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Year-End Tax Planning for Self Managed Super Funds

Wednesday, June 24, 2015

Self Managed Superannuation Funds

Year end tax planning

Maximise year end opportunities and minimise risks 

The end of the financial year will be here before you know it. We’ve outlined the incoming changes, and essential ‘house-keeping’ that needs be completed prior to 30 June.

We want to help you achieve the best result for your SMSF and yourself. If there is any additional information we can assist you with or help you in any other way, please contact Rogerson Kenny today, 03 9802 2533.

What’s changing?

New trustee penalties

From 1 July 2014, the ATO has greater powers to enforce the superannuation rules by levying financial penalties directly on trustees. Under these new powers, the ATO can: 

  • Issue a rectification direction - requiring the SMSF’s trustee/director to take specific action to rectify the contravention within a specific timeframe. A fine of up to $1,700 per breach applies for non-compliance.
  • Issue an education direction - require the trustee/director to complete an ATO approved education course within a specific timeframe (costs payable by the trustee not the SMSF). A fine of up to $1,700 and an administrative penalty of $850 applies for non-compliance.
  • Impose an administrative penalty - penalties from $850 to $10,200 apply to specific breaches. Each individual trustee is liable for the penalty and directors of a corporate trustee are jointly and severally liable.   The penalties are payable by the trustee/ director and not refunded by the SMSF.

Restrictions on insurance inside your SMSF

From 1 July 2014, superannuation funds will only be able to offer or take out new insurance cover where the definitions are consistent with the death, terminal illness, permanent incapacity and temporary incapacity conditions of release under SIS. 

This requirement will largely impact on own occupation total and permanent disability (TPD) definitions, which are unlikely to meet the new definitions, and also on income protection policies where these policies provide a number of ancillary benefits.

Superannuation guarantee changes

From 1 July 2014, the minimum rate for superannuation guarantee (SG) contributions increased from 9.25% to 9.5%.

As announced in the 2014/2015 Federal Budget, the intention is for the SG rate to remain at 9.5% until 30 June 2018 and then increase by 0.5% each year until it reaches 12%. 

Year

Superannuation guarantee charge %

1 July 2014 - 30 June 2018

9.5%

1 July 2018 - 30 June 2019

10%

1 July 2019 - 30 June 2020

10.5%

1 July 2020 - 30 June 2021

11%

1 July 2021 - 30 June 2022

11.5%

1 July 2022 onwards

12%

Superannuation contribution caps

There are changes to both the concessional and non-concessional contribution caps from 1 July 2014.

The concessional superannuation contribution cap for those aged 49 years or over on 30 June 2014 has increased to $35,000. The general concessional contribution cap for everyone else has increased to $30,000. 

Concessional Contribution cap

2014/2015

2015/2016

Aged less than 49 on 30 June 2014

$30,000

$30,000

Aged 49 years or over on 30 June 2014

$35,000

$35,000

 

The non-concessional contribution cap has increased to $180,000. For those aged under 65, you can now make up to three years, or $540,000, in non-concessional contributions in a year using the ‘bring forward’ rule.

 

Non-Concessional Contribution cap

2014/2015

2015/2016

Non concessional cap

$180,000

$180,000

Bring forward over 3 years

$540,000

$540,000

Refund excess non-concessional contributions

On 19 March 2015 Tax and Superannuation Laws Amendment (2014 Measures No. 7) Bill 2014 received royal assent. The government announced in the 2014 Budget they will allow individuals the option of withdrawing superannuation contributions in excess of the non-concessional contributions cap made from 1 July 2013 and any associated earnings, with these earnings to be taxed at the individual’s marginal tax rate.

If you elect to release excess non-concessional contributions and 85% of associated earnings, the full associated earnings amount will be included in the individual income tax return and taxed at individual marginal tax rate. The individual will also receive a 15% tax offset to recognise the associated earnings that were already taxed in the fund.

If you elects not to withdraw their excess non-concessional contribution amounts or they do not make any election, you will be subject to excess contribution tax. 

Centrelink & account based pensions

From 1 January 2015, new account based income streams will be subject to the deeming provisions under the Centrelink (DHS) income test. Account based income streams held by income support recipients will be assessed under the same deeming rules that apply to other financial assets.   This could result in an increased level of income from the superannuation pension being assessed for Centrelink’s income test, reducing the level of Government support for some clients.

Under current rules, a portion of the income received from a superannuation pension is excluded from Centrelink’s income test as this portion is considered to reflect a return of capital to the income stream recipient.

If you are in receipt of Government income support payments and an account based pension prior to 1 January 2015, you are not assessed under these new rules unless there is a change to the terms of the pension or a change of provider.

SuperStream

Your SMSF needs to be ready to receive employer contributions by 1 July 2015. You will need to provide to your employer the following:

1) Super fund name

2) ABN

3) Bank details

4) Electronic service address (ESA)

If you have not registered with an ESA service provider, please contact us so we can register your fund with Australia Post. The ESA is AUSTPOSTSMSF under this service.

If you do not provide your employer with the above details, your employer may direct contributions to the employer’s default fund.

Housekeeping

Drawing superannuation pensions

If you are in pension phase make sure the minimum pension has been paid to you for this financial year. By not receiving the required minimum pension any income earned on your pension investments in your superannuation fund will be taxed at 15% rather than being tax free if the pension rules are met by the fund.

Drawing superannuation lump sums

Once you reach 60 all lump sums from superannuation are tax free. However, before age 60 any lump sums that include a taxable component can be taxable. The taxable component includes the tax deductible contributions plus any income that has accumulated on your superannuation benefit. No tax is payable on taxable amounts of up to $185,000, in total, you receive prior to age 60. This amount is indexed annually.

If you are eligible to draw amounts from superannuation you may like to defer receiving the amount until after reaching age 60 or until a later financial year when you may end up paying a lower rate of tax.

Deductibility of superannuation contributions

To claim a tax deduction for super contributions as an employer or as an individual, the payment needs to be received by the fund before 30 June. Merely incurring a liability will not work.

If you are making a personal superannuation contribution that you want to claim as a tax deduction, you need to write to your fund in their approved form and advise them of the amount you intend to claim as a deduction. The superannuation fund then needs to acknowledge your notice of intent and agree to the amount you intend to claim as a deduction. This will normally be in the form of a notice or certificate from the fund and this should be provided to us to confirm the tax deductibility of the contribution.

Review and rectify any outstanding compliance issues

If your auditor has highlighted any breaches or issues in previous year fund audits, you should review and rectify these issues by 30 June. SMSF compliance is coming under increased ATO scrutiny and all trustees should ensure that their funds are compliant.

Valuing SMSF assets

Since 1 July 2012, SMSFs have been required to value its assets at market value. Depending on the asset and situation, a market valuation may be undertaken by a:

  • • Registered valuer
  • • Professional valuation service provider
  • • Member of a recognised professional valuation body, or
  • • A person without formal valuation qualifications but who has specific experience or knowledge in a particular area.

For real property, the valuation may be undertaken by anyone as long as it is based on objective and supportable data. A valuation undertaken by a property valuation service provider, including online services or a real estate agent is acceptable.

However, where the value of the asset represents a significant proportion of the fund’s value or where the nature of the asset indicates that the valuation is likely to be complex, a qualified independent valuer should be used.

Review superannuation investment strategy

Trustees are required to ‘regularly review’ the fund’s investment strategy. We recommend that trustees review the strategy at least annually or when the circumstances of the fund change, and document this review. 

SMSF trustees need to consider the need for insurance cover for the fund members when formulating and reviewing the fund’s investment strategy. This has been the case since 2012.

Where a SMSF has entered into a borrowing arrangement to acquire an asset, trustees should consider the need for any insurance cover inside the fund to assist in meeting the on-going obligations of the debt repayments. The fund’s ability to meet the on-going debt repayments can be severely jeopardised where one member of the fund dies, as the fund may have needed to utilise contributions that were being made for that member to meet the repayments. Such a scenario could result in the fund having to sell the property.

Review insurance inside your SMSF

SMSF trustees need to consider the need for insurance cover for the fund members when formulating and reviewing the fund’s investment strategy. 

Superannuation funds will only be able to offer or take out new insurance cover where the definitions are consistent with the death, terminal illness, permanent incapacity and temporary incapacity conditions of release under the Superannuation Industry Supervision Act. This largely impacts on own occupation Total and Permanent Disability (TPD) definitions, which are likely to no longer be suitable, and also on income protection policies where these policies provide a number of ancillary benefits.
 
It’s important that you review superannuation inside your SMSF not just for compliance with the law but also effectiveness. An important issue to consider is how any insurance inside your fund should be structured; that is, from where the premiums are paid from the fund and what account any policy proceeds will be paid to inside the fund.

Correctly structuring insurance inside your fund can be complex. We recommend that SMSF Trustees seek the advice of their financial adviser to achieve the most tax effective outcomes for insurance proceeds, especially on the death of a member.  

Contributions you didn’t know you made

A contribution to a fund can be more than just a deposit of money into the bank account of a superannuation fund. It could include:

  • • Money
  • • In-specie asset transfers
  • • Paying fund expenses
  • • Increasing the value of a fund asset
  • • Forgiving a funds debt
  • • Meeting a fund liability
  • • Rendering services to the fund at less than market value
  • • Guarantor arrangements
  • • Some Discretionary Trust distributions
  •  

Trustees can often be surprised by what is considered to be a contribution, for example:

  • In-specie transfer - If an asset is transferred or acquired from a related party for less than fair market value, the difference will be treated as a contribution.
  • Capital improvements - Capital improvements to existing fund assets for no consideration or less than arm’s length consideration may be treated as a contribution.
  • Debt forgiveness - A contribution is made if a loan, entered into by the fund, is forgiven by the lender (related party). The contribution is made when the deed of release is executed that then relieves the fund from the obligation of repaying the debt.
  • Guarantor arrangements - A contribution occurs if a guarantor to a debt of the fund (trustees in their own right) satisfies a loan obligation of the fund and then forgoes the right of redemption against the fund (trustees) itself.

Collectibles & Personal Use Assets

If your SMSF holds collectibles or personal use assets, you have just over 12 months to make sure that these assets meet the more stringent requirements of the Superannuation Industry Supervision (SIS) Act. From 1 July 2016, any collectables or personal use assets held within your SMSF regardless of when you acquired them must comply with the following: 

  • • Asset cannot be leased to a related party
  • • Asset cannot be stored in the residence of a member
  • • Assets cannot be used for personal use
  • • Trustee’s must record a decision on where asset is kept
  • • The asset must be insured within 7 days*

Any collectibles and personal use assets that do not meet the requirements by 1 July 2016 must be removed from the fund. If you currently have any collectibles or personal use assets in your SMSF that fail to meet the requirements, it’s important to address this issue and either ensures the assets are compliant or dispose of them.

All sales to a related party will require an independent valuation. Collectibles and personal use assets include the following: artwork; jewellery; antiques; artefacts; coins, medallions or bank notes; postage stamps or first day covers; rare folios, manuscripts or books; memorabilia; wine or spirits; motor vehicles; recreational boats; memberships of sporting or social clubs.

*for assets held prior to 1 July 2011 insurance needs to be in place by 1 July 2016. All assets acquired from 1 July 2011 must be insured within 7 days of acquisition.

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