Category Archives: In The News

Six Member SMSFs allowed from 1 July 2021

It has been a few years since the proposal to increase the number of members in a self-managed super fund (SMSF) from four to six was put forward by then Treasurer Scott Morrison.

On 22 June 2021, the legislation for this proposal received Royal Assent.

SMSFs are permitted to have up to six members from 1 July 2021.

There is a lot to consider when adding members to a SMSF and may not suit everyone.

Key Considerations:

More members can pool their balances to purchase larger or higher value assets such as property.
It could increase the ability to make contributions which in turn could increase cashflow.
Allows families to include more family members. It would allow Mum & Dad to include up to four children under the same SMSF.
Increased complications when there are disputes, in particular family law disputes
Increased risk of control imbalance if voting is based on weighted balances.
All trustees/directors are responsible for decisions made, even if they are not directly involved. Succession planning and future control will need to be carefully considered to help manage the risk of loss of capacity and death
Most States and Territorities, include New South Wales only permit up to four individual trustees. Accordingly, the SMSF will need to have a corporate trustee where all members would be directors in order to have up to six SMSF members.
Some trust deeds specify the four member limit and would need to be varied before increasing the number of members.

Amidst the growing fears around the spread of COVID-19 (coronavirus), we would like to take this opportunity to reassure our clients that Economos are committed to ensuring that the disruptions are kept to a minimum.

As you know this is an unprecedented and constantly evolving situation. The health and safety of our clients and employees are our number one priority and managing the risk of transmission of coronavirus is critically important.

Tax Obligations

The Australian Taxation Office (ATO) together with the Government’s economic response will be assisting taxpayers who experience financial difficulties due to COVID-19.

For more information on the ATO support: https://www.ato.gov.au/Individuals/Dealing-with-disasters/In-detail/Specific-disasters/COVID-19/

At this stage there have been no announcements with regards to any extensions to lodgement due dates. We will monitor and advise you of any developments.

Contact with our team and visiting our office

Based on the information provided by the Australian Government – Department of Health, we will be exercising social distancing. Accordingly, all face-to-face meetings will be held electronically via telephone or web meeting.

Our team have the technology and devices to be able to continue to support you regardless of work location.

For the latest information about coronavirus in Australia, visit the Australian Government’s Department of Health website https://www.health.gov.au or contact the coronavirus health information line: 1800 020 080.

We encourage our clients and the community to remain calm, if we work together to follow protocols within our community, we can help to reduce the risks associated to coronavirus.

We will get through this together.

How the Superannuation changes impact Insurance and Estate Planning strategies

From 1 July 2017, significant changes to superannuation, consequently impact insurance and succession planning strategies which may give rise to the need for reviewing of existing insurance and estate plans.

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Key points:

Dependents can now choose from which super fund their pension commences by rolling over to their fund of choice.
Limitations now apply on the ability to receive Life Insurance proceeds as pensions.

Rollover of death benefit

One of the reforms that applies from 1 July 2017 is the ability to rollover a death benefit to another superannuation fund.

Dependants can now choose from which superannuation fund their pension commences, by rolling over to their fund of choice. This allows more flexibility when deciding which superannuation fund to hold insurance in at the outset, as some do not have the capability to pay a pension.

Only dependants who are currently able to receive a pension will be able to roll to another fund in order to commence a pension — there is no change to eligibility. Specifically, this is the deceased’s:

Spouse
Child under age 18, age 18–25 and financially dependent, or any age and disabled
Financial dependant, or
Someone who was in an interdependency relationship with the deceased just prior to their death.

Whether the pension commences in the fund that insurance is held, or in another fund into which proceeds are rolled, tax may apply to pension payments if the beneficiary is under age 60 when they receive them, and the deceased was under age 60 at their date of death.

Implications of the transfer balance cap

The $1.6 million transfer balance cap, which has applied since 1 July 2017, limits the amount that can be used to commence a pension. This affects death benefit pensions, with different rules applying for discretionary and reversionary death benefit pensions, and child pensions.

Discretionary death benefit pensions

A discretionary (non‐reversionary) death benefit pension may commence when the dependant beneficiary has given specific instructions; or when the trustee is acting on guidance, or a BDBN, provided by the deceased before their death.

Where the trustee commences a death benefit pension that is not a reversionary pension, the commencement value of the pension counts as a credit towards the transfer balance account on the date that the death benefit pension commences.

The commencement value includes any investment earnings accrued to that point, including proceeds from a term life policy — regardless of whether the policy was held in the accumulation or pension phase of the deceased member.

If a discretionary death benefit pension is paid, where superannuation savings and term life proceeds are in excess of the transfer balance cap, the excess will need to be paid out from superannuation as a lump sum. Therefore, while it may be beneficial to fund the full sum insured inside superannuation for affordability reasons, the entire amount of the proceeds may not be retainable inside superannuation.

Reversionary death benefit pensions

A reversionary death benefit pension is a pension that commenced in the name of the deceased and, upon their death, continues, but in the name of their nominated dependent beneficiary. The pension does not cease at any point, as the reversionary beneficiary is immediately entitled to receive payments.

In this scenario, for pensions that reverted on or after 1 July 2017, a transfer balance credit equal to the value of the reverted pension on the date of death, will show in the transfer balance account 12 months after the date of death. The 12‐month grace period allows the dependent beneficiary enough time to rearrange their superannuation interests to ensure that they do not breach the transfer balance cap.

Any term life proceeds paid from a policy held in the pension account will be paid after the date of death. Therefore, it appears that these will not count towards the transfer balance cap. Industry guidance has not clarified this point, and thus a private ruling may be required.

Child pensions

The rules differ for child pensions derived from death benefits, in that the child’s transfer balance cap refers to their portion of the parent’s retirement phase interests. Once the child pension ceases, the child’s transfer balance will extinguish, and they will be able to utilise a second transfer balance cap as an adult.

If the child pension commences after 1 July 2017, the applicable transfer balance cap will depend on whether the parent had a transfer balance account or not. A transfer balance account will exist for the parent if they had an existing pension at their date of death, or they had previously commenced a pension that they subsequently exhausted.

If the parent did not have a transfer balance account and they died on or after 1 July 2017, the child’s transfer balance cap is their portion of the parent’s superannuation interest (including insurance proceeds) multiplied by the general transfer cap ($1.6 million (2017/18)). For instance, if the deceased adult has four children, each could commence a pension with a maximum account balance of $400,000 ($1.6 million/4).

If there is a superannuation balance available, and the term life sum insured is large, it is possible that not all proceeds will be payable as a pension. The remainder will need to be paid to the child(ren) as a lump sum.

If the parent had a transfer balance account and they died on or after 1 July 2017, the child’s transfer balance cap is their portion of the parent’s retirement phase interest that the child has received as a death benefit pension. A retirement phase interest includes any investment earnings accrued after death but before commencement of the child pension, however, it excludes proceeds from a term life policy.

Therefore, in this scenario, regardless of whether term life insurance is held in the accumulation or pension phase, proceeds from the policy will need to be paid to the child as a lump sum.

While there may be limitations on the proportion of term life proceeds that are payable as a pension, the parent may still choose to fund insurance from, and therefore own cover inside, superannuation.

Conclusion

The recent super changes have inadvertently impacted pension strategies which are utilised as a tax effective strategy for dealing with Life Insurance proceeds, at the same time flexibility has increased with the ability to now rollover death benefit pensions to a super fund of the dependents choosing.

Enquiries:

Sam Perera

02 9266 2279

[email protected]

Source: Kaplan, A step by step guide to insurance and estate planning from 1 July 2017.

SMSF Event Based Reporting

With the introduction of the transfer balance cap (TBC), the Australian Taxation Office (ATO) proposed new reporting requirements on all superannuation funds, including Self-Managed Superannuation Funds (SMSFs).

After consultation with the SMSF industry, the ATO announced on 9 November 2017, a relaxed implementation of the new reporting requirements.

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Under the proposed reporting regime, events that count towards an individual’s transfer balance account (TBA) were to be reported within a relatively short timeframe, some within 10 business days after the end of the month in which the event occurs.

Recognising the magnitude of increased administration for SMSFs, the ATO has limited the reporting to SMSFs with members with total superannuation account balances of $1 million or more.

What events will need to be reported?

SMSFs will only need to report events that impact their TBA. Those events include:

Commencement of new an income stream (pension)
Commutations
Cessation of an income stream
Rollovers income stream amounts to another fund to start a new pension
Limited recourse borrowing arrangement (LRBA) repayment events
Structured settlement contributions received on or after 1 July 2017

When do these events need to be report?

From 1 July 2018, those SMSFs that have members with total superannuation account balances of $1 million or more will be required to report the above events within 28 days after the end of the quarter in which the event occurs.

What are the consequences for not reporting?

ATO penalty

If an SMSF fails to report by the required date, a “failure to lodge” penalty may be imposed by the ATO. Depending on how long the event remains unreported, the penalty can be up to $1050 (5 penalty units) for each event.

Tax on Excess Transfer Balance earnings

Where an individual exceeds their TBC, there is tax imposed on excess transfer balance earnings and these earnings accrue until the excess has been removed. Therefore, by reporting late, the individual may end up paying tax on a larger earnings amount then they would have if the amount was removed sooner.

How is Economos getting ready?

We are ready!

We have invested in technology back by a team of experienced SMSF specialist accountants to ensure our clients comply with the new event based reporting regime.

Economos 2017-18 Federal Budget Wrap

Want to know how the Federal Budget measures impact you? Check out our 2017-18 Federal Budget Wrap and if you have any questions or for further information/advice, feel free to get in touch!

Economos 2017-18 Federal Budget Wrap

NSW takes another bite of Foreign residential landowners

The NSW State Government has taken further steps in claiming revenue from foreign land owners.

As a result of the 2016 NSW Budget, a 4% surcharge duty on acquisitions of residential land in NSW by foreign purchasers, will apply to all contracts entered into from 21 June 2016.

The duty is calculated by reference to the dutiable value of the land (generally the purchase price), and is in addition to the standard stamp duty imposed and payable upon acquisitions of land. The surcharge duty will have application irrespective of whether the foreigner is an investor or otherwise, and extends to options to acquire residential land.

Additionally, a land tax surcharge of 0.75% will apply to the taxable value of residential land in NSW owned by foreign persons, commencing in the 2017 land tax year (31 December 2016). These foreigners will also not be entitled to the land tax tax-free threshold, and no principal place of residence exemption will apply for the purposes of the surcharge.

Are you a Foreign Person?

A foreign person is taken to include:

an individual not ordinarily resident in Australia (except for Australian citizens irrespective of where they reside, and New Zealand citizens who hold a special category visa); or
an individual who is not ordinarily resident in Australia, and who holds a substantial interest (20% or more) in a corporation or trust; or
two or more individuals who are not ordinarily resident in Australia, and who hold substantial interests (40% or more) in a corporation or trust.

An individual will be “ordinarily resident” if they have actually been in Australia during 200 or more days in the 12 month period immediately preceding the purchase.

What is Residential Land?

Residential land is defined broadly to include any of the following:

a parcel of land on which there are one or more dwellings, or partially completed dwellings (such as a house);
a strata lot, utility lot or a land use entitlement that is or relates to a separate dwelling; and
a parcel of vacant land that is zoned or otherwise designated for use for residential or principally for residential purposes.

It does not include any land used for primary production, nor does it apply to commercial premises.

For example, the types of property that will attract the duty surcharge in NSW include:

established homes and residential apartments;
a parcel of land on which there is a home or a residential apartment block under construction; and
vacant land (including property development site) that is zoned or designated for residential purposes.

Application to Landholder Companies & Trusts

Where one or more foreign persons acquire an interest in a residential landholder, such as shares in a company, they will be liable to the surcharge to the extent that the landholding is residential.

Furthermore, defining foreign persons is important, particularly where trusts are involved, as a trustee of a discretionary trust will be deemed to be “foreign” where the beneficial interest in the income or capital is held by a foreign person.

This is because, under the Foreign Acquisitions and Takeovers Act 1975 (Cth) (FATA), a beneficiary of a discretionary trust is taken to be entitled to 100% of the trust’s income and capital, irrespective of whether there has been a distribution in their favour. Accordingly, if a beneficiary is not ordinarily in Australia, the trustee will be considered a “foreign person” and hence liable for the surcharges when the trust acquires or holds residential land at the relevant taxing points.

If you wish to know more please contact us at Economos Chartered Accountants

$1.6m Transfer Balance Cap

Retirees with + $1.6m in super face changes to their tax treatment from 1 July 2017

Introduction

One of the biggest proposed super changes brought down in the 2016-17 federal budget was the $1.6 million transfer balance cap. Since the announcement, the legislation has been passed and we now have certainty on the details for this change.

The changes are included in the three bills given Royal Assent last week:

Superannuation (Objective) Bill 2016
Treasury Laws Amendment (Fair and Sustainable Superannuation) Bill 2016
Superannuation (Excess Transfer Balance tax) Imposition Bill 2016

The concept of the $1.6 million balance transfer cap appears simple, however the devil is in the details when it comes to implementation.

What is the $1.6 million transfer balance cap?

Broadly speaking, the $1.6 million transfer balance cap is a limit on how much an individual can transfer into a tax-free pension phase account. This will be effective from 1 July 2017.

The transfer balance cap is per individual.

How does it work?

The transfer balance cap is established at the time an individual moves from accumulation phase into pension phase.

If the individual is already in receipt of a pension on 1 July 2017, the transfer balance cap will be applied at that time.

The transfer balance cap will be tracked like an account or ledger, whereby amounts transferred into pension phase are credits and amounts commuted or rolled over are debits.

Earnings and capital growth on assets supporting the pension are ignored when calculating the cap usage. There is no limitation on the appreciation of value and no requirement to remove the excess earned over $1.6 million.

Conversely, if the pension balance falls below the $1.6 million cap due to poor investment returns, there is no ability to “top up” the shortfall to the cap.

Indexation of the transfer balance cap

The transfer balance cap is indexed in increments of $100,000 on an annual basis in line with Consumer Price Index.

If an individual has not fully utilised their transfer balance cap and chooses to transfer after an indexation increase has occurred, the balance cap amount will be subject to a proportioning formula.

Example

Julie commences a pension with a balance of $1.2 million in the 2017/18 financial year. At that time, she has utilised 75% of her $1.6 million transfer balance cap.

Let’s say the cap was indexed to $1.7 million in the 2019/20 year, her cap has also increased by $25,000, being 25% x $100,000 increase. Accordingly, Julie can commence another pension with $425,000 without breaching her transfer balance cap.

What happens to the individuals already in pension phase before 1 July 2017?

For those who are already in retirement phase and have pension balances totalling to more than $1.6 million, they will need to take action. They have 2 choices:

Commute/Transfer the excess above $1.6 million into an accumulation account within the existing superfund or rollover to another; or
Withdraw the excess above $1.6 million out of superannuation.

If the excess amount is not dealt with, the tax office will issue a directive to commute the excess amount (plus notional earnings) from the retirement phase and issue an Excess Transfer Balance Tax assessment. The imposed tax is on the notional earnings on the excess amount. The tax rate will be 15% for the first notice which is aimed to equalise the tax had it been in the accumulation account. If the first directive is not complied with, the tax office may issue additional assessments which carry a 30% tax rate.

The notional earning amount is based on the 90 Days Bank Accepted Bill Yield plus 7% and compounds daily (similar to the General Interest Charge).

There are some individuals who still have defined benefit lifetime pension such as Life expectancy or Market-linked pensions which have commutation restrictions. Due to these restrictions, the pensions count towards the transfer balance cap, but the individuals cannot reduce the balance to $1.6 million using the methods above. To comply with the cap, there are special valuation arrangements and additional rules relating to Excess Transfer Balance Tax.

Transitional CGT Relief – Resetting Cost Bases

The legislation provides Capital Gains Tax (CGT) relief to those individuals that comply with the transfer balance cap and transition to retirement income stream changes, allowing the cost base of assets reallocated from pension to accumulation phase to be reset. Effectively, if a superfund elects to use this CGT Relief, the superfund is taken to have sold and then reacquire the asset. It is important to note that by applying the CGT Relief, the 12 month eligibility period for the purpose of the CGT discount also resets.

Under this relief, the deemed sale triggers a CGT event. The superfund can choose to include the assessable portion of the capital gain in the tax return or elect to have the gain deferred when the asset is sold.

The elections to utilise the CGT Relief and capital gains deferral, are irrevocable and must be done by the due date of the superfund’s 2016/17 Income Tax Return.

What to do next?

Talk to us and start planning.

We have a planning program for our existing clients which will start from 1 January 2017.

Although this measure theoretically comes into effect from 1 July 2017, it is clear from the detail that action is required much earlier.

Everyone’s circumstances are different and factors such as fund structure, investment types and values, will play a crucial part in determining what choices are the right choices for you.

ATO Data Matching

Third Party Reporting Legislation

Once upon a time, financial information was not readily available and the Australian Taxation Office (ATO) relied on the honesty of taxpayers when preparing and lodging their tax returns.

In the days before that, ATO assessors would sit and ‘mark’ the tax returns.

Thankfully those days are long gone.

These days commerce is undertaken online and checks and balances are provided by digital analysis and the ATO’s digital reach now extends across the internet and international borders.

A New Reporting Regime

Tax and Superannuation Laws Amendment (2015 Measures No. 5) Bill 2015 was given royal assent on 30 November 2015.

This legislation has four main parts to it and Schedule (or “Part”) 4 is about Third Party Reporting.

It was introduced to require third parties to report transactions of real property, shares and units, business transactions made through payment systems and government grants and payment data directly to the ATO.

The legislation has been in place for almost one year.

From 1 July 2016, the states and territories of Australia are obliged to report information about transactions to the ATO pertaining to the following:

Real Property Transactions

The regime applies to all real property transfers executed. State and Territory Revenue Authorities and Land Titles Offices are required to report land transfers within their jurisdiction to the ATO.

In NSW, this information will be collected through a ‘Land Tax Certificate’ which is required to be obtained for every sale of land.

Government grants and payments

Government entities are required to report information about the grants they make to ABN holders and payments for services provided. The start date for collection of data is 1 July 2017.

Business Transactions made through E-Payment Systems

Administrators of payment systems will be required to report transactions they facilitate on behalf a business where the business is receiving a payment, providing a refund or cash to a customer of the business.

Reporters will need to commence collecting the required data from 1 July 2017.

Unit trust transactions

The Australian Securities Investments Commission (ASIC), stockbrokers, share registries, trustees and fund managers will be required to report on the transfer of all shares or units in unit trusts.

The start date for reporting was 1 July 2016 for ASIC.Managed Funds and Trustees reporting through an Annual Investment Income Report will need to report by 31 October 2018.

All other reporters will need to commence collecting the required data from 1 July 2017 with the first annual report due for submission by 31 July 2018

What does this mean for our clients?

In the age of data matching, big data and digital footprints its important to consider that the regulator does not always get it right. Sometimes they add one and one and end up with three! An incorrect assumption can be made and you as the tax payer can end up with a query about a transaction.

By ensuring you (as the client) maintain appropriate records; any ATO queries can be easily addressed without excessive costs.

Its important the tax payer maintains evidence of all major transactions so anomalies can be easily explained.

If you end up with an erroneous query from the regulator, stay calm and contact your advisor or accountant.

If you as the taxpayer are undertaking transactions which create anxiety it is important to discuss with your adviser, so that they can properly identify whether any particular activity you are undertaking is likely to be seen by the ATO as unusual and worthy of further investigation.

A comprehensive list of the ATO’s data matching protocols can be found here: https://www.ato.gov.au/General/Gen/Data-matching-protocols/

Super Reforms passed

The 2016-17 Federal Budget proposed major super reforms have been passed by both houses of Parliament.

Once they receive Royal Assent the major changes include from 1 July 2017:

$1.6 million balance transfer cap
Div293 tax income threshold reduced to $250,000
Concessional contribution cap reduced to $25,000
Non-concessional contribution cap to be $100,000
Removal of the 10% rule for deductible personal concessional contributions

Now we have some certainty, its time to start planning. If you are a current, or even a potential client call me for planning opportunities.

Detailed analysis to come

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