ELEPHANTS IN THE ROOM RELEASED
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REACHOUTTOUS!
Investing | 26
The role of fixed income.
Investing | 30
The time for gold.
Compliance | 34
What to do with in-house assets.
Strategy | 38
The case for one-member SMSFs.
Compliance | 42
Pension transfers from overseas part two.
Compliance | 46
The impact of taxation.
Strategy | 49
Direct property investing options.
Compliance | 52
Key considerations with contributions.
Compliance | 56
The benefits of unitholder agreements.
Strategy | 59
Succession planning for directors.
What’s
When endeavouring to make a change of any significance, doing your homework or due diligence first is key. This principle applies to plenty of scenarios in business, such as hiring a new employee or perhaps looking to acquire a significant asset or another business. In doing so you will hopefully discover any issues that may arise down the track and as such avoid them before they happen.
Based on this premise, some of the problems that have arisen from the introduction of SuperStream to SMSFs have certainly come as a surprise.
Don’t get me wrong, I’m not saying the implementation of a new system has to be done in a completely flawless manner. When undertaking such a significant change in the accepted method by which monies flow in and out of superannuation funds, there are naturally always going to be teething problems, particularly when technology is involved.
For example, the ability for all SMSFs to obtain an electronic service address was one of those requirements that always had the potential of resembling the unenviable task of herding cats. For a start, there were only 15 service providers to choose from and some of them were only facilitating member contributions and not balance rollovers. Hopefully this situation will improve now Australia Post has come to the party offering a full service proposition.
But there is a situation causing SuperStream angst that could have so easily been avoided, even without really having to doing much preplanning research or testing. I’m referring to rollovers out of SMSFs into Australian Prudential Regulation Authority (APRA)-regulated funds that are being prevented from being executed because of standard operating procedures
most of the major banks have in place. SuperStream rollovers are supposed to be performed electronically and executed using one transaction only. All else being equal, this in theory will allow the receiving fund, that is the APRA-regulated fund in the situations to which I’m referring, the ability to record one payment reference number, which in turn allows them to process and finalise the transaction.
Of course, member rollovers are likely to involve large amounts of money, often in the hundreds of thousands of dollars, especially if individuals of an older demographic are involved. Under the SuperStream system, these amounts have to be moved via electronic funds transfer (EFT) and herein lies the problem. Just about every bank places a daily limit on the amount of money that can leave an account using an EFT and this limit is often set anywhere between $20,000 and $50,000.
These banking protocols mean multiple EFTs are having to be established to process a single member rollover, resulting in multiple payment reference numbers and transaction rejection.
The frustrating aspect to this situation is any small business owner or individual who has ever tried to make payments over a certain dollar amount knows these limits exists. So how hard would it have been to realise this would be problematic for the operation of SuperStream? All you would have to do is ask either the banks or any small business owner.
Instead, organisations like the SMSF Association and APRA-regulated funds are having to work together to find an acceptable solution.
It highlights the importance of doing proper due diligence before making a major operational change that results in the exact type of inefficiencies the change is attempting to eliminate.
Editor Darin Tyson-Chan darin.tyson-chan@bmarkmedia.com.au
Senior journalist Jason Spits
Sub-editor Taras Misko
Head of sales and marketing David Robertson sales@bmarkmedia.com.au
Publisher Benchmark Media info@bmarkmedia.com.au
Design and production RedCloud Digital
INAUGURAL SMSF ASSOCIATION TRADE MEDIA JOURNALIST OF THE YEARSMSF Trustee
Empowerment Day
2022 – hybrid event
Inquiries:
Jenny Azores-David (02) 8973 3315 or email events@bmarkmedia.com.au
NSW
15 September 2022
SMC Conference & Function Centre
66 Goulburn Street, Sydney
9.00am-4.30pm AEST
Heffron
Inquiries: 1300 Heffron
Super Intensive Day 2022
NSW
1 September 2022
Rydges Sydney Central
28 Albion Street, Surry Hills
9.00am-5.00pm AEST
Quarterly Technical Webinar
29 September 2022
Accountants’ session
11.00am-12.30pm AEST
Advisers’ session
1.30pm-3.00pm AEST
SMSF Clinic Online
4 October 2022
1.30pm-2.30pm AEDT
8 November 2022
1.30pm-2.30pm AEDT
Institute of Public Accountants
Inquiries: Liz Vella (07) 3034 0903 or email qlddivn@publicaccountants.org.au
2022 National SMSF Retreat
NSW
7-9 September 2022
Mantra on Salt Beach Kingscliff
Gunnamatta Avenue, Kingscliff
2022 National Congress
QLD
16-18 November 2022
JW Marriott Gold Coast Resort & Spa
158 Ferny Avenue, Surfers Paradise
DBA Lawyers
Inquiries: dba@dbanetwork.com.au
To
SMSF Online Updates
9 September 2022
12.00pm-1.30pm AEST
7 October 2022
12.00pm-1.30pm AEDT
11 November 2022
12.00pm-1.30pm AEDT
Accurium
Inquiries: 1800 203 123 or email enquiries@accurium.com.au
SMSF Compliance Essentials QLD
6 September 2022
Hotel Grand Chancellor Brisbane
23 Leichhardt Street, Spring Hill
8.45am-5.10 pm AEST
13 September 2022
Online
9.00am-12.45pm AEST
SMSFs and GST
20 September 2022
Webclass
12.30pm-2.00pm AEST
How does your SMSF death benefit nomination stack up?
11 October 2022
Webinar
12.30pm-1.30pm AEDT
Dealing with the death of an SMSF member
18 October 2022
Webinar
12.30pm-2.00pm AEDT
Quarterly SMSF Update
10 November 2022
Webinar
2.00pm-3.00pm AEDT
Live Q&A
24 November 2022
Webinar
2.00pm-3.00pm AEDT
SuperGuardian
Inquiries: education@superguardian.com.au or visit www.superguardian.com.au
Unit trust investments in an SMSF
7 September 2022 Webinar
12.30pm-1.30pm AEST
Smarter SMSF
Inquiries: www.smartersmsf.com/event/
Changing face of SMSF
8 September 2022
Webinar
11.00am-12.00pm AEST
Insurance with an SMSF
19 October 2022
Webinar
2.00pm-3.00pm AEDT
How SMSFs fared in the federal budget
27 October 2022
Webinar
2.00pm-3.00pm AEDT
Tax and Super Australia
Inquiries: (03) 8851 4555 or email info@taxandsuperaustralia.com.au
The Super Insurance Strategy Series
Part 1
15 September 2022
Webinar
12.30pm-1.30pm AEST
Part 2
27 October 2022
Webinar
12.30pm-1.30pm AEDT
SMSF Auditors
Association of Australia
Inquiries: smsfaaa.com.au/conferences
(02) 8315 7796
SMSF Auditors Day 2022
QLD
27 September 2022
Sofitel Gold Coast Broadbeach
81 Surf Parade, Broadbeach
8.00am-6.00 pm AEST
SuperConcepts
Inquiries: 1300 023 170
Insights into the future of SMSFs
29 September 2022
Webinar
12.30pm-1.30pm AEST
How to structure property as an SMSF investment
27 October 2022
Webinar
12.30pm-1.30pm AEDT
Virtual SMSF Specialist Course
11-13 October 2022
10.00am-2.00pm AEDT
18-20 October 2022
10.00am-2.00pm AEDTs
Cooper Grace Ward
Inquiries: (07) 3231 2400 or email events@cgw.com.au
Regional Roadshow –BDBNs in SMSFs
QLD
13 October 2022
Cooper Grace Ward Level 21, 400 George Street, Brisbane
20 October 2022
Pullman Cairns International
17 Abbott Street, Cairns
25 October 2022
Southport Golf Club
NSW
12 October 2022
The Grace Sydney 77 York Street, Sydney
Chartered Accountants
Australia and New Zealand
Inquiries: 1300 137 322 or email service@ charteredaccountantsanz.com
National SMSF & Financial Advice Conference 2022
NSW
20 October 2022
Hilton Hotel Sydney 488 George Street, Sydney
7.15am-8.00pm AEDT
21 October 2022
Masterclass CAANZ Conference Centre 33 Erskine Street, Sydney
To have an upcoming event featured on the What’s On page, please contact darin.tyson-chan@bmarkmedia.com.au.
have an upcoming event featured on the What’s On page, please contact darin.tyson-chan@bmarkmedia.com.au.
By Darin Tyson-Chan
A leading SMSF executive has acknowledged the growth in the sector is unlikely to continue and a fall in the number of funds and the proportion of superannuation holdings for which they account is to be expected.
“The SMSF sector sits at around 30 per cent of the total superannuation assets. Do we expect to see that increase? I suspect it probably will come down probably over the next decade,” SMSF Association deputy chief executive and director of policy and education Peter Burgess noted.
“The main reason for that I think is we will start to see some of these mega funds start to leave the industry. Some of these SMSFs that have $50 million and $100 million, that money will start to come out of the sector.
“With the introduction, of course, of the transfer balance cap, and the other caps, it’s inevitable that money will come out at some stage and it won’t be replenished or replaced with funds with balances of that size because of the contributions caps and things we have in place now.”
While Burgess predicted SMSFs are likely to contribute slightly less in terms of asset values to the industry, he is
adamant the role they play and their importance will not be diminished.
“I think it’s fair to say [the sector] will still be strong with regard to [the number of] self-managed super funds as the [“Class Annual Benchmark Report”] has found [their
A recent industry poll has shown the ability to choose the method by which exempt current pension income (ECPI) is calculated has already had a significant impact among SMSFs for the 2022 financial year.
The survey revealed 24 per cent of practitioners have SMSF clients who are exercising the choice made available to them and have selected the proportionate method to calculate the ECPI for their fund for the entire 2022 income year.
The exercise also indicated 38 per cent of advisers and accountants had SMSF clients who had chosen not to exercise their choice of ECPI calculation method, while another 38 per cent of participants said they did not have any clients who were eligible to choose how to derive the ECPI for the fund.
“[Seeing] 24 per cent [of trustees making
the choice to apply the proportionate method to determine their ECPI], that’s a pretty high number,” Accurium head of education Mark Ellem observed.
Accurium SMSF manager Matthew Richardson noted the survey result may not even be indicative of the actual effect the change in the ECPI rules has had.
“[The poll result] is reasonably close
popularity] among younger demographics,” he said.
“So we will see more funds, we will see more SMSF investors, but the proportion of those assets will be a little less than what we’ve got today.”
Heffron managing director Meg Heffron concurred with Burgess’s forecast and added another retirement savings factor will also contribute to this phenomenon.
“Legislatively, because we’re forced to take money out when everybody dies, we’ll see the whole quantum of super actually fall. It’s just we’ll only see that reflected in SMSFs probably because that’s where the big balances sit,” Heffron observed.
I would say [to the applications we’ve received for actuarial certificates]. I’m thinking we’re probably getting a few more [requests] for certificates where the trustee has made the choice so [the number from] this poll might be a little bit low [compared to the applications] we’ve received,” Richardson noted.
“But I’m surprised how high that ‘yes’ option is both in the certificate [requests] we’re receiving and in the poll at this point at least. I would have expected it to be a bit lower.”
Ellem pointed out the compliance season for SMSFs is still in its early stages, meaning the number of SMSF trustees exercising their right to choose the fund’s ECPI calculation method could still trend in a different direction.
Accurium anticipates the introduction of ECPI calculation method choice will affect around 3 per cent of SMSFs based upon statistics it has compiled.
SMSF Association chief executive John Maroney has announced he will depart the organisation in early 2023 after nearly six years in the role.
Maroney will be stepping down after the industry body’s 2023 National Conference, which is scheduled to take place in February next year.
He will be succeeded by association deputy chief executive and director of policy and education Peter Burgess, who will take on the chief executive position from March 2023.
Maroney, who has been chief executive since May 2017, said: “Having weathered the COVID storm and returned to hosting large, physical events, including the National Conference in April and Technical Summit [in July], 2023 is the ideal time to hand over to Peter for the next growth phase of the sector and association.”
Burgess, who rejoined the body in May 2020, after having previously held the role of technical director from 2010 to 2013, confirmed his commitment to servicing the association’s members in the future.
“I look forward to working with the board and members to achieve this outcome,” he said.
Former clients of Dixon Advisory and Superannuation Services Pty Ltd have been advised to make a complaint as soon as possible to the Australian Financial Complaints Authority (AFCA) to ensure they may be eligible for possible compensation in the future.
In a website update, the Australian Securities and Investments Commission (ASIC) said it will soon write to former Dixon Advisory clients to inform them a complaint can be made to AFCA if a loss has occurred and it may make them eligible for recompense if a compensation scheme of last resort is established.
“If [previous clients] believe they have suffered loss as a result of the misconduct of Dixon Advisory and/or their former Dixon Advisory financial adviser in providing financial advice, they should make a complaint to the Australian Financial Complaints Authority,” the corporate watchdog said.
“As complaints may only be made against firms who are members of AFCA, complaints against Dixon Advisory should be made as soon as possible. If Dixon Advisory’s AFCA membership ceases, then no further complaints can be accepted.”
The entire superannuation industry and not just the SMSF sector is now seeking a practical solution to the non-arm’s-length expenditure (NALE) rules as the severity of the associated penalties is being better understood.
The matter that is causing angst for superannuation funds across the board relates to the provisions around general expenses and how a discount on administrative services has the potential to trigger the NALE provisions, which will in turn have all of the income of the retirement savings vehicle taxed at 45 per cent.
Industry funds now realise the NALE rules could be applied to their operations as many of them outsource their administrative requirements in order to access cheaper rates.
“So they are caught under these provisions and it means all of the income that the fund receives, including all the SG (superannuation guarantee) contributions they receive from their millions of members, will be taxed at 45 per cent,” SMSF Association deputy chief executive and director of policy and education Peter Burgess said.
The situation was ranked as the number one superannuation industry issue at a recent meeting between the ATO and the industry associations.
The federal government has introduced legislation to further reduce the eligibility age to make downsizer contributions from 60 to 55, less than two months after changes reducing the age from 65 to 60 commenced.
The change is included as part of Treasury Laws Amendment (2022 Measures No 2) Bill 2022, which was introduced into the House of Representatives on 3 August by Assistant Treasurer and Minister for Financial Services Stephen Jones.
In the second reading for the bill, Jones said “this modest change in the eligibility age for the downsizer program complements the government’s comprehensive plan on housing to improve access and affordability”.
“This measure will increase the availability of suitable housing for growing Australian families by encouraging more older Australians to downsize to homes that better meet their needs,” Jones said.
The explanatory memorandum to the bill notes the amendments will also require contribution acceptance rules in the Superannuation Industry (Supervision) Regulations 1994 and Retirement Savings Account Regulations 1997 to ensure downsizer contributions can be accepted by regulated superannuation funds and retirement savings account institutions for individuals aged 55 and over.
Specialist SMSF advisers need to think long and hard before they give a client wholesale investor status. Although it may seem a smart and/or easy option that allows advisers to sidestep some regulatory hurdles, the reality is that it can prove to be a minefield.
It’s easy to understand why it’s tempting to go down the wholesale path. No one needs to be reminded of the regulatory ball of wool that is wrapped around the retail investor under the Corporations Act 2001 Whether it be the financial services guide, a statement of advice or a product disclosure statement, regulators are affording retail investors every possible protection.
But the evidence shows going wholesale is anything but a shortcut. Before explaining why, let’s define who falls into this definition. Under this umbrella we have the wholesale client, the professional investor and the sophisticated investor. Various rules and tests apply across these three categories. For SMSFs, the common method is one of the sophisticated investor tests with the use of an accountant’s certificate stating a person has $2.5 million in net assets or gross income of least $250,000 over the past two financial years. Put another way, it’s assumed these two thresholds show a degree of financial knowledge and investment awareness. However, these tests alone are not a measure of an individual’s sophistication.
Classifying a client as a wholesale or sophisticated investor does not mean they fall outside the regulatory system – an adviser’s duty of care and fiduciary duty to the client very much remains. Indeed, it’s because of the very vague nature of how SMSFs as a wholesale client fit inside the regulatory framework that can make it so risky for the adviser.
To begin with there are some critical questions advisers need to ask themselves before anointing a client with wholesale status.
For example, is it appropriate the fund is invested as a wholesale client in higher-risk investments outside of the retail client framework? The answer is not as straightforward as might be imagined because an adviser must remember that obtaining an accountant’s certificate attesting to wholesale status does not remove their legal, professional and ethical obligations.
Although a client may satisfy the relevant income or asset test, this does not measure the client’s sophistication, knowledge, experience or appetite for risk. Where the tests are incorrectly or inappropriately applied, the Australian Financial Complaints Authority has the discretion to consider complaints received from clients.
Another question advisers need to ask themselves is whether wholesale status is appropriate and in the clients’ best interests, including all members of the SMSF. They also need to ensure they comply with the Financial Planners and Advisers Code of Ethics 2019. Regarding wholesale status, not only advisers but accountants, too, can be at risk for assigning clients wholesale status.
The Corporations Act does have a few options for determining whether a client can have wholesale status. But the most popular option is getting an accountant’s certificate as it is commonly believed to shift the risk away from the adviser or licensee.
But caution needs to be exercised with this approach as accountants may be held liable if a client is later found not to have met the relevant requirements or clients seek to argue they should not have been classified as a wholesale investor and therefore were put at greater risk. It’s critical, therefore, for accountants to exercise their duty of care and apply professional judgment. They must also comply with APES 110, the Code of Ethics for Professional Accountants.
The other problem clouding wholesale status is the regulatory uncertainty. The Australian Investments and Securities Commission (ASIC) simply does not give the guidance advisers or accountants need. Up to 2014, ASIC’s view was that unless an individual in an SMSF context had $10 million in net assets, they would be classed as a retail client. No ifs or buts.
But ASIC has since softened its compliance approach. Now the regulator advises it will not act where an SMSF trustee has been provided with services as a wholesale client that relate to the investments in the fund, where the fund has net assets of at least $2.5 million. This threshold, however, is not legally binding – merely a statement that no compliance action will be taken.
The simple fact is ASIC has not issued any formal guidance on the application of these tests or addressing issues arising in an SMSF context. This highlights the need for legislative change to provide greater clarity and certainty on the subject.
For the adviser or accountant with SMSF clients, it means there are more holes in the regulatory framework than Swiss cheese. Certainly, there is ample scope for aggrieved clients to challenge their classification as a wholesale client. It also highlights that those professionals providing financial services to SMSF trustees need to make their own commercial decisions and consider the legal and business risks. The retail route might be more onerous but also might be safer.
The east coast of Australia has been subject to some of the heaviest flooding on record over the past two years. There have been multiple incidents of tragic flooding affecting large areas of south-east Queensland and coastal New South Wales. Among the affected areas were two of our nation’s most bustling capital cities: Brisbane and Sydney.
For property investors, these two cities have typically been safe havens. Strong price growth, solid rental returns and low vacancy rates have attracted capital from across the nation and many have bought real estate assets in these locations within their SMSFs.
It’s understandable there will now be some investors who are nervous about what has occurred in these cities, what the future might hold and how to protect themselves. It’s here where trustees would be wise to think more carefully about the importance of insurance.
Insurance is, of course, a necessary part of what it means to have an SMSF and is a bulwark against risk that already forms the backbone of an investment strategy. However, for most trustees, the focus has traditionally been squarely on the areas of insurance typically associated with superannuation, whether that be in relation to death, temporary and permanent disablement, income protection or a combination. In other words, trustees usually spend plenty of time considering insurance designed to protect members. But what about insurance designed to protect assets?
The decision to start an SMSF may have come about as a pragmatic way to hold specific assets that are not necessarily easy to include in an Australian Prudential Regulation Authority-regulated superannuation fund. A particular property may be on this list. In this case, the trustees absorb all the regular duties associated with such an asset, such as obtaining tenants to lease the home and maintaining and repairing the property.
The trustees also acquire additional duties, such as regular valuations for reporting purposes, as well as needing to consider on an ongoing basis whether owning the asset is consistent with the fund’s investment strategy, sole purpose test and members’ best financial interest duty.
Part of trustees’ ongoing duties to members is to ensure an investment property is adequately insured against damage, fire, theft and any potential default by renters. This sounds trivial in theory, but in practice this matter has become a great deal more complicated due to the impact of climate change.
As weather patterns change and flood activity becomes more severe, and our cities sprawl into areas that may have a higher risk of disasters, the likelihood of super funds owning properties in riskier locations will rise.
Along with the rising risk, homeowners across the country are likely to scrutinise their own insurance policies and coverage. This could likely lead to an increase in the amount of risk insurers will take on. The knock-on effect of these events is a rise in insurance premiums. Trustees renewing their insurance in the months to come may start to see these costs rising. This is likely to inspire new interest in what has been, up to now, a relatively mundane cost faced by funds.
Insurance costs are unlikely to just jump for homes in risky locations. Insurance works by pooling different levels of risk. Consequently, even properties in locations unlikely to flood may face higher premiums. There is no set time each year that trustees need to review their insurance arrangements, however, they do need to review them. The cost of asset insurance should be assumed, at a minimum, to be the cost of retaining property and other insurable assets in one’s fund. A fund should be reviewing its investment strategy annually to ensure the decision to invest in assets such as property and any accompanying costs, such as insurance, are considered as part of the requirements on trustees to consider the overall risk, return, liquidity and diversification aspects of the fund.
If the shock of a higher premium is what it takes for some trustees to reconsider their arrangements, such consideration should be documented properly by trustees, rather than treating this as a cost-cutting exercise.
It may also be appropriate at this time to consider other asset insurance the fund might have in place. In particular, insurance over collectables and personaluse assets, which need to be insured within seven days of the fund acquiring them, could be covered under the same policy. Ultimately, the trustees are required to ensure the fund’s assets are properly insured against financial loss or liability.
A fund benefits from insurance as it helps manage its risk and improves peace of mind. But the best results are reached when properly considering insurance as part of the fund’s overall risk management.
If the cost of insuring a risky property means the trustees believe there is better value elsewhere, this may just be the right outcome.
Thirty years on, we celebrate that 1 July 2022 marked the 30-year anniversary of the superannuation guarantee (SG) system. Although the SG only became compulsory on 1 July 1992 and then at just 3 per cent to 5 per cent of salary/wages, it was the start of something special. At that time, it covered 72 per cent of workers and employers were required to make contributions into a superannuation fund for their employees. The introduction of the SG was the start of ensuring many working Australians have retirement savings on which they can live once they stop working, without relying solely on the age pension.
It took a decade for the SG rise to 9 per cent in 2002 and on its 30th anniversary, it increased to 10.5 per cent, with legislated plans to climb to 12 per cent by 2025. The gradual increase in the SG over the years has led to immense growth in the superannuation sector. In March 1992, before the introduction of the SG, the total value of superannuation assets was estimated to be $148 billion. Fast forward 30 years and the value of superannuation assets has grown to about $3.4 trillion as at 31 March 2022. To give context, assets held in the Australian superannuation system today exceed the entire market capitalisation of all companies listed on the Australian Securities Exchange, which at June 2022 was around $2.3 trillion.
Superannuation has seen many changes over the past 30 years, from the introduction of SMSFs in 1999, to the introduction of transition-to-retirement pensions and choice of fund rules in 2005, the Simpler Super changes in 2006/07, to more recent changes including the 2021 Your Future, Your Super reforms, the retirement income covenant from 1 July 2022, and the superannuation contribution changes beginning in the 2023 income year, just to name a few.
The superannuation system is not perfect and could do more with further improvements, but it is worthwhile reflecting on what has been achieved so far and asking whether the system is working to allow Australians to support themselves in retirement. What I think we can all agree on though is that compulsory superannuation does help Australians
build financial security in their retirement.
Looking to the future, the challenge is to ensure the superannuation system remains sustainable and works for everyone, without reintroducing uncertainty into the wider system which may then impact confidence and ultimately deter people from investing in super in the future.
To this end, one key challenge is the gender gap. As women take time out of the workforce to care for family and often earn less than their male counterparts, it’s no surprise they retire with much less superannuation than men. The statistics tell us the superannuation gender gap can be anywhere from 22 per cent to 35 per cent in the years approaching retirement age.
Pleasingly, the Labor government has hinted at a number of SG measures that may help close this gender gap. At the 2019 election, Labor committed to paying SG on 18 weeks of paid parental leave (PPL) offered by the government, a move which would help close the gender gap and improve retirement savings for women who take time away from work to have children. Since then, the new government has revisited this proposal with Treasurer Jim Chalmers stating at a media conference in July that, at some point, Labor would like to find a way to responsibly fund paying the SG on PPL provided it is affordable for the government and business alike.
We could also potentially see the SG rate increase to 15 per cent in the future. The ALP’s 2021 National Platform paper affirmed its commitment to the legislated SG increase to 12 per cent and once that has been achieved, it aims to set out a pathway to increasing it to 15 per cent. In that same paper, Labor also stated it would like to ensure the earnings of all workers, including contractors, would attract SG.
We will have to wait and see whether these proposals make their way into law.
In summary, although many pre-retirees who are nearing retirement have not had a complete career of compulsory SG contributions from their employers, the real winners will be those workers who retire having received these monies their entire working lives. Let’s hope the next 30 years will see a stronger and more sustainable superannuation sector.
What will be the outcome of the Quality of Advice Review? This is an extremely good question and speculation is often fun and sometimes necessary.
We could spend the next umpteen number of hours talking, writing and reading about what may happen. For policy advocates such activities are essential if they need to meaningfully engage with these types of reviews.
But what about for people who work at the coalface with actual retail clients? If you fall into this cohort, I do not think it is worth your time engaging in the Quality of Advice Review for large amounts of time for the following reasons.
Allens partner and financial law expert Michelle Levy, who is leading the review, will hand her recommendations to government in mid-December this year.
From here the process then gets a bit murky.
Sometimes governments like to study a review’s findings before publicly releasing the main document and at the same time telling us what they intend to do with the review, such as the recommendations they will keep or change and when they will aim to implement them. They will also sometimes let us know what parts of a review will be ignored or discarded. Two examples of this process were the Ralph business tax review and the Henry tax system review.
On other occasions governments will release documents publicly and then at a later date indicate what they intend to do. An example of this process was the Cooper super review. In fact, with the Cooper review the government announced the formation of a committee to provide further guidance on the recommendations, so a review and then an implementation group.
Once we know the government’s position, we then have the legislation and regulation to put in place its ideas. It is often the case there are differences between what gets announced and what actually finds itself into practical application. There are too many reasons as to why this occurs.
In short, in relation to the Quality of Advice Review, no one knows where it will land, no one knows what the government will do with these recommendations
and no one knows what the functional implications will be of any rule changes and when they may apply.
In my view, I think those dealing directly with clients should focus on what you need to comply with now. You know it is likely the rules are going to change and hopefully change for the better. But that won’t help you get your work done right now.
So this deals with the quality of advice and the unknown ‘rubber has hit the road’ timeline.
Now let’s look at what areas of advice the review will actually address. The review is focused on the advice process, that is, the know your client rules and production of advice documents.
It is not necessarily looking into other aspects of the advice process, such as applying for a licence or being an authorised representative. Similarly, education standards will be subject to a separate review. It is also not necessarily looking at Australian Securities and Investments Commission fees and so on, which are also subject to a separate review.
So there are important aspects of the advice industry, which are market failures in most cases, such as limited Australian financial services licences for accountants, that the review will not be looking at.
The definitions of what is a retail, wholesale or sophisticated client are unfortunately out of scope as well. However, the review has been asked to examine if the “consent arrangements for sophisticated investors and wholesale clients are working effectively for the purposes of financial advice”.
It is our view that the definitions of wholesale and sophisticated clients are an area that needs urgent reform. We believe there are many situations where clients unknowingly give away their rights as a retail consumer, often to their long-term detriment. Shail Singh, one of the Australian Financial Complaints Authority’s (AFCA) senior ombudsmen, expressed a similar sentiment at the recent SMSF Association Technical Summit. Singh said AFCA would like to see clients make an informed consent about being classed as a wholesale investor.
Given its scope, the Quality of Advice Review has the potential to make long-term worthwhile improvements to the advice space, but clearly there are other areas of the advice sector that also need to be addressed.
Queensland has pulled the trigger on accounting for the value of land held interstate when assessing taxpayers’ land tax liability in Queensland. The state is the only jurisdiction to introduce this type of aggregation rule to include Australia-wide landholdings.
TONY GRECOThe interstate land tax measure is effectively a tax rate hike for all entities that hold land in Queensland as well as another Australian jurisdiction. It will have no impact on landholders who only hold land in Queensland.
If landlords pass this added impost onto tenants, this may force some rents to increase in the future. For residential properties this may exacerbate current affordability issues for tenants and will be unwelcome.
There is low awareness of the impact of this change, so it will come as a surprise to most investors when they receive their next land tax bill.
From 30 June 2023, an owner’s liability for land tax will be determined based on the total value of their Australia-wide landholdings that are not exempt, rather than solely on their non-exempt Queensland landholdings.
This value will be used to determine whether the owner has exceeded the tax-free threshold and the applicable general rate of land tax, which will ultimately be applied to the Queensland proportion of the value of the Australia-wide landholdings.
To illustrate the impact of the change, the following first two examples show the additional cost impost on individual investors holding two properties below the respective land tax thresholds and another more common scenario where the individual investor already incurs land tax and the impact when other holdings are amalgamated. The third example shows the financial impact on an SMSF that has a landholding in Queensland below the land tax threshold, but also a property investment in another state.
An individual landholder with $599,999 in taxable land in Queensland and $400,000 in New South Wales would pay no land tax for the 2023 financial year as the Queensland landholding is under the exemption threshold. Under the aggregation of interstate properties changes, land tax will be payable in Queensland despite both properties falling under the respective state land tax exemption
thresholds. For each following year this individual will be paying $2700 in land tax even though both properties fall under the land-tax-free threshold.
An individual landowner owns land in Queensland with a taxable value of $745,000 and also owns land in Victoria valued at $1.565 million on 30 June 2023. The land tax bill would be $1950 for the 2023 financial year, but under the aggregation of interstate properties changes the land tax bill in Queensland will increase to $8422 for each of the following years.
An SMSF has a villa unit with a land value of $300,000 in Queensland and one also in Victoria with a land value of $700,000. As the Queensland land value is under the exemption threshold, the SMSF will not be liable for land tax for the 2023 financial year. Under the aggregation changes, for each of the following years the SMSF will be paying $3315 in Queensland land tax.
We expect there will be some practical difficulties around implementation as there is no uniformity between the land tax rules in each state and territory. Also, not all jurisdictions impose land tax. The Northern Territory does not impose land tax, for example.
Our federal tax system is in urgent need of reform to make it sustainable. If the federal government proceeds with major tax reform, it will invariably impact many state-based taxes such as land tax. While we cannot pre-empt what any future government will contemplate going forward, the case for change is building and we envisage major tax reform as a likely possibility in the immediate term to ensure our tax base is sustainable to meet ever-growing government expenditure and an ageing population.
If this scenario comes to fruition, we envisage a greater role for taxes such as land tax. The Henry tax review recommended the abolition of stamp duty in conjunction with the introduction of a broadbased land tax placing landlords and homeowners on an equal footing. The Australian Capital Territory is already 10 years into a 20-year transition period of replacing stamp duty with land tax. NSW is also proposing a hybrid option of allowing first-home buyers a choice of paying stamp duty or an annual land tax. Queensland is not alone in making changes, but there does not appear to be any consistency among the states and territories.
Louise Biti
Director, Aged Care Steps
Aged Care Steps (AFSL 486723) specialises in the development of advice strategies to support financial planners, accountants and other service providers in relation to aged care and estate planning. For further information refer to www.agedcaresteps.com.au
PCG 2020/5
Practical Compliance Guideline 2020/5 has been updated to extend the ATO’s compliance approach on non-arm’s-length income (NALI) for another 12 months to 30 June 2023.
This is as an administrative decision to allow more time to work through the issues with affected funds.
The ATO has advised that during the current financial year, compliance resources will not be allocated towards determining whether NALI provisions apply to all fund income where an SMSF incurs non-arm’s-length expenditure of a general nature on or before 30 June 2023.
SMSFs should ensure they have operational practices in place to comply with the legislation by 30 June 2023.
The transfer balance account reporting rules are set to change, with annual reporting no longer an option from 1 July 2023.
All SMSFs will need to report transfer balance account events within 28 days from the end of the quarter in which the event occurred.
This does not change the types of events to be recorded and reporting is still only required when an event that impacts the transfer balance account occurs.
SMSFs will still need to report within 10 days of the end of the month if an income stream was commuted in that month due to an excess transfer balance determination.
A High Court decision in the Hill v Zuda case has confirmed SMSFs can make non-lapsing binding death benefit nominations and are not bound by the provisions under Superannuation Industry (Supervision) regulation 6.17A.
The rules for making and/or renewing a binding nomination in an SMSF will be the details specified in the fund’s trust deed or governing rules.
The 2022/23 interest rates required by an SMSF to meet the safe harbour terms for limited recourse
borrowing arrangements outlined in Practical Compliance Guideline 2016/5 are set at 5.35 per cent for real property and 7.35 per cent for listed shares or units.
The preservation age for superannuation has been gradually increasing up to age 60 and is almost at the end of that transition.
From 1 July 2023, anyone wanting to meet the retirement condition of release will need to be at least 59.
The preservation age of 60 will be fully phased in next year, that is, from 1 July 2023. From that date, the qualification age for the age pension increases will also be fully phased in at age 67. It is currently 66.5.
The removal of the contribution work test from 1 July 2022 has introduced some simplification into superannuation contribution rules.
Personal contributions can now be made up to age 75 (subject to contribution caps), regardless of work status.
A work test still applies to individuals between the ages of 67 and 75 only if a personal tax deduction is to be claimed.
However, the difference in the new rules is that the work test (40 hours within 30 consecutive days) can be met anytime during the financial year, including after the contributions are made. It is now a requirement to claim the tax deduction rather than a requirement to make the contribution.
The eligibility age to make a downsizer contribution reduced to age 60 on 1 July 2022. The proposed legislation to further reduce the qualification age for this type of contribution to age 55, announced during the recent election campaign, was tabled in the lower house on 3 August by Assistant Treasurer and Financial Services Minister Stephen Jones.
The new federal government has announced it will hand down a budget on Tuesday, 25 October. We will wait to see what further regulatory changes might be introduced for superannuation.
While a change in government has yet to reveal any impact for the SMSF sector, there is optimism around adjustments to contribution rules, the potential for a nonarm’s-length expenditure solution and a definitive ruling on binding death benefit nominations. The selfmanagedsuper SMSF annual roundtable for 2022 asked four leading lights in the industry to dig into the importance of these and other key issues for the months and years ahead.
DTC: Can we expect to see anything significant changing for SMSFs following the result of this year’s federal election?
PB: It’s early days, but we’re not expecting to see any specific measures targeting SMSFs. When we’ve gone to Canberra and had discussions with the government, as well as the opposition, it’s very clear to us they understand the importance of the SMSF sector and they understand the importance of members having choice when it comes to retirement savings. There are a few measures left over from the previous government – the legacy pension measure, and the residency rule changes – which were announced in the budget last year. We would like to see those measures proceed, but there has been no mention of that. It’s fair to say that for a new Labor government those measures are not high on their agenda, so we’re going to have to be patient.
MH: Peter, when asked what you thought the about the new government and SMSFs, you immediately spoke in terms of being targeted, which shows the mindset we have about governments and SMSFs. We are more concerned about negative outcomes than we are excited about positive ones. The Labor Party has not historically been a great friend to SMSFs, but I don’t think they are antagonistic, either. They are realistic and have bigger fish to fry at the moment than doing something to disrupt a sector that looks after a third of Australia’s retirement savings. I’m optimistic they will leave it alone.
JS: There has been chatter about the government watering down the Your Future, Your Super legislation from a transparency perspective. Is this indicative the new government is more focused on the industry funds sector, maybe to the
PB: That seems to be a stand-alone issue. There’s been no suggestion based on our discussions with the new government that it’s looking to do anything specific around SMSFs, so we have no reason to be concerned at this stage. It is very clear that we won’t see a return to the franking credit policy it took to the previous election.
GC: While the politicians might water down the MySuper rules, I don’t think that shows they’re going to move towards SMSFs and attack them in a specific way. They’ve got other bigger fish to fry mainly on the revenue side of things. SMSFs are not going to be exempt from those sort of mega changes because they’re going to affect income tax and revenue, which are the items the government wants to use to help make up the deficit resulting from the last few years of COVID-19 disruption.
CM: There is going to be pressure on budget repair, to look for areas of either savings or revenue and every time superannuation becomes that big box people want to crack open. The other thing is that it’s not just what the government wants to do, it may be the will of the people who are in their ears. The industry funds have their own agenda, which may or may not impact SMSFs. So we can’t control the political stuff, but can control how we navigate through it.
DTC: Assistant Treasurer and Financial Services Minister Stephen Jones has made comments about channelling superannuation into a particular area, to help the economy, to help build things like infrastructure. What can they use to potentially do this?
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Darin Tyson-Chan (DTC) selfmanagedsuper editor
Jason Spits (JS) selfmanagedsuper senior journalist.
Moderators
Peter Burgess (PB) SMSF Association deputy chief executive and policy and education director.
Claire Mackay (CM) Quantum Financial principal adviser and director.
Meg Heffron (MH) Heffron managing director.
Graeme Colley (GC) SuperConcepts technical and private wealth executive manager.
Continued from previous page
CM: There is a liquidity issue that restricts SMSFs where the balances are much smaller. Larger funds have a greater flexibility given the amount of money they’ve got, but they still have to meet their liquidity requirements. If you start looking at the age demographics of particular funds that have an average lower age, they can be more flexible in taking on longer-term investment projects because they can look at their member base and say, subject to unfortunate events, liquidity is not going to necessarily be as high a priority unless people are switching.
MH: I think it would be incredibly hard
for any kind of government mandate for an investment in infrastructure. Maybe there would be incentives to invest in infrastructure or in something else which is more liquid, but I just can’t see us ending up at a spot where funds are forced to invest in something that creates a liquidity problem.
PB: Mandating a certain percentage of assets to be invested anywhere always raises questions about what that does to the overall return of a fund. Will it have a negative impact on what someone’s retirement savings might be worth when they retire? Those things would need to be worked through and no doubt will come up if those type of proposals get floated.
GC: We will probably see some
DTC: Are we confident the government and Stephen Jones are committed to reviewing the nonarm’s-length expenditure (NALE) provisions and will find a workable solution in a suitable timeframe?
GC: It is good the big superannuation
funds have seen the issue and how the rules will impact them because it has highlighted to the new government that it’s not just small funds having a whinge about the way the laws are being interpreted by the ATO on some of these general
encouragement to invest in a particular sector rather than mandating it. If funds want to invest in start-up companies even now, they can invest in infrastructure-type investments. I think it’d be done through encouragement rather than what we would regard as discouragement and the problems with cash flow if it was mandated.
CM: If the underlying investment is worth it, there will be money that flows to it, but in the SMSF space there are only a handful of funds that can really play in that space. The majority of families are focusing on their retirement savings and a 25-year infrastructure plan for most members is not really going to be high on their agenda.
expenses. The announcement by former superannuation, financial services and the digital economy minister Jane Hume that the rules need to be reviewed has alerted the current government to some things that need to be done as well.
DTC: Some of the contribution rules
It’s early days, but we’re not expecting to see any specific measures targeting SMSFs. When we’ve gone to Canberra and had discussions with the government, as well as the opposition, it’s very clear to us they understand the importance of the SMSF sector. Peter Burgess, SMSF Association
regarding in-specie contributions are being shaped to accommodate the NALE provisions. Is this a sign this issue is continuing to head in the wrong direction?
PB: One of the changes we did see made to Taxation Ruling 2010/1 –which is still in draft format – was to accommodate the introduction of the NALE rules where a fund acquires a property at less than market value. What the ATO have said in the changes to the ruling is you can’t record the difference as an in-specie contribution, which is a common thing we’ve seen in the past. The ATO is now saying in this draft ruling this will be a NALE situation. It means the asset in question will always be tainted and the income the fund receives will need to be taxed as non-arm’s-length income. It’s not clear in the draft ruling whether it could be made retrospective. We have not yet made any formal comments on that draft ruling as we need to see where we land with the NALE rules before we turn our mind to some of those changes that have been proposed. We remain very optimistic we will see a law change. The only way to solve this issue is a complete rewrite of those provisions, not a band-aid fix, to ensure we don’t end up in situations where all of the fund’s income is taxed at 45 per cent because it didn’t incur an admin fee on an arm’s-length terms, or the fund doesn’t end up paying 45 per cent on all the income from a specific investment because the fund didn’t incur an expense in relation to that investment at arm’s-length terms. Options being considered is for the ATO to have discretion to apply these rules and to have some criteria in place before it would take action, and having to consider the financial impact on the fund and whether it was actually an inadvertent mistake. If that’s not possible, the other option would be looking to
break that link between the non-arm’slength expenditure and the income related to that, because that’s where we get the disproportionate outcomes as the penalty is applied to all the income that’s linked to that non-arm’slength expenditure. We need to break that link and identify what we call the shortfall amount and treat it as an excess contribution.
JS: Is it possible we may just see the legislation continuing as is, but applied in line with the original intent rather than seeing a complete rewriting of it?
PB: Yes, from a government perspective, if they’re looking for the simplest solution. But in our view we don’t think you can solve this problem unless you do the complete rewrite. If you do something other than that, you’re probably not going to solve all the issues associated with these provisions.
GC: It depends on the pressure from the lobby groups, big and small super funds, and also whether the government considers that what’s in place now is the end of that policy matter. If that’s the case, then it will only be minor changes to those rules. Often, big slabs of legislation come in and the government is only prepared, irrespective of which party is in power, to make minor changes at that point.
JS: Are individual SMSF trustees aware of the NALE rules and what it might mean for them?
CM: The clients that are aware of it are the ones who need to be aware of it and, as advisers, our job is to bring it to their attention if they weren’t aware of it, or to identify this might be an issue, given what we know about our members, their jobs and what they own in their SMSF. The problem here is this issue has been unresolved for so long. For years, we’ve been hearing from the ATO that when honest or inadvertent mistakes
are made they don’t want Australians to lose sizeable chunks of their retirement savings through penalty taxes. Yet the application of these rules seems a little bit contradictory, so proportionality is important. As an industry, you want the law to be straightforward, but not at the detriment of undermining the whole superannuation sector as well.
MH: The risk here is out of proportion to the offence and it seems crazy that an inappropriate administration fee or advice fee threatens a massive tax be imposed on all of the fund’s income. However, it is also the sector’s focus on it that is out of proportion to the problem. When Claire and I say the clients of ours who are affected are aware of it, that number I suspect is very small. To that end, it’s a shame we’ve spent so much time and effort on an issue which is relevant for very few clients. But if the ATO ends up doing what it initially wanted to do, it would be massively out of proportion to the action of these clients in the first place. It’s not a storm in a teacup, because the storm is very definitely here, but it does seem out of proportion to the extent of the crime.
GC: One of the good things we’ve seen out of this issue, that might sound a bit strange, is clients are more interested in getting documents right on some of these non-arm’s-length arrangements they’ve got in place and making their rental payments on a far more regular basis than they ever had before. They are now really fastidious about those things. So, while we see the negative as everyone else does, we’re also seeing the positives that can come from it. There’s nothing worse when you’re hassling a client to provide documentation year after year after year and nothing happens and yet regulations like this come in and they’re all shocked and go into panic mode to make sure they are not going to be hit with 45 per cent tax.
JS: There have been some significant changes to the landscape around contributions, most notably to the work test. What opportunities have these changes opened up?
MH: The changes are brilliant for clients because there’s a whole demographic of people who may have missed the superannuation boat who now, even though they’re 67, can start putting money into the system. And not just $110,000 a year if they’re working, which is what they used to be able to do, but really meaningful sums. The fact they can also use the non-concessional contribution bring-forward rules during that period too is massive. In the past, if you had a 70-year-old whose 95-year-old mother died and they inherited a lot of money, you would never have thought of super as a spot for that money, but it’s a realistic option now for people who haven’t built up much super. If you overlay that with the fact the consumer price index is so high at the moment, we will certainly see an increase in the general transfer balance cap up to $1.8 million at 1 July 2023 and if inflation continues at the rate it did last quarter, we may even see it move to $1.9 million. Now there will be a whole host of clients who are 70 with less than $1.9 million in super, so non-concessional
contributions will be back on the table for them. It’s enormous for people in that demographic and will change the game on contributions.
CM: If you combine it with the ability to make downsizer contributions as well, that’s helpful for people who may have changed their strategies because of concerns around COVID or job security. And so, if you look at income generation, people go through different stages where they are earning great income but have mortgages, children’s education costs and other expenses coming out in every direction, meaning they can’t add that little bit of extra money to their superannuation that is going to help fund their retirement in 20 years’ time. Helping people load up at the end when they’ve helped out their children and are feeling in a more comfortable place to dedicate some more money to their retirement savings is great as well. I’m all for meeting the rules, but sometimes the rules are a bit silly. We know people are working longer, but also know some people, because of their professions and their careers, can’t work longer and weren’t able to take advantage of the previous contribution rules.
JS: Are there some traps that practitioners need to be aware of because the work test was linked to
other things and raised flags for ineligible contributions?
MH: There are a few. Take downsizer contributions and non-concessional contributions, for example, where somebody makes a contribution thinking it’s going to be a downsizer, only to discover they’ve failed to meet the rules. In the past, if they were 70 and made a downsizer contribution in error, and didn’t meet the work test, it was not treated as a non-concessional contribution and was spat out by the fund. Now, no work test is required and it becomes a perfectly legit contribution. If it fails the downsizer rules, it becomes a non-concessional contribution, which might also create a very large excess. There will also be people who think they’ve met the work test but haven’t and look to claim a deduction for a contribution. In these circumstances the contribution will suddenly become nonconcessional instead of concessional. So with any good thing there’s always a few traps to be aware of, but fundamentally I’m glad we’ve got this change.
GC: One of the really niggling traps is the fact when someone gets to age 75, the fund can still receive contributions 28 days after the month they turned 75. That’s very difficult to explain to some clients. The other trap is the total
I think just filling in a binding death benefit template, no matter how great it is, is dangerous. I wish they didn’t exist. I would ask if you care enough and are determined enough to want to dictate, with no flexibility, where your money goes when you die, why would you use a template to do it?
Meg Heffron, Heffron
super balance applies for some nonconcessional contributions, but doesn’t apply for concessionals and other contributions you can make into the fund. The planning around that needs to be discussed because sometimes the total super balance will have an impact on what you can put into the fund and in other circumstances it won’t.
DTC: Will the ability for older Australians to make superannuation contributions help with sequencing and longevity risk?
CM: I don’t think so. Sequencing and longevity risk are what they are. If you’re someone who’s looking to retire in the next 12 months and at the moment there’s a war going on with no visible conclusion, inflation is going up around the world and there are concerns about being able to afford grocery bills due to these factors, then those risks haven’t changed. They are more pronounced when you see the news every night. These rules are giving people more flexibility when most Australians have a little bit more cash around and trying to match what’s happening in real life and encourage you to save for your superannuation. Sequencing risk and longevity risk have been around for every retiree who wants to have confidence about remaining in retirement regardless of the contribution rules. It may help people get more money into a concessionally taxed environment, but only if they have that money. The
changes are not giving you a tree with more money coming in. You still need to have the money sitting around and if you’ve got so much money that you can’t get any more money into superannuation, that’s a lovely problem to have and this opens that up for you. For the majority of Australians it is an incentive to save for retirement as they get older and encouraging Australians it’s still possible to have a comfortable retirement they can self-fund to a greater degree than in the past.
DTC: A bill was recently tabled in parliament to further reduce the downsizer eligibility age from 60 to 55. If passed into law, it will mark the second downsizer age reduction in a very short period of time. Are moves like this making a simple measure more complicated than needed?
GC: It gets people to think about it a little bit more deeply. With the potential to make downsizer contributions at age 55, we can start to think about the time period between the sale of the house if the client is 55 or 60, and whether they’re going to subsequently buy another house and keep it for 10 years. If that is the case, it may be better to delay that contribution until as late as possible because there are no boundaries on it apart from the age qualification and the amount. So you could make a downsizer contribution, if you’re going to buy
another house and you’re only age 60 or 65, when you’re aged 70, 75 or even older as that could be the right time for it. In the meantime, if there are inheritances and assets the client owns personally, they will be able to put them into super as non-concessional contributions, particularly if they have a total super balance of less than $1.7 million. It has become more complex from a planning point of view because there’s an age limit, a time limit and the question of how long you have owned your own residence.
CM: What most people will get tripped up on is the fact the downsizer contribution has to be made within 90 days from date of settlement, not 90 days from date of contract. The reality is when you’re selling a house, and also looking to where you’re going to live next, that matter is not necessarily top of mind. And sometimes clients do these things without telling us. So it’s about working through that problem and making sure the client can sign the form saying that they have met those conditions and making sure that the money’s available to be put into the super fund within the designated timeframe.
DTC: So if we see age 55 being the new qualification threshold for downsizer contributions, will people have to become more strategic
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In politics they say it’s not the crime that gets you into trouble, it’s the cover up, and similarly with SMSFs it’s not what you’ve done, it’s the paperwork that lets you down.
Claire Mackay, Quantum Financial
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about making them?
MH: If they can still make nonconcessional contributions, they will. The key there is the transfer balance cap. If it is more than $1.7 million for an individual, then they’ve got no other mechanism for getting more money into the super fund and so might have to make their downsizer contribution as soon as possible.
CM: Alternately, it can depend on whether the home you’re going to is not your last home. There’s a push now for people at age 55 to go into purpose-built places, so it ties in with the changing nature of what our homes look like as well.
MH: I have not thought about that, but you’re right. So, there is some logic to 55 as it is when people sometimes move into a different home and that might be their last home.
CM: It’s about considering what you want from your home and the sort of space you want as you get older. There
JS: Let’s move on to the recent High Court case of Hill v Zuda. Graham, how significant has this been for SMSFs?
GC: It’s significant for those super funds with trust deeds that still import SIS (Superannuation Industry (Supervision)) regulation 6.17A into them. It’s interesting as to why the case got to the High Court
are many different circumstances, but I’m loving it because it gives people options they otherwise wouldn’t have had.
PB: It’s a really interesting strategic conversation to have. When the downsizer qualification age was set at 65, you probably only had one opportunity to make that type of contribution. But seeing it’s probably coming down to age 55 means the chances are good that people will have another opportunity to use it later in life. If they only get one go at this, they need to consider whether they should do it now or later. If they do it now, does this maybe prevent them being able to make any further contributions if the downsizer money tips them over the total super balance threshold for nonconcessional contributions. This may ultimately mean they don’t get to have as much in super as they might have if they had made a non-concessional contribution earlier instead of the downsizer contribution. So it does make for a much more interesting strategic conversation with clients.
because it’s a relatively simple technical matter that was considered. It probably didn’t change things from the point of view of the trustee taking charge in the running of the superannuation fund. And I think that’s what people really need to understand about it.
JS: Has it made people sharpen their focus on their death benefits?
MH: I’m not sure this case, in particular, has made people sharpen up and focus on death benefits more. Probably people have looked at it more in the last couple of years with regard to updating their deed, their binding nominations and the interaction between the two. I think as an industry we may have been a bit too laissez-faire about trust deeds and
There’s nothing worse when you’re hassling a client to provide documentation year after year after year and nothing happens and yet regulations like this come in and they’re all shocked and go into panic mode to make sure they are not going to be hit with 45 per cent tax.
Graeme Colley, SuperConcepts
binding nominations as to whether they say the right things. So that’s probably a theme, I’d say, that has emerged over the last couple of years, rather than specifically in response to this case. It’s not a bad thing, right? Personally, I wish we as an industry would completely reject template binding death benefit nominations and have lawyers prepare them because they are so important.
CM: This case should definitely be on people’s agenda if they’re an adviser because when I read through it, I thought who is going to get sued. When there’s
money, and in an SMSF there is money, it will be fought over, especially seeing how common blended families are now. With the knowledge you have as an adviser, do you back yourself to be certain that in every client situation, if they died yesterday, all of their death benefit documentation is tickety-boo given what you know about the potential beneficiaries? When I read this case I was going through each of my clients’ scenarios to consider which ones are at risk. It’s not just about fighting over the will because cracking the
super open to get it into the will is so important. I think every client should have a death document that determines when a member dies who is going to be at the table and on the paperwork, who is advising them, what assets are involved, are the assets liquid, what is the applicable timeframe and the strategies around these factors. It can’t be just a matter of providing a form for the client to sign every three years. From a practical perspective it’s a big deal because you don’t want to be sued by clients where this is an issue for them.
JS: Referring back to templated documents, how much of a concern are they?
MH: I think just filling in a binding death benefit template, no matter how great it is, is dangerous. I wish they didn’t exist. I would ask if you care enough and are determined enough to want to dictate, with no flexibility, where your money goes when you die, why would you use a template to do it? You should be getting a lawyer involved to do it properly or not have a binding nomination at all. I would much prefer to see a client without a binding nomination, than putting one
in place based on a template. We have a template for our administration clients who really want one and I have a little cringe every time somebody uses it. I’d rather if they really want to have a binding death benefit nomination, they get a lawyer involved who’s done their will.
DTC: Do you feel the same way about off-the-shelf trust deeds?
MH: I don’t know that there’s necessarily a need to tailor a trust deed. Ultimately it’s not necessarily the legal document that makes an SMSF unique, rather it’s what you then do with the SMSF. So I’ve got less of a concern about all SMSF trust
deeds looking the same. But a binding death benefit is more like a will so I would rather get the professionals involved.
CM: As an adviser when you know your clients and their family, it gives you an indication of how they operate now and how they may operate in the future. For example, you’d have an idea if they’re happy now, but the rivalry of the children would flare up if they found out the asset values involved. If that were the case, you’d think about whether you need to scrutinise an off-the-shelf trust deed
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The Labor Party has not historically been a great friend to SMSFs, but I don’t think they are antagonistic, either. They are realistic, and have bigger fish to fry at the moment than doing something to disrupt a sector that looks after a third of Australia’s retirement savings. Meg Heffron, Heffron
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and look at whether there is a need to customise it or actually go and get a specialised one for this particular family.
GC: One of the issues we see as problematic is not the deed itself, but when a death benefit nomination is approved or an amendment is made to an existing trust deed. Often these actions are approved by the trustees when a members’ resolution is required. It means the SMSF will have documents that are invalid. We then refer the clients to lawyers to sort it out. Trouble can also arise when actions are taken in the wrong order and there has to be a deed of rectification put in place to correct the situation.
DTC: Is there a rule of thumb to follow as to when it might be appropriate to use an off-the-shelf trust deed?
CM: There’s got to be a cost-benefit analysis. There’s no point spending thousands of dollars to set up a unique structure if you’ve got less than $1 million in the fund. There has to be an element of proportionality applied. But by the same token the concern is when things do become more complex and a more tailored deed is needed, the
trustees show complacency thinking the existing deed has served them well for the past 10 years so why would there be a need to spend money and change it now.
DTC: In general, how would you rate the current standard of SMSF documentation?
CM: I don’t think any of us are going to put their hand on their heart and say 100 per cent of their clients have perfect documentation. There are always going to be elements that have slipped through the cracks or situations where things could have been done better in hindsight. It comes down to the education of trustees. We have progressed to doing things in a more timely manner, which helps, so the days of having an 18-month lag in reporting are gone and that helps. There is also an expectation among trustees who are receiving financial advice and engaging professional service providers that those services include making sure the fund is compliant with its obligations and also that the SMSF’s paperwork is up to date. In politics they say it’s not the crime that gets you into trouble, it’s the cover up, and similarly with SMSFs it’s not what you’ve done, it’s the paperwork that lets you down.
JS: Taking a look at six-member funds, now that we’re a year down the track, how much interest have they attracted?
PB: I’ve got to say, we don’t see a lot of queries from our members about six-member funds. You know, it was a measure that probably not everyone in the industry thought was needed when you look at the fact most funds only have one or two members. So it was never going to open the floodgates for a lot of six-member funds to be established. It did appear to be quite a targeted measure pitched towards larger families enabling them to run one super fund instead of two, and there are costs and benefits associated with that, as well as advantages of scale. I don’t think we’ve seen any updated figures from the ATO on this. Early data suggested they numbered around 100 after being in play for four or five months. I suspect we are in the hundreds in terms of the number of SMSFs with more than four members. But it doesn’t seem to be a topic that we get a lot of questions about.
CM: Interestingly what I have been
It is good the big superannuation funds have seen the issue and how the rules will impact them because it has highlighted to the new government that it’s not just small funds having a whinge about the way the laws are being interpreted by the ATO on some of these general expenses.
Graeme Colley, SuperConcepts
asked about in relation to six-member funds is whether it might be appropriate for three couples to get together to buy an investment property together in an SMSF. So it’s the group of friends wanting to get together and combine their super savings to acquire assets who have expressed interest. When the legislation was passed I always thought it was a solution looking for a problem. My concern was around including children in the fund and what it would mean with regard to investment strategies. There is a danger 20 to 30-year-old children might want to invest in a risky asset like cryptocurrencies that could be in conflict to the priorities of their parents. Also, it opens up knowledge of the parents’ financial situation to the children that may not be a desired outcome.
PB: I think one of the positives is it has reignited the discussion around whether you should have your kids in your SMSF or not. We’ve seen a lot of discussion around that as a result of six-member funds being available now. So from an education point of view, I think that’s been of use.
CM: I guess the point is the average membership of an SMSF is 1.9, so say two, and most of them were couples.
I just think we can underestimate the prevalence of inheritance impatience and elder abuse if children are included in the parents’ SMSF and it’s probably going to get worse as baby boomers are retiring. Also, with the use of powers of attorney it is like you’re giving a legal forum for elder abuse to flourish, which is really quite scary.
MH: When we had this conversation last year, I think I mentioned that I had this enormous flurry of inquiries about it because it was relatively new then, which took me by surprise because I’m on the same page as Claire thinking it’s a solution looking for a problem. So I was really taken aback by the number of inquiries I got back then. I do have one client who has actually taken advantage of the six-member rule. He is using the SMSF like a training ground for his three daughters. So mum and dad and the three daughters are all in the fund and every year he withdraws $330,000 from his own or his wife’s balance and gives $110,000 to each of the girls and they put it back into the SMSF. So their accounts are growing and they’re making investment decisions being part of the SMSF. He reckons that works fine for them, and it might
DTC: The deadline to securing a director identification number for most people is fast approaching.
CM: We sent instructions to our clients back in December last year on how to apply for a director identification number. We included really detailed screenshots, told them it was tedious and explained to them why it has to
be done. So when clients understand why they have to do something, and the fact if they have all of the required information at hand it will take about 20 minutes, they’re fine. So we’ve actually had quite a good uptake. We also told our clients who are company directors already that the deadline to get a director ID for them is September and not November. We did it because we
well do, but I suspect in his heart of hearts he still thinks it’s all his money, which is a pretty scary fundamental disconnect there because it isn’t. I said to him at the time, if they want to roll it out after two or three years, you can’t stop them. It’s their money and they can roll it out if they want to. I always think it is appropriate to set up an SMSF with someone who has routinely shared investments or bank accounts with in the past. For example, I have a friend who lives with a brother and has done so forever. Neither of them have married or had children. Makes perfect sense they would have an SMSF. They own their house together, they do a lot of other things together and that makes perfect sense. Couples commonly set up an SMSF and that makes perfect sense. My kids know exactly what I’m worth, where all the money is, but I don’t really want them in my SMSF though, because I wouldn’t normally invest with them. It’s not about them knowing or not knowing about my financial situation; it’s more about the fact that it’s not really their call where I put my money. So I am yet to be convinced that it makes sense to bring your kids into your super fund in most cases.
don’t want them to fall foul of the rules, but also to enable them to avoid any last minute rush that IT systems may not be able to cope with.
DTC: Has the inclusion of different deadlines for different people made the process more confusing and complicated?
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PB: Yes it has. There are a few little intricacies in the way some of these dates work. So for people who were already a director prior to 31 October last year, if they’re setting up an SMSF today with a corporate trustee, they’ve got till 30 November to obtain their director ID. We’ve had a few questions from members around that so it seems to have caused a bit of confusion. The other situation
causing concern is whether a person was a director on 31 October 2021, but has ceased to be a director and has no intention of taking up a directorship in the future, is required to obtain an ID. The ATO has now confirmed a director ID is not required for these individuals because it doesn’t want the register clogged up with unnecessary ID numbers. In the main I think people are focused on the 30
November deadline, but the requirement for the director of a corporate trustee being established today to obtain an ID before they are appointed director is very important for SMSFs. It emphasises the importance of ensuring the establishment paperwork is done in the right order, these dates are very visible and the ATO can easily check to see if a director ID was acquired when needed.
JS: What are your thoughts about cryptocurrency? Is it too risky to be appropriate for SMSF portfolios?
CM: The beauty of an SMSF is if you want to invest in cryptocurrencies, provided you stick to the rules, you can. I think the concern is that we’re in the very early stages of the asset class. So what it looks like now and what it’s looked like over the last 12 to 18 months, and what it will look like in five years’ time, I think will be very different. The crypto fraud and the stolen wallets are not doing the sector any favours, but you need to sometimes go through these scenarios to allow legislation, proper frameworks and operating protocols to be formulated. The bigger concern is the record-keeping associated with these assets and the fact you may incur tax liabilities from trading coins without actually generating any cash. So you may end up with a tax bill, but have no ability to pay for it. In the SMSF world, record-keeping is a
concern because you need to have confidence the fund including those assets can be audited.
MH: You’re right, Claire, I think the blessing and the curse of an SMSF is you have the power to do anything legal and that gives you the right to blow yourself up. It’s a risk for us as a community and for the individuals who choose to blow themselves up. But I think that’s just part and parcel of the very thing that makes SMSFs so fantastic. I’m also conscious that, you know, everything mainstream was leading edge once. So maybe the elements of crypto we worry about now because we don’t understand them will perhaps one day be insignificant and we’ll be looking at cryptocurrencies as just another valid asset class people who can afford to take risk can invest in. After all, some of the assets we now consider mainstream were also once considered leading edge.
CM: The integrity of the crypto industry is under the pump as well because
if you can’t provide the records, you can’t address all the security issues associated with the assets. I’m super excited the ATO was quick enough to put an annual return label on this as early as it did. That’s great because the more granular the ATO can get in relation to asset classes, the better we will then be able to see trends emerging and identify where there are compliance issues needing to be addressed. In turn, the resulting legislation or rulings will potentially be much more practical and proportionate to the problem.
PB: There’s plenty of interest in cryptocurrencies. If I look at the experience from our National Conference, one of the sessions with the greatest attendance was the session on crypto and it was a similar scenario at our recent Technical Summit. So there’s certainly plenty of interest from advisers and these sessions were just going through the fundamentals of crypto and understanding blockchain.
They weren’t about the strategy side of things. The other thing concerning us is the fact advisers typically can’t give advice on these types of assets because of professional indemnity insurance issues as I understand it. To me that adds another layer of risk. It raises the question where investors are going for their advice on cryptocurrencies.
CM: I think it’s fair to say most advisers are not going to be the first point of contact for someone looking to invest in crypto. If you look at the demographics of those who’ve taken these assets up and where the interest is coming from, activity is not going to be adviser directed. For my clients the discussion has been driven by their 14-year-old grandchildren or their 20-year-old children, and I’m not being dismissive there, I just find it fascinating who is actually leading these conversations. So we are speaking to our clients about cryptocurrency investments, but it’s certainly not in terms of it being a core part of their portfolio or their SMSF. That’s regardless of the professional indemnity insurance issue. I’m more worried about putting together the necessary paperwork.
DTC: The ATO recently announced yearly transfer balance account reporting will be scrapped as of 1 July 2023, meaning everybody will be going on to a quarterly reporting cycle. Is everyone in favour of this move?
MH: I’m totally in favour of it because having two reporting timeframes was too confusing. It should just be one or the other. Having said that, I do understand why SMSFs often baulk at shorter reporting turnaround times. There’s always the argument that if the larger super funds can do it, why can’t SMSFs given the access to data feeds and great software they have now. I think the fundamental problem is that because an SMSF has so few members, all the approximations and the like a large fund does as a matter of course that are just about invisible for them, stand out like nothing else in a small fund. For example, in a large super fund if you roll your balance out on 30 June and you’re a pensioner, there is often no allowance for franking credit refunds because the fund hasn’t lodged its tax return and received a refund. However, in an SMSF there absolutely would be a franking credit refund paid because if we
know there are only two members and one rolls out of the fund, they should get the benefit of the franking credit refunds that are coming down the track when the return is eventually lodged. So the very small number of members in an SMSF results in a heightened focus on accuracy that does not apply to large funds. That makes reporting for SMSFs more difficult. It means I’m not at all dismissive of the accountant saying we can’t do quarterly reporting because unless the practitioner is really focused on keeping the SMSF records up to date all the time, a quick reporting turnaround is incredibly difficult. So while I’m in favour of quarterly reporting, I’m not of the belief the account-keeping of SMSFs should be up to date all of the time. It’s convenient for people if it is, but the ATO assumption that you can be dollar perfect every single time within 28 days puts a false demand on the industry. It’s why SuperStream rollovers out of an SMSF doesn’t work. This demand for perfect accuracy very quickly is crazy and makes no sense in a small fund environment.
DTC: Are service providers ready to make this change seamless?
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I don’t think any of us are going to put their hand on their heart and say 100 per cent of their clients have perfect documentation. There are always going to be elements that have slipped through the cracks or situations where things could have been done better in hindsight.
Claire Mackay, Quantum Financial
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GC: I don’t think so because some clients won’t have the information that is perfectly up to date all of the time. I mean we’ve got some clients we deal with only on a yearly basis and I’m sure most accountants would as well. So it’s certainly going to have its issues.
MH: The other thing is we as an industry probably get a little too hung up on imagining this will have a significant effect. But in practice clients don’t start pensions very often and that’s the only situation where we really need to be totally, perfectly up to date with our record-keeping. For example, with regard to commutations, unless it’s a full commutation, we already know what the tax components are and we know what the dollar amount is so quarterly reporting will be less of an issue except when it comes to starting pensions.
DTC: Is this going to be a shock for trustees?
CM: From a client perspective, as long as they’re getting their money in their bank account on the day that they expect it, do they care? No. I think clients recognise they are paying for a service and it’s our job as professionals to make sure
reporting quarterly happens. If the ATO is unreasonable in its timetable, then it’s up to us as a profession to let the regulator know, as much as we’d love to help it, the small practices that service a significant portion of SMSFs may not have the required systems in place to make it happen.
PB: As an industry body we’re supportive of this change and in our view it’s about moving the industry forward. It’s also about SMSF members having access to up-to-date information. There are clear signs of frustration about not being able to get updated information and I think the next step in the process is to allow more practitioners access to the ATO portals, like myGov, in an efficient way. I have to say we were very grateful the ATO did agree to extend the start date for the quarterly TBAR (transfer balance account report) requirement because that was raised as part of the consultation process with us and others. We were certainly very firm on the view that we needed another 12 months for accounting firms and others, who were very busy, to make the changes to the system. So it was great to see that.
JS: Has there been any progress in opening up access to those ATO portals?
PB: Not that we’re aware of. We certainly
raised it in our Quality of Advice Review submission, that access to data is one way to reduce the cost of giving advice. So it was certainly something that we had a bit to say about in our submission, but we were not aware of any progress in that area.
CM: That’s what is so frustrating about this. I can be appointed by a client for Centrelink purposes, which means I can do everything for them with regard to Centrelink, but I can’t access their ATO portal to get some basic data for that same client. In fact I can’t even engage with the ATO. I think the regulator has to recognise who is in the SMSF ecosystem and who needs access to the portals. It could actually help the ATO too as it could assist in identifying trends, such as uncovering where the problems lie, or if there are positive developments and whether there is some commonality there. We’ve been asking for this for a long time and I don’t really understand what the resistance is.
PB: I think there are a few system changes that would need to be made to accommodate it. But Claire you’re right, we’re in this strange world where accountants have access to the information, but can’t give the advice and advisers who can give advice don’t have access to it. So that doesn’t make a lot of sense.
When the downsizer qualification age was set at 65, you probably only had one opportunity to make that type of contribution. But seeing it’s probably coming down to age 55 means the chances are good that people will have another opportunity to use it later in life.
Peter Burgess, SMSF Association
Prevailing market conditions have created some difficulties for fixed income during this period. However, Eric Souders suggests the role of this asset class within portfolios has not changed and there are reasons for investors to be optimistic about it.
The first half of 2022 presented a challenging environment for traditional asset classes such as equities and fixed income as high inflation persisted and central banks around the world tightened monetary policy. The combination of rising interest rates and widening credit risk premiums, also referred to as credit spreads, the latter resulting significantly from the slower growth implications of the transition to higher interest rate structures around the world, generated historically negative total returns for fixed income markets. Moreover, in this environment
because starting yields were so low, performance was not dampened by the income component of fixed income.
As a result, broadly invested traditional global fixed income indices, such as the Bloomberg Global Aggregate Index, had the worst quarter in its history in the first quarter (-4.90 per cent in Australian dollar terms), followed closely by their second-worst quarter in the second quarter (at -4.44 per cent), generating a half year return 2.3 times as bad as the previous worst. Within the equity market, the MSCI World
ERIC SOUDERS is portfolio manager of the Payden Global Income Opportunities Fund.and S&P 500 indices returned -20 per cent during the first half of 2022, while the technology-focused Nasdaq returned -29 per cent during the same period. Select nontraditional asset classes also struggled, such as cryptocurrency, with Bitcoin down nearly 60 per cent and Ethereum down nearly 75 per cent. Indeed, investors had nowhere to hide as traditional correlations and the benefit of diversification completely broke down amid sharply declining prices across both equities and fixed income.
For most investors the inclusion of fixed income within a portfolio has typically served to deliver a reasonable rate of return, mainly via income, while helping dampen drawdowns relative to other asset classes such as equities during economic downturns. Given the results of the first half of 2022, investors are likely scratching their heads and asking themselves if anything has changed in terms of the role fixed income should play within a portfolio. Is the first half of 2022 a precursor to something different for fixed income in the future or will the features investors have become accustomed to for decades return in the coming months and quarters?
At Payden & Rygel we do not believe the primary role fixed income plays within a portfolio has changed. However, we do believe the past six months offer an important reminder regarding how traditional roles and relationships between asset classes can break down. Although these types of environments don’t occur very often, they can result in acute outcomes, which means investors should be thinking of ways to better optimise their portfolios and mitigate these experiences in future years. For example, investors might consider the trade-offs between using passive versus active management or the pros and cons of a benchmark-oriented strategy versus one that allows for more flexibility and customisation.
The fixed income landscape has evolved tremendously in recent years, affording investors greater latitude with respect to
decision-making. We believe the market evolution should allow fixed income to play an expanded role within portfolios, namely greater diversification and correlation benefits when combined with other asset classes, such as equities and alternatives. In addition, we feel the painful path to higher nominal yields provides greater return potential for investors who partner with managers that have a sound, repeatable investment process and strong track record in credit selection.
The global macro backdrop in 2022 has been underscored by accelerating inflation, significantly hawkish monetary policy, decelerating growth and rising geopolitical risk. Each of these factors occurring simultaneously is rare indeed and the result has been tighter financial conditions and uncommon performance results across traditional asset classes during the first half of the year. Given the extraordinary nature of the first half of 2022, it is important for investors to determine what led to this situation and how the evolution of those components might shape the macro backdrop going forward.
Broadly speaking, the past two years can be summarised by extreme swings in economic activity as normal periods of the business cycle were sharply condensed. The main driver was the COVID-19 pandemic, where the forced shutdown of global economic activity resulted in unprecedented disruption of supply chains, significant fiscal stimulus and extremely supportive monetary conditions. The result was an acute deceleration in global economic activity followed by a recovery that occurred faster and in greater magnitude than expected.
The strong recovery has resulted in persistent inflation across both goods and services, exacerbated by higher food and energy prices associated with Russia’s invasion of Ukraine. Global central banks have been forced to combat inflation by
significantly increasing interest rates, with July seeing the Reserve Bank of Australia increasing the cash rate by 50 basis points for the third consecutive month, while the United States Federal Reserve has increased rates from 0.25 per cent to 2.5 per cent so far this year.
At the same time, recession risks have risen as real economic activity in the US contracted in both the first and second quarters of 2022, while the shape of the yield curve in the US has inverted to levels consistent with recession. In addition, consumer confidence has declined significantly and higher interest rates are likely to adversely impact the global housing market. All of this taken together has narrowed the path for a soft landing from a global economic standpoint. With that said, there are reasons to be optimistic and some signs that central bank policy is making an impact are evident.
The first reason to be optimistic is the strength and resilience of the labour market. In fact, the labour market is arguably too strong in the US and undoubtedly something the Federal Reserve is trying to dampen. The most recent July jobs report resulted in a declining unemployment rate, given the creation of more than 500,000 jobs, all while wage growth continues to accelerate. The strong employment picture is critical, especially in countries like the US where consumption represents around 60 per cent of its gross domestic product. In addition, employment is perhaps the most important component of the ability to service debt, which should benefit the housing market, particularly when combined with the lack of supply in US housing.
The second reason to be optimistic is the starting point of balance sheets from both a corporate and household perspective. Corporate balance sheets were strengthened during COVID-19 as capital was raised in anticipation of a prolonged slowdown. At the same time, the abrupt economic recovery
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has led to an expansion in revenue, margins and profits, leading to deleveraging in the corporate credit market. From a household standpoint, both aggregate savings and borrowing capacity today are in a much better position when compared to levels in 2007, prior to the 2008 global financial crisis. A strong labour market coupled with healthy balance sheets across corporations and households should increase the propensity to consume and service debt, both important features for economic activity and financial markets.
We believe the macro backdrop will remain volatile in the coming quarters and given the extraordinary conditions of the past two years, it is important for investors to expand their imagination with respect to the potential range of outcomes. There is abundant reason to be cautious at this stage, but there are also reasons to be balanced amid signs central bank policy is having an impact.
First, the commodity complex has softened from extreme levels earlier in the year. For example, gasoline prices have declined around 30 per cent from their peak in June. Industrial commodity prices have also declined 30 per cent from their peak, while food prices associated with Russia’s invasion of Ukraine, wheat being an example, are down 45 per cent from their highs and are now lower when compared to pre-conflict levels.
Second, supply chains are showing signs of improvement, with dry box freight rates down 35 per cent from their peak in 2021. The trajectory of this data is important given commodity prices and supply chain disruption have been critical ingredients to the inflationary backdrop since 2021. In addition, the Federal Reserve has recently turned its focus to headline inflation, which includes food and energy, as an important
complement to its more traditional focus on core measures of inflation. At Payden & Rygel, we believe a softening in headline inflation is an important step in the right direction for the connectivity between consumption, economic activity and the posture of central banks.
Central banks have dramatically increased interest rates and although inflation remains a concern, they have become a bit more balanced with respect to slowing growth and deceleration in both spending and production. We believe central banks will continue to raise rates, particularly as labour markets and aggregate consumption remain strong, but we think it’s important to acknowledge the impact higher rates have had, especially when combined with quantitative tightening and declining fiscal stimulus.
Putting it all together we have a backdrop where growth is undoubtedly slowing and inflation is showing signs of deceleration, while consumption and labour remain sticky. The recovery in asset prices in July increases the likelihood of a more hawkish stance from central banks, such as the Fed, in the coming weeks when compared to a modestly more dovish tone recently. Despite no shortage of macro headwinds, our view remains that the downturn will be reasonably shallow in terms of both duration and magnitude given the durability associated with the starting point of the labour market, consumption and housing.
At Payden & Rygel our focus is on actively managed fixed income portfolios, with an investment process that combines topdown and bottom-up decision-making. Our macroeconomic view informs top-down decisions and sets the stage for the direction of travel in areas such as interest rates and credit spreads. Bottom-up decisions are also shaped by the macro view, with additional emphasis on three main pillars: fundamentals, valuations and technicals.
As a multi-asset manager, it is important to consider how these pillars apply to various asset classes both on a stand-alone and cross-sectional basis.
Today, we believe the combination of these pillars provides an attractive opportunity for fixed income investors.
First, although there is a higher likelihood fundamentals will deteriorate and default rates will rise, the starting point is very strong, with 12-month forward default expectations in the US high-yield corporate market projected to be below 2 per cent as of the middle of 2022. We expect the default rate to rise from this level, but not significantly when considering the health of corporate balance sheets and lack of refinancing needs.
Second, valuations are far more attractive today when compared to the beginning of 2022. For example, credit spreads in commercial mortgage-backed securities have increased to their widest level since the commodity crisis of 2016, when corporate bond default rates increased to 5 per cent, which is much higher than our base case going forward. In addition, high-quality emerging market sovereign debt credit spreads increased to decadewide levels when compared to corporate credit. Within the third pillar, the technical backdrop is supported by elevated levels of cash and a high degree of pessimism, which could generate strong tailwinds if sentiment improves.
Going forward, we believe dispersion will remain elevated and security selection a critical component to active management. That said, we are encouraged by the opportunities available in the current environment and the prospect for returns in the near term. This is supported by a yield of 5.5 per cent in our multi-asset portfolios, with a low degree of interest rate sensitivity, in addition to significantly discounted dollar prices across asset classes. Historically, the combination of these factors has resulted in a favourable outcome for investors who can withstand near-term volatility.
Gold has historically performed well when markets are performing poorly and it looks like this phenomenon will be repeated during this set of economic challenges, Mark Pey writes.
The numbers say it all. In the first half of 2022, gold held its value better than almost every other asset. In this period, the Nasdaq decreased by 29.3 per cent, US government bonds fell 21.1 per cent, the bellwether S&P 500 dropped 20 per cent, emerging equity markets declined by 17.2 per cent, the S&P/ ASX 200 Index decreased by 13.4 per cent and, wait for it, Bitcoin fell 59.1 per cent. In sharp contrast, the gold price rose by 4.4 per cent in Australia, 7 per cent in Europe, 9.4 per cent in the United
Kingdom and 14.4 per cent in Japan. Only in the US did a stronger greenback see the price decline by a modest 1.2 per cent.
So what are the factors allowing gold to shine relative to other asset classes? First, that other benchmark safe haven in volatile times, bonds, especially sovereign bonds, have suffered significant falls. As the Bank of America put it bluntly, US bonds have seen “the worst declines since 1865”. That’s nearly 160 years. Certainly the 30-year bond bull
market has come skidding to an abrupt halt.
Second, and it’s related to the bond market crash, is rising inflation. It’s no secret why. Starting with the global financial crisis (GFC) in 2008 and then COVID-19, governments globally have been pumppriming their economies, the polite way of saying they have been printing money. The inevitable had to happen. Initially, it was asset inflation; now it has spread to the wider economy, fuelled by higher commodity prices due to the tragic events unfolding in Ukraine.
Yet despite these inflationary pressures, governments are finding it difficult to turn off the spending tap, with no better example than how quickly the new Labor government folded when it attempted to wind up the $750 JobKeeper payments for anyone testing positive to the coronavirus.
For those with a historical bent, what is unfolding now is being compared with the 1970s. In that decade, inflation, partly fuelled by two oil price spikes, hit double digits. It wasn’t until US Federal Reserve chairman Paul Volcker, who held the reins from 1979 to 1987, raised interest rates to double digits to slow wages and price rises, did the inflation genie finally return to the bottle.
Today, the Volcker ‘cure’, effectively tightening monetary policy to induce a US recession, is not an option. Leaving aside the politics of having a recession, such interest rate hikes are simply not possible when total debt across government (in the US, the debt-to-gross-domestic-product ratio is 130 per cent), corporate and personal sectors is considered. Many Australian households are feeling the mortgage pinch with the cash rate at 1.35 per cent; put a nought after the one and imagine their howls of anger.
Yet inflation remains the economic scourge it was back in the 1970s. In Europe, it has already touched 20 per cent annually in some countries, and their ability to fight it with higher rates is limited considering the above-mentioned debt levels and ongoing
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For SMSFs, the traditional asset allocation has been Australian blue-chip shares, cash and fixed deposits, property and managed funds. But that portfolio mix is under stress. Despite rising interest rates, returns on cash and fixed deposits are still miserly and the share market remains volatile. Undoubtably some trustees are having a rethink about their asset allocation, with capital preservation top of mind, especially for those in pension phase.
One option is commodities, many of which are enjoying strong price increases in the wake of Russia’s invasion of Ukraine. Like most assets, shares, exchange-traded funds or managed funds provide avenues to acquire gold. But with this precious metal, in particular, there is the opportunity to hold it physically with minimal management fees.
For SMSFs, what’s required to hold it physically?
First, the trust deed and investment strategy must allow the holding of this type of asset. If this is not the case, then the documentation will have to be amended before making any acquisition. There are no short cuts to doing this paperwork. The regulators oversee special rules to prevent fraud and mismanagement, which will require extra paperwork. So be prepared for that level of accountability.
Second, the physical gold cannot be acquired from a related party. The ATO can take a very dim view of such transactions.
Third, buying physical gold, whether it is bars or ingots, means you assume the responsibility for its storage and insurance, as well as the purchase and sales documents. There is a process that must be followed and regulator oversight to ensure it happens.
The other alternative is to buy gold online and have the insurance and storage the responsibility of the seller. If choosing this option, and increasingly investors are doing so, it’s critical you choose a seller meeting the standard rules. Reputable companies typically sell gold certified by the London Bullion Metal Association. Also ensure the actual rights to the gold are in the SMSF’s name.
One final warning. The ATO has strict guidelines on investing in collectables and personal-use assets. Gold, in coin form, for example, becomes a collectable if its value exceeds the face value of the coin and it can trade at a price above the spot price of its metal content. Typically, precious metals such as gold bullion, where their value is determined by the weight of the precious metal, are not considered collectables.
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economic weakness. The US, especially in terms of its government debt, is not in a dissimilar situation.
In this 1970s inflationary environment, gold thrived. It rose from US$35 an ounce to more than US$800 by the end of that decade. So, is history repeating itself? Certainly gold has been an excellent hedge against inflation because its price tends to rise when the cost increases. Often that rising gold price is accompanied by falling share markets as has occurred in the first half of this year.
It’s not just about inflation though. Recently the word deflation, too, has been
There are several ways to buy gold. In Australia, goldmining shares have been an entry point for investors wanting exposure to this asset. Other options are managed funds and exchange-traded funds. But increasingly investors want to buy physical gold to get the upside of any price movement minus the influence of market sentiment that can sway the prices of these other gold investments linked to the share market. If you are considering physical gold online, there are some definite guidelines to follow.
It’s imperative that you can get your funds in and out quickly and easily. Only use payment methods you trust when buying gold online. Liquidity is critical, meaning you must have the ability to buy and sell any amount at any time. Some providers let you buy any amount, but restrict the amount you can sell.
passing economists’ lips. That is when prices fall and business activity slows, typically heralding a recession, or, in the 1930s, the Great Depression. In that period, the relative purchasing power of gold rose as other prices fell because people chose to hold liquid assets, of which gold was a prime example.
Going hand in glove with inflation in the 1970s were heightened geopolitical tensions. The bloody war in Vietnam, which was a proxy for the Cold War, and most significantly the Middle East where political tensions caused the oil price to rise sharply with enormous ramifications for a global economy then joined at the hip to this source of energy. Today, it’s Russia
The best providers for buying gold online are those that meet the industry’s standard rules maintained by the top global gold organisations. The best companies provide gold that is certified by the London Bullion Metal Association (LBMA) – a guideline Rush Gold adheres to. The LBMA also has a Precious Metals Global Code of Conduct (Rush Gold is a signatory to this code) to ensure investors are always treated fairly, transparently and legally.
Finally, when buying gold online consider the country where the company is based. Some countries have relaxed standards about property ownership and consumer protections. But countries such as Australia, where Rush Gold is based, have a strong financial regulatory framework, consumer rights, strong property laws and stable government. It’s another level of protection in a world where scams are proliferating.
What can’t be denied is that although the price of gold can be volatile in the short term, it has traditionally maintained its value over the long term.
in Ukraine and China sabre-rattling over Taiwan that have markets spooked and some commodity prices skyrocketing.
But gold is not just an investment story for troubled times. Far from it. It’s worth remembering gold has a long history of holding its value. Since antiquity, the unique properties of this precious metal have been valued by different societies.
There is also the macroeconomic issue of supply and demand. Many central banks have been sellers of gold since the 1990s, but this slowed since the GFC raised question marks about the security of paper assets. Since the start of the GFC, central banks have been significant net buyers.
Simultaneously, gold production has only been steady, at best, for more than two decades. It is, after all, a finite resource and has been mined for more than 5000 years, with Mesopotamia (today’s Syria) possibly the first place where it was extracted and smelted.
On the demand side, greater wealth in emerging economies has stimulated gold buying, especially where there has been a historical nexus between gold and the culture, with the world’s two most populous countries, China and India, obvious examples. Gold bars have been a traditional way to store wealth in China, while India is the second largest goldconsuming nation where it has long been associated with matrimony.
For investors, it is increasingly being seen as a way of diversifying their portfolios, as well as offering capital preservation. In the past, gold has performed well when other assets have retreated, such as the 1970s. Conversely, shares performed well in the 1980s and 1990s, even considering the 1987 share market crash, while the gold price was relatively flat.
Gold as an investment, like any other, is no panacea. Like all assets its price ebbs and flows. In 2020, for example, COVID-19 saw demand for jewellery drop
sharply. But at the same time demand for investment gold and gold derivatives, such as exchange-traded funds, increased, as did bars and coins. Gold sometimes trades like an investment, sometimes like a hedge and sometimes like a commodity, and the investment rationale won the day in 2020.
What can’t be denied is that although the price of gold can be volatile in the short term, it has traditionally maintained its value over the long term. Over the years, it has served as a hedge against inflation and against the erosion of major currencies, as well as a safe haven in troubled times, and therefore an investment worthy of consideration for any diversified portfolio.
Gold is not just an investment story for troubled times. Far from it. It’s worth remembering gold has a long history of holding its value.
There are strict rules applying to in-house assets that all SMSF trustees must consider. Mark Ellem explains how an in-house asset breach occurs and the courses of action that must be taken in these circumstances.
Where an SMSF has an asset that is an in-house asset, that alone is not a breach of the superannuation rules. The breach occurs where the rules applying to an in-house asset are not followed. Consequently, once it’s determined an SMSF has an in-house asset, the relevant rules must be followed.
Non-compliance with the in-house asset rules can lead to the imposition of 60 penalty points under the SMSF administration penalty regime and, using the current value of a penalty point, that would be a fine of $13,320 per trustee. Based on auditor contravention reports (ACR) lodged during the period 1 July 2004 to 30 June 2020, breaches of the in-house asset rules were the highest reported breach by value and second highest by percentage of total reported infractions. So, understanding when
an asset of an SMSF is an in-house asset and/or subsequently following the prescribed rules appears to be a continuing challenge.
Sub-section 71(1) of the Superannuation Industry (Supervision) (SIS) Act defines an in-house asset of a superannuation fund as one that is any of the following:
1. a loan to, or an investment in, a related party of the superannuation fund, or
2. an investment in a related trust of the superannuation fund, or
3. an asset of the superannuation fund that is subject to a lease or lease arrangement between the superannuation fund trustee(s) and a related party.
MARK ELLEM is head of education at Accurium.The ATO has outlined in SMSF Ruling 2009/4 its view of the meaning of a number of in-house asset terms as they apply to the definition of an in-house asset.
While an asset of an SMSF may prima facie be an in-house asset, it may be excluded from the in-house asset rules. Sub-paragraphs 71(1) (a) through to (j) of the SIS Act provide a list of assets that are specially excluded from being treated as an in-house asset.
There are also anti-avoidance provisions within the in-house asset rules that have the purpose of capturing any schemes or arrangements entered into for the purpose of circumventing the in-house asset rules. Subsection 71(4) of the SIS Act also effectively gives the ATO commissioner the power to deem an asset as an in-house asset. The deeming powers of the tax commissioner to treat an asset as an in-house asset was referenced in the ATO’s decision impact statement on the Aussiegolfa case. While the court decided the power was not required in that particular case, the ATO stated: “The ATO will continue to consider issuing a determination under subsection 71(4) of the SIS Act as appropriate in circumstances where the trustee of a SMSF enters into an arrangement to acquire an asset that would otherwise be an in-house asset under section 71 of the SIS Act if directly held by the SMSF.”
The commissioner can also make a determination not to treat an asset of a superannuation fund as an in-house asset. The commissioner has outlined the ATO’s approach to making such a determination in Practice Statement Law Administration 2009/8.
Once it is determined an SMSF has an inhouse asset, as stated earlier, this is not in itself a breach. However, sub-section 84(1) of the SIS Act requires the trustee(s) to take all reasonable steps to ensure they comply with the in-house asset rules. These can be summarised as follows:
Rule 1: The year-end in-house asset market value ratio test.
If, at the end of the income year, the market value ratio of in-house asset of an SMSF exceeds 5 per cent of the total fund’s assets, the trustees must prepare a written plan to reduce this ratio to 5 per cent or below. This plan must be prepared before the end of the next following income year and each trustee must ensure the steps in the plan are carried out as stipulated in section 82 of the SIS Act For example, if an SMSF exceeds the 5 per cent in-house asset market value ratio as at 30 June 2022, a plan must be prepared and implemented on or before 30 June 2023.
Rule 2: In-house asset market value ratio already exceeds 5 per cent.
Where the market value ratio of an SMSF’s existing in-house assets already exceeds 5 per cent, under sub-section 83(2) of the SIS Act, the fund is prohibited from acquiring any further in-house assets.
Table 1
Rule 3: In-house asset market value ratio does not exceed 5 per cent.
Where the market value ratio of an SMSF’s existing in-house assets does not exceed 5 per cent, the fund is prohibited from acquiring any further in-house assets where it would result in in the fund’s in-house asset market value ratio exceeding 5 per cent as stated in sub-section 83(3) of the SIS Act
A breach of SIS Act sub-section 84(1) will occur where either of the above three rules apply but are not followed.
For the purpose of determining a fund’s market value ratio of its in-house assets, either at the time an in-house asset is being acquired or for the year-end in-house asset rule, the formula in sub-section 75(1) of the SIS Act is applied (Table 1).
When calculating the market value ratio using the formula in Table 1, any fund liabilities should be ignored.
For example, an SMSF with a limited recourse borrowing arrangement (LRBA) has gross assets of $2 million, but after allowing for the loan under the LRBA of $600,000, has net assets of $1.4 million. Where the SMSF also has an in-house asset, the market value ratio will be based on the fund’s gross assets of $2 million and not its net assets of $1.4 million.
As noted, an in-house asset includes an asset subject to a lease or a lease arrangement between an SMSF and a related party. The in-house asset exclusions permit an SMSF to lease business real property to a related
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Number of whole dollars in value of in-house assets
Number of whole dollars in value of all fund assets
Understanding when an asset of an SMSF is an in-house asset and/or subsequently following the prescribed rules appears to be a continuing challenge.
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party. However, consider the scenario where the property does not satisfy the definition of ‘business real property’, for example, a residential property and consequently the lease of the fund’s property is an in-house asset of the SMSF.
In these situations the in-house asset rules must be applied. That is:
• the year-end in-house asset market value ratio test (rule 1), and
• the 5 per cent tests for acquiring a new in-house asset (rules 2 and 3).
For the purpose of applying the rules, it’s important to determine the value of the in-house asset. In relation to an asset where a lease or lease arrangement is involved, the value of the in-house asset is the value of the asset subject to the lease, that is, it is the value of the residential property and not the value of the rental income during the period it was leased to the related party. It would generally be expected the value of a property held would be more than 5 per cent of the value of total fund assets. Does simply ceasing the lease to the related party rectify the fund’s in-house asset issue? This will depend on which of the inhouse asset rules apply.
• Where the lease or lease arrangement to the related party was in place on 30 June, the year-end in-house asset rule applies. This requires the trustee to put in place a written plan to dispose of the excess in-house asset amount by the following 30 June. Cessation of the lease to the related party does not satisfy the requirement to dispose of the excess in-house asset amount. As the in-house asset is the item subject to the lease or lease arrangement with the related party, that asset is the one requiring disposal. However, the ATO has provided previous guidance in National Tax Liaison Group Super Technical minutes from June 2012 that while it considers the cessation of the lease not satisfying the requirement to dispose of the excess in-
house asset amount, where it was a one-off breach the regulator is unlikely to make the fund non-complying. It should be noted, however, these comments from the ATO were made prior to the introduction of the SMSF administration penalty regime. The fund would have also likely not complied with either sub-section 83(2) or 83(3) of the SIS Act
• Where the lease or lease arrangement ceases prior to 30 June, there is no longer a lease arrangement between the fund and the related party. Therefore, there is no longer an in-house asset, the year-end in-house asset does not apply and there is no requirement for the written plan to dispose of the excess in-house asset amount. However, it is likely the fund has not complied with either sub-section 83(2) or 83(3) of the SIS Act as it acquired an in-house asset (commencement of the lease to the related party) and the value of the property is used for the purpose of the 5 per cent market value ratio limit, taking it above the 5 per cent threshold. Consequently, the fund has also breached section 84 of the SIS Act
as the in-house asset rules have not been complied with.
Of course, the ATO may take further action if the lease of the residential property for short periods of time continues in subsequent income years and it can be seen to deliberately cease prior to each 30 June so as not to trigger the year-end in-house asset market value test in SIS Act section 82. That is, it would be prudent to ensure it doesn’t happen again.
In addition to compliance with the in-house asset rules, consideration should also be given to the application of other provisions of the SIS Act and SIS Regulations and the Income Tax Assessment Act and Regulations, including, but not limited to:
Investment strategy: while the fund’s in-house asset market value ratio may not exceed 5 per cent, does the investment fit within the fund’s investment strategy? Sole purpose test: again, while the fund’s in-house asset market value ratio may not exceed 5 per cent, does the fund have relevant evidence to show the sole purpose of making the investment was the provision of retirement benefits for members?
Arm’s-length dealings: any investment or loan or fund asset under a lease or lease arrangement must be on arm’s-length terms. Lending to fund members: a trustee must not lend money to a fund member or their relative or provide financial assistance using the resources of the fund, again, to a fund member or their relative.
Non-arm’s-length income provisions: where the terms of a related-party transaction are not at arm’s length and result in the SMSF deriving more income or incurring less expenditure than what would have been the case had the SMSF and the other party been dealing on an arm’s-length basis, the resulting income could be treated as non-arm’s-length income. This will lead to tax penalties imposed on the SMSF.
During the period 1 July 2004 to 30 June 2020, breaches of the inhouse asset rules were the highest reported breach by value and second highest by percentage of total reported infractions.
Is it better to house two members in a single SMSF or run two separate funds for each individual? Michael Hallinan considers both of these propositions.
Now SMSFs can have up to six members, it is a good time to consider whether they should only have one member. This is not a criticism of the former government’s unexpected but welcome championing of larger SMSFs. This championing was possibly an attempt to future-proof SMSFs against the re-emergence of anti-SMSF policy changes. The Labor Party’s proposal to make imputation credits non-refundable for super funds being an example – a policy that would have had a disproportionate adverse impact on SMSFs compared to other
superannuation sectors.
Unfortunately, the impact of the increase in the membership size, made effective on 1 July 2021, from four to six members has not yet flowed through the ATO reporting system and was not captured in the most recent SMSF quarterly statistical report of March 2022. The most recent report only captures data applicable to the 2020 financial year. However, this data does indicate less than 4 per cent of SMSFs have four members, while 23.7 per cent are singlemember funds in respect of the 2020 income year.
The five-year collection period with regard to SMSF membership size is set out in Table 1 taken from the March 2022 statistical report.
The data indicates a very slight increase in the proportion of single-member SMSFs over the collection period with a corresponding reduction in the percentage of multi-member SMSFs. In all years of the report, single-member and two-member funds have accounted for no less than 92.4 per cent of all SMSFs.
The issue to be considered in this article is whether the advantages of single-member SMSFs are sufficient to offset the scale advantages, particularly the initial set-up costs and the recurring costs, of twomember funds.
To do this we will look at a case study and to make the comparison more robust, the single-member SMSF has a corporate structure, while the two-member SMSF has an individual trustee structure. Further, we have assumed there are no member movements – whether inwards or outwards in either fund.
These assumptions clearly favour the twomember SMSFs given the ‘nil cost’ structure of individual trusteeship as against the cost of a special purpose corporate trustee, approximately $800 including the Australian Securities and Investments Commission (ASIC) registration fee of $538. However, once the administration and transaction costs associated with the admission of an additional member to an SMSF with an individual trustee structure, particularly where the fund has one or more direct real estate investments, are taken into account, the corporate trustee structure will represent reasonable value.
The actual case to be used is that of Bill and Mary. The comparison will be based upon a scenario where Bill and Mary each have their own SMSF (with their own single-director/single-member corporate trustee) versus one with Bill and Mary being
members of the same two-member SMSF.
The typical establishment costs of two single-member SMSFs as against a twomember SMSF are set out in Table 2. The costs are illustrative only and not exhaustive. It would be possible for the same corporate entity to act as trustee of both Bill’s SMSF and also Mary’s SMSF. This could be achieved by setting up B&M Super Pty Ltd with Bill and Mary as the only directors as that entity would satisfy the requirements of section 17A(2)(a)(ii) of the Superannuation Industry (Supervision) (SIS) Act. However, such a cost-saving arrangement would undermine one of the main benefits of a single-member SMSF. Consequently, this cost-saving arrangement will be ignored. Clearly the single-member SMSFs have no scale when compared to two-member SMSFs and if cost was the only criterion, then single-member SMSFs would be the less satisfactory solution.
The typical operating costs of two singlemember SMSFs compared to a twomember SMSF are set out in Table 3. The costs are illustrative only and not exhaustive. Again, clearly the single-member SMSFs
have no scale when compared to twomember SMSFs and if operating cost was the only criterion, then single-member SMSFs would be the less satisfactory solution.
The above comparisons undoubtedly show the cost savings arising from the scale of two-member SMSFs against singlemember funds.
They do not, however, include irregular costs or occasional costs, such as trust deed amendments. Presumably such costs would not alter the scale advantage of twomember SMSFs.
The case for single-member SMSFs cannot be based solely on cost. Clearly, as shown by the tables, both typical establishment and operating costs would be lower on a per member basis in two-member SMSFs. What then is the rational basis for operating two single-member SMSFs as against a twomember SMSF?
The justification for single-member SMSFs is primarily based upon the desire for and benefits of unadulterated control and splendid isolation. The attributes of control and splendid isolation will be best
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appreciated by married couples who have had previous relationships. While they may jointly own their marital home, many prefer to keep their super in splendid isolation from their spouse and exclusively retain unadulterated control over their own super.
The benefits of splendid isolation and unadulterated control will be particularly appealing in the situations of relationship breakdowns, mental incapacity and estate planning.
However, there are other benefits of single-member SMSFs. These include the avoidance of a dominant member, the ability to have different investment strategies, the ability to use different advisers and the avoidance of the risk the SMSF will be treated as a foreign trust for the purposes of additional transfer duty or land tax.
As there is no second member in a single-
member SMSF, there cannot be a dominant member; the single member can pursue their preferred investment strategy, the single member can engage their preferred service providers and the risk of the SMSF being treated as a foreign trust is much reduced.
Finally, it may be much easier for the single-member SMSF to have all assets treated as segregated current pension assets than would be the case if there was a second member.
Before considering these benefits of single-member SMSFs, there are other advantages of two-member SMSFs that should, in fairness, also be acknowledged. Two-member SMSFs could have a greater contribution inflow thereby permitting access to investments with minimum investment limits, or to geared investments where the size of expected contribution inflows is a material consideration for any lender under a limited recourse borrowing
arrangement.
Where a relationship breakdown occurs, the practical result is usually a significant and prolonged disruption to the proper administration of the SMSF. This disruption is due to the disinclination of the two parties to cooperate due to personal animosity between them or that one party treats the disruption as a bargaining lever for the property settlement.
In these situations the SMSF’s bank account is often effectively frozen as one side declines to provide joint instructions. Commonly, pension payments cannot be made either as investment instructions are not given or the payment is not authorised. Normal end-of-year activities of the SMSF can be suspended or delayed. The SMSF may suffer loss of the earnings tax exemption for failing to pay the minimum pension
Table 2: Typical SMSF establishment costsamount or breach various operating standards. These adverse outcomes will not arise in a single-member SMSF.
While having a single-member SMSF does not immunise the superannuation interest from court-ordered payment splits and does not provide indivisibility of superannuation interests (particularly since recent amendments to both the Family Law Act and Taxation Administration Act permitting Family Court registrars requesting and sourcing information from the ATO about superannuation interests of the other spouse), it will prevent the administration of the single-member SMSF from freezing. If the member is in pension phase, the effective freezing of the administration of the SMSF may render the member without an income.
Should a member of a single-member SMSF suffer mental incapacity, the member’s preferred attorney or attorneys could take over management and control of the fund. This can avoid the complication of having a second mentally capable trustee or director seeking to interfere or control the joint SMSF.
Where the member has children from a previous marriage, it can be more easily and effectively prearranged that, upon death, control of the fund moves to these children in a single-member SMSF. This would prevent the member’s second wife from seeking to exercise control or challenging the validity of estate planning mechanisms
put in place by the deceased member, such as binding death benefit nominations or reversionary pension nominations, or seeking to exercise any dispositive discretions conferred on the trustee in respect of the death benefit.
There is a good case for single-member SMSFs, particularly for individuals who do not wish to intermingle investment or control or both of their superannuation interests. This would be the case for individuals who are in their second or subsequent marriage. There is, however, an additional cost for this unadulterated control and splendid isolation, but the cost is not too great when compared to the costs incurred when these elements are absent.
Bringing pension scheme payments back to Australia from overseas is a complex process. In part two of this multi-part feature, Jemma Sanderson dispels some of the myths associated with UK pension transfers.
Following on from part one, and the complexities of UK pension transfers, including the consideration of multiple jurisdictions, there are many inaccuracies and areas that are misunderstood.
In part two of the series, we will bust some of the myths associated with these transactions.
Some of the questions we are asked about these transfers are as follows:
1. If I have benefits in the UK greater than my nonconcessional cap, do I have to transfer to Australia
over multiple years?
2. I already have more than $1.7 million in total superannuation in Australia, does that mean I can’t transfer any more benefits to Australia other than the growth since I became an Australian resident?
3. If I have already started implementing a strategy for a multiple step/year transfer, am I allowed to alter my strategy and transfer within a shorter period of time?
4. I am in excess of my lifetime allowance, so will I have to leave my benefits above that in the UK or
5. I have a defined benefit scheme, so does that prevent me from transferring my benefits to Australia?
6. If I’m under age 55, is it not worthwhile for me to consider doing anything with my UK benefits?
7. I have multiple accounts in the UK so do I have to consolidate them before I transfer any benefits to Australia?
8. I transferred benefits from the UK to another jurisdiction prior to April 2015. Does that mean I can’t easily transfer those amounts to Australia?
9. I’ve just turned 55 and want to transfer my benefits to Australia. Will they be trapped in the superannuation system until my preservation age of 60?
The Australian superannuation contribution provisions are a very important consideration when looking to transfer funds from a UK scheme to Australia. As outlined in part one, the amount that would be assessed towards this limit is broadly the balance in the individual’s UK schemes at the time they became an Australian resident, plus the value of any contributions they made since becoming a resident. Therefore, if the balance at that time was more than $330,000, that is a consideration.
However, just because the individual had a balance in UK accounts at their date of residence of greater than $330,000 doesn’t mean the benefits can’t be transferred to Australia in a tax-effective and timely manner.
As with myth one, the Australian superannuation provisions are a very important consideration when looking to transfer funds from a UK scheme to Australia. Where an individual has more than $1.7 million in superannuation in Australia, then their non-concessional contribution cap is likely to be nil.
As above, from a UK pension transfer perspective, the amount that would be assessed towards this limit is the balance in the individual’s UK schemes at the time they became an Australian resident. Therefore, if the individual doesn’t have any available non-concessional contribution cap as they have more than $1.7 million in superannuation in Australia, that is a consideration.
In the situation where an individual has already commenced the implementation of a multiple-phase approach to transfer their benefits to Australia doesn’t meant they are then limited by the original timing. In such situations, where this has been undertaken such that the benefits are already split into multiple self-invested personal pensions in the UK, it can make it slightly easier to then transfer the accounts remaining in the UK. Therefore, partial implementation of a multi-year strategy doesn’t mean a new strategy can’t be implemented to transfer the benefits to Australia more quickly.
Where an individual is in excess of their
lifetime allowance (LTA) in the UK (currently £1,073,100), many believe they then can’t transfer any benefits to Australia without incurring a 55 per cent tax charge. This is not the case. If the benefits are transferred correctly, then the 25 per cent LTA charge may apply, however, there could be no further tax implications in Australia or the UK.
It is important when a member is in excess of their LTA that it is well understood how much of their LTA they may have available, they could have already used some of it by taking benefits from the UK previously, as well as ensuring the implementation of any strategies are undertaken correctly. The incorrect implementation, including the liaison with the ATO and Her Majesty’s Revenue and Customs, could result in the 55 per cent tax charge being imposed and no ability to claim back any credits.
One area where benefits may have already fully used the LTA is if an individual takes out a pension commencement lump sum (PCLS) to take out a tax-free amount of up to the 25 per cent, when they had to crystallise 100 per cent. The remaining balance, or 75 per cent, would have been assessed towards their LTA. A PCLS is only available for 25 per cent up to the LTA, but there could be uncrystallised benefits above the LTA that haven’t been dealt with due to the perceived 55 per cent tax result, as well as the crystallised amount remaining, plus any growth/earnings on that.
Where a member has a defined benefit (DB) scheme in the UK is where the most value add arises with a transfer from the UK to Australia as these schemes are resulting in quite high transfer values. However, in order to undertake any transfer, the member needs to obtain advice from a pension transfer specialist (PTS) who is accredited to provide that advice by the UK Financial Conduct Authority. Where that advice is
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Partial implementation of a multi-year strategy doesn’t mean a new strategy can’t be implemented to transfer the benefits to Australia more quickly.
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provided, and the PTS signs-off with the relevant UK DB scheme, then the money can be transferred out of the DB scheme to Australia if the individual is 55 or over, or to another UK scheme that is not a DB in operation.
There are a limited number of PTSs who can provide this advice as it is a very highly regulated sector in the UK. Therefore, it is important to consider the use of a PTS who is not just familiar with the transfer of a DB scheme to another UK scheme, but one who is familiar and experienced with transfers to Australia, particularly when you want to get the best outcome for clients.
The individual’s age is very relevant to their ability to take a benefit out of a UK scheme, including transferring the benefits to an Australian superannuation account. Until the individual is 55, they are unable to receive any benefits out of their UK scheme or undertake a transfer from the UK to Australia. However, it may still be worthwhile where the individual has a DB scheme in the UK to consider whether it is appropriate to transfer the DB scheme to another UK scheme, subject to PTS advice (see myth five). Upon them attaining age 55, or in the lead-up to that time, they could then
consider their options to transfer the money into Australia.
Over the period of time leading up to age 55, the individual would have to have the non-DB scheme managed/invested and therefore this is a consideration for that individual.
It is important to note the current pension age in the UK is 55, however, this is likely to increase over time, with those people born between 6 April 1971 and 6 April 1973 likely to have some transitional rules apply, and those born after 6 April 1973 having an applicable pension age of 57.
Where an individual has multiple schemes in the UK, they don’t have to be consolidated prior to any transfer. In actual fact, having separate accounts can enable a more strategic transfer of the overall benefits to Australia with ultimate consideration of the timing.
It is not necessary to consolidate the benefits, however, in some situations this may be the most appropriate course of action. It will of course depend on the individual’s circumstances.
In the lead-up to April 2015, when there were substantial changes to the pension scheme rules in the UK, many expats transferred their UK monies into recognised overseas pension scheme accounts in other international jurisdictions, including Malta, Guernsey and Gibraltar.
Where this is the case, these accounts are also able to be transferred into Australia. The main consideration with respect to these accounts are:
a. any exit fees that may apply – we have experienced situations where the exit fee within a particular period of time is very cost prohibitive to the individual and therefore this may delay the ultimate transfer,
b. the tax requirements of the particular jurisdiction prior to a transfer occurring – depending on the jurisdiction, clearance is required by the local taxation authorities. This generally results in the transfer taking longer, but is not prohibitive, and
c. ensuring the scheme in the foreign jurisdiction satisfies the definition under the Australian legislation of being a foreign superannuation fund. By satisfying this definition, the individual is able to use the provision in Australia where only the growth in the account since they became an Australian resident is subject to tax. Therefore, such accounts can also be transferred into Australia.
There is a divergence between the UK pension age of 55 and the Australian preservation age of 60. Accordingly, where UK benefits are transferred to superannuation in Australia, they will be unable to be accessed until the individual reaches age 60 in Australia and satisfies a condition of release with a nil cashing restriction.
However, several of the strategies available for the repatriation of UK pension scheme benefits may not involve the benefits being transferred entirely into superannuation in Australia, instead being transferred to the individual personally. Therefore, benefits may not all be trapped in Australia upon transfer.
With myths busted and areas to be cautious of identified, part three of this series will delve into the strategies that enable UK pension scheme members to transfer their benefits to Australia in a tax-effective and timely manner. These strategies have enabled the above myths to be busted and provide many UK expats to have the certainty that their UK benefits can be transferred to Australia and managed effectively.
Where an individual has multiple schemes in the UK, they don’t have to be consolidated prior to any transfer.
21 APRIL
We are delighted to announce our new conference, designed specifically to develop your practice and explore business opportunities. Join us for a practical, informative and thought-provoking program that has been created to give you tools and ideas to grow and maximise your client list; develop your practice including your own personal development.
In this one-day intensive event we bring you tax and superannuation technical specialists; regulators; business opportunities and solutions – all with outstanding networking opportunities. Seats will be limited so we encourage you to book your place as soon as our registrations open –stay tuned!
LOCATION Sofitel on Collins, Melbourne
DATE 21 April 2023
TIMES 9:00am - 5:30pm (Conference) 5:30pm - 7:30pm (Cocktail party) Ticket
www.tsa.delegateconnect.co
T: (03) 8851 4555 | E: conference@taxandsuperaustralia.com.au
Quite simply, one of the biggest incentives for people to contribute to super, to lock their money away until retirement and to commence income streams is tax. Superannuation remains the most tax-effective means of saving and the tax incentives offered to Australians are a major driver of the growth of Australia’s superannuation system – currently sitting at around $3.4 trillion, according to Australian Prudential Regulation Authority figures released in March.
It is critical therefore for any tax advisers in the SMSF industry to have a solid understanding of tax rules in super to not only maximise retirement savings, but also to navigate our complex tax and
Following are some of the key issues in tax in super and a number of the sometimes overlooked tax matters.
A frequently misunderstood process is claiming a deduction for personal super contributions, particularly around the paperwork needed and timing within which it must be completed.
In order to claim a tax deduction for personal superannuation contributions, individuals must complete a “Notice of intent to claim
or vary a deduction for personal super contributions”, a section 290-170 notice of the Income Tax Assessment Act (ITAA), provide that form to their super fund (including SMSFs) and have the super fund supply an acknowledgement letter to them.
Further, this paperwork must be in place by the date of lodgement of their personal tax return and no later than 30 June of the year following the year of contribution. Failure to do so will result in a loss of entitlement to claim the tax deduction. Importantly, the commissioner of taxation has no discretion in relation to these requirements.
Non-arm’s-length expenditure (NALE) remains a challenging area for many SMSF trustees and their advisers. An SMSF that does not incur or pay expenses on an arm’slength basis risks the income of the fund being treated as non-arm’s-length income (NALI) and taxed at the highest marginal tax rate. This can include annual income, as well as capital gains.
Rules around NALE have been in force since 2018, particularly in relation to those expenses with a nexus to particular income of the fund, for example, property management fees in relation to rental property income. Since that time, the ATO has formed a view stipulated in Law Companion Ruling 2021/12 that general expenses have a sufficient nexus to all income of the fund. While it has been prepared to give trustees time to adjust to this view, as stated in Practical Compliance Guideline 2020/5, from 1 July 2022 it is expected to make further inquiry and take action in relation to these general expenses not paid on an arm’s-length basis.
As such, where family offices or accounts departments assist in the administration of SMSFs, a fee may need to be paid by the fund. Further, any advisers using their own firms to assist with administration or tax agent services will need to consider how these rules may apply to them.
For many superannuants, the make-up of their benefits as either taxable or taxfree will never be an issue, certainly while they are alive, as benefits are generally tax exempt for those over the age of 60. Where superannuation benefits are ultimately paid to a beneficiary following the death of the member, however, tax will be payable on the taxable component where the beneficiary is not a tax dependant. This mainly impacts adult children. Importantly, if no tax-free component can be identified or has been tracked, the whole amount will be treated as taxable and taxed at 15 per cent plus the Medicare levy.
Most SMSF software easily tracks these components, but where specialised software is not used, other records will need to be kept and calculations made annually to ensure they are appropriately tracked.
A provision of tax law that can also be overlooked relates to the requirement for capital gains tax (CGT) to be the primary code for calculating gains and losses within a super fund. While it is broadly understood super funds can’t ‘trade’, and therefore all buying and selling of securities will be subject to the CGT provisions, there are certain assets that are excluded from this treatment.
As the breadth and scope of modern assets expands, some assets growing in popularity may actually be able to be treated as income and not capital gain. The types of assets in this group are generally those with predominantly debt-like features. This can be a complicated area and may require specialist advice.
In a global economy and as the use of investment managers increases, the incidence of SMSFs holding foreign bank accounts is on the rise. For example, it would not be unusual for managed portfolios to have holdings in foreign markets.
Generally, foreign exchange gains and losses will give rise to assessable income or an allowable deduction, but provisions also apply that would allow these gains and/ or losses to be ignored. Specific criteria must be met to enable an election to be made. This would generally apply where the value of the foreign bank account does not exceed $250,000, although some minor fluctuations are allowed. The ability to use these provisions is not automatic and an election must first be made. Again, this can be a complicated area requiring specialist advice so care must be exercised where a fund holds foreign bank accounts.
Most tax agents do not use tax-effect accounting in the preparation of financial statements and tax returns. However, there are times when it is appropriate to do so. Typically, when a member is rolling out of a fund or when splitting assets during marital breakdown, tax-effect accounting will ensure the departing member effectively pays their share of tax on assets rather than having the remaining member being left with the tax bill upon the ultimate sale of the assets.
While there is an argument tax-effect accounting can give a truer account of members’ entitlements by allowing for notional tax should the assets be sold on a particular date, in super it can be a mistake to assume any tax paid as income attributable to members in retirement phase will be tax-free.
It is worth noting where tax-effect accounting can be used at a particular time for a specific purpose, as described above, the fund can stop using this method later.
While not exclusive to SMSFs, it is a timely reminder an entity must hold shares at risk for at least 45 days to be entitled to claim franking credits attached to dividends received. It is important to note the day of
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acquisition and disposal is not included in the 45-day calculation.
Small shareholders may be entitled to an exemption from this rule if their total franking credit entitlement is less than $5000.
Around 45 per cent of all SMSFs are either wholly or partially in retirement phase. For these funds their biggest concession will likely be exempt current pension income (ECPI).
Calculating ECPI is undertaken using either the segregated method or the proportionate method. The segregated method allows income from assets segregated for pension-paying purposes to be ignored, including funds that are only paying income streams in retirement phase.
The proportionate method is used for funds that have accumulation accounts as well as pension accounts and can also be used where funds were not solely paying income streams for the whole year. When claiming ECPI using this methodology, an actuarial certificate must first be obtained to ascertain the percentage of income that will be exempt from tax.
Recent changes in law have allowed for more flexibility in choosing the ECPI methodology that can be used, but only in certain circumstances. Where a fund is 100 per cent in retirement phase for part of the year, they can either use the proportionate method for the whole year or only that period in which they held an accumulation account and segregated method for the period they were wholly in retirement phase. In addition, those funds wholly in retirement phase for the entire year, but could not previously use the segregated method because they held disregarded small fund assets, where a member in retirement had a total super balance in excess of $1.6 million, will no longer be required to obtain an actuarial certificate to claim ECPI.
Not all expenses incurred by a super fund are going to be fully tax deductible. Some expenses may need to be capitalised, such as certain legal fees, and others, like fines, are not deductible at all.
Expenses incurred that are typically deductible, under general principles of section 8-1 of the ITAA, include accounting, actuarial, audit and other administration costs. Some expenses have specific provisions for deductibility, including the supervisory levy and tax-related expenses defined in section 25-5 of the ITAA. Some legal expenses may be deductible, such as those needed to update a deed in response to legislative changes. However, a deed update undertaken for other purposes may not be deductible – a good reason to ensure regular deed updates are undertaken.
Set-up costs for SMSFs are generally not deductible. Financial advice can be confusing as to deductibility. Generally, advice in relation to investment management is likely to be deductible, but structuring advice will not be.
ATO Tax Ruling (TR) 93/17 contains good commentary and plenty of examples on income tax deductions available to super funds and can be a useful resource to ensure deductions are being claimed correctly.
When a fund claims a deduction for ECPI, it is not entitled to claim a full tax deduction for all expenses. Rather, only a portion of expenses will be deductible and when a fund is completely in retirement phase for the whole year, no deductions can be claimed.
When apportioning expenses for deductibility, different methods can be used, but whichever method is employed, it must be done so on a fair and reasonable basis. Many tax agents simply apply the actuarial percentage to expenses, but some expenses directly attributable to paying pensions may not be deductible at all. Conversely, some fund expenses can still
be deductible in full, for example, the ATO supervisory levy.
TR 93/17 also discusses methods of apportionment that can be used.
According to the data contained in “ATO Self-managed super funds: A statistical overview 2019-20”, the SMSF sector is currently serviced by 13,800 tax agents who account for the servicing of 99 per cent of funds. While the average number of funds per agent is around 31, the median is nine, which means there are a significant number of agents who only have a small number of SMSF clients. In fact, over 9200 of these tax agents have 20 or fewer SMSF clients. Thirty-two tax agents have over 500 clients and 861 have between 101 and 500 clients. Tax agents have an obligation to only undertake tax work for which they are qualified and experienced. The SMSF sector continues to grow and our superannuation laws continue to become more complex. As such, the need for SMSF specialists will only increase, along with the hope those not specialised in this area will seek out the assistance of those who are.
An SMSF that does not incur or pay expenses on an arm’s-length basis risks the income of the fund being treated as non-arm’s-length income (NALI) and taxed at the highest marginal tax rate.
SMSFs are the only superannuation structure allowing members to invest in direct property. Tim Miller looks at the different options available to trustees to include this asset class in their funds.
A key aspect of using an SMSF for retirement planning purposes is the ability to use it to acquire direct property assets, either directly or indirectly. Property in this sense can be:
• business real property, that is, property used wholly and exclusively for business purposes, or
• residential investment property.
Business real property is the only type of property that can be directly acquired from a related party, making it an attractive proposition for small business owners. However, the introduction of limited recourse borrowing arrangements (LRBA) from 2007 saw a rise in SMSFs acquiring residential investment properties.
What is generally a focus for trustees is determining how they can acquire property. There is a great deal of attention given to the use of LRBAs, often resulting in other opportunities being overlooked.
Key positives of an SMSF investing in business real property include the general benefits of investing in a growth asset that provides a regular commercial rate of rental income, meaning the small business proprietors can have the satisfaction that their rent is helping to fund their retirement.
Where an SMSF is considering a business real property transaction, it is important to ensure:
• all transactions, including ongoing rental payments, are conducted at arm’s length and are well documented,
• the property, if leased to a related party, is always maintained wholly and exclusively as business real property,
• sufficient cash flow exists within the SMSF to manage all property expenses on an ongoing basis,
• the trustees have a plan in place to satisfy all future benefit payment requirements as and when they arise, particularly where property makes up a significant proportion of the SMSF’s
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TIM MILLER is education manager at SuperGuardian.Continued from previous page
investments, and • all investments are part of the fund’s documented investment strategy.
In light of the release of Law Companion Ruling 2021/2 dealing with non-arm’slength expenditure, the concept of property owners undertaking repairs, maintenance and/or improvements to property must be considered firstly with reference to whether they are undertaking those tasks in their trustee or individual capacity, and given the scale of work often involved, whether they are appropriately qualified to do so.
Prior to the introduction of contribution caps, the in-specie contribution of business real property was a strategy that enabled members to generate a rapid increase in the value of total SMSF assets. While the use of in-specie transfers continues to be relevant, it must now be considered in light of the contribution cap restrictions and sits best within the realms of the bring-forward provisions.
For example, for an individual fund member under age 75, with a total superannuation balance less than $1.48 million, the maximum non-concessional contribution that can be made in any financial year is limited to $330,000, based on the application of the three-year bring-forward provisions. The $330,000 restriction may not be sufficient in the current property market for a full in-specie transfer, but it can certainly partially fund the acquisition with the balance coming from a fund’s cash holdings.
Where it is possible for the transfer to occur in respect of more than one individual, such as a member and their spouse, this contribution limit potentially increases to $660,000, again subject to the relevant total superannuation balances. That excludes any personal deductible contribution the members may be entitled to make.
It is entirely conceivable a couple who are small business owners have had very little opportunity, or desire, to contribute to super and as such their total superannuation balance is below $500,000. If this is the case, not only could they contribute a combined amount of $660,000 as non-concessional, but if they haven’t contributed since 2018/19, they could use the carry-forward concessional contribution rules. That could see them contributing a further $130,000 each, which would not only give them extra purchasing power, but also a tax deduction to offset the sale of the property. The proposed reduction in eligibility age for downsizer contributions to 55 could provide another avenue to aid in the transfer of business property if the members have owned their primary place of residence for 10 years.
Where residential property investments are considered, many of the issues outlined above will apply, with the exception of in-specie transfers as that would imply transferring an asset already owned by a related party.
Residential property cannot be acquired by an SMSF if owned by members or related parties and is unable to be leased to a related party, which includes but is not limited to the members and their extended families.
Another area in which care must be taken is where an SMSF wishes to purchase a property jointly with other parties, whether related or not.
Specifically, in the event a direct property investment is to be purchased jointly with other parties, the manner in which ownership is structured should be carefully considered. This includes the careful assessment of tenants-in-common arrangements or the use of non-geared unit trusts.
Although tenants-in-common arrangements can be used to facilitate the partial acquisition of direct property investments, the use of this ownership structure must be very carefully considered for the following reasons:
• if the underlying direct property investment is not, or does not remain, consistent with the business real property definition, the SMSF will not be able to: lease the property to a related party, or subsequently acquire the remaining share of the property from a related party,
• a partial share of a property held on the basis of tenants-in-common is likely to be extremely difficult to sell to an unrelated party, and
• any actions by the other party could impact the SMSF’s investment.
Non-geared unit trusts as defined under Superannuation Industry (Supervision) (SIS) regulation 13.22c can assist in facilitating
What is generally a focus for trustees is determining how they can acquire property. There is a great deal of attention given to the use of LRBAs, often resulting in other opportunities being overlooked.
partial direct property investments that may subsequently be acquired by the SMSF over time. They can also be used by a fund that acquires 100 per cent of the units and then subsequently transfers those units back to related parties over time as an intergenerational asset retention strategy. They are a means to unitise otherwise lumpy assets.
Properly structured non-geared unit trusts are eligible for:
• a general exemption under the in-house assets provisions, and
• an exemption under the acquisition of asset provisions, which is extremely powerful.
The significance of the in-house asset exemption is an SMSF is restricted to the amount it invests in related unit trusts to 5 per cent of the total fund assets unless an exemption applies. Accordingly, nongeared unit trusts can represent effective vehicles for the partial acquisition of direct property investments held in conjunction with related parties. In particular, nongeared unit trusts can effectively cater for the subsequent transfer of additional property ownership to the SMSF via the acquisition of additional units in the non-geared unit trust, without any change in ownership of the underlying direct property investment. Consideration will need to be given to the possibility of capital gains tax and stamp duty implications in regards to the transfer of units.
The regulations provide for investments in non-geared companies or trusts, however, in most instances these structures take the appearance of a trust rather than a company.
Investing via a trust – the rules
SIS regulation 13.22c, which relates to investments in a related trust post 28 June 2000, ensures certain investments of a superannuation fund are excluded from the meaning of in-house asset, making them exempt from the 5 per cent limitation, if the investment satisfies the following conditions:
• the unit trust does not borrow,
• there is no charge over an asset of the trust,
• the trust does not invest in or loan money to individuals or other entities (other than deposits with authorised deposit-taking institutions),
• the trust has not acquired an asset from a related party of the superannuation fund (after 11 August 1999) other than business real property that has been acquired at market value,
• the trust had not acquired an asset (apart from business real property acquired at market value) that had been owned by a related party of the superannuation fund in the previous three years (not including any period of ownership prior to 11 August 1999),
• the trust does not, directly or indirectly, lease assets to related parties, other than business real property,
• the trust does not conduct a business, and
• the trust conducts all transactions on an arm’s-length basis.
The third point in effect means investing in shares, including listed securities or units of other trusts/managed funds, is not permitted via the trust. In practice, this means non-geared unit trusts are generally only effective for funds wishing to hold direct tangible assets such as direct property, cash and gold. Interestingly, office furniture and equipment can be owned, but not if it is leased to a related party, not even for business purposes, as it is not considered to be business real property.
A fund will lose the in-house asset exemption if the number of members in the fund exceeds six and therefore no longer meets the definition of an SMSF. It will also lose the exemption if the trust:
• invests in other entities (for example, acquiring shares),
• makes a loan to another entity, unless the loan is a deposit with an authorised deposit-taking institution,
• gives a charge, or allows a charge to be
given, over, or in relation to, a unit trust asset,
• borrows money,
• conducts a business,
• becomes a party, either directly or indirectly, to a lease arrangement involving a related party of the fund that does not involve business real property,
• conducts a transaction other than on an arm’s-length basis,
• acquires an asset (other than business real property acquired at market value) from a related party of the fund, or
• acquires an asset (other than business real property acquired at market value) from any party if the asset had been an asset of a related party of the fund since the later of: the end of 11 August 1999, or the day three years before the day on which the asset was acquired by the fund.
The areas of greatest risk will often come back to the commerciality of transactions and the nature of the investment, that is, whether the trust is running a business and loans money to other entities. This final point has certainly been an issue in light of COVID-19 where rent deferrals are considered to be a loan. While relief was granted for in-house asset purposes, care must now be taken to recover outstanding monies.
All investments, whether held directly or via a related or unrelated entity, must still be made in accordance with an appropriately formulated investment strategy and in satisfaction of the sole purpose test, that is, to be made for the genuine purpose of providing retirement benefits. SMSF trustees should not enter into any property investment transaction without first obtaining appropriate taxation/investment/ strategic advice.
There are seven key components individuals must observe when looking to make contributions into an SMSF, Graeme Colley writes.
There is more to super contributions than just the amount your clients are going to make. There are many considerations, including the timing of the contribution, who made it and the reason for doing so. This article covers seven critical things to remember when contributing to super.
Until 30 June 2022, anyone aged 67 or older was required to meet a work test of 40 hours in 30 consecutive days prior to either making a personal contribution or an employer making salary sacrifice
contributions. The work test must have been satisfied in the financial year prior to personal contributions being made to the fund.
However, from 1 July 2022, the work test is only required to be met for personal contributions where the individual will be claiming them as a tax deduction. The work test can also be met at any time during the financial year in which the tax deduction is to be claimed. This makes things much more flexible than previously.
The work test is not required for super contributions that are made:
GRAEME COLLEY is SMSF technical and private wealth executive manager at SuperConcepts.
• prior to reaching age 67,
• for superannuation guarantee contributions,
• under an industrial award or agreement,
• for salary sacrifice contributions that are in addition to superannuation guarantee and industrial award or agreement contributions, and
• for personal non-concessional (nondeductible) contributions.
There is a maximum age limit at which personal and salary sacrifice contributions can be accepted by a superannuation fund. This threshold requires them to be made prior to 28 days in the month after the individual has reached age 75. For example, a person who turns 75 on 15 September must make personal contributions by 28 October in the financial year and their employer must make any salary sacrifice
contributions to the fund by that time as well.
It is important to understand an individual’s total super balance (TSB) as it controls the amount of non-concessional contributions that can be made to the fund without incurring a tax penalty. Non-concessional contributions include those made by an individual for themselves or their spouse and non-concessional contributions made by anyone for a child under age 18.
A person’s TSB is calculated on 30 June at the end of a financial year and determines the amount of non-concessional contributions that can be made for the individual in the next financial year without incurring a tax penalty. As a general rule, the TSB is the individual’s balance in all superannuation funds they are a member of, including amounts in their accumulation and pension account(s). However, it can include amounts being transferred between funds on 30 June and some amounts an SMSF has in limited recourse borrowing arrangements.
How much can be contributed?
Technically, no limit applies to the amount that can be contributed to the fund. The maximum amount that can be made for a member depends on the type of contributions being made and whether the contribution will be treated as a concessional or non-concessional contribution. Tax and interest rate penalties can apply if the contributions made to the fund exceed the relevant contributions cap.
There is a standard concessional contribution cap of $27,500. However, for anyone with a TSB of no more than $500,000 it is possible to carry forward any unused concessional contributions for up to five years.
As an example, in the 2023 financial year, Fabi, who has a TSB of $300,000, wishes to claim a tax deduction of $50,000 for contributions she makes to her super
fund. She looks at her myGov account, which shows she can carry forward up to $60,000 in unused concessional contributions that have not been used in the past five years. Because of the amount Fabi can carry forward, she decides to claim the tax deduction for $50,000 to offset some taxable capital gains from the sale of investments.
Where a person’s TSB is less than $1.7 million, it is possible to make a standard non-concessional contribution of up to $110,000 in the next financial year. However, it may be possible to access the bring-forward rule if the individual’s TSB is no more than $1.59 million.
For anyone with a TSB of between $1.48 million and $1.59 million, it is possible for non-concessional contributions of up to $220,000 to be made at any time over a fixed two-year period that commences in the year in which more than the standard nonconcessional contribution is made.
For anyone with a TSB of no more than $1.48 million, it is possible for nonconcessional contributions of up to $330,000 to be made at any time during a fixed three-year period commencing in the financial year in which more than the standard non-concessional contribution has been made.
Example 1
Rosy has a TSB on 30 June 2022 of $1.8 million. As her TSB exceeds the cap of $1.7 million, if she makes non-concessional contributions to the fund, any excess may be subject to tax and interest rate penalties.
Example 2
Amanda has a TSB on 30 June 2022 of $1.6 million. As her TSB is no more than $1.7
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It is important to understand an individual’s total super balance as it controls the amount of nonconcessional contributions that can be made to the fund without incurring a tax penalty.
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million, she can make non-concessional contributions of up to $110,000 if she wishes.
Example 3
Cathryn has a TSB on 30 June 2022 of $1.5 million. She can make non-concessional contributions up to the standard cap of $110,000. However, if she contributes more than the standard concessional contributions cap, she will be able to access the bring-forward rule of $220,000 over two financial years commencing on 1 July 2022.
Example 4
Jill has a TSB on 30 June 2022 of $1 million. Just like Cathryn, she can make non-concessional contributions up to the standard cap of $110,000. However, if she contributes more than the standard concessional contributions cap, she will be able to access the bring-forward rule of $330,000 over three financial years commencing on 1 July 2022. She decides to contribute $150,000 in the 2023 financial year, $100,000 in the 2024 financial year and $80,000 in the 2025 financial year.
Contributions are usually made to super as a cash payment, which includes electronic transfers and cheques. However, it is possible to transfer investments and other assets to the fund that can be treated as a contribution. Some funds may not accept transfers of investments or other assets, however, this is not usually an issue where an SMSF is involved.
There are limits to the types of investments and other assets that an individual can make to super as a contribution. It is possible for an individual to transfer listed shares and other listed securities, managed fund investments,
commercial property and some relatedparty investments to the fund, providing they are transferred at their market value.
Cash and electronic transfers are treated as being a contribution to the fund when they are received, so it is necessary to make sure any contributions made close to the end of the financial year are received by the fund prior to 30 June. If not, they may end up being treated as being received in the subsequent financial year and that can create some issues. Cheques are treated differently and providing the cheque is cashed as soon as possible following the receipt, it can be included in the financial year it was received by the trustee.
Transfers of investments and other assets are accepted by the fund as a contribution when the fund becomes legally entitled to them. For listed investments the transfer takes place when recognised on the exchange or when an off-market transfer is fully completed by all parties. Where real estate is involved, the transfer occurs on settlement of the
property and for other investments it can be when the documents are signed to recognise the transfer to the fund.
It is important that in some circumstances the fund is notified of the type of contribution at the time it is made to the fund.
Examples of transfers where trustees should be notified before they are made into the SMSF include downsizer contributions, capital gains tax small business amounts and spouse contributions. The reason for this is to ensure they are not confused with other non-concessional contributions that are being made to the fund by the individual for themselves or for someone else.
If a person is going to claim a personal tax deduction for contributions to the fund, it is important for the SMSF to be notified prior to certain events occurring. As a general rule, the fund is required to be notified if the person intends to claim a tax deduction for the contribution prior to lodging their tax return for the year in which the contribution was made and at the latest at the end of the next financial year after the contribution was made. However, it may be necessary to notify the fund earlier than these events in question if the person is commencing a pension or rolling over their benefit to another fund. If the fund is not notified as required, the person may miss out on the tax deduction being sought.
Don’t forget if benefits are being rolled over, the fund, including an SMSF, must be registered for SuperStream.
Getting these seven things right about super contributions will help you with the why, how and where of contributing to super, whether it is a big fund or an SMSF. It ensures the fund can accept the contribution, tax deductions can be claimed when necessary and there are no penalties involved in the amount contributed.
If a person is going to claim a personal tax deduction for contributions to the fund, it is important for the SMSF to be notified prior to certain events occurring.
Investing in a unit trust to hold certain assets can be beneficial, but adds a layer of complexity to an SMSF portfolio. Shaun Backhaus and Daniel Butler explore the benefits of putting a unitholders’ agreement in place to minimise the risks associated with these arrangements.
Unit trusts are a common investment structure and can provide a simple way for parties to co-invest in property or business together. In particular, investing via a unit trust is a popular way for SMSFs to invest in real estate, including to develop property.
While the terms of a unit trust deed typically cover a number of important points, there are many other critical points that can be covered in a variation to the deed or in a unitholders’ agreement to provide greater certainty, minimise risks and to assist avoiding costly disputes.
This article outlines what unitholders’ agreements should typically contain and why they should be considered where there is more than one unitholder, including a related party.
Should the trust deed be varied before entering into a unitholders’ agreement?
Typically yes. This is because many deeds may have
been prepared years ago and do not reflect the range of trust, taxation and other developments from the date they were originally prepared. Moreover, many deeds supplied in recent times are not at a satisfactory standard of quality, especially if not supplied by a reputable law firm practising in the area.
Accordingly, there is sound reason to carefully examine a unit trust deed to make sure it is appropriate before embarking on preparing a unitholders’ agreement. A note of caution, however, care is needed in making any variation to a trust deed for fear of ‘resettling’ the trust (a ‘resettlement’ is broadly for tax purposes the creation of a new trust and a transfer of property from the old trust to the new trust) and giving rise to tax and duty problems. Expert advice from a lawyer with tax and duty experience in the relevant jurisdiction is recommended to make sure variations do not attract unwanted tax liabilities.
SHAUN BACKHAUS (pictured) is a lawyer and DANIEL BUTLER is a director at DBA Lawyers.What should be included in the unitholders’ agreement?
A unitholders’ agreement is dependent on the quality of the drafting in the unit trust deed and on how well the agreement is drafted. Such an agreement should cover the key points in the relationship between the unitholders not covered by the unit trust deed and also the key risks and rights each unitholder may have in certain scenarios.
We now briefly examine various types of provisions and issues that should be considered in preparing a unitholders’ agreement.
How units can be offered by sale and to whom?
Some unit trust deeds include provisions requiring a unitholder intending to dispose of their units, that is a vendor, to offer their units in the first instance to other unitholders in proportion to the other, or purchasing, unitholders’ holdings.
Initially, the vendor might offer their units at the value notified by them based on their market value, which may be at an inflated or deflated price. There may be provisions allowing the purchasing unitholders to dispute the vendor’s market value and request an independent valuation of the units.
Special provisions can be inserted in a unitholders’ agreement to include the process agreed between the unitholders. For example, where there is an individual unitholder who dies, rather than their units transferring to their executors upon their death to form part of their deceased estate (which the other unitholders do not get along with, et cetera), the other unitholders could be provided with the right to purchase those units subject to the specified valuation process set out in the unitholders’ agreement.
Similarly, where the unitholder is a company or trustee of a trust and the key person(s) in respect of that company or trust
dies or loses capacity, this may be a trigger event allowing the other unitholders to undertake a compulsory purchase of the units held by that company or trust.
Where an SMSF is a unitholder, care is needed so a contravention of the Superannuation Industry (Supervision) (SIS) Act 1993 does not occur. For example, where there is a 50/50 arrangement between two unrelated SMSF unitholders and the key person of one of the SMSF unitholders dies and the other 50 per cent SMSF unitholder obtains the right to purchase the deceased SMSF’s units, then the in-house asset rule in part 8 of the SIS Act would be contravened.
In this situation, for the purchase to proceed, the first step for the SMSF related to the key person who is still alive would be to dispose of their entire unitholding in that unit trust. Note that if that SMSF did not dispose of its 50 per cent before a related party outside the SMSF acquires a greater amount of units, then an immediate contravention of the in-house asset rules occurs.
The unitholders’ agreement can specify a range of limitations or prohibitions, which, if contravened, give rise to a compulsory purchase of the defaulting unitholder’s units. For example, unitholders, especially when one or more SMSFs are involved, should prohibit all unitholders from placing their units to any security or charge, for example, some lenders may want to register a charge under the Personal Property Securities (PPS) Act 2009 in respect of a unitholder’s unit certificates. Thus, if a unitholder did pledge their units for security in respect of a mortgage or charge, this event could give rise to a compulsory purchase trigger under a unitholders’ agreement.
For example, if unitholder ABC Pty Ltd of the ATF ABC Family Trust sought to raise some finance and provided their unit certificates subject to a PPS Act charge and
the unitholders’ agreement specified that no unitholder can charge their units, this would allow the other unitholders to compulsorily purchase these units. Note, a unitholder that places their units to some form of security or charge increases the risk of other unitholders and the trustee of the unit trust may also become embroiled in a legal dispute seeking to resolve any issues that arise from the enforcement of the charge, et cetera.
The agreement may also list other criteria for when a compulsorily buyout would be invoked, such as on the change of control of a unitholder, where the unitholder becomes insolvent or rendered bankrupt, or where the unitholder breaches any of its obligations under the trust deed or unitholders’ agreement and fails to rectify within a specified timeframe.
What decisions require a greater than majority vote?
There are typically a range of decisions unitholders want to be subject to a vote that is higher than the usual 50 per cent threshold to pass a unitholders’ resolution. Typically, at least a 75 per cent, that is a special resolution, threshold is relied upon and certain decisions are set to a 100 per cent, or a unanimous resolution, threshold. Broadly, the unitholders need to consider what the key decisions are that should be subject to a higher threshold and set them out in the unitholders’ agreement; typically in an annexure to the agreement so the agreement is not bogged down with this detail. For example:
• a special resolution may be required to invest more than $100,000 on improvements to a property, or
• a unanimous resolution may be required to decide to purchase or decide to dispose of a property.
In recent times where there are numerous unrelated unitholders involved, there is a trend to include a provision that requires the
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property to be sold in say five to seven years’ time unless a special resolution is passed to retain the property. Tax advice should be obtained before inserting such a provision as this may suggest the investment is not for long-term capital appreciation, but rather an asset held on revenue account where any capital appreciation might be assessed as normal income.
There are a range of safeguarding provisions we like to insert into a unitholders’ agreement to minimise the risk of contravening the SIS Act and SIS Regulations 1994.
These provisions need input from the client and the lawyer preparing the agreement to make sure the provisions are suitable for the parties. Several such provisions usually include:
• that suitable wording is included to limit an SMSF and its related parties from acquiring more than a 50 per cent stake in the unit trust or a controlling interest unless approved by a special process. This is designed to minimise the risk of an in-house asset contravention as a ‘relatedtrust’ relationship can easily arise under section 70E(2) of the SIS Act, and
• appropriate provisions to confirm each SMSF trustee has undertaken appropriate due diligence, investigations and checks and has had ample opportunity to obtain professional advice before investing in the unit trust and entering into the agreement. These provisions would also confirm the investor will not contravene the SIS Act or the SIS Regulations and has responsibility for their ongoing compliance with the super rules. Moreover, if any provision in the unitholders’ agreement was ever considered to breach or constitute a SIS Act or SIS Regulations contravention, then
the relevant provision in the unitholders’ agreement is to be read down to the extent of inconsistency with the SIS Act and SIS Regulations.
There are many things that can happen to a unitholder, or the person controlling a unitholder entity, that can cause problems for other unitholders. These include such things as a unitholder or their controllers or associates:
• dying or losing capacity,
• becoming bankrupt, insolvent or being placed into liquidation or under administration,
• being sued or otherwise caught up in litigation,
• getting divorced or experiencing other familial or personal issues, or
• simply wanting to divest their unitholding. While an investor may initially know and get along with all of their fellow unitholders, these events can result in another unknown person or entity becoming a unitholder, or
controlling a unitholder entity, which may not be a desirable outcome for the remaining unitholders. Naturally, having appropriate compulsory purchase triggers in the unitholders’ agreement to cover the key risks for those involved is recommended.
Further, the unitholders may be involved in a time-consuming dispute and require some mechanism for one or more unitholders to resolve the issue. To minimise any dispute, appropriate alternative dispute resolution (ADR) provisions should be included to minimise the involvement of the courts until the ADR provisions have been exhausted, for example, the parties seek to resolve first and if after five business days there is still a dispute, the parties involve a mediator before commencing legal action. Appropriate ADR provisions may result in hundreds of thousands of dollars not being charged in a drawn-out legal battle and having a unitholders’ agreement to just include these provisions can justify the investment in obtaining one.
The process of discussing and agreeing on what should be included and what not to include in a unitholders’ agreement is usually a great way to understand what is in the minds of the prospective investors and what goals and risks they consider important in respect of the relationship. Furthermore, it is much easier to discuss these upfront compared to after a falling out when the parties are only corresponding between their lawyers.
A proper review and fixing up of a unit trust, and putting in place a unitholders’ agreement, is a prudent way to ensure greater certainty and minimise the opportunity for future disputes. In particular, the parties’ rights and obligations in respect of various matters included in a unitholders’ agreement should be clear from the commencement of the relationship. Such an agreement can ensure any default events or disputes are dealt with more effectively.
A proper review and fixing up of a unit trust, and putting in place a unitholders’ agreement, is a prudent way to ensure greater certainty and minimise the opportunity for future disputes.
Grant Abbott identifies a present danger among SMSF structures and highlights an opportunity to minimise contributions tax.
In my last article I laid out the competencies to provide advice on SMSFs. These were once codified into the financial services training package but are no more. But in my mind they are still the bare minimum of what is required in terms of being able to advise on SMSFs.
I thought in this article I would again test your knowledge and lay out a major trap that many advisers have right under their very noses that can cost them significantly in a strict liability suit under sections 54C and 55(3) of the Superannuation Industry (Supervision) (SIS) Act. I’ll also outline a little tax deferral treat given to us by One Nation Senator Pauline Hanson that can be used to defer and if played right permanently reduce tax using superannuation.
Table 1 taken from the December 2021 ATO statistics shows the disaster on our horizon, one I have seen many accountants and planners fall into, even the best
and brightest SMSF advisers. What do you think it is?
I am always surprised, as chair of the Succession, Asset Protection and Estate Planning Advisers Association, that succession planning in SMSFs is as rare as a Tasmanian tiger. After all, with six-member SMSFs, how can it be that 23.7 per cent of SMSFs have one member?
If you don’t see a problem with no succession planning, consider what can happen on the death of the single member in an SMSF.
a. Section 17A(2) of the SIS Act provides a singlemember SMSF is required to have either a corporate trustee where the single member is the director or another person becomes a trustee in addition to the single-member trustee of the fund.
b. Assuming the majority of single-member SMSFs have a corporate trustee, what happens when the single director dies?
i. If the adviser has not set in place a successor director solution, enabling the executor of the deceased member’s estate to become a director in place of the deceased member
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director, as per section 17A(3)(a) of the SIS Act, the corporate trustee has no ability to act and is rudderless.
ii. The result may be the fund being left with no trustee and as a result the fund may breach section 19 of the SIS Act, thereby precluding it from being a regulated superannuation fund.
iii. If the fund is not a regulated superannuation fund, then section 42A of the SIS Act would render it a noncomplying superannuation fund.
So, the successor director solution is a must and you can tell whether you have the ability to insert a successor director by reading the company constitution. Now, if you have not read your client’s SMSF corporate trustee constitution to see what happens on death and whether there are any limitations, then you need some upskilling as this is one of the prime competency standards for providing advice on SMSFs.
Advisers tell me all the time “but my lawyer says it does not matter as the shares held by the former member/director of the SMSF will pass to the estate and the executor can make themselves a director”.
It sounds good in theory, but does it work in practice?
First off, the shares will be vested in the executor of the estate if there is a will. So one of the first issues on which the executor will receive legal advice is when can they, under the various state succession acts, deal with those shares. Many states prohibit a dealing within a period of time pending a potential family provisions claim, which can be up to a year from the death of the member.
So, while waiting for the expiration of a family provisions claim period, what is the status of the SMSF? Non-complying as explained above.
And you might be thinking this would never happen, but here’s the deal, if you do not plan and prepare for the worst and it happens, you could be looking at a long, drawn out, expensive and nasty legal argument, especially if there is a family provisions claim.
To give you a real-life example, Abbott and Mourly Lawyers were involved in a family provisions claim, representing the spouse of a husband who died with a family discretionary trust and SMSF where he was the only director of both corporate trustees and the shareholder. The original lawyer’s advice at the outset was there is no need to worry because the shares will pass to the estate and the executor, who was not the spouse, but a long-time business friend, could become the
director of the corporate trustee.
The case went on for three years as the counsel representing one of the deceased’s children made a family provision claim on the estate and threatened the executor with a whole list of wrongs, charges and civil actions if they sought to do anything with the companies without the express approval of their client. It got so bad the bank, which had a mortgage on a property in the discretionary trust, started recovery action against the trustee for failure to repay the loan.
My advice to avoid this situation is to put in place a successor director for the SMSF to minimise any litigation and more importantly avoid ending up with a non-complying SMSF.
Jim Jones is 35 years old, earns $145,000 a year and is married with two children who are lovingly cared for by his spouse. He is a successful computer consultant with limited ability to shift income. He is a sole trader and with his business humming along, Jim’s tax liabilities are significant. For the year ended 30 June 2022, his accounts show projected taxable income of $145,000. On that projection he will pay tax of $39,491 including Medicare. Jim has a house worth $850,000 and a redraw facility of $250,000.
Jim is also the sole member and director of the Jones SMSF with $300,000 in his superannuation benefits all sitting in cash. So
Table 1: Proportion of funds by number of membersfar so good and let’s hope it is not a singlemember SMSF and Jim has life insurance in the fund.
Now let’s work through a scenario where Jim contributes $100,000 of concessional contributions on 27 June 2022 from the equity of his home.
For the 2022 income year, Jim makes a personal tax-deductible contribution of $100,000. At the outset this would reduce Jim’s taxable income to $45,000 and his tax liabilities for the year ended 30 June 2022 to $5092, but with a low-income tax offset of $325 and low-to-middle-income tax offset of $1275, his total tax bill would be $3492.
From the fund’s perspective the $100,000 contribution would be assessable to the trustee of the Jones SMSF as taxable contributions per section 295-160 of the Income Tax Assessment Act 1997 (ITAA). Potential tax payable on these contributions,
that is, the contributions tax, is 15 per cent of $100,000 or $15,000.
Contributions tax minimisation strategy: It is important for the trustee of the SMSF to seek to minimise the contributions tax liability of the fund and to achieve this the trustee could do one or more of the following:
1. interest expenses – if the trustee decides to borrow to invest in property under a special purpose SMSF loan,
2. invest in shares paying imputation credits – these may also be leveraged using a special purpose SMSF loan, or
3. invest in an early-stage innovation company – here any investment receives a 20 per cent tax offset. These investments that go to reduce the contributions tax liability in the fund will bring about an ongoing, in some cases, permanent reduction of tax payable in the SMSF. The best time for maximising the benefits is to have the contributions capital in from day one and not day 364.
Step three – add back excess concessional contributions to Jim’s personal taxes
Jim’s personal income taxation position is as follows:
• Jim can use the catch-up provisions that commenced in 2018/19 as he is under the $500,000 super balance qualifying threshold. Over the four-year period Jim has contributed $50,000 so his catch-up concessional contribution balance for the year ended 30 June 2022 is $102,500$50,000 = $52,500.
• This means personal super contributions that are excess concessional contributions: $100,000 - $52,500 = $47,500. This excess is to be added back to Jim’s 2022 assessable income upon an amended assessment by the ATO post the lodgement of the fund and Jim’s personal income tax returns.
• Any excess concessional contribution is a non-concessional contribution using Jim’s non-concessional contributions cap of
$110,000, which he is well under.
• Jim’s 2022 tax assessment in March 2023 based on current income of $45,000 is $3492.
• The trustee of the super fund lodges its tax return in March 2023 showing concessional contributions by Jim, who has lodged the appropriate concessional contribution notice of $100,000.
• An amended assessment is issued by the ATO to Jim personally once the fund’s tax position and Jim’s personal income tax returns are married up in order to tax the excess concessional contribution at Jim’s marginal tax rate, as stipulated by section 291-15 of the ITAA. There will be an add back of the excess concessional contribution of $47,500, but no excess concessional contributions charge as this has been abolished effective 1 July 2021.
• The amended tax assessment for Jim is $47,500 of taxable income, which is taxed at 32.5 per cent + 2 per cent Medicare levy = $16,387.50.
• However, section 291-15(b) of the ITAA provides a 15 per cent tax offset on the excess concessional contribution of $47,500, which is $7125.
• So total tax payable on the $100,000 contribution is $9262 and there are no other penalties.
• Total tax payable on $145,000 is $7125 + $3492 = $10,617 or a tax rate of 7.3 per cent.
• If Jim did not have any carry-forward concessional contributions, then his excess concessional contribution would be $72,500 with tax payable on this amount, including the Medicare levy being $25,012, but with a 15 per cent tax offset of $10,875 leaving him with total tax payable in the amended assessment of $14,137.
• Total tax payable on $145,000 is $14,137 + $3492 = $17,629 or a tax rate of 12 per cent.
I am always surprised, as chair of the Succession, Asset Protection and Estate Planning Advisers Association, that succession planning in SMSFs is as rare as a Tasmanian tiger.
The SMSF Professionals Day 2022 was hosted in Sydney as a hybrid event. Practitioners travelled to the Sydney Masonic Centre to hear technical presentations from a host of industry experts and the ATO.
The SMSF Association Technical Summit 2022 was held as a one-city event for the first time. Around 300 delegates travelled to the RACV Royal Pines Resort on the Gold Coast to attend.
When it comes to who can receive a death benefit and the subsequent tax liability, it is at times important to go back to the basics.
Regulation 6.22 of the Superannuation Industry (Supervision) (SIS) Regulations determines who can receive a death benefit of the deceased member. The trustee can pay a death benefit to any dependant or to the legal personal representative (LPR) of the estate.
Section 10 of the SIS Act defines who is a dependant and includes the deceased’s spouse, children of any age and any person who was in an interdependency relationship with the deceased at the time of death.
The definition of dependant is inclusive and hence covers a dependant within the ordinary meaning of the word. This therefore includes financial dependency and can be partial when looking at the SIS Act definition as shown in Faull v Complaints Tribunal (1999).
The SIS Regulations also determine the form in which benefits can be paid under sub-regulation 6.21(2). The form of cashing a death benefit needs to be any one or more of the following:
• In respect of each person to whom benefits are cashed: a single lump sum, or an interim lump sum and a final lump sum.
• One or more pensions or the purchase of one or more annuities, payable to an entitled recipient.
An entitled recipient is defined under subregulation 6.21(2A) as:
• a spouse,
• a person who was financially dependent on the deceased, but not including the deceased’s children,
• a person with whom the deceased was in an interdependency relationship, but not including the deceased’s children,
• a child of the deceased but only if the child is disabled, under age 18 (at the time of death) or between ages 18 and 25 and financially dependent on the deceased.
The taxation treatment is dependent on firstly whether the recipient is a death benefits dependant as defined under section 302-195 of the Income Tax Assessment Act (ITAA). A death benefits dependant is similar to a SIS Act dependant except for a couple of exceptions. In relation to children, a child of any age is a SIS Act dependant, but under the tax act, only children under the age of 18. Over the age of 18, they must either be in an interdependency
relationship or fully financially dependent at the time of death of the member. A former spouse is the other main exception. Under the SIS Act, a former spouse is not a dependant, but under the ITAA that person is. Therefore, for the payment to a former spouse to be tax-free, the payment must go via the estate or personally if demonstrated to be financially dependent at the time of death on the member under the SIS Act
The remaining considerations are the tax components of the death benefit and in what form the benefit will be paid, by pension and/or lump sum.
The taxable component of a lump sum death benefit paid to a dependant is tax-free. It is classified as a non-assessable non-exempt payment. If the payment is to a non-tax death benefits dependant, that is, a financially dependent adult child, the taxable component is taxed at 15 per cent and the untaxed element at 30 per cent.
If the payment is made as a death benefit pension to a dependant, the taxable component of the pension payment is treated as follows:
• either the deceased or pension recipient is aged 60 or over at time of the member’s death. Tax free – non-assessable non-exempt income, or
• deceased or pension recipient is under the age 60 at the time of the member’s death. Taxed at pension recipient’s marginal tax rate with a 15 per cent tax offset.
Death benefit pensions cannot be paid to individuals who do not fit the definition of a dependant.
When it comes to implementation of the above, the current trust deed of the fund is crucial. It is also critical to review the trail of control documentation, such as binding death benefit nominations and reversionary pensions, to determine if any documents are in conflict with the deceased wishes.
To avoid conflicts of interest, family disharmony and even potential court disputes, planning while your client is alive is essential. There are many benefits from proper planning. Three main ones being:
• thoughtful decisions – planning can help your client think through and express what really is important to them,
• a roadmap – planning can help create a set of key priorities and a checklist of the critical points that need to be addressed, and
• collaboration – a good plan allows for conversations with family, friends and other professional advisers.
Episode1 DeanHutchins CEO&Founder DiversifiedFinancialPlanners
LiamShorte SMSFSpecialistAdvisor VeranteFiancialPlanning
Episode
Robert Porte SMSF Specialist Advisor & Director Wealthporte Financial Group
Episode4 MaileneWheeler SuperannuationAdvisoryExpert&Director VincentsAccountants
Like many of us, Megan* never thought it would happen to her – she never imagined she would need to escape a violent relationship; she never imagined her own family would turn their backs on her; she never imagined she and her daughter would become homeless and have to live out of their car.
Right now, there are thousands of Australians like Megan* experiencing homelessness but going unnoticed. Couch surfing, living out of cars, staying in refuges or transitional housing and sleeping rough – they are often not represented in official statistics. In fact, for every person experiencing homelessness you can see, there are 13 more that you can’t see.
Together we can help stop the rise in homelessness.
