Education Bites

This 'bite' is part of the Super Foundations course.

Super is ultimately about saving for retirement so understanding when money can be paid out (known as “paying a benefit”) is every bit as important as understanding how to get it in there in the first place.

Once again, given the generous tax concessions available on super savings, it makes sense that there would be rules about it. They are designed so most people are only tapping into their super savings when the Government wants them to – such as when they’ve retired. There are some circumstances when super benefits can be taken earlier but these are limited.

There are special tax rules for the payments made to people from their super to make sure it is particularly tax effective in retirement but also not so generous that tax breaks are given away unnecessarily.

On 1 July 2021 the cap was indexed for the first time, from $1.6m to $1.7m. But not everyone got the full $100,000 increase. When the cap is indexed again in the future, there are strategies which can be employed to maximise the outcome for clients.

Most super balances end up in a super income stream (pension) at some point. While these accounts are really all about pension payments, it is also very common for a member to take a commutation (lump sum).

This module explains the two types of commutation (partial and full), what can be done with the commutation amount and how each type of commutation impacts important issues like minimum payment amounts and exempt current pension income.

Individuals start pensions for a range of reasons.

It might be because they are seeking income in retirement or cash flow for other reasons such as contribution strategies. Or they simply want access to the tax benefits of drawing a pension (eg tax exempt investment income inside the fund).

Regardless of the reasons, there are a number of tax and compliance issues to consider before the pension starts.

Retirement has always had a very specific meaning in the super law as it has an important impact on how and when members can access their superannuation. It took on even more importance from 1 July 2017 due to the changes to the tax treatment of funds paying transition to retirement income streams.

In this module we explore the retirement definition, its implications and common questions.

The decision to nominate a reversionary beneficiary on a pension, or equally to go without, is an important one. There can be advantages and disadvantages depending on an individual’s circumstances. The issues can be complex but it’s important to be able to explain them in a way clients understand so they can make an informed decision about what will happen to their pension on their death.

The rules about who can be nominated generally apply to both SMSFs and non-SMSFs. But some funds may have their own special rules.

Anyone who has reached their preservation age can start a transition to retirement income stream (TRIS). These are just account-based pensions with some extra restrictions. Eventually, a TRIS will become a retirement phase pension which we often think of as a “normal” or "full" account-based pension.

But there are some important things to consider when that time is close - some rules to follow, smart steps to take and simple strategies that can help make best use of the super tax concessions.

Individuals generally can’t access their super until they reach their preservation age. Even then, there are generally limits on how they can access their benefits and how much they can have until they have retired or turned 65.

These rules, known as the preservation rules, apply to both SMSFs and non-SMSFs, although some funds may have their own more restrictive rules.

Given the significant penalties that can apply when super benefits are withdrawn before an individual is eligible, it is important to understand these rules.

Changes on 1 July 2022 mean more people than ever can consider a withdrawal & recontribution strategy. In this module, we’ll identify target clients, explain how to implement the strategy and when fine tuning will be required to get the best result.

Our module “ECPI unpacked” explained the two methods SMSFs use to claim “exempt current pension income” (ECPI) – the tax exemption that applies to certain investment income for funds providing retirement phase pensions.

This module explores this topic further and delves into some important features of ECPI in less common scenarios – for example:

1. when pensions are partially or fully commuted,
2. when a pension member dies,
3. when a fund’s income is earned very unevenly during a year or pensions start and stop during the year, and
4. when a fund sells assets with capital gains that have been deferred as a result of special tax relief taken in 2017.

One of the great benefits of starting a retirement phase pension is that the fund providing it stops paying tax on some or all of its investment income.  The income that is exempt from tax is called “exempt current pension income” or ECPI.

The way in which ECPI is calculated can be different under different circumstances and there are some important rules to understand.

Some of these rules only apply to SMSFs whereas others are the same for all super funds.

This module gives an overview of how ECPI is calculated as well as some tips and traps when it comes to getting the best possible result in an SMSF.

This 'bite' is part of the Super Foundations course.

In the earlier modules of the Heffron Super Foundations course, we mentioned three times when super could potentially be taxed:

• On the way in – when contributions are made to a super fund
• Inside the fund – while the super fund’s investments are growing
• On the way out – when benefits are paid out of a super fund

You’ll also recall that we said the normal super fund tax rate is 15% on contributions (#1) and investment earnings (#2).

We touched on how super benefits are taxed (#3) in “Getting money out of super – an overview” but in this module, we’ll take a closer look at #1 and #2. In particular, how super funds are taxed and when the tax rate might be more or less than 15%.

All super funds need to meet the residency rules to be entitled to concessional tax treatment. In this module, we will look at the rules an SMSF needs to meet to qualify as an “Australian super fund”, what SMSF trustees and members need to think about before they travel overseas, and steps to take to ensure a fund continues to meet the residency rules.

SMSFs are generally prohibited from acquiring assets from related parties or leasing assets to related parties.  There are limited exceptions.
One of the most commonly known exceptions is for “business real property”.  

As the name suggests, business real property is simply real property used in a business.  However, real life scenarios can be more complex than that. 

Note the same rules apply to small APRA funds but other types of funds would be subject to different rules.

The super law requires all SMSF trustees to “formulate, regularly review and give effect to” an investment strategy for their fund.

With the ATO continuing to focus on investment strategies and able to penalise trustees who fail the rules, it is important all professionals supporting SMSF trustees understand what is needed to develop an ATO compliant investment strategy.

This 'bite' is part of the Super Foundations course.

Once a super fund has money, it’s time to invest it.

But super funds are given very generous tax treatment – it’s the Government’s way of helping people save for retirement. So it’s not surprising there are rules to follow to make sure those tax breaks are only used by people who are genuinely trying to save for their retirement.  

This is particularly obvious when it comes to investment rules. There are rules that trustees need to think about carefully when it comes to:

• Why an investment is made
• Who else is involved
• From whom the investment is acquired
• What is done with it afterwards (ie once the fund owns it)

Believe it or not, there are not many rules about exactly what a super fund invests in. Most of the mainstream things people might invest in themselves (or via other structures like a family trust) can be bought in an SMSF. Really common examples are shares listed on a stock exchange, managed funds, property or property trusts, term deposits and cash. The investments don’t have to be in Australia – plenty of SMSFs own shares listed on overseas stock exchanges or hold deposits in foreign banks. Even more exotic investments such as artwork, crypto currencies, and shares in private companies are allowed.  In all cases, it’s the other rules that can get in the way.

This module is all about those other rules.

Approximately 10% of SMSFs own commercial property, and often this property is leased to a related party.  The super and tax laws include rules about to whom funds can lease assets, the terms of the arrangement and the documentation required.  Failure to follow these rules can result in:

• a breach of the super law (and potentially penalties on the trustee), or
• adverse tax consequences for the fund because the income from the arrangement is considered non-arm’s length income (NALI) and taxed at 45%.

Note, this module specifically deals with SMSFs.  Similar rules would also apply to small APRA funds but other types of funds would be subject to different rules.

The focus for this module is commercial property.  The specific rules for the leasing of other assets (eg residential property, collectables) are not covered.

Whilst not common, sometimes an SMSF trustee chooses to invest the fund’s assets by lending money to other parties.  The super and tax laws include rules about to whom funds can lend monies and the terms of any permitted loan arrangement.  Failure to follow these rules can result in:

• a breach of the super law (and potentially penalties on the trustee), or
• adverse tax consequences for the fund because the income from the arrangement is considered non-arm’s length income (NALI) and taxed at 45%.

Super funds are allowed to invest in a wide range of different assets with relatively few restrictions. Where strong limits are imposed is where the fund has dealings with "related parties". These generally come in four forms:

• limitations on the amount funds can invest in entities like trusts or companies that are related parties,
• limitations on the amount funds can lend to related parties,
• limitations on the value of certain assets that the fund can lease to related parties,
• specific processes to be followed when certain assets (collectables) are sold to related parties, and
• quite significant restrictions on the assets that can be acquired from related parties.

This module is about the last set of rules and we cover the assets that can and cannot be acquired from a related party.

The term “related party” comes up often for SMSFs, mainly linked to the fund’s investments. 

Broadly speaking, a related party is a person or entity (such as a trust or company) that might be expected to have a closer relationship with the members of the SMSF than other parties.  To make sure the trustee is always focused on saving for members’ retirement rather than some other purpose:

• there are some transactions that are prohibited entirely with related parties (for example, an SMSF cannot buy residential property from a related party), and
• others that are just limited (for example, an SMSF cannot invest more than 5% of its assets in shares in a company that is a related party).

The definition of the term can be complex and it is the subject of this module.

SMSFs have special rules about who needs to be a trustee (or a director) and who needs to be a member. In this module, we will look at how a fund might stop meeting these rules after the death of a trustee, director or member. We will also consider what changes may be needed to the fund’s structure as a result and how soon these changes need to be made.

Twenty years ago, the elderly rarely had super, let alone an SMSF. These days, over 25% of SMSF members are over age 70 and almost 15% are over age 75.

Across the entire population, by 2055 the proportion of those over age 65 is expected to grow from around 15% to 23%. While people are living longer and staying healthy for longer, it is no secret that the risk of mental and physical impairment increases with age. By 2056, more than 1.1m Australians are expected to have dementia and it stands to reason that many of these people will have balances in super funds and in some cases an SMSF.

Not surprisingly it is becoming increasingly important to understand how to prepare for, and deal with, the incapacity of individuals with super balances, particularly SMSF members.

Self-managed superannuation funds, or SMSFs as they are more commonly known, are unique to Australia. Not that many people in Australia have an SMSF –just over 4% of the total population - but total assets held by SMSFs at the end of 30 June 2021 represented just over 25% of total assets in super – a whopping $822 billion! But what exactly is an SMSF? In this module, we will work through the rules to qualify as an SMSF.