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February 2017

ATO reports on top contravention areas for SMSFs

Important information:  The ATO has released data that shows where the highest proportion of contraventions occurred in the year leading to 30 June 2016, and how many were rectified.

           

 

As part of its statistical review for SMSFs, the ATO reported that for the year ending 30 June 2016, 7,900 SMSFs had auditor contravention reports (ACR) lodged with 20,500 contraventions. 

“This was a decrease from the previous year of 4 per cent in the number of SMSFs with an ACR and a decrease of 7 per cent in the number of contraventions,” the ATO said.

In the year to June 2016, just under half of all contraventions were reported as rectified, the report said.

“The most commonly reported contraventions continued to be loans or financial assistance to members at 22 per cent, while in-house assets and separation of assets constituted 19 per cent and 13 per cent respectively,” the ATO said.

“In monetary terms, the latter two contraventions represented 29 per cent and 25 per cent of the reported contraventions up to 30 June 2016 respectively.”

The ATO also revealed data on the investment performance of SMSFs in SMSFs: A statistical overview 2014-15 which shows the average return on assets for the year ended 30 June 2015 was 6.2 per cent.

The average SMSF member balance was $590,000 and the median balance was $355,000, an increase of 21 per cent and 26 per cent respectively over the five years to 30 June 2015. 

The average female member balance increased 24 per cent over the five-year period, while the average male balance increased 17 per cent over the same period.

Female member balances remained below that of males, however, at $498,000, with the average balance for male members at $633,000.

Over the five years, there was also a 7 per cent shift of funds moving into the pension phase. However, the majority of SMSFs remained in the accumulation phase at 52 per cent.

 

MIRANDA BROWNLEE
Tuesday, 28 February 2017
www.smsfadviser.com

Some financial terms explained

 

Below are four important financial terms.  They are Transition to Retirement; Pension Phase; Allocated Pensions; and Estate Planning.

       

 

TRANSITION TO RETIREMENT PENSION

What does it mean?
A transition to retirement pension is a flexible way to move from work to retirement. On reaching your preservation age (generally 55, but is increasing over time and may be 60 if you were born after 30 June 1964), you can start accessing super (including the preserved portion) via a super pension while maintaining or reducing work hours.

Comment
Many individuals nearing retirement are looking for ways to boost their super savings. With the introduction of government’s simpler super reforms in July 2006, it is now possible to do exactly this by making the most of transition to retirement (TTR) rules.

You can take advantage of the transition to retirement rules by salary sacrificing part or all of your employment income into super, while at the same time beginning an allocated pension from your existing super funds. The pension provides an income while you continue working, and is tax free for individuals over 60, and carries a 15% tax rebate if you're aged between 55 and 60.

At the same time you're getting considerable tax benefits from salary sacrificing your income into super, paying only 15% contributions tax, as opposed to PAYE income tax rates of up to 45%.

So at what age is this strategy of most benefit? Most advisers agree that it best suits someone aged 60 or more, or at the very least age 55. Between now and 30 June 2012 an individual can take a pension income stream tax-free and make contributions (both salary sacrifice and employer contributions) up to $100,000 per annum.

To begin a TTR strategy, you must have reached ‘preservation age’, in order to access super benefits. This is age 55 if you were born before 1 July 1960, phasing to age 60 for those born after 30 June 1964.
Due to the reduced cash flow, anyone thinking about the TTR strategy should have no debt.

Not all super fund providers offer TTR arrangements.

The fees of setting up a TTR arrangement should be minimal – and if you are able to set up the scheme yourself, no costs should be incurred at all. Once you reach retirement age, the commutation of the TTR pension back to accumulation phase is also allowed and should be at a minimal cost.

Before deciding on whether to set up at TTR strategy, you firstly have to find out what your pension is worth, then check the numbers on your living costs and see if the after-tax income of the pension will cover your needs. Then you need to make an application to the super fund for the pension to commence, and notify your payroll office of your decision to salary sacrifice to superannuation.

The TTR strategy has the Australian Taxation Office stamp of approval, which has stated that it will not apply anti-avoidance provisions where this strategy is employed. The ATO notes: “We would only be concerned where accessing the pension or undertaking the salary sacrifice may be artificial or contrived.”

This information is of a general nature only and doesn't constitute personal investment advice.

PENSION PHASE

What does it mean?
Many retirees convert their retirement savings to a pension upon retirement due to the considerable tax benefits available in the pension phase. .

Comment
Once retired, you have the choice of retaining your funds in super (in the accumulation phase) or converting your funds to a pension, such as an allocated pension.

Taxation payments will be higher if you leave your assets in a super fund compared to a pension. In the accumulation phase, earnings on a super funds are taxed at up to 15 per cent. But once a fund converts to paying a pension, there is no tax payable on the earnings. Additionally, if you are aged over 60, any pension drawdowns are also tax free.

Let's say that your account balance is $500,00 and generates 8 per cent ($40,000) assessable earnings. Assuming half of this is income, and the other half realised capital gains, then the tax payable would be around $5,000. If the account had been converted to the pension phase, then the tax would be nil.

One possible downside of commencing a pension is that you may not need the minimum level of income that you must draw down. For instance, you may have income from other sources, such as investments in your names or employment income.

And once a pension is commenced, it is no longer possible to add extra contributions.
The costs charged by the product provider when making the switch from accumulation to pension phase will vary, but are impossible to avoid once you've decided to cash in your super assets. But it is vital that you shop around when looking for a retirement income product, as fees and charges can range enormously.

 

ALLOCATED PENSION

What does it mean?
An allocated pension is a product purchased by retirees to convert their super savings into a regular income. Retirees use allocated pensions to pay themselves an income over a time period roughly equivalent to their life expectancy. Pension payments can be made monthly, quarterly, half yearly and yearly and are deposited directly into a retiree's bank account.

Comment
Allocated pensions are by far the most popular product around for retirees looking to live off their super savings in retirement.

So why are allocated pensions so popular? Why don't retirees just withdraw their funds out of super and dump the lot into a term deposit or savings account, or even use their super to buy other investments such as an investment property or shares?

The major reason here is tax. Allocated pensions save you tax compared to most other strategies in retirement. That's because any investment earnings in an allocated pension – interest, dividends, capital gains – are tax free (age 60 and above). In comparison, interest made on a term deposit or rent received on an investment property held outside the super environment are subject to tax at the retiree's marginal tax rate. 

When a retiree buys an allocated pension to house their super savings they don't have to say goodbye to the money forever. At any time, you can opt to withdraw all, or part, of your money from an allocated pension by simply filling in a couple of forms (check to see if there are any restrictions on the number of lump sum withdrawals allowed each year). You may use the money to buy a business or property, or to go on an overseas trip. Some retirees assist their children to buy a house. The allocated pension offers this needed flexibility. 

So how much does an allocated pension pay? Well, that depends on how much you have to start with, and how old you are. The Government sets minimum limits, which are calculated when the pension is established and recalcuated at the beginning of each financial year.

You can change the amount and frequency of your pension payments whenever you need to, but you can't turn an allocated pension on or off like a tap. Once started, you must receive at least the minimum payment each year. The pension ceases when the account balance hits zero.

Allocated pensions aren't just cash accounts. Retirees have a raft of investment choices at their fingertips including Aussie and international shares, managed funds, listed property, fixed interest and cash. The aim of an allocated pension is to not simply eat into your capital, but to actually make money in retirement as well. Retirees drawdown a combination of capital and investment earnings to live on. Cleary, the more money you make on your investments, the longer your retirement money will last – and the more holidays you can enjoy.

Allocated pensions are not just popular with retirees (those who are permanently retireed and have reached preservation age). Pre-retirees, over age 55, looking to boost their super before retiring completely often buy allocated pensions in order to undertake the transition to retirement strategy. You can read more about this popular strategy below.

 

ESTATE PLANNING

What does it mean?
An estate plan sets out how your financial assets will be distributed after you die. Estate plans involve such things as a will, power of attorney and testamentary trusts.

Comment
It’s probably fair to say that the majority of people think estate planning involves drafting a will and perhaps buying life insurance. Unfortunately the checklist of estate planning items is considerably longer than this, and failing to tick all the boxes can produce a raft of unintentional consequences, including a big tax bill for your beneficiaries to pay, delays in probate and even the possibly of having your will contested.

Probably the biggest mistake that people make is placing too much trust in the power of their will. In fact, the will is probably the weakest link in an estate plan, especially compared to the protection offered by family trusts and companies, and even super if structured correctly. Indeed, the beneficiaries named on super and insurance policies will override the terms of the will, and the distribution of assets in a family trust will be determined by the trust deed. Similarly, property that is held as joint tenant will automatically revert to the surviving joint tenant, regardless of what the will might say.

Putting it simply, a more complicated life – both personally and financially – makes for a more complex estate plan. Clearly, a person who has children to other marriages, an ex-spouse or spouses, a greedy son-or daughter-in-law, children under 18, or a family business to pass on is in greater need of an estate plan, than most. However complications can also arise in the most simple of cases when an estate plan is not thought out holistically – for instance, when the distribution of assets across beneficiaries is unequal or set out in a manner that is unsuitable (for example, a non-working spouse receives the house but no ongoing income, whereas a working child receives a super pension).

To some extent, an estate plan lets you dictate proceedings from the grave. As an example, you don’t trust your son-in-law and think he will leave your daughter and take her inheritance. To prevent this, you could set up a Testamentary Trust, which, if drafted correctly, should protect the inheritance from a family law dispute should your daughter eventually divorce her unlikeable other half. Furthermore, the Trust could dictate that your daughter receives her inheritance as an income stream rather than a lump sum, which would also prevent her from blowing it on a frivolous spending spree or a sinking business. In brief, a Testamentary Trust is a trust established under a will, which comes into existence on your death.

For some, the thought that a surviving spouse may remarry and use their inheritance to support a second family would cause them to turn in their grave. In this situation, a Testamentary Trust could be used to provide for the surviving spouse only. Further reasons for using a Testamentary Trust are for children under 18, since it enables estate income to be distributed to minors in the most tax-effective manner (normally children under 18 are subject to penalty tax rates on investment income).

As already mentioned, the will is only one aspect of an estate plan. Setting up Testamentary Trusts, listing your beneficiaries for insurance policies and super accounts, electing someone to be your enduring power of attorney – a person who is empowered to deal with your financial, personal or health matters should you become incapacitated – and naming guardians for your children, are all integral functions of an estate plan. You should also give some thought to the ownership structure of the family home and any investment properties to ascertain whether joint tenancy or tenants-in-common is the preferable option. In most cases, joint tenancy is preferable since it means that the surviving spouse skips the delays involved in probate, which is granted by the Supreme Court to the executor of the will enabling them to distribute the assets of the estate.

Business owners in a partnership structure should also have special arrangements in place in the event of their own, or their business partner’s, death. People in partnerships are encouraged to have a buy-sell agreement in place, which involves each partner taking out life insurance on the other partner’s life. Basically, this means that should one partner die, the surviving partner’s life insurance is used to buy out the remaining stake in the business – providing much needed funds to the deceased’s family, but just as importantly, ensuring the continuation of the business for the surviving partner.

Estate planners, financial planners and lawyers can be called upon to design an estate plan for you. Remember to update your estate plan – not just your will, but also your life insurance and super policies – after significant events such as separation, divorce or the birth of a new child.

 

Source:     www.thebull.com.au

Government urged to rectify ‘legislative shortcoming’ with CGT relief

 

The Tax Institute has called for an extension of the deadline for applying the CGT relief in respect to the segregated approach, amid concerns some SMSF trustees are at risk of missing out.

         

 

In a submission to Treasury on the most recent tranche of draft superannuation reforms, The Tax Institute recommended that the government extend the CGT election deadline by at least 12 months. 

“A key legislative shortcoming in the superannuation reforms is that a superannuation fund cannot elect to apply the transitional CGT relief for members with a TRIS and income streams in excess of the $1.6 million transfer balance cap unless, in respect of the segregated method, the member takes action before 1 July 2017,” the submission said.

“In the interests of simplicity and fairness for members that do not quickly become fully aware of the minutiae and full ramifications of the superannuation tax changes, the CGT election deadline should be extended to at least 30 June 2018.”

The Tax Institute said in the submission that it is aware of situations where advisers are booked up until 30 June 2017.

“This means that some advisers may not be able to provide advice on decisions their clients need to make before 1 July 2017,” it said.

“We recommend at least a 12-month period leading up to 30 June 2018 for the community and advisers to be educated about the transitional CGT relief and for any election to be made.”

The institute said this would give SMSF trustees 12 months from 1 July 2017 to obtain advice and make their election.

It also recommended that the government amend the definition of a transition to retirement income stream so that an account-based pension that is started as a TRIS ceases to be a TRIS once the superannuation fund becomes aware that a full condition of release has occurred.

“That would mean that members who started a TRIS but have already reached age 65 would not need to take action before 1 July 2017 to stop and restart their income stream.

“The member could then lodge the relevant forms with the ATO.”

MIRANDA BROWNLEE
Friday, 24 February 2017
smsfadviser.com

Jump-start your retirement savings

 

Unfortunately, many people would reach their mid-fifties and conclude that their savings are not on track to finance a satisfactory lifestyle in retirement. 

           

 

Fortunately, worthwhile steps can often be taken to boost their nest-eggs in the countdown to retiring.

Perhaps family obligations and/or work circumstances made it difficult to put aside enough money towards retirement. Perhaps, inertia or procrastination played a part.

Ideally, you should begin to save for retirement as early as possible in your working life. (See the recent Smart Investing blog 'Save early, save often'.)

Early savers have the formidable advantage of compounding over the long haul as investment returns are earned on past returns as well as the original capital (including super contributions). And saving early may ease the pressure of a late dash to save as much as possible in the final years before retiring.

Ways to potentially boost lagging retirement savings for those aged 50-plus include:

  • Consider delaying retirement if possible given your circumstances. From a financial aspect, a longer working life provides an opportunity to save more for what will be a shorter retirement. And a shorter retirement is obviously less costly. (Perhaps think about working part-time if possible as an alternative to outright retirement.)
     
  • Re-evaluate your ability to save after your children leave home. Parents aged in their fifties or so often have the ability to save more once their adult children are finally independent – and once their mortgages are finally paid off.
     
  • Remind yourself how much you can save each year without overshooting the concessional (pre-tax) and non-concessional (after-tax) contribution caps. Although, for instance, the annual concessional cap – compulsory, salary-sacrificed and personally-deductible contributions – is reduced to an indexed $25,000 from 2017-18, numerous fund members may be able to afford to contribute more than at present and remain with the cap.
     
  • Look at ways to reduce your investment management costs. High annual fees keep compounding over time to markedly erode the benefits of compounding returns. In other words, compounding costs and compounding returns work in opposite directions.

Maybe the bottom-line is to face reality. Preferably, you should have started to save seriously much earlier. Now It is a matter of saving as much as possible while still in the workforce.
 

Robin Bowerman
​Head of Market Strategy and Communications at Vanguard.
05 February 2017
www.vanguardinvestments.com.au

Government pushes forward with multinational tax measures

 

The Australian government has introduced legislation to Parliament to implement a new string of tax measures to prevent multinationals from profit shifting.

             

 

Planned to commence on 1 July, the diverted profits tax (DPT) will give the ATO new powers to combat contrived arrangements and multinational tax avoidance, targeting multinationals with global income in excess of $1 billion and Australian income over $25 million. 

Under the new tax the ATO will be able to apply Australia’s anti-avoidance provisions, with companies in question required to pay a 40 per cent penalty tax rate immediately.

The DPT will restrict multinationals’ ability to use transfer pricing rules and will strengthen existing anti-avoidance rules, according to a statement issued by Treasurer Scott Morrison’s office.

Foreign pension funds, sovereign wealth funds, managed investment trusts and similar foreign entities will be exempt from the tax, with the government saying it wishes to avoid increasing the compliance burden for these “low-risk”, “passive” and “widely held” entities. 

The legislation includes two additional measures to strengthen compliance and increase transparency.

The first aims to increase the maximum penalty for multinationals that fail to lodge tax documents on time to $525,000, while also doubling the penalty for those found to have provided misleading information.

The second will amend the current transfer pricing laws to make them concurrent with the 2015 OECD recommendations, ensuring analysis fairly reflects the transaction and making the pricing of intangibles more transparent.

 

JACK DERWIN
Friday, 10 February 2017
www.accountantsdaily.com.au

Save early, save often

 

One of the underlying attributes of Australia's superannuation system is that it starts young adults saving for retirement as soon as they join the workforce.

           

 

Without compulsory super contributions, many millennials – aged in their twenties to thirties and also known as members of Generation Y – may have second thoughts about saving for retirement early in their working lives.

Any reluctance to begin saving for retirement at a relatively early age is understandable given that their post-working days might be 40 years away or so.

A challenge, of course, is to convince millennials that saving for the really long-term is worthwhile. And part of that challenge is to persuade millennials about the value of adding to their superannuation guarantee (SG) contributions in such ways as making salary-sacrificed contributions.

A recent New York Times personal finance feature – For millennials, it's never too early to save for retirement – comments that it is “perennially true” that most young adults don't make retirement savings a priority.

However, its author tellingly adds, “millennials are in an ideal position to get started” because their perhaps seemingly modest regular savings have the opportunity to grow substantially over time.

The article is largely based on interviews with five people aged 28 to 32 about their attitudes towards savings and investing. The interviews produced some surprising and not-so-surprising responses.

For instance, a 28-year-old accountant interviewed has been saving for retirement since she was 17 and arranges with her husband for one of their salaries be saved each pay day. However, several of those interviewed recognise the need to properly save for retirement yet have never quite got around to it.

High in the reasons why young adults should begin saving and investing as early as possible is to reap the rewards of what is sometimes called “the magic of compounding”.

Compounding occurs when investors earn investment returns on past investment returns as well as on their original capital. And the compounding returns can really mount (or compound) over the long term – particularly the extremely long term.

Ways to get the most out of compounding include:

  • Start to save and invest as early as possible in your working life with as much as possible. Compounding needs plenty of time to produce its best results.
     
  • Invest regularly to keep building your investment capital and to accelerate the benefits of compounding.
     
  • Adhere to an appropriate long-term asset allocation for your portfolio – with enough exposure to growth assets.

A perhaps overlooked attribute of compounding is that disciplined investors who reinvest their earnings are less likely to be distracted from their long-term course by the latest market noise such as a bout of higher market volatility. Meanwhile, there returns keep compounding.

Current retirees who had recognised the value of compounding at the beginning of their working lives should now be enjoying its rewards.
 
 

Robin Bowerman
​Head of Market Strategy and Communications at Vanguard.
29 January 2017
www.vanguardinvestments.com.au

Deloitte points to ‘red flag’ SMSF patterns

 

Deloitte has outlined behaviours that typically do not pass the “sniff test” and can alert the ATO to potential non-compliance or suspect SMSF transactions.

         

 

As the SMSF auditing process becomes increasingly automated, focusing on “gut” instincts is where auditors can and should be applying their skill set to produce better outcomes for clients and the ATO, according to Deloitte’s SMSF audit leader Jo Heighway. 

“We’re automating so much of the mundane testing now that it’s really important for auditors to be using their gut a lot more,” Ms Heighway said at the SMSF Association’s national conference in Melbourne.

Classic red flags for auditors, and ultimately the ATO, are often issues which simply “don’t seem right” when a fund’s story is looked at from a big picture perspective, Ms Heighway said.

For example, lack of documentation is a classic trigger for auditors, particularly given the ease of access to documentation today.

“Sometimes you’ll find a client has very little documentation where it’s very obvious that they should. For example, if they have shares in an unlisted company, there should be share certificates or share transfer forms,” Ms Heighway said.

“If things like that are missing, it’s an indication that things are not in order.”

Property is another area where missing documentation doesn’t pass the “sniff test,” Ms Heighway said. This particularly applies to holiday rentals, such as Airbnb.

“Trustees, in some cases, are using websites to find renters, and often the documentation trail there is poor, particularly if they can’t identify who is staying there,” she said.

Other behavioural triggers that also alert an auditor to suspect activity is a trustee’s story changing throughout the audit, slow replies to the auditor and “most obviously”, a request to withdraw.

“This is where having a good solid relationship with the client is really important. Have that honest conversation about what is causing the concern to try and move forward,” Ms Heighway said.

She stressed that auditors should not approach an audit with a ‘guilty until proven innocent’ frame of mind, but rather be open with clients and stress that auditors are not out to create notices of non-compliance and are seeking to help clients remain compliant. 

“To get the best outcome, the client has got to be really comfortable with you,” Ms Heighway said.

KATARINA TAURIAN
Friday, 17 February 2017
smsfadviser.com

What recent retirees can teach pre-retirees

 

Frank Sinatra's My Way probably hasn't been among the karaoke top 100 for years. Yet its signature lyrics, “regrets, I've had a few”, will certainly resonate with all of us – including recent retirees.

           

 

As Smart Investing recently discussed – see Improve your financial satisfaction in retirement countdown – Vanguard analysts have surveyed thousands of pre-retirees and recent retirees in Australia, US, UK and Canada to measure their satisfaction with their financials.

The analysts Anna Madamba and Stephen Utkus were seeking, among other things, lessons that could be learned from the experience of recent retirees. (Pre-retirees are defined as those within 10 years of retirement while recent retirees have retired over the past 10 years.)

“In other words,” write Madamba and Utkus, “we looked into recent retiree views about how differently they would handle their transition to retirement [if they had the chance to do it again].”

Recent retirees were asked if they strongly agree with the following statements when looking back at their preparations for retirement:

  • “I should have saved more”: Australian recent retirees, 45 per cent.
  • “I should have started planning earlier”: Australian recent retirees, 36 per cent.
  • “I should have dedicated more time to planning for retirement”: Australian recent retirees, 28 per cent.
  • “I should have learned more about government benefits available to me”: Australian recent retirees, 26 per cent.
  • “I should have learned more about my employer-sponsored superannuation fund”: Australian recent retirees, 33 per cent.
  • “I should have hired an adviser”: Australian recent retirees, 8 per cent.

Overall, the analysts found that recent retirees appear satisfied with how they handled their planning for retirement. That said, however, recent retirees recognise some clear deficiencies in their preparations – predominantly the need to save more and spend more time planning.

It is telling that just 8 per cent of Australian recent retirees surveyed regret not having consulted an adviser about their transition to retirement. As discussed over the past week by Smart Investing, the study points to the “advice gap” among pre-retirees, with a large percentage in the surveyed countries relying only on the guidance from family and friends; that's if they take any advice.

A task for advisers, superannuation funds and Government is to emphasise to pre-retirees the benefits of quality professional advice, particularly in the last 10 years of their working lives.

 

Robin Bowerman
​Head of Market Strategy and Communications at Vanguard.
17 February 2017
www.vanguardinvestments.com.au