Balance is above the critical $1.6m threshold?

Franking Credit Refunds

Top of mind for many SMSF trustees – particularly retirees - is the upcoming Federal Election and the Australian Labor Party (ALP) policy on refunds of excess franking credits. 

Despite a parliamentary inquiry recommending against the policy and strong backlash from various sectors, the ALP remain committed to the measure.  This means it has a reasonable chance of becoming a reality (in some form) if Labor wins the Federal election.

So what should SMSF trustees be doing now?

Watch pension payments before 30 June 2019

As we get closer to the end of the financial year, many SMSF members with pensions will be checking the amounts paid from their fund so far to make sure the minimum payment requirements will be met.  Others, who only take payments right at the end of the year, will need to double check the amount that needs to be paid from their fund and make sure it all happens before midnight, 30 June 2019.

BUDGET: Changes to Exempt Current Pension Income (ECPI)

If the four short paragraphs about ECPI had been included in the 2016-17 Federal Budget, the Government could have saved actuaries and software providers hundreds of thousands of dollars in software development costs and saved the sanity of accountants and advisers!

Sadly they didn’t and their proposed changes will achieve the desired effect of reducing red tape a few years too late.

Nonetheless, we welcome the announcements as part of the solution to simplifying ECPI. 

Why do pension payments now need to be paid in cash?  I’m sure my clients used to be able to take in-specie pension payments.

Well, in fact pension payments have always needed to be paid in cash.  Only lump sums can be taken in-specie (ie in the form of assets rather than cash).  Whilst it may have appeared in the past as though your clients were taking in-specie pension payments, the payments would have in fact been in-specie lump sums.  Let me explain.

A superannuation default for life

Both the Productivity Commission and the Hayne Report identified the long running issue of multiple superannuation accounts as an issue.  Almost everyone has a story about discovering that they or a friend had multiple superannuation accounts as a result of having multiple jobs throughout their lives.

The real challenges for trustees of large superannuation funds

There was presumably a collective sigh of relief from our largest financial institutions when Hayne decided not to recommend a ban on superannuation funds that make a profit (often called “retail” funds and offered by financial institutions as distinct from “industry funds” which were historically set up and backed by trade unions and are designed to return profits to members).

Is this a missed opportunity?

While the hearings sent shockwaves through Australia’s major financial institutions, I would describe the final report as being light on major structural reforms when it comes to advice and restoring trust for the thousands of individuals saving for retirement.

Independence matters

The Report made a number of recommendations about financial advice that will be well covered by others (for example, new annual renewal requirements for ongoing service fees, bans on grandfathered commissions, a review of other commissions for insurance, new disciplinary approaches for financial advisers, restrictions on the payment of advice fees from MySuper accounts etc).

What are the implications of the Royal Commission for SMSFs?

The first thing I did when I opened the final report from the Hayne Royal Commission into Banking Misconduct and Superannuation was to search for “SMSF”.  Other than the definitions, it appeared twice – once to explain that SMSFs are administered by the ATO and the second time in the context of explaining choice in superannuation.

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.