Those lucky enough to retire early – well before their preservation age – are often confused about when they can access their superannuation.
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.
Those lucky enough to retire early – well before their preservation age – are often confused about when they can access their superannuation.
The Government’s proposal to enable individuals with multiple employers to elect to “opt out” of the superannuation guarantee (SG) system in respect of their wages from certain employers is not yet law.
In the new world of calculating exempt current pension income, if your 100% pension fund receives a contribution, and a new pension is commenced with that amount immediately on receipt, do you need an actuarial certificate?
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.
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.
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).
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.
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).
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.
Before the Productivity Commission publicly released their final report into superannuation review this month, there was inevitably much discussion about whether or not a minimum balance for SMSFs would be recommended.
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.
SMSFs can claim deductions for certain expenditure incurred by the fund provided the residential investment property is rented or available for rent. The types of expenditure which can and can’t be claimed and your record keeping requirements are summarised below.
In the final week of Parliament, there were a number of superannuation related measures still to be passed into law. We provide a status update below on each of these measures together with the Government’s other May 2018 Federal Budget superannuation related proposals.
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.
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.
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:
What’s the change?
Under the scheme, the employee is able to take up the entitlement themselves or nominate an associate to take up the share entitlement. If his SMSF were to take up the shares, what would be the consequences from a superannuation perspective?
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?
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?
In recent days the Government announced a handful of proposed technical changes to the taxation law to address a number of minor but important issues affecting some retirees. We cover two of these proposed changes below.
Potentially, but this will depend on why your client is receiving the lump sum, their age, the amount paid and the components of the lump sum.
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.
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.
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.
With a new financial year upon us, you may be thinking about what contribution caps apply for the 2018/19 financial year.
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.
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.
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.
The methods available for obtaining Total Superannuation Balance and Transfer Balance Cap information depend upon whether or not you are the individual’s tax agent.
Must the fund issue a PAYG summary? Does the individual need to report the payments in their personal tax return? Are they still eligible for the untaxed element tax offset?
Last month’s Full Federal Court decision in the Aussiegolfa case [Aussiegolfa Pty Ltd (Trustee) v Commissioner of Taxation  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 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.
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  QSC 185].
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 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.
When will the unallocated amount first count towards his Total Superannuation Balance?
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:
From 1 July 2017 there are three major changes affecting funds paying retirement phase pensions and claiming a tax exemption on some or all of their investment income (exempt current pension income or ECPI). Will some of these create the need for a fund to have more than one actuarial certificate in a year?
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.
Given such action is now contrary to the ATO’s new position expressed in SMSF Regulator’s Bulletin 2018/1, is the ATO likely to take action in relation to the fund?
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.
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.
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.
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.
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).
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.
Following on from Meg’s blog article earlier this month, the ATO has now responded to calls from the SMSF industry to simplify reporting and reduce unnecessary work when it comes to TBARs and whether or not accumulation balances also need to be reported.
In this article, Lyn clarifies the new ATO position.
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.
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
With some new rules for actuarial certificates coming in from 1 July 2017, the term "deemed segregation" has popped into the SMSF vernacular. What does it actually mean and why is it important?
And is the minimum pension for the current year recalculated on his 65th birthday?
Whilst a TRIS automatically becomes a retirement phase pension on the recipient’s 65th birthday, it doesn’t automatically become an account based pension.
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.
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.
It depends on whether the pension reverted (continued automatically) to a reversionary beneficiary such as the spouse on death or stopped.
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:
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.
With all the recent focus on new limitations on super, it’s easy to forget that there is also at least one new rule that helps those still saving to put more into their super account with the best possible tax treatment.
Until this year, there were really only two ways for most people to voluntarily make extra superannuation contributions.
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
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.
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?
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?
The ATO announcement this morning advising that they will be extending the due date for lodgement of SMSF Annual Returns strongly indicates the complexities around the CGT Relief is proving challenging, as we, at Heffron, predicted would be the case.
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.
Draft legislation has been released for comment aimed at closing off two avenues in which the Government considers LRBAs could be used to circumvent contribution caps.
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.
The Bills necessary to make both the above measures law have now received Royal Assent.
Both were May 2017 budget measures and will take effect from 1 July 2018. (Further changes to the Superannuation Industry (Supervision) Regulations 1994 will be required but these do not require a vote in parliament and are expected to progress smoothly.
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.
The terms "segregated" and "pooled" (or "unsegregated") have been part of the superannuation landscape for 30 years (since superannuation was first taxed in 1988). From 1 July 2017, however, the way we think about these terms for pension funds needs to change profoundly.
The timing of TBARs (Transfer Balance Account Reports) for SMSFs has been hotly debated ever since the ATO first flagged its view that this should occur outside the normal annual return cycle. The final verdict is now in.
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.
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.
Is something funny happening on MyGov for those with large contributions before 1 July 2017?
In short, yes.
It’s not popular to voice support for the very wealthy, particularly retirees with very large super balances. But they have just been shafted big time in the latest round of super changes.
I’m not a huge fan of scaremongering around trust deeds.
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.
Last Thursday (24 November) the ATO released Law Companion Guide (LCG) 2016/D8. It is designed to provide some extra insights into how the ATO will apply the CGT relief accompanying the 1 July 2017 changes to superannuation pensions.
The new superannuation legislation flew through both houses of Parliament so quickly that I expect most people are still catching their breath about their scale rather than focusing on what next.
But there are some important things to be thinking about right now if you are affected by the changes or advising people who are. Here are just six.
In a word – yes.
Big news this week with the Government announcing a total backflip on one of its big 2016 Federal Budget measures – the lifetime limit on non-concessional contributions.
Unfortunately – in my view at least – it has replaced an unpopular and unreasonable measure with something that has plenty of weaknesses itself.
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.
The budget is always a tricky time – should we speculate about what might happen and try to pre-empt it? Or should we plan around the law we know about rather than what might happen in a few weeks’ time on the basis that trying to predict the unpredictable often means we jump at shadows?
Accountants daily published an interesting article earlier this week about the ATO targeting low cost SMSF auditors (http://www.accountantsdaily.com.au/breaking-news/8339-ato-targeting-low-cost-smsf-auditors-says-superauditors).
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.
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).