SMSF Loan Mistakes: Costly Penalties Ahead!

SMSF Loan Mistakes: Costly Penalties Ahead!

Highlighting common SMSF loan mistakes to help trustees avoid costly penalties and secure their investments.

Loaning money from an SMSF to fund members or relatives is against the super laws and can land trustees with big fines, so it’s important to know the rules and not use SMSF savings for anything other than retirement purposes.

New ATO estimates show that, in 2020 and 2021, SMSF trustees entered into more than $200 million in prohibited loans to members or related parties. This was in addition to more than $600 million illegally withdrawn.

The huge amounts explain the ATO’s concern, with deputy commissioner Emma Rosenzweig telling a recent SMSF conference the regulator considered it essential to ensure “SMSFs aren’t seen as a vehicle to access super illegally or to provide short-term finance”.i

She says newly established SMSFs are more likely to make prohibited loans, with the key drivers being lack of knowledge and attitudes towards super. Trustees also tend to dip into their super when facing financial stress or personal issues.

The rules for providing a loan or other direct or indirect financial assistance from your SMSF to fund members, family or other related parties are simple.ii

It’s illegal, even if the loan is repaid with interest.

Your SMSF’s assets are solely to provide for members' retirements and cannot be used for other purposes.

If you think you won’t get caught, the ATO is actively looking for trustees making prohibited loans by identifying individuals with outstanding personal lodgement applications, overdue tax debts and applications for early access prior to setting up a SMSF.

Tough penalties

If you breach the lending provision by making a loan to fund members or relatives, significant sanctions can be imposed. The penalty for each fund trustee can be almost $19,000. And penalties must be paid personally, not from SMSF assets.iii

Lending to members could also lead to civil and criminal penalties.

Serious breaches of your trustee obligations can lead to disqualification, which means you can never be a SMSF trustee again and your name is on the public record forever.

The biggest risk is your SMSF could be deemed non-complying and unable to take advantage of the 15 per cent tax rates applying within the super system. In the year a SMSF is deemed non-complying, it’s hit with the highest margin tax rate on its income and a fine equal to almost half its assets.

If your fund has made a prohibited loan, it must be repaid as soon as possible. It’s important to talk to us early, so we can help you work out the next steps.

The ATO’s SMSF early engagement and voluntary disclosure service allows trustees or their accountant to voluntarily report non-compliance issues.

Early disclosure is encouraged by the ATO and generally the regulator will not audit the SMSF if non-compliance is resolved this way.

Legal ways to make a loan

While making a loan to a member or related party is illegal, it’s possible to make a loan to certain businesses from your SMSF.

These loans must be in the best interests of members and comply with the fund’s documented investment strategy.

They must not exceed 5 per cent of the SMSF’s total assets and if the loan exceeds this limit at 30 June, trustees must prepare a plan to meet that limit by the end of the following financial year.

Loans can only be made to a company or trust with a corporate trustee (not a sole trader or partnership), be on arm’s-length commercial terms, and must not breach the sole purpose test.

If you’re thinking about entering into a loan arrangement, talk to us first so we can help ensure it’s structured appropriately to comply with super law.

If you need help with your SMSF or business financing and loans, call our office today.

i https://www.ato.gov.au/media-centre/levelling-up-smsf-compliance-the-regulators-update
ii https://www.ato.gov.au/individuals-and-families/super-for-individuals-and-families/self-managed-super-funds-smsf/investing/restrictions-on-investments/related-parties-and-relatives
iii https://www.ato.gov.au/individuals-and-families/super-for-individuals-and-families/self-managed-super-funds-smsf/administering-and-reporting/how-we-help-and-regulate-smsfs/how-we-deal-with-non-compliance

This article is intended as an information source only and to provide general information only. The comments, examples, words and extracts from legislation and other sources in this publication do not constitute legal advice, financial or tax advice and should not be relied upon as such. All readers should seek advice from a professional adviser regarding the application of any of the comments in this article to their particular situation.


Navigating SMSF Contribution Caps: Avoid Excess Taxes

Navigating SMSF Contribution Caps: Avoid Excess Taxes

Understanding SMSF contribution caps is vital to avoid excess taxes. This overview highlights the critical aspects of concessional and non-concessional limits and offers solutions for potential over-contributions.

The rules around making some types of super contributions have been relaxed in recent years, so it’s worth exploring the different opportunities available to you before making a large contribution.i

What are contribution caps?

Given the tax-effective environment of Australia’s super system, there are annual limits on how much you can contribute each financial year.

The two main types of contributions are concessional (before-tax) and non-concessional (after-tax) contributions.

Concessional contributions include employer Super Guarantee contributions, salary sacrifice and personal tax-deductible contributions, with the general contributions cap for 2023-24 being $27,500. In some situations, you may be permitted to contribute more if you have unused cap amounts from previous financial years.

If you’re a SMSF member, you may be able to make a concessional contribution in one financial year and have it count towards your concessional cap in the following financial year.

Non-concessional contributions cap

If you use after-tax money to make a super contribution, this is classes as a non-concessional contribution and there is no tax payable when the contribution is paid into your super account.

The general non-concessional contributions cap in 2023-24 is $110,000 provided you meet all the eligibility criteria, such as your Total Super Balance being below your personal limit. Your personal cap may be different.

If you’re age 55 or older, the once-only downsizer contribution cap is $300,000 per person ($600,000 for a couple). These contributions from the sale of your main residence don’t count towards your annual non-concessional cap.

Exceeding your contribution caps

There are different rules for super contributions that exceed the annual caps, depending on the type of contribution.

If you go over the annual concessional cap, your contribution is counted as personal assessable income and taxed at your marginal tax rate, with a 15 per cent tax offset to reflect the tax already paid by your super fund. Your increased assessable income may also affect any Medicare levy, Centrelink benefits and child support obligations.

The excess contributions can be withdrawn from your super fund, but if you choose not to withdraw them, the excess is counted towards your non-concessional contributions cap.

If you don’t or can’t elect to release excess contributions, you could end up paying up to 94 per cent in tax.ii

Exceed your non-concessional cap

Contributions exceeding your annual non-concessional (after-tax) cap are taxed at 45 per cent plus the 2 per cent Medicare levy. This is in addition to the tax already paid on this money.

Before the ATO applies this tax, you are given the opportunity to withdraw the excess non-concessional contributions, plus a notional amount to reflect the investment earnings.

You pay tax on the notional earnings just like personal income, less a 15 per cent offset.

Withdrawing excess contributions

Like most things to do with tax and super, the process for withdrawing excess contributions is fiddly.

If you have an excess concessional contribution, the ATO sends you a determination letter with details of what you need to do, plus an income tax notice of assessment.

You have 60 days to decide whether to have the excess concessional contribution refunded by the super fund and tax deducted by the ATO, or to pay the tax personally and leave the contribution in your account.

Refunding excess non-concessional contributions

For excess non-concessional contributions, the ATO assumes you wish to have your excess contributions and notional earnings refunded in order to avoid paying 47 per cent on them.

The default process is the ATO automatically issues a release authority to your fund and directs it to deduct the additional tax owing and return the leftover amount to you.

If you wish to nominate a specific fund from which the refund should be paid, or leave the excess in your account and pay the tax personally, you must make an election within 60 days of the initial notice.

Call us today to assess how the super contribution caps may affect you.

i https://www.ato.gov.au/individuals-and-families/super-for-individuals-and-families/super/growing-and-keeping-track-of-your-super/caps-limits-and-tax-on-super-contributions/restrictions-on-voluntary-contributions
ii https://www.ato.gov.au/individuals-and-families/super-for-individuals-and-families/super/growing-and-keeping-track-of-your-super/caps-limits-and-tax-on-super-contributions/concessional-contributions-cap

This article is intended as an information source only and to provide general information only. The comments, examples, words and extracts from legislation and other sources in this publication do not constitute legal advice, financial or tax advice and should not be relied upon as such. All readers should seek advice from a professional adviser regarding the application of any of the comments in this article to their particular situation.


How Will the Latest Superannuation Changes Affect Your Finances?

How Will the Latest Superannuation Changes Affect Your Finances?

The new financial year brings significant changes to Australia's superannuation rules. From the Superannuation Guarantee increase to changes in pension drawdowns, here's an overview of what you need to know.

As our superannuation balances increase, staying abreast of the evolving rules and regulations becomes increasingly important.

Super bonus for workers

For employees, the dawn of the new financial year brings an uplift in the Superannuation Guarantee contributed by employers. It is now 11 per cent of eligible wages.

This rate will increase by 0.5 per cent each year until it reaches 12 per cent in 2025.i

The Australian Tax Office will also be cracking down on employers who don’t pay on time or at all.

Minimum pension drawdown increased

The COVID-19 measure that reduced the minimum drawdown on super pensions is set to conclude on 1 July 2023.

Investors receiving super pensions and annuities must withdraw a minimum amount each year. The federal government reduced this amount by 50 per cent over the last four financial years to help those wanting to protect their capital as the markets recovered from the chaos of the pandemic.

You can find out more by visiting the ATO’s minimum pension standards.

Transfer balance cap to be lifted

From 1 July 2023, the cap on capital that can be transferred into your super pension will rise to $1.9 million.ii

The transfer balance cap limits the total amount of super that can be transferred into a tax-free pension account. This is a lifetime limit.

The cap is indexed and began at $1.6 million when it was introduced in 2017. Increases in the cap are tied to CPI movements.

Extra tax for large balances

Investors holding super balances exceeding $3 million will no longer enjoy the full benefits of super tax breaks on their earnings.

From 1 July 2025, taxes on future earnings will be 30 per cent instead of 15 per cent although they will continue to benefit from more generous tax breaks on earnings from the funds below the $3 million threshold.

Other recent changes

A number of changes announced in both federal budgets last year have also been slowly introduced over the past 12 months.

A significant change has been the reduction in the minimum age for those eligible to invest a portion of their home sale proceeds into their super, a move known as a ‘downsizer contribution’.

From 1 January 2023, if you are aged 55 or older, you can now contribute to your super up to $300,000 (or $600,000 for a couple) from the sale of their home.

The home must be in Australia and owned by you for at least 10 years.

Another significant reform for many has been the removal of the work test for those under 75, who can now make or receive personal super contributions and salary sacrificed contributions. (Although the ATO notes that you may still need to meet the work test to claim a personal super contribution deduction.)

Previously if you were under 75, you could only make or receive voluntary contributions to super if you worked at least 40 hours over a 30-day period.

While caps have been lifted and programs expanded, at least one scheme has not changed. The Low Income Super Tax Offset (LISTO) threshold remains at $37,000. LISTO is a government payment to super funds of up to $500 to help low-income earners save for retirement.

If you earn $37,000 or less a year you may be eligible a LISTO payment. You don’t need to do anything other than to ensure your super fund has your tax file number.

Lastly, a promising initiative that could yield future benefits is the Federal Budget's continued funding for a superannuation consumer advocate, aimed at enhancing investor outcomes.

Expert advice is important to help navigate these changes over the coming year. Call us for more information.

i https://www.ato.gov.au/Business/Small-business-newsroom/Lodging-and-paying/The-super-guarantee-rate-is-increasing/
ii https://www.ato.gov.au/Individuals/Super/Withdrawing-and-using-your-super/Transfer-balance-cap/

This article is intended as an information source only and to provide general information only. The comments, examples, words and extracts from legislation and other sources in this publication do not constitute legal advice, financial or tax advice and should not be relied upon as such. All readers should seek advice from a professional adviser regarding the application of any of the comments in this article to their particular situation.


Navigating EOFY: Your SMSF Preparation Guide

Navigating EOFY: Your SMSF Preparation Guide

Navigating EOFY can be challenging, especially for Australians managing SMSFs. This guide provides a comprehensive checklist to help you prepare your fund the annual audit, ensuring you meet all ATO requirements.

If you're an Australian Tax Resident with an SMSF, it's crucial to ensure your fund is in good shape and prepared for the EOFY and the annual audit.

It’s particularly important this year, because the ATO is focussed on fixing a number of issues when it comes to SMSFs. These include high rates of non-lodgment and problematic related party loans by SMSF members operating small businesses.

Ensure Your SMSF Paperwork is Up-to-Date

Review all the administrative responsibilities of your SMSF to identify any incomplete ones. These include updating the fund’s minutes to record all decisions and actions taken during the year, lodging any required Transfer Balance Account Reports (TBARs), and documenting decisions about benefit payments and withdrawals.

Although it’s easy to forget, SMSFs are required to keep all contact details, banking details and electronic service address up-to-date with the ATO.

Prioritise Early Contributions and Payments

If you want a super contribution counted in the 2022–23 financial year, ensure the fund’s bank account receives payment by 30 June.

Minimum pension payments to members also need to be made by 30 June to meet the annual payment rules and ensure the income stream doesn't cease for income tax purposes.

Prepare Your Contribution Administration

If your SMSF receives tax-effective super contributions for salary sacrifice arrangements, ensure the fund has all the necessary paperwork before the arrangements commences.

Check you have appropriate evidence (and trust deed authority) to verify any downsizer contributions. From 1 January 2023, SMSF members aged 55 and over are eligible to make a downsizer contribution of up to $300,000 ($600,000 for a couple).

Timely Lodgment of Your Annual Return

Non-lodgment of the annual return is a major red flag for the ATO, particularly for new SMSFs.

Ensure your annual return is prepared and lodged on time to avoid coming under the tax man’s microscope for potential illegal early access or non-compliance.

Understand the Implications of New Tax Rules

The planned new tax on member balances over $3 million could create significant issues for some SMSF members, so trustees should review the potential implications ahead of EOFY.

Funds with large, lumpy assets such as business real property should consider the implications and liquidity issues of members implementing strategies designed to limit the impact of the new tax.

Accurate Valuation of Your Fund's Assets

SMSF rules require all fund assets to be valued at market value at year-end, including investments in unlisted companies or trusts, cryptocurrency, and collectible assets. The ATO is monitoring this area, so trustees should organise appropriate valuations as soon as possible.

Ensure valuations can be substantiated if there are audit queries and the process is undertaken in line with valuation guidelines.

Reevaluate Your Investment Strategy

Review the fund’s investment strategy to ensure it covers all relevant areas, including whether investment asset ranges remain relevant to your investment objectives. Deviations from strategic asset ranges must be documented, together with intended actions to address them.

Review your NALE

Non-arm’s length expenses (NALE) and income are key interest areas for the ATO, so check the fund complies with the rules.

Pay particular attention to all SMSF transactions involving related parties and ensure their arm’s length nature can be fully substantiated.

Get your auditor onboard

Trustees are required to appoint their auditor at least 45 days before lodgment due date, so ensure you have this organised.

Prepare for earlier TBAR reporting

From 1 July 2023, SMSFs will be required to report TBARs more frequently. All TBAR events will need to be submitted 28 days after the quarter in which the event occurred, so ensure you have systems in place to meet the new requirement.

All TBAR events occurring in 2022-23 will need to be reported by 28 October 2023.

Ensure trustees have a director ID

SMSF with a corporate structure must ensure all trustees have a director ID number. Although this was a requirement from 1 November 2022, many SMSF trustees are yet to apply.

Holding a director ID is an essential part of the SMSF registration process and directors must apply via the Australian Business Registry Services website.

If you would like to discuss EOFY tasks for your SMSF or your personal super contributions, contact us today.

This article is intended as an information source only and to provide general information only. The comments, examples, words and extracts from legislation and other sources in this publication do not constitute legal advice, financial or tax advice and should not be relied upon as such. All readers should seek advice from a professional adviser regarding the application of any of the comments in this article to their particular situation.


Illegal early SMSF access on ATO's radar

ATO Targets Illegal Early Access to SMSFs Amid Tax Increase Concerns

ATO Targets Illegal Early Access to SMSFs Amid Tax Increase Concerns

Following the Albanese Government's proposal to double the tax on investment earnings for super account balances over $3 million, many individuals are considering withdrawing funds from their self-managed superannuation funds (SMSFs) to avoid tax increases. However, early access to SMSF savings is illegal, and the Australian Taxation Office (ATO) is ramping up efforts to combat this growing issue.

As SMSF trustees have more control of their super assets compared to those invested in a large superannuation fund, accessing your money, and moving it out of the super system can sound like an attractive idea.

But as good as it might sound, gaining early access to your super savings is illegal and it is an activity the Australian Taxation Office is increasingly keen to stamp out.

ATO's Battle Against Illegal SMSF Access: Trustee Disqualifications on the Rise

According to ATO assistant commissioner Justin Micale, nearly 300 SMSF trustees have been disqualified for illegally accessing their retirement savings in the first half of 2022-23, more than in the entire 2021-22 financial year. The ATO crackdown has seen $2 million in administrative penalties issued and an additional $4 million in tax collected.i

Illegal early release is one of the major areas of focus for the ATO’s SMSF enforcement team. “We are seeing an increasing number of trustees taking advantage of their direct access to their superannuation bank account and they are using these savings to pay for items such as business debts, holidays, renovations and new cars,” Micale told an SMSF industry conference.i

In an attempt to stamp out early access, the ATO is checking funds that fail to lodge annual returns, while SMSF auditors are being encouraged to report SMSF loans or breaches of the payment standards – even if the money is repaid to the fund.

How to Access Your Retirement Savings Legally

The ATO scrutiny is part of a broader campaign to remind SMSF trustees of their responsibility to ensure if they access their super early, they do it within the super laws.

Generally, you can only access your super when you reach your preservation age and retire, or turn 65 even if you are still working. For anyone born after 30 June 1964, the preservation age is age 60.

To access your super legally, you must satisfy a condition of release. There are only very limited circumstances where you can legally access your super early and the eligibility requirements often relate to specific expenses or terminal illness.

It is illegal to access your super for any reason other than when it is allowed by the superannuation law.

The Danger of Illegal SMSF Early Access Schemes

Currently, a spate of illegal early access schemes are encouraging trustees to withdraw their super early to pay for personal expenses such as credit card debt, holidays, or buying property.

According to the ATO, promoters of these schemes usually charge high fees and commissions and request identity documents. This often leads to identity theft (which involves using your personal details to commit fraud or other crimes) and can take years to clear up. Your super savings could even be stolen.

The best way to protect yourself from illegal access schemes is to halt any involvement with a scheme or the person approaching you. Do not sign any documents or provide your personal details and contact the ATO immediately.

Protecting Your SMSF from Unlawful Activities

Keeping your fund details updated with the ATO is one of the best ways to help reduce the risk of fraud and illegal access to your SMSF.

Trustees should ensure their SMSF’s membership details are recorded correctly and the ATO is notified of any changes. This includes details such as the fund's bank account, electronic service address, trustees, members and contact details.

Regular updates ensure that, when someone initiates a rollover request from an SMSF the ATO’s SMSF Verification System (SVS) can verify the fund and member details. If the receiving SMSF does not have a 'registered' or 'complying' status, it won’t be able to receive the rollover.

To further reduce the risk of fraud, the ATO sends trustees emails and text alerts when changes are supplied about key details relating to a fund.

If you need help understanding the super and tax rules governing your SMSF, call our office today.

i https://www.ato.gov.au/Media-centre/Speeches/Other/SMSF-compliance---What-s-on-the-Regulator-s-radar-/

This article is intended as an information source only and to provide general information only. The comments, examples, words and extracts from legislation and other sources in this publication do not constitute legal advice, financial or tax advice and should not be relied upon as such. All readers should seek advice from a professional adviser regarding the application of any of the comments in this article to their particular situation.


What do most SMSFs invest in?

What do most SMSFs invest in?

With Australia's compulsory superannuation system passing its 30th birthday in July, we take a closer look at one of super’s biggest success stories – the self-managed super fund (SMSF). There are now almost 607,000 SMSFs worth a combined $894 million, with 1.1 million members.

While one of the benefits of running your own fund is the flexibility to chart your own course, concerns have been raised over the years that SMSFs are too heavily invested in cash and shares and not as well diversified as large public funds. The latest figures show these concerns are largely unfounded.

Comparing SMSFs and large funds

SMSF administrator, SuperConcepts recently surveyed 4,500 funds to find out how SMSF trustees invest and identify any emerging trends.i They also wanted to see how SMSFs compare with large APRA-regulated funds including - industry, retail, public sector and corporate funds - in terms of their investments.

The table below shows the overall asset breakdown as at 31 March 2022.

Asset type SMSF % APRA fund %
Cash and short-term deposits 12.2 9.1
Australian fixed interest 8.4 10.0
International fixed interest 2.1 7.9
Australian shares 40.0 28.5
International shares 16.4 27.0
Property 16.0 8.5
Other (incl. infrastructure, cryptocurrency, commodities and collectables) 4.9 9.0
Total 100 100

Source: SuperConcepts

Several differences stand out:

  • SMSFs have a higher level of cash and short-term deposits, although not massively so.
  • SMSFs hold more Australian shares and property
  • APRA funds hold more international shares and fixed interest, and more alternative assets.

At first glance, these differences conform to the stereotype of SMSFs being too dependent on cash, Australian shares and property.

However, the preference for cash may come down to a higher proportion of SMSF members in pension phase (45 per cent of SMSFs are partly or fully in pension phase according to the ATO). The more members a fund has in pension phase, the more cash and liquid investments it needs to cover benefit payments.

Also, the differences are not so stark when you group assets. For instance, cash and fixed interest combined amount to 22.7 per cent for SMSFs and 27.0 per cent for APRA funds. Similarly, local and international shares (56.4 per cent for SMSFs, 55.5 per cent for APRA funds) and property and other (20.9 per cent vs 17.5 per cent ).

It’s likely that the differences within these broad asset groupings are driven by access to different markets, and SMSF trustees being more comfortable picking investments they know such as local shares and property.

What’s more, while big funds can invest directly in large infrastructure projects with steady capital appreciation and reliable income streams, SMSF investors may be pursuing a similar strategy but with real property instead.

Top 10 SMSF investments

Whether it’s the familiarity factor or ease of access, the top 10 investments by value held by SMSFs in the SuperConcepts survey were all Australian shares. As you might expect, the major banks dominate the top 10, along with market heavyweights BHP, CSL and Telstra.

Another thing the top 10 have in common, apart from being household names and easy to access, is dividends. Just as SMSFs in retirement phase hold higher levels of cash to fund their daily income needs, high dividend paying shares are prized for their regular income stream.

Use of ETFs and managed funds

While SMSFs hold large sums in direct Australian shares, diversification improves markedly when you add investments in Australian and international shares held via ETFs and managed funds.

The SuperConcepts survey found almost one third of SMSF investments by value are held in pooled investments. The highest usage is for international shares and fixed interest, where 75 per cent of exposure is via ETFs and managed funds.

As it’s still relatively difficult to access direct investments in international shares, it’s not surprising that global share funds account for eight of the top 10 ETFs and managed funds.

This latest research shows that the diversification of SMSF investment portfolios is broadly comparable to the big super funds. After 30 years of growth and a new generation taking control of their investments, the SMSF sector has well and truly come of age.

If you would like to discuss your SMSF’s investment strategy or you are thinking of setting up your own fund, give us a call.

i https://www.superconcepts.com.au/insights-and-support/news-and-media/detail/2022/06/19/superconcepts-relaunches-quarterly-smsf-investment-patterns-survey

This article is intended as an information source only and to provide general information only. The comments, examples, words and extracts from legislation and other sources in this publication do not constitute legal advice, financial or tax advice and should not be relied upon as such. All readers should seek advice from a professional adviser regarding the application of any of the comments in this article to their particular situation.


SMSF Compliance Checklist For June 30th (EOFY)

SMSF Compliance Checklist For June 30th (EOFY)

Ensuring your SMSF meets all compliance obligations is vital as we approach EOFY, i.e. the end of the financial year.

Failure to meet the ATO's strict rules can mean paying out significantly more tax than necessary.

Here are some key tasks trustees need to complete prior to 30 June 2022:

Check minimum pension drawdowns

Check that any members being paid an account-based pension have received the right amount for the current financial year.

Even though the government has extended its 50 per cent reduction in the minimum pension payment, underpayment can cause compliance problems for your SMSF. So ensure pensioner members have been paid at least their minimum percentage factor prior to 30 June. Documentation needs to be updated and minuted to avoid any problems with the fund’s auditor.

Trustees should also discuss with members receiving a super pension whether they intend taking advantage of the temporary extension in the coming financial year.

Stay within the contribution rules

For 2021-22, the general cap on concessional (before-tax) contributions is $27,500, while non-concessional (after-tax) contributions are limited to $110,000.

An individual member’s annual cap may be different to these amounts, so check that members have verified their current position before accepting contributions. Otherwise, they may face tax penalties.

Legislation has now passed abolishing the work test from 1 July 2022 for contributions made by older SMSF members. For this EOFY, however, trustees still need to check whether contributing members aged between 67 and 75 meet the work test (or work test exemption) before accepting their contributions.

Verify bring-forward contributions

An important EOFY strategy for many SMSF members is using a bring-forward arrangement to access up to three years annual non-concessional contribution caps. For eligible fund members, this can be up to $330,000 in a single year.

SMSF trustees should remind members commencing a bring-forward arrangement they need to meet all the eligibility criteria and that their personal non-concessional cap may be lower if they already have a large Total Super Balance (over $1.48 million).

Although members aged 67 to 74 are unable to commence a bring-forward arrangement in 2021-22, your fund will be able to accept these contributions from older members once 1 July 2022 arrives.

Review the fund’s investment strategy

Other important trustee tasks prior to EOFY are checking the fund has a documented investment strategy and that it has been reviewed for its ongoing suitability.

Trustees are required to minute all investment decisions, including why an investment was chosen and whether all trustees agreed with the decision.

You also need to ensure your SMSF’s investments (such as real estate and collectibles) are valued at market value prior to EOFY. The valuation must be based on objective data with supporting documentation, so if a professional valuation is required, don’t leave it to the last minute.

Get the paperwork in place

Trustees are also required to consider whether members should be provided with life and Total and Permanent Disability (TPD) insurance, so ensure this has been reviewed and documented.

If your SMSF is required to hold insurance for members, check the current insurance policies provide adequate cover and all premiums are paid before 30 June.

Also check the SMSF’s recordkeeping is updated, fully documented and ready for inspection by the fund’s auditor or accountant. This includes minuting trustee decisions; collating bank, dividend and investment statements; and preparing details of any asset purchases or sales.

Review the capital gains position

If your SMSF has members in accumulation phase, review any capital gains made during the financial year and the period these assets have been held.

It may be worth considering whether to dispose of investments with unrealised capital losses if the fund made capital gains during 2021-22. The realised capital losses can then be offset against the capital gains to potentially reduce the fund’s tax bill.

Prepare for the audit

Trustees must have appointed an approved SMSF auditor no later than 45 days before you need to lodge your SMSF annual return. You need to have an auditor organised, even if no contributions or payments have been made during 2021-22.

SMSF auditors are required to examine both the fund’s financial statements and assess its compliance with super law, so ensuring all the fund’s records are in order and ready for review will streamline the audit process.

If you would like help preparing your SMSF for the financial year end, contact our office today.

This article is intended as an information source only and to provide general information only. The comments, examples, words and extracts from legislation and other sources in this publication do not constitute legal advice, financial or tax advice and should not be relied upon as such. All readers should seek advice from a professional adviser regarding the application of any of the comments in this article to their particular situation.


Using an SMSF to invest in property: What are the rules?

Using an SMSF to invest in property: What are the rules?

Using a self managed super fund (SMSF) to invest in property has become very popular in Australia. With property prices rising sharply in recent times, interest in property investment has surged too. If you're thinking of using an SMSF to invest in property, it's important to understand the rules around this type of investment. In this blog post, we'll outline the basics of investing in property through an SMSF. We'll also discuss the benefits and risks associated with this type of investment. So if you're curious about using an SMSF to invest in property, keep reading!

In the September 2021 quarter, Australia’s SMSFs had almost $88 billion invested in non-residential real property, with another $47 billion in residential real property.

But before you add property investments to your SMSF, there are rules you need to be aware of.

Rules for SMSF property investments

All SMSF investments – not just property – must meet the sole purpose test. This means your SMSF must be maintained for the sole purpose of providing retirement benefits to fund members or their dependants.

Also keep in mind the related party rule, which prohibits SMSFs from buying real property from a related party. This means your relatives, business partners and their spouse or children, any company a fund member and their associates control or influence, or any trust a fund member or their associates control.

There are two exceptions. One is buying business real property like agricultural property, or a shop or office from which you operate your business. The other is if the value of the in-house asset is less than 5 per cent of your SMSF’s total assets.

Related parties and SMSF members can lease business and farming properties from your fund, but the arrangement must be at commercial rates and paid in full on the due date. Renting residential or holiday properties to related parties – even at market rent – is not permitted.

Borrowing the right way

Buying a property investment usually involves borrowing money. Again, strict rules apply.

SMSF loans are normally through a limited recourse borrowing arrangement (LRBA), although other structures such as tenants-in-common or related non-geared unit trusts may be acceptable. In the September 2021 quarter, SMSFs had almost $63 billion invested through LRBAs.

LRBAs prohibit lenders from seizing other assets in your SMSF if you default on your loan, so they tend to impose tougher loan conditions. Most lenders now require an SMSF to have a buffer of cash and/or shares equivalent to around 10 per cent of the property’s value.

You must also establish a bare trust (which is separate from the SMSF) to hold the property. And restrictions are imposed on the modifications you can made to your property, with significant changes requiring a new loan. Improvements must be paid for from cash already in the SMSF, not borrowed money.

Be mindful of diversification

Although including property in your SMSF can be a great idea, they are expensive assets. Unless the fund has a high balance, they can reduce diversification across asset classes. This can leave your SMSF exposed to investment risk and make it tricky to pay member benefits without needing to sell the property.

Adding an investment property must also fit the fund’s investment strategy in terms of diversification, liquidity and maximising returns to fund members. The ATO no longer automatically accepts buying an investment property is in the best interest of members, if it is the main asset and the fund’s total balance is low.

The fund’s trust deed must also provide the trustees with authority to implement a borrowing arrangement.

Tax benefits

A key benefit of using your SMSF to invest in property is the concessionally taxed super environment. Instead of paying your marginal rate, an SMSF only pays 15 per cent on investment income the property earns. Once fund members retire, rental income is tax-free.

There are also capital gains tax benefits. Properties held by an SMSF for more than 12 months pay a discounted rate of 10 per cent on any capital gain when sold.

Interest payments on borrowings are tax deductible and if your SMSF’s expenses exceed its income, a taxable loss can be carried forward to offset future income. Losses cannot, however, be offset against your personal income.

That said, not following the tax rules can be costly. If a property investment doesn’t meet the requirements of the sole purpose test for example, a SMSF becomes ineligible for the normal super tax concessions.

And if you finance an LRBA through a related-party loan, the loan must meet the ATO’s safe harbour guidelines. Otherwise, the income and capital gain from the asset will be taxed at the top marginal tax rate.

There’s a lot to think about, so if you would like to discuss property investments and your SMSF give us a call.

This article is intended as an information source only and to provide general information only. The comments, examples, words and extracts from legislation and other sources in this publication do not constitute legal advice, financial or tax advice and should not be relied upon as such. All readers should seek advice from a professional adviser regarding the application of any of the comments in this article to their particular situation.


Your SMSF: Wind it up or pass it on?

Your SMSF: Wind it up or pass it on?

Now that new legislation allows a maximum of six members in an SMSF, some fund trustees may be wondering if this could be an easy way to ensure a smooth transfer of their super to the next generation.

The simple answer is yes, but before you start adding your children and their spouses to your fund, it’s essential to develop a detailed SMSF succession plan to head off any potential problems.

Why make a SMSF succession plan?

Most SMSF trustees understand the concept of estate planning and the importance of deciding how you want your assets distributed when you pass away. But many overlook the importance of a succession plan.

Although your estate plan will cover who gets your assets when you die, your Will doesn’t determine who receives your super, or who takes control of your SMSF. The issue of control is also important if you become seriously ill or lose mental capacity.

By putting a detailed succession plan in place, you can ensure a smooth transition in the control of your SMSF and the payment of your super death benefits to your nominated beneficiaries. It also reduces the potential for the fund to become non-compliant and provides opportunities for death benefits to be paid tax effectively.

Whether to wind up your fund

Traditionally, most two-trustee SMSFs were wound up as members got older and became less keen on undertaking the myriad tasks involved in keeping a super fund compliant.

Super law requires SMSFs with an individual trustee structure to have a minimum of two trustees, so many funds are automatically wound up after the death or incapacity of a trustee.

But the introduction of six-member SMSFs provides families with more flexibility to use their fund as a tool for intergenerational wealth transfer.

Adding your adult children to an SMSF means they can take over some of the administrative burden as you age. It can also simplify the transfer of assets to younger family members.

There are potential downsides that need to be considered, however, as the trustees in control of your SMSF after your death, are the ones making decisions about the distribution of your super death benefits.

Appointing a power of attorney

Ensuring you have a fully documented Enduring Power of Attorney (EPOA) in place in the event of serious illness, death or loss of mental capacity is an essential element in a good SMSF succession plan.

Having an EPOA makes it much easier to keep a fund operating smoothly, as the attorney can step in as trustee and take over administering the fund, together with making decisions about fund investments and payment of death benefits.

Developing an effective succession plan

With a carefully constructed SMSF succession plan, you can reduce the potential for disputes and ensure a smooth transition of control to the next generation.

It’s important to remember any instructions you leave in your Will about payment of your super benefits – or control of your SMSF – are not binding on the fund’s trustees after your death.

That’s why it’s essential to have a binding death benefit nomination (preferably non-lapsing).

Part of your regular succession planning should be to review your SMSF’s trust deed and check it includes the necessary powers to achieve your estate planning goals. These powers include the ability to provide income streams to beneficiaries and appoint the executor of your Will to take your place as fund trustee.

Tax and your SMSF

Tax is also a vital consideration in estate and SMSF succession planning.

Super and tax laws use different definitions of who is and isn’t considered a dependant and how the benefits they receive are taxed, so this needs to be carefully managed.

An SMSF can pay super death benefits to both your dependants and non-dependants, but the tax implications vary. Super benefits generally have both tax-free and taxable components, so talk to us before nominating a beneficiary to ensure your super will be paid tax-effectively.

Nominating a reversionary beneficiary for your super benefit can also be tax effective. A reversionary pension means your beneficiary (usually your spouse), automatically receives your super pension so fund assets won’t need to be sold to pay the benefit. Asset sales can create a CGT bill.

If you would like to discuss your SMSF succession plan, give us a call today.

This article is intended as an information source only and to provide general information only. The comments, examples, words and extracts from legislation and other sources in this publication do not constitute legal advice, financial or tax advice and should not be relied upon as such. All readers should seek advice from a professional adviser regarding the application of any of the comments in this article to their particular situation.


Women and Younger Australians Now Leading the Way With SMSFs

Women and Younger Australians Now Leading the Way With SMSFs

Self-managed super funds (SMSFs) have emerged from a difficult year stronger than ever. Not only have balances been repaired after the initial market shock in the early days of COVID-19, but more young people and women are taking control of their retirement savings. We take a look at what's attracting them.

At the end of March there were 597,396 SMSFs with 1,120,936 members, according to the ATOs latest SMSF Statistical Report for March 2021.

Numbers have been increasing steadily this financial year after a short decline in the June quarter last year. In the nine months to March this year, there were an additional 16,817 SMSFs in operation with 32,054 new members. And they are not necessarily who you might expect.

The changing face of SMSFs

It’s often assumed that SMSFs are for older, wealthy retirees, mostly men, who enjoy tinkering with their investments. While that may have been true once, times are changing.

The ATO report shows Australians under age 45 now make up around 47 per cent of all new SMSF trustees. The largest group by age to set up a fund in the March quarter was the 35-44 age bracket, accounting for 34 per cent of new funds. Coming a distant second, the 45-49 age group established 18 per cent of funds.

What’s more, women are diving in at an earlier age than men. While men still account for more SMSF establishments overall than women, at 56 per cent and 44 per cent respectively in the March quarter, 65 per cent of women were under 50 when they set up their fund compared with 62 per cent of men.

So what’s attracting younger people to SMSFs?

The advantages of starting early

The sooner you take control of your super, the better your retirement outcome is likely to be. SMSFs not only give you more control over your investments, but they also provide more flexibility to:

• Invest in assets such as real property and collectibles which you can’t access in other types of super funds,

• Manage your tax to suit your personal circumstances, and

• Develop an estate plan to ensure the best tax outcomes for your beneficiaries.
That said, it’s generally agreed that an SMSF becomes more cost effective than other types of funds once you have accumulated $200,000 or more in super. That means someone on a higher-than-average salary with Super Guarantee (SG) payments from their employer of $10,000 to $15,000 a year will likely be in their late 30s before an SMSF becomes cost effective.

This was backed up by the ATO report which revealed the taxable income range with the highest number of new SMSFs was the $100,000 to $150,000 bracket. This group accounted for 19 per cent of new funds, followed by the $80,000 to $100,000 bracket which accounted for 14 per cent.

Those who have the means may be able to build up their balance sooner via salary sacrifice or personal super contributions.

Shares and property bounce back

The rise in total funds and members was also reflected in a jump in total SMSF assets to $787.1 billion in the March quarter, up more than 13 per cent over the year.

For those curious about where other SMSF trustees are investing, the top asset types are listed shares (26 per cent of total assets worth $207.4 billion) and cash and term deposits (19 per cent or $149.4 billion). Shares have bounced back strongly since March last year, mostly at the expense of cash and term deposits, as SMSFs reinvest some of their cash holdings.

The booming property market was also reflected in the biggest increase in limited recourse borrowing arrangements (LRBAs) since 2019. LRBAs, popular with SMSF residential property investors, increased by $3.5 billion over the March quarter alone to $59.4 billion, or 7.5 per cent of total SMSF assets.

Happy SMSF customers

There’s nothing like booming markets to put a smile on investors’ faces, but a recent survey shows SMSF trustees are happier than most.

Roy Morgan’s April Superannuation Satisfaction Report showed overall super fund satisfaction increased by 7 percentage points to almost 72 per cent over the year. But SMSFs had the highest customer satisfaction at 81 per cent.i

Clearly, SMSFs are providing real value for more Australians at an increasingly earlier age. But getting expert advice is crucial, especially in the early stages, to ensure your fund is set up correctly to provide the outcomes you want.

If you would like to discuss your current SMSF strategy or whether an SMSF is appropriate for you, give us a call.

All statistics taken from the ATO SMSF Statistical Report for March 2021, https://data.gov.au/data/dataset/self-managed-superannuation-funds/resource/c2d3808d-fc2c-41bd-8122-b8e83fe22188

i http://www.roymorgan.com/findings/8703-superannuation-satisfaction-april-2021-202105250447

This article is intended as an information source only and to provide general information only. The comments, examples, words and extracts from legislation and other sources in this publication do not constitute legal advice, financial or tax advice and should not be relied upon as such. All readers should seek advice from a professional adviser regarding the application of any of the comments in this article to their particular situation.