SMSF update after update seems to hit us. The legislation is constantly changing. Even though the super changes as of 1 July 2017 are done and dusted, some issues among these received less limelight. And some issues continue to need our attention. Let’s look at those.
Here is what might be an ongoing issue since 1 July 2017. Especially re your clients’ salary sacrifice and reserving strategies, contribution splitting, bring forward limits and especially the total superannuation balance in mind.
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Remember that commutation minutes must have been signed and on file as of 30 June 2017.
Capital gains tax (CGT) relief
This is a one time offer! For members with an excess above the $1.6M TBC during 2016/17. Taking up CGT relief might be a no brainer!
SMSF auditors continue to report that majority of CGT relief applications are incorrect.
The due date for SMSF 2017 lodgements is now the 30 June 2018. Take your time. Seek help if required.
Carefully document method, eligibility and have an asset schedule on file. Change contribution limits!
Lump sum commutations from pensions no longer count towards minimum pension, but can be in cash or in specie.
TRIS is no longer tax exempt and therefore doesn’t hit the TBA, but minimum pension payment still apply as before.
There isn’t even an official term for a TRIS upon hitting a condition of release and turning into ECPI. We call it a Retirement TRIS. NTAA calls it an Exempt TRIS. The ATO doesn’t call it anything since they claim that it doesn’t even exist. In their view the TRIS needs to stop and an ABP to start before the account can move into retirement phase.
So let’s just say that the trustee needs to be notified when a condition of release is satisfied (apart from turning 65). As always review your documentation to make sure it is water tight. And consider a conversion to an account based pension to avoid any future discussion with the ATO.
- Condition of release satisfied and trustee notified
- Turning 65 years of age
- Review documentation
Issues on death if beneficiary has not satisfied condition of release – ATO consultation paper Feb 2018
Events Based Reporting
Also called Transfer Balance Account Reporting, or TBAR for short.
From 1 July 2018, timeframes for reporting are determined by the total superannuation balances of the SMSF’s members:
Where all members of the SMSF have a total superannuation balance of less than $1M, the SMSF can report this information at the same time as when its annual return is due, or
SMSFs that have any members with a total superannuation balance of $1 million or more must report events affecting members’ transfer balances within 28 days after the end of the quarter in which the event occurs
Report for TBAR
- Starting a retirement pension
- LRBA payments
- Structured settlement contributions
Not report for TBAR
- Pension payments
- Investment gains & losses
- Funds reduced to zero balance
- Death of a member
Commutation due to excess transfer balance account – report 10 days after the month when the commutation occurred. All other TBA events report 28 days after quarter end.
Develop processes now to be ready for TBAR as of 30 June 2018. Ensure you are dealing with accurate TSBs.
Exempt current pension income
If fund is segregated and unsegregated throughout the financial year for ECPI:
- No longer obtain actuarial certificate and apply percentage for whole year (only period when fund was unsegregated)
- Actuarial certificate required for fund 100% segregated by default with TSB >$1M
Limited Recourse Borrowings Arrangements (LRBA)
LRBAs are under siege from Labour, interest rates and bank policies, but there are safe harbour provisions.
According to ATO statistics:
- SMSFs in LRBAs at 30 June 2016 $25.4 billion
- 50/50 split between residential & commercial
- Needs to be put in context of $6.05 Trillion
- 0.2% of housing market
- 6.96% of SMSFs have LRBA
For LRBAs established post 1 July 2017 and in retirement phase, repayments being made from accumulation account count towards members TBC
There is a consultation paper out there at the moment re LRBA integrity measures.
- Issue is for member to use an LRBA to make non-concessional contributions to reduce TSB to under $1.6M
- Proposed measure is to come into effect from 1 July 2018 and for LRBAs entered into after 1 July 2018
- Concern for lenders with SMSF members around $1.6M TSB, will have reduces capacity to service loans, as they may not be permitted to make additional non-concessional contributions
Will allow contributing proceeds of downsizing into superannuation from 1 July 2018.
Applies to sale of main residence, where the exchange of contracts for the sale occurs on or after 1 July 2018
If over 65 and meet eligibility requirements, you can make a downsizer contribution into super of up to $300,000 from the proceeds of selling your home
Downsizer contribution will not count towards contributions caps or be affected by the total superannuation balance test
Can only make downsizing contributions for the sale of one home. Cannot access again for the sale of a second home.
Downsizer contributions are not tax deductible. But as important is that they are taken into account for determining eligibility for the age pension.
If you sell your home, are eligible and choose to make a downsizer contribution, there is no requirement for you to purchase another home.
- 65 or over at the time of the downsizer contribution (no maximum age limit)
- Proceeds of selling PPR with a contract of sale on or after 1 July 2018
- The member or their spouse owned PPR for 10 years or more prior to sale
- Home is in Australia and is not a caravan, houseboat or other mobile home
- Proceeds (capital gain or loss) from the sale are either exempt or partially exempt from capital gains tax (CGT) under the main residence exemption
- Provided super fund with downsizer contribution form either before or at the time of making the downsizer contribution
- Make downsizer contribution within 90 days of receiving the proceeds of sale which is usually the date of settlement
- Have not previously made a downsizer contribution to super from the sale of another home
Consider this for clients who are upsizing or in specie contribution instead of cash.
First Home Super Saver Contributions
- From 1 July 2017 – voluntary concessional (before-tax) and non-concessional (after tax) contributions into your super fund to save for first home
- From 1 July 2018 – can then apply to release contributions, along with associated earnings, to help purchase first home. Must be 18 years or over to apply for the release
- Maximum contribution using the FHSS, is $30,000 and any super contributions must be within members annual contributions caps
- Maximum amount you can contribute annually to super account under FHSS is $15,000
- All contributions to FHSS must be voluntary contributions
- Must be at least 18 years of age to apply for the release of super contributions under FHSS
- Concessional contributions taxed on way in
- Release of contributions and deemed earnings is taxed at the members marginal tax rate less a 30% tax offset
- Investment returns calculated by formula rather than fund performance – 90 day bank bill
- Could encourage parents to bring in adult child into SMSF
Death Benefits From 1 July 2017
6 Month death benefit rule removed so pensions retain their death benefit status. Tax beneficiary can receive tax free lump sum in future.
You cannot roll death benefit back to Accumulation or add to another pension account.
Can roll death benefit over to another fund.
High net wealth clients need review asap. Why?
- Compulsory cashing as only $1.6M per member
- Reversionary pensions not given
- Binding death benefit nominations to direct accumulation benefits
- Documentation under the spotlight (Perry v Nicholson – 2017 QSC 163)
- Timing is important
- Communicate with clients to establish new engagement and review fees
- TBAR management requires strategic advice to be provided much earlier
- Pension management and advice has changed
- Focus on death and documentation
Disclaimer: Tax Talks does not provide financial or tax advice. This applies to these show notes as well as the actual podcast interview. All information on Tax Talks is provided for entertainment purposes only and might no longer be up to date or correct. You should seek professional accredited tax and financial advice when considering whether the information is suitable to your or your client’s circumstances.
Last Updated on 05 May 2020