GPL Financial Group GPL Partners

July 2019

Interest rate for SMSF loans set to rise under safe harbour terms

Despite the recent cut to official interest rates, an update in the ATO’s superannuation rates and thresholds indicates that the minimum interest rate for SMSF loans under the safe harbour terms will increase for the 2019–20 financial year.

           

 

The ATO recently updated its superannuation rates and thresholds to include the interest rate amount for the 2019–20 financial year for SMSFs that want to ensure their limited recourse borrowing arrangements (LRBAs) are consistent with the safe harbour terms outlined in Practical Compliance Guideline 2016/5.

Back in 2014, the ATO confirmed that borrowings on non-commercial terms from a related party could cause non-arm’s length income (NALI). In order to avoid NALI, SMSFs had to restructure their LRBAs to ensure they were consistent with an arm’s length dealing.

To assist SMSFs in restructuring their loans on arm’s length terms, the ATO released PCG 2016/5, which set out the safe harbour provisions for what it would consider to be commercial terms.

However, the ATO also confirmed in 2016 that if the safe harbour terms were not applied, the loan would not be subject to NALI if the SMSF could demonstrate that the terms of their loan were consistent with the terms that a commercial provider would offer. 

In a recent update, the ATO stated that the LRBA interest rate for real property assets under the safe harbour terms will rise to 5.94 per cent, up from the 5.80 per cent rate that was set for the 2018–19 financial year.

The LRBA interest rate for listed shares or units will increase to 7.94 per cent for the 2019–20 financial year, up from the 7.80 per cent set for this year.

Following the decision of the Reserve Bank to cut interest rates this month, Reserve Bank governor Philip Lowe stated the board wouldn’t rule out making further cuts to interest rates this year.

“Our latest set of forecasts were prepared on the assumption that the cash rate would follow the path implied by market pricing, which was for the cash rate to be around 1 per cent by the end of the year,” Mr Lowe said.

“There are, of course, a range of other possible scenarios and much will depend on how the evidence evolves, especially on the labour market.”

 

Miranda Brownlee
20 June 2019
smsfadviser.com

 

Control considerations flagged with death benefit pensions for children

When starting retirement phase pension accounts, SMSF professionals and their clients should think carefully about how it might impact the amount of death benefit pension that their children will be able to receive, says a technical expert.

         

 

Australian executor trustees senior technical manager Julie Steed said that, when discussing pensions and estate planning with clients, it’s very important to think about what money will be leaving the super system.

“If we’re going to have excess amounts, do we really want to be holding insurance in super anymore? We may want it outside of super where we can direct it straight through to our estate plans through testamentary discretionary trusts that we can control,” Ms Steed explained at the Chartered Accountants Australia and New Zealand SMSF Day 2019 Workshop.

“Most parents, when faced with the choice between tax efficiency and control for their adolescent children, will nearly always choose control over tax efficiency.”

Ms Steed said that if the deceased has a transfer balance account at any time prior to their death, then the child death benefit amount will be the child’s share of the retirement phase pension accounts.

“So, if I started a retirement phase pension on 1 July 2017 with $1.6 million, and it’s grown to $2 million by the time I die, and I’ve got a single child, my child can receive $2 million as a death benefit pension, even though that’s $400,000 above the general transfer balance cap,” she explained.

Importantly, the process and formula with the child cap increment, she said, also applies to accumulation accounts.

“This means that my children can have zero amounts out of my accumulation accounts. So, if I’ve got $2 million in pension phase, and $3 million in accumulation phase, and I’ve got two children and they’re getting 50 per cent each, they can each have $1 million of my retirement phase pension, but the $1.5 million for each child in my accumulation accounts will have to come out of super,” she said.

“This is really important when thinking about starting retirement phase pension accounts.”

Ms Steed said that if the deceased had no transfer balance account, then the child cap increment is pro-rated to their proportion of the deceased’s total benefit, and insurance proceeds can be included in the deceased’s total benefit.

“I worked with an adviser last year who had a client that was in her 40s and had a really aggressive form of Parkinson’s disease. It was terminal, but her life expectancy was still 10 years. So, she didn’t qualify under terminal illness payments, but she qualified under total and permanent disability (TPD),” Ms Steed said.

“She had $120,000 in accumulated benefits and $1 million worth of insurance. She heard about the benefits of tax-free investment returns in pension phase and she wanted to maximise her benefit, so she was going to start a TPD pension with her $120,000. Now, fortunately she went and got financial advice, because if she hadn’t, she would have started that pension for $120,000.”

Unfortunately, the client did die much sooner than anticipated, only a couple of weeks after the insurance amount was actually received in the super fund for TPD.

“Now if she had started a retirement phase pension with her $120,000, each of her two children would have only been able to start a death benefit pension for $60,000 each. They would have each had $500,000 rattling around outside of super,” she said.

“Her adviser stopped her from starting the retirement phase pension and so she just left the TPD benefit in accumulation phase and it was unrestricted non-preserved, so she could access some of that money she needed for living. But when the $1 million of insurance came in, her kids were actually able to start a death benefit pension for $550,000 each.”

Ms Steed said the big issue wasn’t so much the tax consequences of that money leaving super, but rather the control issues of that money leaving the super fund.

 

 

Miranda Brownlee
25 June 2019
smsfadviser.com

 

Good investment habits versus damaging biases

In a low-interest, lower-return, more-volatile investment environment, investors have an even greater incentive to keep wealth-damaging behavioural traits or biases under control.

         

 

Individual investors have no control, of course, on the emotions of other investors or the overall state of investment markets. However, you can try to keep your emotions in check when making investment decisions.

And it is under your control to create and stick to an appropriately-diversified portfolio, set achievable long-term goals and have realistic expectations for returns. A disciplined investor guided by a solid financial plan is less likely to allow emotions to get in the way of investment success.

Here are seven of the undesirable traits that behavioural economists generally say investors should avoid:

Overconfidence

Many investors have an unjustifiable confidence in their ability to make smart investment decisions. Overconfident investors often believe they can pick future winning investments and somehow beat the market.

This overconfidence typically leads to frequently buying and selling shares in a chase for winners and being overly optimistic about the future performance of chosen investments.

Loss aversion

An excessive aversion to loss can make investors unreasonably sensitive to investment losses. Such investors tend to sell their winning investments while holding on to losers that are unlikely to recover.
And loss aversion can lead to investors being unwilling to take appropriate investment risks – potentially lowering long-term returns.

Regret

Excessively dwelling on past losses can lead to investors focusing too much on part of their portfolio rather than the portfolio as a whole. This trait, also known as “narrow framing”, can hinder an investor’s efforts to have a properly-diversified, long-term portfolio and make them more sensitive to short-term market movements.

Inertia

Inertia tends to get in the way of beginning to seriously save, saving more whenever possible and developing a long-term financial plan.

Fear and greed

These are the terrible twins of becoming fearful when markets are falling and becoming greedy when markets are rising. Fear and greed often lead to selling shares after prices have sharply fallen, only to buy after prices have sharply risen.

Comfort in crowd-following

Investors often gain a false sense of security by following the investment crowd. As with fear and greed, this usually results in jumping in and out of the markets at the wrong times.

Confirmation bias

This involves deciding on a course of action and then looking around for evidence to support that action while blocking out contrary opinions and research.

As part of your efforts to keep damaging traits or biases in check, try to block out investment “noise” – the abundance of often-conflicting and misleading information facing investors.

Make the most of investment compounding to magnify your long-term returns. (Compounding occurs as returns are earned on past returns as well as your original investment.) Recognising the rewards of compounding can help investors to stay focussed on the long term.

And think about ways to beat investment inertia including putting yourself into a form of saving “autopilot” by making higher salary-sacrificed super contributions.

 

Written by Robin Bowerman
Head of Corporate Affairs at Vanguard.
25 June 2019
vanguardinvestments.com.au

 

Critical documentation steps flagged with switching SMSF loans

With an increasing number of SMSF clients looking to switch loans following the exodus of the major banks from SMSF lending, a law firm has highlighted some of the considerations and important steps with documentation in this process.

           

 

Last year, the last few major banks that were still offering SMSF loan products decided to withdraw their products for residential property for new customers. Banks such as AMP and Macquarie also decided to exit the SMSF lending space.

As a result, some of the non-bank or second-tier lenders are now seeing increased demand from SMSF trustees who are looking to refinance their loan.

With the recent changes in the SMSF lending landscape, Townsends Business and Corporate Lawyers said some SMSF clients are deciding to remove and replace the current custodian of the holding trust with a new corporate custodian.

The law firm explained there are a number of important considerations and steps when completing this process.

It gave an example of John and Mary who acquired a residential property in NSW using their SMSF under a limited recourse borrowing arrangement (LRBA).

“The finance was provided by one of the big four banks.” said Townsends.

“The first point of reference for John and Mary would be to review the current bank finance trust deed to determine whether the trust deed permits the resignation of the current custodian and the appointment of a new custodian; otherwise, the holding trust deed may need to be amended to effect this.”

The couple would then need to work out whether authorisation is required from their lender in order to change the trustee of the holding trust.

“Holding trust deeds prepared by the banks often limit the custodian company to a company incorporated by the bank,” Townsends noted.

“In John and Mary’s case, this means that they may be required to seek confirmation from the Bank that it would be prepared to execute any necessary documents to remove the current custodian company and replace it with a new corporate custodian.”

They would also need to consider whether the removal and appointment of the trustee of the holding trust may be considered as a resettlement of trust, and also whether the Deed of Removal and Appointment may need to be registered on the local state general register. Townsends said this will depend on the state or territory laws that apply to the deed.

“In Mary and John’s case, the law that applies to the deed is the law of NSW, and it is likely that the Bank they borrowed form will require that the Deed of Removal and Appointment be registered in order to transfer legal title of the property from the current custodian to the new custodian,” it said.

“John and Mary could consider discharging the current mortgage in order to remove the current custodian as mortgagor and to register a new mortgage with a new custodian as the mortgagor.”

 

Miranda Brownlee
14 June 2019
smsfadviser.com

 

Consolidate your super and save

If I offered you a year's pay for an hour or so of work, you would probably jump at the opportunity.

         

 

But many people unwittingly walk away from that opportunity when they maintain multiple super accounts. The end up paying extra fees and insurance premiums that significantly erode balances over time.

In this increasingly mobile economy, it's understandable that so many people have more than one super account. New accounts may have been established as you changed jobs, or you may work more than one job, each with their own super plan.

When it comes to boosting your super, however, one is the friendliest number.

Last year the Australian Productivity Commission estimated that a 21-year old with a full-time starting salary of $50,000 and an average insurance premium of $340 would have $833,000 in her super by age 67 if she has only one account. If she has multiple accounts, her final balance shrinks to $782,000, leaving her with $51,000, or 6% less, to spend in retirement. That's roughly equal to her first year's salary.

It's a common scenario. About one in three member accounts is an unintended multiple, according to the Productivity Commission, and they cost members about $2.6 billion annually.

And it's the compounding effect of these additional premiums and fees that really damage your super balance over time.

In addition to increasing your balance, consolidating your super accounts reduces your paperwork and makes it easier to track your super.

And it only requires a small amount of work.

(Keep in mind that while consolidating makes sense for most of those in defined-contribution plans, it is a more complicated decision for participants in defined-benefit plans. If you are in a defined-benefit plan, consult with an advisor to determine whether reducing accounts is wise.)

Before you consolidate, find out whether your super fund charges exit fees and review how any changes will impact the insurance you may have through super. Also, check whether changing funds will affect how much your employer contributes.

Then, look for a diversified, low-cost fund that matches your risk tolerance and time horizon. It may be a super plan you already participate in, or a new one you find by comparing funds.

Then, let your employer know about your decision. If you are not sure how many super accounts you have, you can find out and continue tracking your super with this tool from the Australian Tax Office.

 

Written by Robin Bowerman
Head of Corporate Affairs at Vanguard.
25 June 2019
vanguardinvestments.com.au

 

Australia – the story goes on.

         

 

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An up-to-date snapshot of Australia's vital statistics.  

Please click on the following link to see all this interesting information. The areas covered are:

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Access all this data here.

Asset allocation as you age

How age changes investing preferences.

         

 

Vanguard's latest edition of How Australia Saves – a report which takes a deep dive into how Australians are managing their superannuation savings – confirmed that the vast majority (87%) of super members have their retirement savings sitting in the default options of their superannuation fund.

This reliance on default funds is both a strength and weakness of the Australian super system.

A strength is that the same research shows that in most cases, the default option outperformed those, without professional planning help, who built their own asset allocations based on the available investment options on the menu in their super fund. And importantly, those invested in the default options had less risk baked into their portfolios than the individual portfolios.

A perceived weakness with both mandatory contributions and default options, is that they have the effect of driving disengagement by Australians with their superannuation.

However not everyone in the default options is disengaged – a number certainly will have decided that the default option's asset allocation is right for them.

But an interesting question, and potentially a greater weakness of the system, is whether the asset allocation of a typical default fund suits members of any age.

Age is a pretty powerful filter for investment decision-making. Financial advisers sometimes say that if they had to build a financial plan based only on one piece of information that your age would be that critical data point.

If you consider two super members. One is 25 years old and has started their first full-time job, the other has just celebrated their 64th birthday and is planning their life after full-time work about a year from now.

Both are invested in the same fund's default balanced option and therefore have exactly the same asset allocation in their investment portfolio – the same percentage exposure to both growth (equities /property) and fixed income (bonds) and cash assets.

Yet our 25-year-old may have their money invested for the next 70 years. Our near retiree realistically has a time horizon of more like 20-30 years.

In addition to their age difference, their ability to recover from severe market shocks, like a global financial crisis, is also very different.

For the 25 year-old, a GFC like event would barely show up as a blip on their fund's performance chart as they approach retirement in 40 years' time. For the 64 year-old the consequences and impact of a GFC event on their retirement lifestyle could be much more immediate and dramatic as they enter the drawdown years. Technical folks call this sequencing risk.

Each of these members could choose to move away from the default by opting for one of the other risk-based portfolios – typically ranging from conservative or stable to high growth – and align their asset allocation more closely with age and therefore risk profile.

But given what we know about disengagement or inertia in superannuation, most people do not do that.

A new breed

A new generation of default options are emerging in the Australian market where the asset allocation is driven by the age of the member rather than targeting a certain level of risk for the portfolio investment mix.

In the US, such products called 'target-date' or lifecycle funds have become a dominant choice for default portfolios.

Vanguard in the US is a major provider of investments and record keeping services to the retirement industry, and has recorded a 50 per cent rise in the use of target-date funds over the ten years between 2007 and 2017. Now about three quarters of all retirement savers in the US use these types of funds.

Target date funds are not all built the same. Vanguard's approach is to segment investors into four phases, the first of which caters for younger investors (under 40) where a higher allocation to equities – around 90 per cent – is used.

The second phase moves the asset allocation to a 50/50 split between growth and income investments for people aged 41-65 – an asset allocation that is very reflective of many of the balanced default funds available to Australian super members.

Phase three is when investors are in the early years of retirement and again the asset allocation to riskier assets is reduced, while the fourth phase is for members who are in the later stages of retirement, with the portfolio keeping just a modest exposure to equities within the portfolio.

Back to basics

If you take the concepts which a target date fund presents in terms of asset allocation principles, they are simply providing an automated way to dial back market risk as an investor ages, in addition to recognising the increasing importance of capital preservation as you age.

The aim is avoid extreme asset allocation decisions – either too aggressive or overly conservative – and avoid the impact of poor portfolio construction due to inadequate diversification.

These are sound, fundamental principles which can be leveraged by anyone considering their appropriate asset allocation to complement the goals they are saving towards.

Your asset allocation – how you allocate money to each asset class – is one of the most important decisions faced when constructing an investment portfolio – and there is a wealth of evidence showing it has the biggest influence out of all investment decisions on the performance of your investment.

This article was first published in the ASX Investor Update newsletter on 12 June 2019

 

Written by Robin Bowerman
Head of Corporate Affairs at Vanguard.
18 June 2019
vanguardinvestments.com.au

 

Big four firm outlines new financial year checklist for SMSFs

With the new financial year starting, one of the big four accounting firms has highlighted the key areas on which SMSF professionals should focus their attention for SMSF clients.

       

 

With end of financial year planning now out of the way, Deloitte Private partner Liz Westover outlined some of the areas that might need to be reviewed with SMSF clients for the 2019–20 financial year.

Minutes for withdrawals above the pension minimum

Speaking at a recent Chartered Accountants Australia and New Zealand event, Ms Westover said where clients are planning to withdraw more than the pension, there may be certain minutes that need to be made.

“If you’re above the minimum and you want to treat some of them as lump sums from accumulation and so on, then get your documents in place because the ATO has a view that they must be prospective, they can’t be retrospective,” Ms Westover said.

Update clients on the new rates and thresholds

SMSF professionals should also ensure their clients are up to date with the rates and thresholds for the 2019–20 financial year.

“The ATO released this months ago, but there are plenty of organisations that just have a two-page list of rates and thresholds that you might want to distribute to your clients,” she said.

Sort out data feeds

Ms Westover said using proper SMSF administration software can create a lot of efficiency for SMSF firms, but practitioners need to ensure that the data feeds are actually in place.

“Now is a good opportunity to get clients to sign authorisations to get those data feeds in place,” she said.

Contributions splitting

Contributions splitting is a good strategy for evening up the balances between spouses, she said.

If an SMSF client made contributions last financial year, then this financial year they can make an election to split up to 85 per cent of those concessional contributions to their partner.

“So, if I’m looking to bring my partner’s balance up, then that’s a great way to do it. It’s a bit of a slow burn, but if you’re talking to younger clients where they can benefit from that over time, contribution splitting can be a good way to build up that second person’s balance,” she explained.

Determining lodgement dates for 2019–20

If it’s a new fund, then the client’s lodgement date will be in February, or if there are funds that were late last financial year, then they will have an October deadline, Ms Westover explained.

“Most clients will generally be in that May–June bucket, but as you’re planning your work, if you just get a good sense of when funds are actually going to be due for lodgement, that can help you work through your workflows and make sure that nobody is late,” she said.

“The ATO has a very strong focus on non-lodgements at the moment.”

Individual versus corporate trustee

While the ATO’s statistics show that 81 per cent of funds are now being set up with a corporate trustee, she said, there are still a lot of funds around with corporate trustees.

“I won’t set a client up [in an SMSF] without a corporate trustee. Nevertheless, we are still in a situation where 59 per cent have corporate trustees and 41 per cent have individual trustees,” she said.

While the process of changing a fund with individual trustees to a corporate trustee is a lengthy process, she said, the new financial year may be a good opportunity to revisit this with clients that still have individual trustees and encourage them to switch to a corporate trustee.

“Everyone has a fresh mind in the new financial year, so that might be a great exercise to actually do,” she said.

Addressing potential residency issues

If SMSF professionals have clients that are heading off overseas on secondments, they will need to consider how this might impact the fund and whether it will jeopardise the fund’s residency status, Ms Westover warned.

“I had a client recently who joined his mum’s fund because he wanted to help her out in terms of the investment side, which was fine, but then he decided he was going to move overseas and semi-permanently, so we had some real issues around the fund in terms of residency and what we did,” she said.

“We talked him through what all the implications were, what he could actually do, and in the end we made the decision that we were going to get him back out of the fund, and in actual fact he was in a better position to help his mother with some of the investments out of the fund than he was being in the fund because he didn’t have control over then.”

One of the other options would have been to turn the fund into a small APRA fund, she said.

“He didn’t want to do that one, but it’s important to have those discussions with your clients. Are you moving overseas and what impact is it going to have on your fund?” she said.

Estate planning

Ms Westover said estate planning is probably the single biggest issue for SMSF clients, especially following the implementation of the super reforms on 1 July 2017.

Previously, it didn’t matter how much clients had in their income streams, she said, as they could just have a reversionary pension, and in their mind, it was sorted.

“Now we potentially have to pull a lot of money out of super as a result of the transfer balance cap provisions, so you need to be thinking about how to deal with the accumulation accounts. I might have a reversionary pension in place on the income stream account, but what about the accumulation account, do I need a binding death benefit nomination?” she said.

“I still see a lot of clients who do not understand that superannuation does not automatically form part of their estate and that their will won’t have any jurisdiction over their superannuation benefits. I’m actually quite astounded by the amount of times that I still see that.”

 

Miranda Brownlee
28 June 2019
smsfadviser.com

 

Super growth reducing age pension drawdown

Less than half of new retirees accessed the age pension last year and of those who did, only one-quarter drew a full pension, according to new research from annuity provider Challenger, which claims superannuation is working on a mass scale.

         

 

The research, released by the Challenger Retirement Income Research (CRIR) team, found only 45 per cent of people who had turned 66 and were eligible for the age pension were claiming it and only 25 per cent of this age cohort were accessing a full age pension.

The CRIR team stated the data, which was drawn from the Department of Social Services from December 2018, also showed 70 per cent of all age-eligible retirees currently receive some form of age pension, but only 42 per cent were on the full age pension, however, this latter figure was an overall average and included retirees in their 90s who never had any form of superannuation.

“The apparent success of super in building savings at retirement is likely to be delaying age pension access for most people. As super balances continue to grow, most retirees can expect to spend longer in retirement before they receive any age pension,” the research said.

The CRIR team claimed superannuation was working on a mass scale and its success in creating retirement savings was not limited to a single sector or a handful of funds.

“While some funds have been particularly successful in building balances for their members approaching retirement, the rising tide of time in the system is lifting average consolidated balances across the system,” the report noted.

The CRIR team added the average retirement-phase member balance across all large Australian Prudential Regulation Authority (APRA) funds at June 2018 was $281,253, but this figure was not for consolidated balances, which were on average for a person with super aged 60 to 64 just over $300,000. When combined at the household level among couples entering retirement, this balance was more than $400,000.

These figures would, however, lead to an interaction with the assets test, which has its lowest threshold starting at $258,500 for a single person and $387,500 for a couple, and where a 7.8 per cent a year taper rate begins.

“This means that the average large APRA fund member in the retirement phase does not get the full age pension,” the report noted, adding access to the pension would increase as they spent their retirement savings from year-to-year.

 

 Jason Spits
June 26, 2019
smsmagazine.com.au