Heffron | Australia's leading independently owned SMSF administrator


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.

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.

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:

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?

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.

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?

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.

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.

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?

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:

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.

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.

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).