Tag Archives: SMSF

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.

There have been so many changes in superannuation in the last few years, it can be hard to keep track with the best ways to maximise your self-managed superannuation fund.

Here are our Top 10 strategies to utilise your Self-Managed Superannuation Fund (SMSF).

1. Maximise Contributions with Personal Superannuation Contributions

If you make a personal contribution into your superannuation fund, you may be able to claim a tax deduction for those contribution. The contribution must be made from your after-tax income i.e. from your bank account directly into your super fund. Before claiming a deduction, you must submit a Notice of Intent to Claim a Deduction for Personal Contribution Form and receive an acknowledgement from your fund. Personal super contributions that are claimed as a tax deduction will count towards your concessional contribution cap (2018-19: $25,000). If you exceed the cap, you will have to pay extra tax and will count to your non-concessional contribution cap.

Suitable for members who are investors externally to their SMSF

2. Direct Property Investment

Buying an SMSF Property or investment property directly through an SMSF is becoming increasingly popular. Direct property investing can provide capital growth and rental income in a very tax advantageous structure. Rental income is taxed at 15% and capital gains at 10% if the property is held for more than 12 months. If you hold your property until you have retired and commenced a pension, both rental income and capital gains could become tax free.

Suitable for people who enjoy property investing

3. Business Real Property

Generally speaking, you cannot buy an SMSF property and live in it, nor can you rent it to a relative, even on commercial terms. However, if you run a business, you can buy a commercial property using your SMSF and lease it to your own business.

Your business would pay rent at market rate to your SMSF, which is a tax-deductible expense for your business. Since rent is not classified as a superannuation contribution, you can still make concessional and non-concessional contributions, subject to your age and contribution caps.

Suitable for members who are investors externally to their SMSF

4. SMSF Property Loans or Limited Recourse Borrowing Arrangements

SMSFs can borrow money to purchase a single acquirable asset such as a property, or a collection of identical assets that have the same market value such as a parcel of shares. This is achieved via a limited recourse borrowing arrangement (LRBA). This arrangement involves the lender’s recourse being limited to the single asset. Borrowing in an SMSF is not without risk although there are several potential benefits including leverage, tax advantages and asset protection.

Suitable for experienced property investors with the ability to service the loan in their SMSF.

5. Recontribution Strategy

A re-contribution strategy is where you withdraw your super and re-contribute it back into super. There a several reasons as to why you may utilise this strategy:
• Estate Planning
• Tax Planning
• To utilise you and your spouse’s Transfer Balance Cap (currently $1.6 million)
• To maximise Centrelink Benefits
• Access government co-contribution and spousal contribution tax offset.

Suitable for members who have retired or over 65 years old, and eligible to make non-concessional contributions

6. Start an Account Based Pension

Once you reach preservation age and have met the relevant retirement conditions, you can allocate up to $1.6 million to start an Account Based Pension. An Account Based Pension converts your accumulation balance into “retirement phase”. In retirement phase, earnings are tax-free.

Suitable for members over 65 years old and members who are retired – aged between preservation age and 64 years old

7. Spousal Contribution Splitting

This strategy involves one member of a couple to split up to 85% of their concessional contributions received within a financial year with their spouse. This opportunity provides an opportunity to equalise their retirement benefits in particular where one spouse is younger, earning a lower income or is not working.

Suitable for couples

8. Separate Investment Strategies/Segregated Assets

Circumstances may warrant separate investment strategies within one fund e.g. Parents with children in one fund. The children have a different investing profile to their parents. Under new legislation if funds have over $1.6 mil in pension phase, they are not entitled to use segregation to determine tax-free earnings. However, there is a difference between segregation for tax and segregation for accounting.

Suitable for funds with both parents and children

9. In Specie Transfers

This involves making a contribution by transferring listed shares or business real property into your SMSF and not receiving cash proceeds. Although this triggers a SMSF capital gains tax event, this will allow future earnings to be made in a concessional tax environment. Subject to contribution caps.

Suitable for investors who hold investments in listed shares and business real property outside super

10. Downsizer Contribution

An older Australian who downsizes can contribute up to $300,000 to super regardless of employment status, Total Superannuation Balance and non-concessional contribution cap. This involves a member 65 years old or older, selling their home and making a contribution within a prescribed period.

Suitable for members over 65 years old

Bonus Strategy

11. Carry-forward concessional contributions of unused caps over five years

From 1 July 2018, if your Total Superannuation Balance is less than $500,000 at the end of a financial year, you will have the opportunity to start accumulating the unused portions of your concessional contribution caps from previous years (up to 5 years) in the following financial years. This mechanism will allow you to “catch-up” on concessional caps and make contributions which will count towards your unused concessional contribution caps.
Amounts carried forward that have not been used after five years will expire.
The first year in which you can access unused concessional contributions is the 2019–20 financial year.

Suitable for members with balances less than $500,000 in superannuation

Our SMSF Accountant and Specialist, Leanne Tinyow

Speak to one of experienced SMSF Accountants in Sydney. Leanne Tinyow is Economos’ Head of SMSF Services and is in charge of the compliance and administration of over 400 Self-Managed Super Funds. She is also well versed in helping new clients with SMSF setup and sdministration and can answer several SMSF property related questions.

$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.

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

SMSF and Personal Bankruptcy

Bankruptcy and SMSFs

When an individual suffers bankruptcy, one of the last things they consider is their Self-Managed Superannuation Fund (SMSF).

When a Trustee becomes insolvent or is declared bankrupt, they are classified as a disqualified person. A disqualified person should not be a Trustee of a Superannuation Fund or a Director of a Corporate Trustee. Under Section 126K of the Superannuation Industry Supervision Act 1993 (SIS Act), penalties can apply, if a person continues to act as a Trustee of the SMSF after knowing they are disqualified.

Those who are a member of an SMSF must also be an individual trustee or director of a corporate trustee. A disqualified person cannot be an individual trustee nor director of a company trustee – hence the problem.

So when a trustee becomes a disqualified person, it poses a serious problem to the SMSF and puts the entire fund at risk.

If you are a Director of a Corporate Trustee, you may also have obligations to inform the Australian Securities & Investments Commission (ASIC).

For more information, see the ATO Commissioner Practice Statement on disqualification of the Trustees (PS LA 2006/17).

If you become bankrupt or enter into a personal insolvency agreement, you must:

Remove yourself as a trustee

You must cease being, or acting as a trustee immediately. This must be notified to the tax office within 28 days.

Restructure your SMSF

After removing yourself as a trustee, the SMSF has 6 months to restructure in order to meet the definition of an SMSF. The basic definition of an SMSF is that all members must be trustees and all trustees must be members and there must be more than one and no more than four individuals.

The other trustees or directors of the corporate trustee have the following options:

Rollover the bankrupts benefits to another complying superfund e.g. Retail or Industry funds
Appoint an approved trustee who has a license from APRA i.e. the SMSF changes from being self managed to being a Small APRA Fund (which becomes managed by someone else);
Wind up the fund by rolling all members’ benefits out of the fund and into another appropriate super vehicle.

How to become a trustee of an SMSF again?

A person, who was disqualified due to insolvency/bankruptcy, cannot have their disqualification status waived during the period of administration.

However once they have been discharged from bankruptcy, they are no longer a disqualified person and can become a trustee of an SMSF again.

Disqualification may be a result of a conviction involving dishonesty or a court determination. If a person became a disqualified due to conviction involving dishonesty, they may apply for a declaration to waive their disqualified status. This must be done within 14 days after the date of their conviction. And under a court/regulator disqualification, application must be made to request the court/regulator to revoke the disqualification.

Due to the tight deadlines, restructuring and the highly involved nature with the regulators, we urge any person who may become insolvent or bankrupt and holds an SMSF to contact our office.

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