The make-up of the new Federal Government makes changes to superannuation certain – even though we don’t yet know what it will be, says Andrew Yee, SMSF specialist at HLB Mann Judd Sydney.
Fortunately any changes are unlikely to become effective until after July 1, 2017, so fund members and SMSF trustees have a year to prepare.
“As it’s also the start of a new financial year, it’s an especially good time to review SMSF arrangements and make any changes or updates that are required to ensure they are compliant, able to implement future changes easily, as well as taking advantage of current opportunities, such as more generous transition to retirement rules, that might end this financial year,” Mr Yee said.
“Any changes that are introduced by the Government will be easier to manage and less costly to implement if the SMSF is up to date and in good shape.”
Mr Yee said HLB Mann Judd’s tips for an SMSF health check include:
Transition to retirement super pensions
It is critical that anyone aged over 55 consider starting a pension from their SMSF this financial year as the rules could change from July 1, 2017, Mr Yee says.
“Under the current super rules, anyone who has reached ‘preservation age’ (55 for those born before July 1, 1960) can start a pension and draw up to a maximum of 10 percent of their account balance each year, irrespective of whether they continue to work or not.
“It is a good strategy to reduce tax but more importantly, increase contributions to superannuation whilst supplementing their reduced take-home pay with their pension withdrawal.
“The added bonus of this strategy is that earnings in the super fund paying the pension, are exempt from tax.
“It is proposed to remove this tax exemption from July 1, 2017 for funds paying a transition to retirement pension. However, super funds already paying pensions to persons over age 55 and retired or to persons over age 65, will continue to receive the tax exemption.”
Review salary sacrifice agreements to ensure they take full advantage of the current concessional contribution caps this year.
“These are currently $30,000 for those under age 50 and $35,000 for those aged 50 and over,” Mr Yee says.
“Anyone turning 50 during the next 12 months will be eligible for the $35,000 cap this year so, if possible, salary sacrifice agreements should be updated to reflect this.”
He recommends that anyone planning to make after tax contributions to their SMSF should also undertake a “stocktake” of non-concessional contributions made since July 1, 2007 to determine whether they are under or over the proposed $500,000 lifetime non-concessional contributions cap.
“If in doubt, contact the Australian Taxation Office to provide this information, as breaching these caps can be very expensive.”
Review current and future cash flows in the SMSF
With proposed changes to superannuation that severely restrict the amount of money that can be contributed to superannuation, in particular the $500,000 lifetime non-concessional contributions cap back-dated to July 1, 2007, SMSF trustees may need to restructure their SMSF, or change the asset mix of their fund so as to maintain cash flow required to operate their SMSF.
Mr Yee says this may mean stopping or reducing pensions in their SMSF, especially as members may not be able to re-contribute their pensions without exceeding their $500,000 cap.
“This may be particularly problematic for SMSFs with lumpy assets such as property, or even worse where the SMSF has borrowed monies to acquire these assets and also need to make interest repayments.
“Trustees may be forced to sell such assets in order to meet pension liabilities, or just stop the pension which will then mean the SMSF will pay tax on the earnings of these assets.”
Plan for the $1.6 million pension cap
If the proposed pension cap does come into effect on July 1, 2017, SMSF trustees with over $1.6 million in super benefits who are in pension phase, or planning to commence pensions, must get their structure right beforehand.
“Under the proposed cap, people with over tax free pension assets of $1.6 million, will need to move the excess balance back to accumulation phase and attract 15 percent income tax on its earnings.
“Therefore people may consider how to segregate pension assets and accumulation assets beforehand so they can minimise the tax impact on accumulation assets after July 1, 2017 if the pension cap changes are made.
“Similarly people may consider selling assets and realising profits now so as to mitigate any capital tax liabilities after July 1, 2017,” Mr Yee says.
Review the trust deed
If it hasn’t been done recently, SMSF trust deeds should be reviewed to updated as necessary.
“This will be especially important if the proposed changes to superannuation announced in the 2016 Federal Budget are implemented, as they are quite significant,” Mr Yee says.
“Other changes affecting trust deeds have been introduced in recent years, and many trust deeds may not reflect them.”
Convert to corporate trustee
Mr Yee says that SMSFs with individual trustees should consider whether it is worth converting to a corporate trustee.
“A company is generally a better trustee structure than individuals as it allows movement of members into and out of the fund without having to change the name of the SMSF on the fund assets and bank accounts,” he says.
Review death benefit nominations
Review member death benefit nominations to determine whether nominations are valid and have not lapsed, and whether they are still in accordance with the member’s wishes and the trust deed.
Mr Yee warns that trustees of SMSFs holding collectable assets, such as antiques or artwork, need to be aware of the strict rules that came into force from July 1, 2016.
Under these rules, a collectable asset:
“These rules have been in place since July 1, 2011 for collectables purchased after then; however collectables purchased before this have until June 30, 2016 in order to comply.”
Life insurance in SMSF
Mr Yee says that it can be a good idea to have any life insurance policies owned by the SMSF.
“It makes good financial sense to have life insurance inside super as the premiums can be paid by contributions.
“Also, the premiums are generally tax deductible inside super, whereas outside super they are not. And the cost of cover is generally more competitive within super.”
Consider winding up the SMSF
For some, it could be worth considering whether the SMSF is still viable or whether it should be wound up.
“It may be that the fund has reduced in value to a point where it is no longer cost effective to continue operating. For instance, members may have exited, or a key trustee/member has died and the remaining member or members do not have the skills or inclination to continue running the SMSF,” Mr Yee says.
“If other changes are made to superannuation, it may simply become too difficult to bother for some.”
Compliance with SuperStream
SuperStream is a government initiative designed to streamline the payment of employer superannuation contributions and benefit rollovers and transfers.
Mr Yee says that if a SMSF receives employer contributions from an unrelated employer, then trustees will need to ensure the fund is compliant, by establishing an Electronic Service Address (ESA) so it is able to receive employer contribution data that accords with SuperStream requirements.
The due date for SuperStream compliance was June 30, 2016, however this deadline has been extended to October 30, 2016 for small businesses.
Seek specialised advice
Finally, due to the significant changes likely to come from July 1, 2017, the current financial year is shaping up to be a watershed year for superannuation planning.
Therefore SMSF trustees should consider seeking specialised advice so that they are prepared for whatever changes do take place.
HLB Mann Judd Sydney is a firm of accountants and business and financial advisers, and a member of the HLB Mann Judd Australasian Association.
For more information please contact:
Phone: 02 9020 4213