GPL Financial Group GPL Partners

October 2019

ATO opens applications for SG exemption

High-income-earning SMSF trustees with multiple employers will be able to apply from mid-October to gain exemptions from super guarantee contributions, according to the ATO.

         

 

An update posted on the ATO website on Friday revealed that following the recent passage of the Treasury Laws Amendment (2018 Superannuation Measures No. 1) Bill 2019 through Parliament, individuals would be able to apply for contribution exemptions from 16 October.

“Individuals with more than one employer, who expect their employers’ compulsory super contributions will exceed their annual concessional contributions cap for a financial year, will be able to apply for an exemption certificate to release some of their employers from their SG obligations,” the ATO said.

“Individuals will still need to receive SG payments from at least one employer.”

To apply for the exemption, trustees would need to submit the relevant form 60 days before the start of the next quarter. However, given the laws had only been passed recently, the deadline would be extended for the January quarter, the ATO said.

“The Commissioner of Taxation has extended the lodgement period for the quarter commencing 1 January 2020 only, and will accept applications lodged on or before 18 November 2019,” the office stated.

“The application form provides the commissioner with the information required to make an assessment, including which employers the exemption certificate will apply to [and] the quarters in the financial year for which the exemption is sought.”

The new rules will give high-income earners, such as doctors, the flexibility to ensure they do not breach the concessional cap through having multiple employers. However, SMSF members affected will need to consider alternative arrangements to ensure they are not shortchanged in their contributions, according to Heffron SMSF Solutions managing director Meg Heffron.

“The certificate process is completely silent on whether the individual and their employer have negotiated some form of alternative compensation for the loss of the superannuation contributions,” Ms Heffron said in a recent blog post.

“This is left entirely to the two parties to resolve themselves and may sometimes mean it is better not to use the new rules. For example, an individual who is unable to reach an agreement with their employer to provide additional wages in lieu of compulsory contributions may choose not to apply for the notice.”

Ms Heffron suggested a number of contribution options to ensure affected trustees were still maximising their concessional contributions, including negotiating a mix of contributions and additional salary from their exempt employer, or asking for additional salary sacrifice contributions from the employer that was still paying SG contributions.

“As with any negotiations around salary and superannuation, both parties would need to carefully consider the impact of their chosen arrangement on other benefits that are linked to salary,” she said.

 

 

Sarah Kendell
30 September 2019
smsfadviser.com

 

Australia by the numbers – September 2019

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tradingeconomics.com/australia

ATO letters indicate a wider SMSF warning

Letters sent by the ATO to nearly 18,000 SMSFs may serve as a warning to a far greater number of funds with similar strategies, an SMSF expert has claimed.

         

 

Letters sent by the ATO to the trustees of nearly 18,000 SMSFs may have a potential impact on, and serve as a warning to, a far greater number of funds who have invested in a single asset or asset class, an SMSF expert has claimed.

Smarter SMSF chief executive Aaron Dunn said while the ATO sent letters to the trustees of 17,700 funds the total number of SMSFs with more than 90 per cent of investments in a single asset or asset class was 180,000.

“The ATO has made people aware that nearly one third of funds have invested 90 per cent or more within a single asset or asset class and the thing that will be picked up from these letters will be the expectations that now exist around diversification and the investment strategy,” Dunn said in a webinar held yesterday.

“In my view this heightens the requirements to ensure the investment strategy documents do spend more time satisfying the audit process and the regulator as to how the diversification requirement is satisfied by that single asset class, and this is not just for property investments or property with an LRBA but where a fund has any heavy asset allocation.”

Dunn said the letter writing campaign was a targeted approach but was bringing a wider awareness of investment strategy requirements to the SMSF market for trustees as well as for auditors.

He pointed to the letters also being sent to auditors by the ATO and legal cases, such as Cam & Bear and Baumgartner, as demonstrating auditors were also open to higher levels of exposure in relation to inadequate investment strategies.

“What are going to be the expectations of auditors in making sure trustees have complied with Superannuation Industry (Supervision) Regulation 4.09?,” Dunn said.

“Which is why I go back to the 180,000 figure because auditors are going to be spending more time looking at same set of principles and considerations for all funds that have heavy asset concentration and looking to improve the documented decisions for diversification.”

 

 

Jason Spits
September 26, 2019
smsmagazine.com.au

 

Choosing your investment strategy

Investors are faced with a significant and growing challenge. Stretched government balance sheets and an ageing population will likely place a growing emphasis on retirees to “self-fund” their retirement. 

         

 

At the same time, the expectations for market returns have fallen in line with record low interest rates in Australia and elsewhere.

Official term deposit rates published by the RBA remind us that the traditional safe haven of term deposits, popular following the financial crisis given more attractive cash rates, are now offering on average just 1.5%, which may not even keep pace with inflation.

So for most of us, the requirement to take on some investment risk will be essential to achieve our long term savings goals. This is where the options can get a little complicated, so let's break it down.

There are many ways to take more risk, but let's focus on the two key actions that can easily be implemented within your portfolio – changes to asset allocation, and/or – investment strategy selection.

Changes to Asset Allocation

In its simplest form, varying your equity / bond mix can be an effective way to match your required return to your investment goals, but keep in mind that the potential for extra return does not come without taking on added risk.

Too much risk and you may not be able to stay the course through the inevitable market downturns on the journey to achieving your goal. Behavioural mistakes made along the way can cost years of investment returns, so best to match the risk of the strategy to your own tolerance, as best you can.

Strategy Selection

Within each asset class, another way to seek a higher return is through the strategies that you select for your investment portfolio.

An active investment strategy generally seeks to take positions that differ from broad cap weighted market indices, to deliver a higher return. Unlike changes to your equity / bond mix, which can increase the total risk of your portfolio, selecting an active strategy introduces what is referred to as “active risk”.

To borrow a driving analogy, if the most direct route to your destination, which may be a main arterial or freeway, is akin to a cap-weighted index, then using your local knowledge of back-roads and traffic conditions to arrive at your destination ahead of time, could be considered the active strategy equivalent.

Traditional active managers employing skill and experience to outperform is not the only way however.

Over the last few decades, other strategies have emerged which can be used to pursue outperformance. Just like more traditional forms of active management, these strategies – commonly either quantitative strategies employing sophisticated modelling techniques, or factor based strategies, seeking to harvest identified risk premia – endeavour to deliver a positive “active return” against a benchmark.

To extend the driving analogy, systematic strategies could be likened to the rise of driving algorithms, such as Google Maps, which help to get us to our destinations faster by analysing data sets of past and present driving conditions. Whether you prefer to test your own driving skill, utilise google maps or simply take the direct route, understanding the likelihood for success, and the risk you are taking if your choice doesn't work out, is critical to making an informed decision.

Active risk

When selecting an investment strategy, the promise of greater rewards will likely come with higher risk. This is referred to as “active risk”.

Active risk is typically measured in terms of the expected difference between the returns of the strategy and the returns of the underlying benchmark, which more often than not will refer to a comparable cap weighted market index. You can look for active risk indicators from the fund manager which may be disclosed as “tracking error” or “active share”.

Other indicators of active risk which can be useful when comparing across a range of different product choices include the number of securities held by the portfolio, the maximum position size in any one security, the rules listed for deviations of sector or country weights in the case of a global strategy, and past results.

The spectrum of risk

At the lower end of the spectrum, market cap index funds can be characterised by low cost, low to no active risk, and high transparency owing to the rules-based nature of market cap indices.

Systematic strategies such as factor funds can span a broad spectrum when it comes to active risk, however, most follow a set of rules which drive the weighting of securities in the portfolio, providing transparency of approach, assuming the rules are disclosed, and are typically lower cost than more traditional active strategies.

Traditional active strategies, come in many forms, from highly diversified, low active risk approaches, to very concentrated, high active risk strategies. The cost you are willing to pay should be scaled according to the level of outperformance you expect and the perceived skill of the manager.

Where you end up with your choice is highly personal, as a successful strategy is one that is structured to deliver on your investment goals. Recognise that your asset allocation choice, where you land on the growth / defensive spectrum, will be the main driver of your overall return.

Patience is critical to success, and remains an accessible edge for those who possess it, whether you are a professional investor responsible for the goals of others, or an individual investor saving for your personal goals.

(This article originally appeared in Cuffelinks)

 

Aidan Geysen
Head of Investment Strategy Group
30 September 2019
vanguardinvestments.com.au

 

Interest rising in SMSF set-up

Interest in setting up an SMSF among those in APRA-regulated super funds is on the increase, while the average balance and age of new SMSF trustees have declined, according to Investment Trends data.

         

 

The research firm’s 2019 SMSF Reports surveyed almost 5,000 investors and found that 21 per cent of those who did not have an SMSF were either planning to or actively in the process of setting up a self-managed fund, up from 19 per cent in 2018 and 18 per cent in 2017.

At the same time, the data indicated that the age and balance level of new SMSF members were falling, with those who had set up a self-managed fund between 2015 and 2019 having a median age of 47 and a super balance of $230,000.

This compared to a median age of 50 and balance of $320,000 for those who had set up an SMSF between 2011 and 2014, and a median age of 52 and balance of $420,000 for those who had set up a fund between 2006 and 2010.

Among those who intended to set up an SMSF, balance levels and ages were even lower, with an average super balance of $40,000 and age of 35.

A higher level of investors than previous years also indicated they planned to set up an SMSF based on word of mouth, with over 25 per cent of those who intended to set up a self-managed fund saying they were planning to do so on advice from a friend who already had an SMSF, up from 21 per cent in 2018.

Around 23 per cent of potential new SMSF members said they wanted a self-managed fund to achieve more control over their investments, while 21 per cent said they were planning to set one up to achieve better returns.

Among existing SMSF trustees, direct shares continued to be the most popular asset class to achieve these improved returns, with an average of 35 per cent of SMSF portfolio assets allocated to shares outside managed funds and ETFs.

However, this was down on 36 per cent in 2018 and 37 per cent in 2017, while over the same period, direct property allocations had increased by 1 per cent per year to 13 per cent in 2019.

While the top three SMSF asset classes were still direct shares, cash and property, trustees demonstrated a preference for gaining international equities exposure, with 35 per cent saying they planned on investing in international shares within the next year.

Enthusiasm for international investing was highest among those with a financial planner, where trustees on average expected to have 18 per cent of their portfolio invested in international assets by 2020.

 

 

Sarah Kendell
19 September 2019
smsfadviser.com

 

NALI, LRBA measures pass Parliament

The government’s further restrictions to non-arm’s length income and LRBAs have passed Parliament, meaning SMSF trustees approaching retirement with an outstanding loan on a property will need to consider their options when planning contribution strategies for the 2020 financial year.

           

 

The Treasury Laws Amendment (2018 Superannuation Measures No. 1) Bill 2019 passed the Senate on Thursday after passing through the House of Representatives earlier this week, meaning the bill now only needs to receive royal assent before it becomes law.

The bill contains a measure to include the value of outstanding LRBAs in a member’s super balance if the loan is from a related party or the member has met a full condition of release, and where the LRBA was entered into from 1 July 2018 onwards.

It also includes further restrictions to non-arm’s length income, meaning income earned at arm’s length can still be taxed as NALI if a member has incurred an expense in relation to that income which was not at arm’s length.

Additionally, the bill introduces an option for high-income earners with multiple employers to opt out of super guarantee contributions for part of their employment.

Commenting on the new laws, Australian Executor Trustees senior technical services manager Julie Steed said affected SMSF members would need to factor their LRBA balance into their total super balance at the end of the last financial year, as well as make changes to their portfolio if needed.

“The inability to make certain additional contributions may be a catalyst for some members to conclude that the LRBA doesn’t suit their needs any longer,” Ms Steed said.

“Some funds may look to sell the asset and repay the loan, and some trustees who currently have diversified holdings which include a property with an LRBA may decide to liquidate cash and shares to pay down their LRBA and retain the property, leaving them with less diversified investments.”

In regard to the NALI changes, SuperConcepts general manager of technical services and education Peter Burgess said trustees would need to be diligent going forward in ensuring any services performed for their own SMSF were provided at arm’s-length rates.

“From now on, to avoid these new NALI measures being applied, trustees who provide services to their fund will either need to be able to show the amount charged for any such services is not less than that which would be expected to be charged between parties dealing at arm’s length, or the service provided was purely internal — for example, where the trustees undertake bookkeeping activities for no charge in performing their trustee duties,” Mr Burgess said.

He added that the changes overall would close the remaining loopholes by which trustees might have been able to circumvent the super reforms introduced in 2017.

 

 

Sarah Kendell
20 September 2019
smsfadviser.com

 

Shares to remain volatile as trade war heats up

Shane Oliver – Investors should expect more sharemarket volatility over the next year as the trade war between the US and China ratchets up, according to AMP Capital.

         

 

In a recent blog post, the fund manager’s head of investment strategy and chief economist, Shane Oliver, said the US–China trade war had escalated again in August and new tariffs had come into force on 1 September.

“This follows the breakdown in trade talks between the two countries in May, and consequently, President Trump announced new tariffs on China in early August,” Mr Oliver said.

“More recently, the situation escalated as China retaliated, and the US then retaliated and so on.”

Mr Oliver said despite this amplification of the trade war, a deal between the two countries was likely to be reached as consumer confidence in the US economy could be affected if the situation went any further.

“The impact has not really hit consumers in the US and globally yet, as while tariff rates have gone up, they haven’t been that onerous; but if they continue, they will have more of an impact on consumers, and on products such as electronic goods coming into the US,” he said.

“There’s been a decline in business confidence and a decline in business investment, and likewise we’ve seen a decline in the Chinese economy and their exports to the US, so it is beginning to have a negative impact.”

Mr Oliver added that it would be harder to reach a deal now given trust had been broken on both sides, but that President Trump was clearly more committed to reaching one given the trade war was starting to affect the sharemarket.

“While it may be taking longer, ultimately we think a deal will be reached because President Trump wants to be re-elected next year and he may struggle to get re-elected if he lets the US economy slide into recession,” he said.

“Investors should expect more volatility and falls in sharemarkets along the way, but once a deal is reached and central banks around the world ease up on monetary policy, that should help sharemarkets on a six- to 12-month time horizon.”

 

 

Sarah Kendell
10 September 2019
smsfadviser.com

 

A positive pension change with a cash rate twist

Later this month around 630,000 Australians currently qualifying for a partial age pension will receive a welcome fortnightly payments boost.

         

 

How much extra is received by individuals and couples in this cohort – a subset of the approximately 2.5 million people who are paid an age pension benefit – will vary and depend on their total level of financial assets.

But it's the reason behind this looming retirement pay rise that's most interesting, because it goes to the heart of events that have been happening on global financial markets, and at a monetary policy level, for some time.

These events could also point to further age pension rises down the track.

This month the Reserve Bank of Australia board opted to keep official interest rates on hold, after having cut them by 0.25 per cent to a record low 1 per cent in July. That followed a 0.25 per cent cut in June to 1.25 per cent from 1.5 per cent, the level they had been sitting on for three years.

As official rates have fallen over time, so have the returns from cash-linked products such as bank savings accounts and term deposits that a large number of retirees use to generate income.

And that has become a costly problem for those retirees holding sizeable amounts of cash who are means tested for the age pension based on the return the government “deems” their financial investments to be earning.

In what is a highly complex system, around 1.6 million Australians qualify on both an income test and assets test basis to receive the full age pension benefit. The majority of those on the pension earn little or no additional income above their payments and have limited assets, with the family home exempted for pension assessment purposes.

Department of Social Services data shows a further 318,282 retirees qualify for a part-pension on an “assets test” basis.

Individuals and couples are assessed on whether they do or don't own a home, and can hold up to a certain value of assets before their pension is reduced under what's known as the taper rate.

And then there's a larger group of 627,850 retirees who receive a part pension by qualifying under the “income test”. This test is based on how much additional income they actually earn, and how much of a return their financial investments are “deemed” by the government to be earning.

It's in this segment where many will receive an age pension pay rise this month, backdated to July 1.

Until July, retirees holding financial assets such as cash, shares and other investment holdings including superannuation, were deemed to be earning a return rate of 1.75 per cent per annum on the first $51,200 (for singles) and $85,000 (for couples). All financial assets above these levels were deemed to be earning 3.25 per cent.

Now, reflecting the progressive cuts to official interest rates by the Reserve Bank down to current levels, the government has determined to cut these deeming rates and simultaneously increase the financial assets assessment levels.

The government's new minimum deeming rate has been cut by 0.75 per cent to 1 per cent (bringing it into line with the official cash rate), while the maximum deeming rate has dropped by 0.25 per cent to 3 per cent.

At the same time, the financial assets assessment level for singles and couples has been increased slightly to $51,800 and $86,200 respectively.

The deeming rates feed directly into the income test assessment, which allows singles to earn up to $174 per fortnight – including both real and deemed income – without being penalised. Singles lose 50 cents of their pension for every dollar earned above this level. For couples, the maximum fortnightly income is $308 before their pension payments are reduced.

Pocketing the changes

While not delivering massive financial benefits, the deeming changes will certainly be meaningful for many retirees.

How much extra an individual or couple receives is tiered and will come down to their financial assets, and whether or not they are homeowners.

The amounts detailed below are the sweetest spots from the new deeming rates before other factors used to assess age pension entitlements result in lower payment increases.

A single homeowner with $280,000 can expect to receive an additional $510 per annum based on the new deeming rates, and a home-owning couple with $410,000 in financial assets an extra $789.

A single non-homeowner with $520,000 can expect to receive an additional $810 per annum, and a non-home owning couple with $670,000 in financial assets an extra $1,114.

What's clear is that the changes to deeming rates are a positive, and underscore the importance of ongoing reviews of the financial components used to assess age pension entitlements and payments.

As noted in the 2018 Vanguard research paper The role of the age pension in your retirement plan, the age pension is a meaningful portion of retirement income for most Australians, and should be considered a key part of the retirement planning process.

 

 

Tony Kaye
Personal Finance Writer, Vanguard Australia
10 September 2019
vanguardinvestment.com.au