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Financial Planning

Retire on your own terms and not the market’s

One of the biggest retirement challenges is ensuring that the savings accumulated during your working years lasts as long as you do.

         

 

If you had invested $10,000 in Australian shares on 31 October 2009 without any further contributions or withdrawals, you would have experienced an average of 8.3% annualised rate of return and ended up with $22,278 a decade later on 31 October 2019.

Obviously, the numbers change once you start withdrawing income.

Unforeseen events such as market downturns can shorten the lifespan of your retirement portfolio if you withdraw funds to pay bills during a period of falling share values. The market downturn not only impacts the value of your portfolio but the regular withdrawal of funds to pay for everyday expenses (exactly what your retirement portfolio was meant to do) means that the capital left in your portfolio to help earn gains when the market eventually rebounds, is also diminished.

If the market downturn continues into the beginning of your retirement years, during which a high proportion of negative returns occur, it can have a lasting negative effect, ultimately reducing the amount of income you can withdraw over your lifetime. This is known as the sequence of returns risk.

Fortunately, there are number of straightforward strategies that can limit the odds that investors will fall into the downturn trap.

An approach that has been rather successful in the US is the target date fund model, which works to derisk an investment portfolio based on a 'target date' for retirement with the fund. The concept has been gaining momentum here in Australia and superannuation funds typically base these products on a 'lifecycle design'.

Vanguard's US target date fund glide-path takes place over four stages and constructs a portfolio based on balancing market, inflation, and longevity risks in an efficient and transparent manner over an investor's life cycle. Investors are generally split into four phases beginning at those aged 40 years and younger, and gradually moving towards the fourth and final retirement phase. The first phase considers the time horizon of an investor in the early stages of their career, thus allocating up to 90 percent of the portfolio to equities. Phases 2 and 3 gradually de-risk the portfolio away from equities before the retirement phase.

Phase 1 starts with an allocation of around 90 percent to equities and then commences de-risking during the mid to late career phase. Phase 3 encompasses the transition to retirement phase, where the portfolio de-risks further before reaching a landing point in the final retirement phase.

While this is a sound concept, it could have adverse effects if not implemented properly. For instance, being too conservative in the investment approach during the early years of one's career or too aggressive as one approaches retirement. The objective of this asset allocation model is to avoid being either extreme end of the spectrum and to adequately diversify where possible.

Having a proper asset allocation strategy will improve the odds that your retirement portfolio will endure but you may want to investigate other methods that also achieve this goal. 

Whichever strategy you choose, finding a way to curb the effects of volatility on your retirement portfolio may improve your odds of retiring on your own terms and not the market's.

 

Written by Robin Bowerman
Head of Corporate Affairs at Vanguard.
09 December 2019​
vanguardinvestments.com.au

 

 

 

2020 audits to focus on investment strategy

SMSF auditors are expected to focus more clearly on specific details and evidence around a fund’s investment strategy in the coming year as the industry continues to feel the ripple effects from the ATO’s diversification letter campaign of 2019.

       

 

SMSF trustees could expect a “more conservative approach” from their auditors this year, meaning it was likely further evidence and documentation could be requested during their fund’s annual audit process.  SuperConcepts general manager of technical services and education Peter Burgess told SMSF Adviser recently.

“Trustees may be asked to provide further evidence of transactions, asset ownership and valuations of assets, particularly whether the fund has unlisted investments,” Mr Burgess said.

“Where the fund has a large exposure to a single asset or asset class, the trustees may be asked to provide further evidence via a trustee minute, addendum or revised investment strategy that they have properly considered the fund’s investment objective, the risks of making the investments, asset diversification and the liquidity and cash-flow needs of the fund.”

SMSF auditor and Tactical Super director Deanne Firth said the ATO’s letter campaign to 17,000 trustees last year had shaken many in the industry out of their complacency when it came to constructing a detailed investment strategy.

“For years, trustees have used a set and forget approach to their investment strategies or had the [asset] ranges so broad that they didn’t need to update the strategy,” Ms Firth told SMSF Adviser.

“In fact, a lot of investment strategies date back to the fund establishment where they signed the strategy that came with the deed. Now the ATO has made it clear to trustees that they want to see evidence of consideration and, especially if the fund isn’t diversified, evidence that they understand the risks of their strategy.”

Ms Firth said she expected 2020 to be “the year of investment strategy updates”, with trustees taking the time to review their strategy and potentially further diversify their portfolio.

 

By: Sarah Kendell
Source: Peter Burgess and Deanne Firth
06 January 2020
smsfadviser.com

 

 

 

Australia – latest facts and figures

The data contained on this website can help with many day to day decisions.

       

 

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

  • Overview
  • Markets
  • GDP
  • Labour
  • Prices
  • Money
  • Trade
  • Government
  • Business
  • Consumer
  • Housing
  • Taxes
  • Climate

 

Access all this data here.

 

 

tradingeconomics.com/australia

‘Visible, valued and owned’: ATO outlines super priorities for new year

The ATO has renewed its commitment to making sure super is “visible, valued and owned” in 2020, naming consolidation of member accounts and reducing the incidence of SG non-payment as some of its key priorities for the coming year.

         

 

In a recent statement published to the ATO website, ATO deputy commissioner James O’Halloran said the regulator would keep an eye on ensuring the implementation of any reforms in the super space were “fit for the future” in terms of the impact they would have on practitioners going forward.

“Just like many of our readers, we’re in the business of turning concepts into reality; the implementation of any major reform must not only be designed to be ‘fit for purpose’ but also ‘fit for the future’,” Mr O’Halloran said.

“Or to put it another way, super is about people and their future. So, we’ll keep the client experience front and centre of all we do, because we know our approach and actions impact your members’ plans for their investments and their retirement.”

Mr O’Halloran added that the ATO would continue to scrutinise employers around SG non-payment in the new year, a process that had been made easier by the rollout of the Single Touch Payroll system over the course of 2019.

“Aided by the introduction of Single Touch Payroll and fund event-based reporting, we now have an unprecedented level of ‘visibility’ of super information at the account and transaction level and we’re increasingly using this capability,” he said.

Mr O’Halloran also touched on the introduction of myGovID as a key achievement for the year that would continue to roll out in 2020.

“We’ve recently launched myGovID, the federal government’s digital identity solution which aims to transform how Australians interact with government,” he said.

“It will be faster and easier to prove who you are when accessing government online services.”

He added that while the ATO “can’t predict the next wave of reform”, it would focus on ensuring super was “visible, valued and owned” by Australians in the coming year.

 

 

Sarah Kendell 
30 December 2019
accountantsdaily.com.au

 

 

 

 

 

 

A 20-year investment growth story

At the end of 2018, after a dismal fourth quarter – in fact, the worst quarterly performance in seven years – the Australian share market closed at a two-year low.

         

 

No doubt, many investors at the time were probably anticipating a mediocre year ahead.

Yet, seven months later, the Australian share market had not only recovered all its 2018 fourth-quarter losses, but breached its all-time peak set back in November 2007.

And, while ongoing geopolitical tensions and economic fears, overshadowed by the US-China trade war, have continued to rattle global financial markets through 2019, it's been a relatively solid investment year.

The message from us at Vanguard to investors, as always, has been to tune out from the daily market noise, and to remain disciplined and diversified, irrespective of shorter-term volatility.

Many investor portfolios are well ahead on where they started 12 months ago. In fact, just about every major asset class barring cash has delivered strong year-to-date returns.

Driving that has been an insatiable hunt for yield. With interest rates at record lows, investors globally have been searching for investments generating higher returns. Concurrently, investors seeking a degree of safety have diverted capital into the more defensive asset classes such as bonds.

That's driven huge capital inflows into shares, listed property and fixed income assets. In turn, that demand has driven strong price appreciation across global financial markets.

Strong double-digit returns

Those with broad exposures to Australian, US and international shares, and to Australian and international listed property, have achieved double-digit 12-month returns. Even bonds have returned close to 10 per cent so far this year.

You can see the relative returns of a range of different asset classes over the year, and all the way back to 1970, by accessing and bookmarking the Vanguard Interactive Index Chart.

Of course, past performance is never an indicator of future performance. The best and worst performing asset classes will often vary from one year to the next.

Australian listed property was the best-performing asset class return in the financial year to 30 June, 2019, delivering 19.3 per cent. But, in 2018, the best performer was US shares, and the financial year before it was hedged international shares.

In fact, the last example of the same asset class delivering the best returns in two consecutive years was more than a decade ago, back in 2008 and 2009, when hedged international bonds returned 8.6 per cent and 11.5 per cent respectively.

Taking a longer-term look

Although shorter-term returns analysis can be somewhat useful, it's only when one does a much longer examination of investment trends that a more meaningful picture emerges.

This year marks two decades since the turn of the century, so it's an opportune time to capture almost a full 20 years of investment returns across eight different asset classes.

The chart data below goes up to the end of October (the latest chart data available) – which is broadly in line with total returns through to the middle of December.

You can replicate the same data through our Index Chart. Using a base investment figure of $10,000, and assuming all distributions are fully reinvested, the first broad observation is that investors have achieved consistent growth over time.

As expected, returns across different asset classes over the last 20 years have varied. Most notably, the 2007 to 2009 period shows the sharp deterioration in asset values stemming from the 2007 US subprime crisis that precipitated the global financial crisis. After reaching an all-time high in November 2007, the Australian share market dropped 54 per cent over the 14 months to February 2009 before starting its long-term recovery run that finally saw the S&P/ASX 200 Index surpass its previous record in July this year.

Over the past 20 years the ASX has returned more than 8 per cent per annum, turning a hypothetical $10,000 investment made in January 2000 into just over $49,000. That's a 390 per cent return, excluding any fees, expenses and taxes.

A $10,000 investment into international listed property over the same time frame would have returned 10.2 per cent per annum and be worth more than $68,000, using the same assumptions as above. That equates to a 580 per cent total return. Investors in any of the major asset classes would have done well over the past 20 years, and obviously those with investments across multiple asset classes would have achieved the smoothest returns.

But you didn't need '2020 vision' back in the year 2000 to know that total asset class returns would increase over time. It's a basic rule of compounding that when investment returns are reinvested over a long period that the value of a portfolio also will increase.

You can replicate this same pattern over other periods of time. Having a regular investment contributions strategy will amplify returns, in the same way as compulsory and voluntary superannuation contributions add to members' account balances in accumulation phase.

The importance of diversification

Heading into 2020, financial markets most likely will remain decidedly jittery. A US-China trade truce still appears distant, and escalating trade and cross-border tax issues between the US and other countries will add to markets pressure.

Asset class returns will vary, as they always do, depending on these and other catalysts.

As can be gleaned from the index chart, especially from a longer-term perspective, spreading your money across a range of investments is one of the best ways to reduce your exposure to market risk.

This way you are not relying on the returns of a single asset class.

Ways to diversify are:

  • Include exposure to different asset classes, like shares, fixed interest and property.
     
  • Hold a spread of investments within an asset class, like different countries, industries and companies.
     
  • Invest in a number of funds managed by different fund managers. For example, consider blending active with index managers.

The right mix of asset classes or investments for you will depend on your goals, time frame and tolerance for risk.

If you don't use one already, consider seeing a professional financial adviser to help you determine the optimal asset allocation for your individual needs.

 

Tony Kaye
Personal Finance Writer Vanguard Australia
09 December 2019
vanguardinvestments.com.au

 

 

Catch-up concessional contributions – strategies and practicalities

It’s been a long time coming but members are finally able to use the catch-up concessional contribution rules for the first time this year (2019–20).

           

 

The new rules represent a shift away from the government’s previous “use it or lose it” approach to super contributions and provide members with an important opportunity to make additional contributions in later years, when they may be better able to afford it.

However, the new rules also potentially make salary sacrifice and personal deductible contribution advice more complicated, as advisers need to determine both a member’s eligibility to use these concessions as well as the value of the member’s effective concessional cap in a year.

Catch-up concessional contribution recap

Under the catch-up concessional contribution rules, a member is able to carry forward and contribute any unused concessional contribution cap amounts that accrued in the previous five years (commencing from 1 July 2018) where their total superannuation balance (TSB) at the end of the previous financial year is below $500,000.

For example, taking into account the existing concessional cap of $25,000, the new rules allow an eligible member that had $10,000 of concessional contributions in 2018–19 and a total super balance under $500,000 on 30 June 2019, to make total concessional contributions this year of up to $40,000 ($15,000 + $25,000). 

As time goes on, the catch-up rules could allow members to make quite high levels of concessional contributions over one year as members will have access to both the standard concessional cap in that year plus any unused cap amounts from the previous five financial years.

For example, taking things to the extreme, the new rules could allow an eligible member to make total concessional contributions of up to $157,5001 in the 2023–24 financial year, assuming they had no concessional contributions in any of the preceding five financial years. Alternatively, someone earning a salary of $70,000 in 2019–20 and only receiving employer SG contributions would accumulate an unused cap amount over the next two years of $36,5002, allowing total concessional contributions of $64,003 in 2021–22.

Once a member starts to use some of their unused concessional cap amounts, the rules operate on a first-in, first-out basis. For example, assume a member had the following unused cap amounts for the following years:

  • 2018–19 – $15,000
  • 2019–20 – $13,000
  • 2020–21 – $5,000

If the member then exceeded the standard annual concessional cap in 2022–23 by $20,000, the unused concessional cap for 2018–19 would be reduced to nil and the unused cap amount for 2019–20 would be reduced to $8,000. 

Finally, it is important to note that a member will only be able to carry forward any unused concessional cap amounts for a maximum of five years. For example, a member’s unused concessional cap amount for 2018–19 must be used by the end of 2023-24.

Unused concessional contribution amounts continue to accrue where TSB is over $500,000

It is important to note that while the $500,000 TSB eligibility requirement restricts a member’s ability to make catch-up concessional contributions in a year, it does not prevent the client from accruing unused concessional cap amounts in that year.

For example, if a member had a TSB of $501,000 on 30 June 2019, the member would be ineligible to contribute any unused concessional cap amounts that accrued in the 2018–19 year in the 2019–20 year. However, if their TSB declined due to negative investment returns or lump sum withdrawals during 2019–20, and was below $500,000 on 30 June 2020, the member could contribute the unused concessional cap amounts that accrued in 2018–19 and 2019–20 during the 2020–21 year.

Practical catch-up contribution issues

Before recommending catch-up concessional contributions, advisers need to confirm a range of issues, including:

  1. Value of member’s TSB as at 30 June at the end of the previous financial year;
  2. Value of member’s unused concessional cap amounts for the previous five financial years (commencing from 2018–19); and
  3. Amount of additional catch-up concessional contributions a member can make in a year, taking into account any other concessional contributions, such as employer SG contributions, that will be made during the year. 

1. Total superannuation balance

To determine whether a member is eligible to make catch-up concessional contributions, advisers need to confirm that the member’s total superannuation balance (TSB) is below $500,000 at the end of the previous financial year.

Advisers can determine the value of a member’s TSB by making their own investigations or by getting the client to confirm their TSB value with the ATO — potentially via the myGov website. However, advisers should exercise caution relying on any ATO TSB data and should confirm the data is up to date and accurate and includes all amounts that are included in the calculation of TSB.

For example, the value of a member’s interests in an SMSF will not be reported to the ATO until the fund lodges its SMSF annual return. Depending on an SMSF’s circumstances, this may not be until May the following year. Therefore, SMSF members with a TSB that is likely to be close to the $500,000 threshold may need to wait until the values of the member balances have been confirmed.

2.  Value of unused concessional contributions cap amounts

Advisers will need to calculate the value of a member’s unused concessional cap amounts for previous years (commencing 1 July 2018) by making their own investigations, as at the time of writing the ATO does not report this figure. However, the ATO has announced it intends to start reporting unused concessional contributions cap amounts via myGov by the end of 2019.

However, once again, advisers will need to exercise caution relying on ATO unused concessional cap data and should make reasonable inquiries to confirm it is accurate and up to date. In the interim, or as an alternative, advisers should consider contacting the member’s super fund to obtain concessional contribution details for the previous financial years.

In this case, advisers should take care to contact all funds that may have received concessional contributions for the member during the relevant catch-up period. For example, some members could have received contributions to various funds over a number of years due to:

  • the member having chosen to roll over to a different fund during the catch-up period and redirecting their employer contributions to the new fund;
  • the member having changed jobs during the catch-up period and their new employer contributing their SG contributions to the employer’s default fund;
  • the member having multiple jobs and each employer contributing to a different fund;
  • the member’s employer contributing SG and salary sacrifice amounts to different funds.

Advisers should also take care to confirm the status of any personal contributions made by the member in the previous year. For example, a fund may be showing a contribution as a personal non-concessional contribution; however, if the member subsequently gave the fund a deduction notice for the contribution, maybe on the advice of their accountant, the contribution would change status from a non-concessional contribution to a concessional contribution.

In addition, an adviser should exercise caution to confirm whether the amount of any deduction claimed on a personal contribution is likely to change. For example, a member that has already made a contribution and lodged a deduction notice may be able to vary the notice down to reduce the amount they claimed as a deduction — maybe because they did not earn as much income as they expected. Alternatively, if a member wishes to increase the amount of the deduction claimed, they could lodge another deduction notice specifying the additional amount they wish to claim. 

Where a member has not made any personal deductible contributions during the catch-up period, an adviser could also calculate a member’s unused concessional cap by checking the employer contribution details for the member via their myGov account. While myGov does not report unused concessional cap amounts, it does report employer contribution details for 2018–19, which could allow an adviser to calculate a member’s unused cap amount for that year (and later years). While the ATO has announced it intends to start reporting members’ personal deductible contribution information via myGov, this is not expected until sometime in 2020. Therefore, these amounts would need to be factored in separately.

Another alternative could be to check any payslips for superannuation contribution details. Once again, an adviser would need to check the member had not made any personal deductible contributions and had not changed jobs or had multiple jobs during the relevant bring-forward period.

Finally, as part of calculating the member’s unused cap amount, an adviser will also need to identify any amounts of unused concessional cap that the member may have already used and deduct those amounts from the relevant year. See catch-up concessional contribution recap above for more details. 

3. Calculate contribution amount

Once an adviser has confirmed the value of a member’s unused cap amounts, the next step is to determine the member’s effective concessional cap in a year, taking into account the value of any other concessional contributions made during the same year.

For example, if an eligible member had unused concessional cap amounts in 2018–19 of $5,000, their effective concessional cap in 2019–20 would be $30,000. However, if the member will have employer contributions of $21,000 this year, their cap space will only be $9,000.

Therefore, it will be important to take into account the level of a member’s employer contributions that will be made during a year, including any additional contributions due to salary sacrifice arrangements or bonus payments, when determining the additional contributions a member can make during a year.

What could be done.

As previously discussed, the catch-up concessional contribution rules provide members with the flexibility to make additional concessional contributions via either a salary sacrifice arrangement or by making personal deductible contributions in a later year when they may be better able to afford it.

For example, the new rules allow members who have spent time out of the workforce caring for an elderly family member or on maternity leave to make additional concessional contributions to catch up for those contributions they missed out on. Alternatively, the catch-up contribution rules could allow members on average incomes that have only been receiving employer SG amounts to make extra contributions to fully utilise their concessional cap. However, in many cases, the ability to make additional contributions will be entirely dependent on the member’s level of income and their ability to afford extra contributions.

In this case, members wanting to make extra contributions could consider alternative strategies, such as: 

  • selling assets to fund personal deductible contributions or transferring listed shares or managed funds into an SMSF as an in-specie personal deductible contribution;
  • contributing some or all of an annual bonus as a personal deductible contribution;
  • contributing all or part of a windfall, such as an inheritance, as a personal deductible contribution; or
  • from preservation age, entering into a salary sacrifice arrangement and replacing the lost income with a transition to retirement pension. 

Disposal or transfer of assets

Where a member wants to transfer the capital value of assets into super, they could either sell the assets and contribute the proceeds or transfer the assets into an SMSF or super wrap as an in-specie contribution.

In either case, the disposal or transfer will trigger a CGT event and could result in the member realising a large capital gain. However, a member could potentially make a personal deductible contribution to offset some or all of the capital gain. In this case, the deductible contribution amount could be increased if they are eligible to utilise the catch-up contribution rules and have unused cap amounts available.

For example, assume a member earning $70,000 and receiving 9.5 per cent employer SG, sold an asset in 2020–21 realising a net (discounted) capital gain of $35,000. In this case, assuming the member was eligible to make catch-up concessional contributions and had an unused cap amount in 2019–20 of $18,350, they would have an effective concessional cap in 2020–21 of $43,350. Taking into account the 9.5 per cent employer SG contribution, this would allow the member to make a personal deductible contribution of up to $36,500 to fully offset the amount of the capital gain and still remain within their concessional cap. 

As a result, by contributing $35,000 of the sale proceeds as a personal deductible contribution, the member will have achieved their objective of boosting their super while also saving $6,800 in tax being the difference between the tax payable on the capital gain of $12,050 and 15 per cent contributions tax of $5,250.

Alternatively, where an eligible member receives an end-of-year bonus, they could achieve a similar result by using the catch-up concessional contributions rules to make a personal deductible contribution equivalent to the pre-tax value of the bonus amount. However, in this case it will be important to factor in any SG payable on the bonus (also taking into account the SG maximum contribution base for the relevant quarter where relied on by the employer) as well as the member’s salary as this could effectively reduce the amount of remaining cap they have available.

Member receiving a windfall

Members receiving a windfall, such as an inheritance, could potentially use the catch-up concessional contribution rules to fully utilise any amounts of unused concessional cap they have available. Also taking into account the deduction available, this could allow them to reduce their tax and further maximise their contributions to super. 

For example, an eligible member with $10,000 of unused concessional cap from 2018–19 would have an effective concessional cap in 2019–20 of $35,000. Assuming the member received a small $10,000 inheritance and were already salary sacrificing up to the concessional cap, they could use that amount to make a $10,000 personal deductible contribution — which would result in $1,500 tax payable and net contributions of $8,500.

However, assuming the member was on the 37 per cent tax rate, this would also potentially qualify the member for a tax reduction or refund of $3,700. Assuming the member then contributed that amount to super as a non-concessional contribution, the member would have net contributions of $12,200. 

Member has reached preservation age

Members reaching preservation age could also utilise their unused concessional cap by entering into a prospective salary sacrifice arrangement to fully utilise their unused concessional cap over one or more years and then commence a transition to retirement (TTR) pension to replace some or all of their lost income.

While the reduction in the benefit of the salary sacrifice TTR strategy since 1 July 2017 is well understood, it is important to appreciate that this has been due to the combined impact of both: 

  • the removal of the tax-free status of earnings on assets supporting TTR income streams, and
  • the reduction of the concessional cap for members over age 50 from $35,000 to $25,000. 

Therefore, the ability of eligible members to use the catch-up concessional contribution rules to salary sacrifice unused cap amounts that have accrued over the previous five years (from 1 July 2018) could see eligible members get an increased benefit from implementing the strategy.

For example, a 60-year-old member on a $100,000 salary with a total super balance of $450,000 on 30 June 2021 would likely accumulate approximately $633,169 in super by age 65, assuming they just continued to receive employer SG contributions over that period.

Alternatively, if they entered into a standard TTR strategy and salary sacrificed up to the standard concessional cap each year and commenced a TTR pension to replace their lost income, they would instead have total super savings of $651,817 by age 65.

However, if the member had $50,000 of unused concessional cap from the previous three years, they could salary sacrifice up $67,500 in the first year to have total concessional contributions of $77,500. In this case, the member would then have an income shortfall of $44,450, which they could replace by commencing a TTR income stream with their super savings of $450,000. After year one, the member would need to reduce their salary sacrifice arrangement to align with the standard concessional cap and roll part of the TTR pension back to accumulation phase to reduce the pension payments. However, by doing so, the member would have total super savings of $662,781 by age 65. 

The outcomes are summarised here:

Option 1 – employer SG contributions only

Total super balance: $633,169

Option 2 – salary sacrifice up to standard concessional cap to age 65 with TTR pension payments to replace lost income

Total super balance: $651,817

Benefit over strategy 1: $18,648

Option 3 – salary sacrifice up to effective concessional cap in year 1 then up to standard concessional cap to age 65 with TTR pension payments to replace lost income

Total super balance: $662,781

Benefit over strategy 1: $29,612

Therefore, the TTR salary sacrifice strategy could be used to allow members to fully utilise any unused cap amounts that accrued in the previous five years to maximise their final retirement balance.

Conclusion

The catch-up concessional cap rules may provide eligible members with additional flexibility to top up their superannuation. However, the rules are complicated, and advisers providing advice in this area will need to exercise caution to ensure they capture all relevant amounts so they can correctly calculate a member’s unused concessional cap amounts for previous years, and therefore a member’s effective concessional cap. 

 

 

Craig Day, executive manager, Colonial First State
As reported in smsfadviser.com
by Sarah Kendle
06 January 2020

 

 

 

Nearing retirement? 7 steps to take before you leave work

You're so close. You were diligent in making additional contributions to your super when it made sense and have saved enough in your fund of choice.

         

 

You're so close. You were diligent in making additional contributions to your super when it made sense and have saved enough in your fund of choice. You have created a realistic retirement budget. You dream of more days at the beach, turning into a grey nomad, with none, zero, nada, office commitments.

To increase the odds that your retirement fantasy matches the reality consider these three simple questions:

Start with three simple questions:

  • Have you got enough?
     
  • Have you had enough?
     
  • Do you have enough to do?
     

Assuming the answer is yes to all three then complete a few important steps before you bid farewell to work. Our pre-retirement checklist can guide you through this process.

As with longer-term retirement planning, this process need not eat up days of time. You should be able to complete most of it in an afternoon, or in small chunks spread out over several days.

Somewhere from two years to six months before your retirement morning tea or farewell drinks, schedule time to start ticking items off this list so that they don't intrude on your days at the beach or with the grandkids.

1) Know how you plan to spend your time in retirement. The idea of not working appeals to many people, but some retirees miss being busy and socialising with others. To prepare for this possibility, check out possible part-time work or volunteer opportunities. Drop by the local community organisation, community garden or other social outlets. Look into taking a class or learning a new skill or finally expanding that passion/hobby to the next level. Make some plans to fill your days.

2) Go to the doctor for a checkup. Review your health insurance and match your health needs to your coverage.

3) Revisit your financial plan. Have you saved enough to fund your planned retirement lifestyle now it is much more in focus? Do you have an emergency fund? Does your asset allocation match your required return and risk tolerance?

4) Check whether you are eligible for the age pension or any other payments and services from the Australian Government. You can apply for the age pension three months before you plan to retire.

5) Review your super statements and look for lost or unclaimed super.

6) Create or make needed changes to your will, enduring power of attorney and advance health directive. Pay special attention to beneficiaries so that your money goes to the intended person.

7) Decide how and when you will access your super. You may access your super when you reach preservation age, which ranges from 55 to 60, depending on when you were born. You may take your super as a lump sum, a regular pension, or a combination of both. For more information on these decisions, you may want to read this guide from the Australian Securities & Investment Commission.

Following these steps can allow you to head into retirement with confidence and the necessary information to design the post-work life you desire.

 

Written by Robin Bowerman, Head of Corporate Affairs at Vanguard.
02 December 2019​

 

ATO outlines tax relief for bushfire victims

The ATO has outlined the ways in which those impacted by Australia’s bushfire crisis will be given relief from any outstanding tax obligations.

         

 

The ATO has outlined the ways in which those impacted by Australia’s bushfire crisis will be given relief from any outstanding tax obligations. 

More information can be found here.

In a statement on the ATO website, the regulator said it did not want those affected to be concerned about their tax affairs, and would be helping individuals with any obligations once the crisis had ceased.

“For identified impacted postcodes, we’ll automatically grant deferrals for lodgments and payments due. You or your agent don’t need to apply for these deferrals,” the ATO said.

“We recognise the ongoing effects of this disaster and will continue to update identified impacted postcodes.”

Lists of impacted postcodes in Queensland, New South Wales, South Australia and Victoria were available on the ATO website. Automatic deferrals applied to both businesses and residential addresses, the ATO said.

Those who had been impacted but did not reside in a postcode that was on the ATO’s identified impacted postcode list could call the regulator’s Emergency Support Infoline for assistance. Alternative helplines were available for non-English speakers, Aboriginal or Torres Strait Islanders and those with hearing or speaking difficulties.

“To help you, we can, for example, give you extra time to pay your debt or lodge tax forms; help you find your lost tax file number by using methods to verify your identity such as date of birth, address and bank account details; re-issue income tax returns, activity statements and notices of assessment; help you reconstruct tax records that were lost or damaged; fast-track any refunds owed; set up a payment plan tailored to your circumstances including interest-free period; [and] remit penalties or interest charged during the time you were affected,” the ATO said.

Individuals could also talk to their tax agent, who could work with the ATO to provide appropriate support, the regulator said.

 

Sarah Kendell
07 January 2020
smsfadviser.com

 

 

 

 

 

 

Eggs, baskets and diversified SMSF investment strategies

The ATO wants to ensure that, when an SMSF has a significant majority of its investments in a single asset class, the trustees have considered, as part of the investment strategy, the risks which could arise from that limited diversification.

       

 

Through the course of this article, we will consider the ATO requirements of SMSF trustees, and the auditor of the fund, regarding the issue of diversification of fund investments.

Is “having all of your SMSF eggs in the one basket” permitted?

The short answer is, yes. There is no legislative prohibition on the nature or proportion of the investments an SMSF may hold, although there are some additional requirements imposed if the SMSF holds certain assets, such as:

  • collectible and personal use assets,
  • units in a related unit trust, and
  • an investment made under a limited recourse borrowing arrangement.

While an SMSF trustee may hold virtually any investment available, there are legislative requirements concerning the formulation, and regular review, of the investment strategy of the SMSF, and this brings us back to the earlier reference to the ATO.

In August 2019, the ATO wrote to about 17,700 SMSF trustees (approx. 3 per cent of all SMSFs), as well as fund auditors, regarding what we have referred to earlier as “having all of your eggs in the one basket” — more formally referred to as the limited diversification of investments of those SMSFs.

Although the intent of the ATO correspondence was to remind trustees of the fact that the lack of diversification should be formally considered, an unfortunate component of the letter (at an early stage in the letter) was reference to penalties for non-compliance.

That overshadowed the intent behind the letters: to remind trustees and auditors of the requirements for the proper formulation of an investment strategy for their SMSF.

SMSF investment strategy requirements

The superannuation legislation requires that SMSF trustees [SIS Act s 52B(2)(f) and SIS Reg. 4.09(2)]:

  • “… formulate, review regularly and give effect to an investment strategy that has regard to the whole of the circumstances of the entity including…:

    (b) the composition of the entity’s investments as a whole, including the extent to which they are diverse or involve exposure of the entity to risks from inadequate diversification.”

So, while there is little stopping the SMSF trustee from lacking diversification in the investments of the SMSF, the trustee needs to have considered the various risks that may arise from that lack of diversification.

What circumstances may arise where it is likely there will be a lack of diversification?

A number of instances will occur in SMSFs which may result in the fund having significant exposure to one asset class, including:

  • the SMSF trustees know and trust investments in property, to the exclusion of other investment options;
  • the fund members invest in a variety of investments outside of the SMSF, and their aim for the SMSF is limited to holding a specific type of investment;
  • the fund members have most of their super in a public offer fund, but use the SMSF to hold an investment type, such as property, not available in the public offer fund;
  • for risk purposes, a decision may have been made to “quarantine” a real estate investment (such as a factory) in a second SMSF, so as not to risk the other SMSF in the event of a damages claim;
  • owners of a business establish an SMSF to hold the property from which their business operates, while each also has their own SMSF with their spouse; and
  • all available funds are applied to minimise the amount borrowed to acquire an asset under a limited recourse borrowing arrangement, with the eventual aim of broadening the investment range in the future.

Should trustees do anything to rectify the limited diversification?

Not necessarily. As mentioned, the lack of diversification is not the actual issue — the issue is whether the trustee of the SMSF has, as part of the creation or review of the investment strategy, provided adequate consideration to:

  • the extent to which the fund investments are diverse, and
  • the risks, including potential liquidity issues, from limited diversification.

Effectively, for trustees to be able to prove they have considered the potential risks of limited diversification, they will not only need to have a written investment strategy, but also written confirmation that the apparent lack of diversification, and resultant risks, have been considered.

Therefore, ensuring the investment strategy is up to date and that consideration has been given to the effects of any limited diversification is important.

Would planning for the future be beneficial?

Part of the risk from limited diversification is the forced action resulting from unexpected occurrences.

To plan for such eventualities is an important component of the role a prudent trustee would perform.

In the SMSF environment, that is generally referred to as an “exit strategy”.

Instances where an exit strategy would be of use include:

  • the situation of a two-member SMSF with a limited recourse borrowing arrangement, and planning for the occurrence of death, disability or divorce;
  • an agreement of business owners in the example covered earlier which could cater for the splitting of the business or the death or disability of a member, including a process to deal with the asset without causing an adverse impact.

Regardless of the ATO requirements, it is important for SMSF trustees to consider the risks which may arise from limited diversification, and the focus on those risks can be beneficial in formulating plans to mitigate any adverse impact.

How can trustees ensure they comply with the ATO requirements?

Step 1 in ensuring compliance is to confirm that the SMSF has a current investment strategy, as that is one of the covenants (the “non-negotiables”) under which SMSFs must operate.

Step 2 is to ensure that it is reviewed regularly — the ATO view is that regularly means at least annually.

Step 3 involves the specific considerations the trustee needs to cover in each review, including:

  • the investment risk and likely return;
  • the liquidity of the investments, having regard to cash flow requirements;
  • the ability to discharge current and future liabilities;
  • whether the trustee should hold insurance for the members; and
  • the composition of the “… investments as a whole, including the extent to which they are diverse or involve exposure… to risks from inadequate diversification”.

Formally undertaking a review of the investment strategy at least annually, such as when the SMSF financial statements have been prepared, with the review

  • ensuring the fund investments are within any parameters set out in the investment strategy, and
  • covering the matters detailed in Step 3 above, with particular attention to the diversification aspect, if applicable

will see the trustee effectively covering not only the ATO requirements but also meeting the specific covenant concerning SMSF investments.

More considerations

Mentioned earlier was the fact that some SMSF auditors had also received correspondence from the ATO. That occurred if they had audited an SMSF which has more than 90 per cent of its assets in a single asset class.

The correspondence effectively put auditors on notice to ensure trustees have given adequate consideration to the diversification issues we have covered in this article.

As a result, trustees can expect increased auditor scrutiny of their investment strategy documentation, including the diversification considerations.

Documentation

An anomaly with the investment strategy legislation is that, while the trustee of the SMSF must have an investment strategy, there is no stipulated requirement that it be in writing.

The same applies to the diversification considerations.

However, it would be a very brave trustee who did not support their decisions with proper documents as, without written proof, it is likely the auditor and the ATO will deem that no such investment strategy exists.

Topdocs recommends that an investment strategy be regularly reviewed and, if necessary, it be updated so as to ensure it remains reflective of the trustee’s intentions.

Additionally, if the investments are limited in their diversification, trustee resolutions confirming their deliberations of the risks involved must be prepared.

Conclusion

Having eggs in the one basket is permitted, but trustees need to have considered the risks and difficulties involved.

SMSF trustees have much to think about in the administration of their fund — the degree of diversification of investments is one consideration they should properly document.

 

 

Michael Harkin
27 November 2019
smsfadviser.com

 

New opportunities for employees to claim additional superannuation

Under the current rules, the maximum amount of “concessional” superannuation contributions that can be claimed is $25,000.00 per person per annum.

           

 

This is referred to as the “concessional contributions cap”. Concessional contributions refer to those contributions that are claimed as a tax deduction by the person or entity paying the contribution. They include employer contributions, salary sacrifice contributions and personal deductible contributions.

Up until 30 June 2017, the so-called “10 per cent rule” applied where you could only claim personal contributions if your income from employment was less than 10per cent of your total income. Note that the definition of “income” included “assessable fringe benefits” and “reportable superannuation contributions”.

This restriction meant that many employed individuals could not make deductible personal contributions to reduce their taxable incomes, and the only way to maximise their total concessional contributions cap was to make arrangements with their employer for a salary sacrifice arrangement where they would reduce their gross salary in favour of the employer making a larger contribution (above the normal 9.5 per cent of salary) to the employee’s super fund. These salary sacrifice arrangements are still available and continue to provide the same benefits, an employee may not always be able to make such arrangements with their particular employer.

Salary sacrifice arrangements can only be made prospectively, which means that if, say, the employee wanted to make a lump sum contribution near the end of the financial year, this would not be possible.

With the changes applying from 1 July 2017, employees can now make additional personal contributions and claim a tax deduction for the additional contributions, thus putting them on the same footing as self-employed people. The additional flexibility of this system may be helpful in several different scenarios. Take the following for example:

  • Mary is working as a specialist teacher earning, say, $110,000.
  • She has had an investment property in a capital city for many years and decides to sell the property to rearrange her investments in preparation for planned retirement in a few years.
  • She is shocked to find out from her accountant that based on the estimated sale price, there will be a taxable capital gain of $100,000 on the sale of the property which will cost her almost $45,000 in additional tax.
  • Mary is able to make an additional contribution to superannuation of $14,500 and, as a result, reduces her tax bill by around $7,000.
  • Although Mary’s super fund will have to pay tax of $2,175 on the additional contribution, she is still almost $5,000 better off.

Or take the case of Joe who is employed as a builder and earns $60,000 p.a. In May, Joe receives a bequest of $25,000 from the estate of a recently deceased relative. He would like to retain around $6,000 of the money to take the family on a holiday trip and save the balance of $19,000.

After talking to his financial adviser, Joe decides to contribute the full $25,000 to his existing superannuation fund; $19,000 is claimed as a concessional contribution and $6,000 as a non-concessional contribution. As a result of claiming the additional contribution, Joe receives an additional tax refund of $6,800, which he uses for the family holiday.

After allowing for the additional tax in the super fund on the concessional contribution of $2,850 (i.e. 15 per cent of $19,000), Joe has increased his net savings by $3,150 and also has an additional $800 spending money for the holiday!

Note that people who are 65 or older are still required to meet the “work test” in order to claim concessional contributions, although this is not normally an issue for people with a significant part of their income coming from wages.

Note also that just like salary sacrifice superannuation contributions, Centrelink adds back any personal concessional contributions claimed when assessing entitlements that are subject to the “income test”.

 

Bob Locke
25 November 2019
smsfadviser.com

 

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