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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

 

Lessons from the 2019 Index Chart

Between smartphones, websites and watches that alert you even when you have ignored the phone, it is hard, if not impossible, to tune out the noise of the world.

         

 

Trade wars, Brexit, currency slumps, geopolitical tensions are just the headlines that can dominate the news cycle on any given day at the moment. Thankfully the Australian cricket team provided some welcome relief – and restored a little national pride – at Edgbaston.

Vanguard has been publishing its annual index chart that plots the performance of all the major markets and asset class indices for Australian investors for 18 years. It allows investors to look at how markets have rewarded them for the risk they have taken through periods of market rises and periodic slumps.

This year's chart provides the data to June 30 2019, and naturally there is always a tendency to focus on what has topped the performance table – US shares at 10.3 per cent per annum is the answer – and while interesting, that is not the key message from the chart.

The core message – and the reason for continuing to publish it over such an extended period of time – is to understand the power of markets over the long-term.

Think of a major event that roiled investment markets and look at that point on the chart – the last Australian recession in 1992 or the collapse of Lehman Bros, for example, in 2008 – to understand its impact at the time. Then zoom out to see how it affected returns over the full 30-year time period covered by the chart.

The other message provided by the index chart that is sometimes lost in translation is when investors lean towards wanting to predict what will be the top performing asset class next year… and the year after that.

You can view the digital version of the chart here (or order a print copy here) but if you are tempted to try and time markets, it's worth taking a look at page four of the index chart brochure which has a table of the total returns across all the major asset classes featured in the chart.

The best and worst performing asset classes are highlighted across each year – and feel free to let us know if you spot a performance pattern because what we see is what Burton Malkiel captured so elegantly in his investment classic, A Random Walk Down Wall Street.

The index chart shows the performance of markets over the long-term, but for individual investors its value is in understanding how you blend all of those markets to create a portfolio with the right asset allocation to achieve your investment goals within a risk level that you are comfortable with.

For investors a sense of perspective is a critical tool in the armory that can help tune out short-term noise, focus on your long-term goals and, as the legendary founder of Vanguard, Jack Bogle said, help you to “stay the course”.

 

Written by Robin Bowerman
Head of Corporate Affairs at Vanguard.
6 August 2019
Vanguardinvestments.com.au

LRBA changes mostly affect Melbourne, Sydney retirees

Incoming changes to LRBA provisions are likely to affect the majority of SMSF trustees in Melbourne and Sydney who are approaching retirement and have recently purchased a property within their fund, according to a major financial institution.

         

 

IOOF senior technical services manager Julie Steed told SMSF Adviser that laws currently before parliament to add a member’s LRBA balance to their total super balance if the member had a related-party LRBA would have larger consequences than expected, due to the explosion in related-party LRBAs since the major lenders exited SMSF loans.

“I would say 90 per cent of the LRBAs I’ve helped advisers with in the last 12–18 months have been related-party loans,” Ms Steed said.

“If I’m an adviser, my dealer group will say an LRBA is a financial product, and as such, the LRBA has to be on my APL, but when you look at the current providers who will loan LRBA products, most of them are not major lenders or associated with AFSL holders.

“So, most people are getting a line of credit on their mortgage and there are plenty of online administration houses available to set up the LRBA relatively inexpensively, so advisers are able to get those documents within an hour’s appointment.”

Ms Steed said the new laws, expected to pass parliament in the coming weeks, would cause problems for trustees looking to pay off their LRBA in the years approaching retirement, particularly those in the major capital cities where property values were higher.

“If you’re in South Australia, it is feasible to buy a residential investment property within 10 kilometres of the CBD for under $500,000, but in Melbourne and Sydney, if you want a two-bedroom apartment in that distance of the city, you are well in excess,” she said.

“If I’m 50 and buying that type of property in Sydney, it’s likely I will get to 65 and have an outstanding loan amount that I would be looking to extinguish with NCCs. But adding back the unpaid amount of LRBA to my total super balance puts me over the $1.6 million, which means my eligibility to make NCCs is nil.”

Ms Steed added that the only way to get around the new laws was for trustees to refinance their property with a non-related party lender, which presented its own problems.

“One of the things with going to second-tier lenders is that they might be good mortgage brokers but perhaps not know very much about super law, so their ability to advise clients as to the structure and the whole process possibly isn’t there,” she said.

“That is where they would advise the trustee to go and get professional advice, but if a lot of trustees who feel quite happy to not be advised use second-tier lenders, they are the exact type of people who wouldn’t bother to take that advice and would then fall foul of the laws.”

 

 

Sarah Kendell
29 August 2019
smsfadviser.com

 

How’s Australia doing statistically?

One great source of data about Australia. Become better acquainted with the country we love.  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.

 

 

tradingeconomics.com/australia

For a smoother path to investment success, diversify

The word diversification crops up in many contexts. You might hear a business person talk about diversifying revenue streams, or a footy fan mention a team’s need to assemble a group of players with diverse skills.

         

 

In a variety of arenas, people agree that diversification can improve chances for success. Investors are no different. In a recent survey of nearly 2,000 self-managed super fund investors, about 76 per cent agreed that it is important for their SMSFs to be diversified across different investment types. Yet only 39 per cent say their portfolio is very well or well-diversified.*

That’s not especially surprising. Closing the gap between theory and reality is always a challenge. Just as it’s easy to promise yourself to eat healthily but still sit down to steak, chips and ice cream too often, it’s easy to agree on the wisdom of diversification but not be certain that your portfolio achieves that goal.

Diversification protects against the risk that a share, bond or asset class will fall in value and generate losses that will prove difficult to recover from. Today’s soaring tech share could be tomorrow’s bankruptcy. By expanding the number and type of shares and bonds you own, you increase the odds that parts of your portfolio will hold their value when others fall.

A diversified portfolio is divided among asset classes such as shares, bonds and cash to achieve investors’ required returns within the limits of their risk tolerance. This formula will vary depending on an individual investor’s age, risk tolerance, time horizon and goals.

As you examine your investments, keep these diversification concepts in mind:

  • Your asset allocation, the way you divide your portfolio between different asset classes, is one of the biggest drivers of long-term performance. In other words, the specific shares or bonds you choose matter less than how much of your portfolio you devote to each of those asset classes.
     
  • Bonds are a crucial way to diversify against the risk of the share market. A portfolio invested 100 per cent in shares generated an annualised average return of 10.5 per cent over 80 years, according to Vanguard research**, but lost more than 40 per cent in its worst year. In contrast, a portfolio divided evenly between shares and bonds returned 8.3 percent on average per year, but lost only about 20 per cent in its worst year.
     
  • Investors should diversify both across and within asset classes. Once you have decided how much to put in each asset class, you should figure out how much to put into subsets of those asset classes. A diverse share portfolio, for example, should include allocations to small, medium and large companies and include international shares. 
     
  • Remember to examine your entire portfolio. If you have multiple super, or other investment accounts, consider them as a whole.
     
  • Once you have chosen an asset allocation, the ups and downs of financial markets may throw it off course. Remember to rebalance to your initial allocations to stay on course or choose a fund that does this for you.

*2019 Vanguard/Investment Trends SMSF Report
**Vanguard Portfolio Construction for Taxable Investors

 

Written by Robin Bowerman
Head of Corporate Affairs at Vanguard.
13 August 2019
Vanguardinvestments.com.au

 

SMSF advice appetite strong, says ASIC

A new ASIC report has highlighted demand for further advice on the specifics of SMSFs among the Australian population, particularly among those who have a financial planner.

         

 

The report, titled Financial advice: What consumers really think, found that 25 per cent of consumers who had recently received financial advice wanted more guidance around SMSFs.

Around 50 per cent of financial advice customers also wanted advice on retirement income planning, while around 45 per cent wanted guidance on growing their superannuation, highlighting the potential value for accountants in establishing a referral partnership with advice businesses to tap into this demand.

Within this group of consumers who had seen a financial adviser, 45 per cent chose their adviser based on their level of experience, while about 43 per cent chose them based on their ability to understand the consumer’s personal goals.

An additional 43 per cent selected their adviser as they were someone the consumer was comfortable talking to.

However, demand for SMSF advice was not limited to those who had seen a financial planner, with 15 per cent of the broader consumer population also indicating a desire for guidance around self-managed funds.

This broader group selected their adviser based primarily on their reputation (38 per cent), their experience (41 per cent) and their ability to talk to the consumer in a way they could understand (36 per cent).

Across all respondent groups, the majority indicated that the adviser would need at least five to 10 years in the industry to be trustworthy, the report said.

 

 

Sarah Kendell
28 August 2019
accountantsdaily.com.au

 

Valuations key to avoiding NALI restrictions

SMSF trustees may find properties within their fund caught under changes to non-arm’s length income rules if the property is involved in a related-party transaction and is not professionally valued, according to a leading SMSF law firm.

         

 

Speaking at a seminar in Sydney on Wednesday, DBA Lawyers’ Shaun Backhaus said it was important that trustees and their advisers not rely on informal valuations from real estate agents if they were acquiring or disposing of a property through a related party.

“When you get the real estate agent’s appraisal, it’s typically going to be a two- or three-line letter saying, ‘Based on my appraisal, the value is this’,” Mr Backhaus said.

“I would bet that half the time, there’s also an email or text message going to your client or, even worse, you, saying, ‘How much do you want me to make this?’ So, I think that’s not really going to cut it.”

Mr Backhaus explained that in disputed cases — such as when there was a suspicion that a property had been acquired from or by a related party at less than market value — the ATO would review the instructions given to the valuer by the trustee or adviser.

If the transaction was found not to have occurred at arm’s length, income earned from the property would be subject to 45 per cent tax as per the new measures currently before parliament.

Even those who had been diligent in their instructions to their real estate agent could be caught if the valuation did not appear to be “based on objective and supportable data” as per the ATO’s guidance on the issue, Mr Backhaus said.

“If there’s an acquisition from a related party and all you’ve got is that agent appraisal and [the value has] shot up later, the ATO could say, ‘No, based on these things in the media which the agent didn’t take into account, the value should have been more’,” he said.

“I recognise clients aren’t going to want to get a $2,000 appraisal very often, but if there are any related-party transactions involved, they need to get a valuation.”

 

Sarah Kendell
14 August 2019
smsfadviser.com

 

Access to more resources and tools than most websites.

We provide 24/7 access to all these extra tools and resources to help you build on what we offer concerning your tax and other financial affairs. *

         

 

Latest News. 7-9 individual articles every month and all chosen for their relevance. Our website is a great place to stay informed.

Videos. All are relevant, interesting, educational and interesting. Videos that are changed three times a year to ensure you and your family are able to lean about many issues related financial issues and topics.

Calculators. A good range of calculators to help you better understand and manage your personal and family financial issues. Four of the more popular are: Pay calculator, Budget Calculator, Loan Calculator, and Super Calculator

Client Portals. Portals are quite common on many sites and can be used to store your data, pay bills, log onto investment systems.

Ask us a question at any time. If you have a question on any related topic then don’t hesitate to use a form on our site to ask.

Your information is private and confidential and should be treated that way. Using Secure File transfer means your information is encrypted when sent in either direction over the Internet.

Many sites also have a message window feature that displays messages of interest or that cover topics and deadlines you should be aware of.

 

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