For those who are considering whether to establish a Self Managed Super Fund we have devised a checklist of aspects to think about before proceeding.

1. Ask yourself one more time if this is the right decision for you. It might be time to take a deep breath and just check that you are sure. Don't do it just because SMSF is a buzzword and everyone else you know is doing it. It has to work for you and your family. So maybe sit down and do the age old thing, draw up two columns, one pro and one con, and go through it all again
2. Part of the shift is being confident, not only that the SMSF structure will work for you, but that it will perform better than what you have already. So go through your existing statements on your retail or industry fund or whatever it is you have, and check its performance over time. Do you have a consistent and coherent investment strategy to fulfil your goals for retirement savings
3. Make sure you have a good idea of how you will deploy your money when you set up your fund, either acting by yourself or with the help of an investment adviser you trust. Part of this is to understand how you can roll over existing super accounts, but also how you might put other assets currently outside your super into your new fund. Think about what assets you want to put into your fund and understand how much tax you might have to pay on getting them into your SMSF.
4. You're going to become a trustee of your fund, so you need to make sure you understand your responsibilities and legal obligations. Work out if you want to get some professional help, or if you want to be completely DIY. You should understand how much work is required to administer the fund and work out if you have the time and expertise to do it yourself. If not, you should know what sort of skills you need to access, have some particular advisers in mind and have an understanding of their fees.
5. Decide on your structure - individual trustees or a corporate trustee. The corporate route has gained in popularity in recent times but there are advantages and disadvantages for each. Professional advice will be useful here.
6. Make sure all your tax affairs are in order. The ATO is the regulator of the SMSF sector and will approve the creation of your fund. It will definitely have issues with your application if you've been convicted of dishonesty offences, but they will also be cautious if you have a large outstanding tax bill, a history of not lodging your returns, if you have a private company with a poor reporting record or taxes outstanding.  If there are other trustees in your fund, they also need to be eligible, so check that they are.
7. Apply the residency test. If you live outside of Australia for long periods, an SMSF might not work for you because that will impact on the tax situation. The fund needs to meet the ATO's definition of an "Australian superannuation fund” to be eligible for tax concessions.
8. Get your trust deed together with the help of a legal practitioner. Sign and date it and make sure that is properly executed. Make sure all trustees sign it. At the same time, or within 21 days of becoming a trustee or director, all trustees need to sign a declaration saying they understand their duties and responsibilities. Keep this safe because you could be asked to produce it later.
9. Access the tax file numbers of everyone in the fund, because these will be quoted when the fund is registered with the AT0.
10. Set up your fund's bank account. You'll quote this account if and when you close down your existing super funds to kick off your SMSF.
11. You need your trust deeds and bank account number when you register your fund with the AT0. If you've gone with a company structure, you'll also need an Australian Business Number (ABN).
12. Write out your fund's investment strategy. This is not only a good exercise to go through, but you'll need it to show that your investment decisions comply with the strategy you have already outlined, and even more importantly, comply with super laws.
13. Finally, refer to the ATO’s website for its SMSF series of booklets and information at http://www.ato.gov.au/Super/Self-managed-super-funds/.   And don't be shy about reaching out to the professionals for advice - that's what we're here for.

Note: Advice contained in this flyer is general in nature and does not consider your particular situation or needs. If information contained is not appropriate to you at this stage please pass on to family and friends who may benefit. Please do not act on this advice until its appropriateness has been determined by a qualified adviser.

For more information on SMSF’s or to arrange a no-cost, no-obligation first consultation, please contact us at GEM Capital on Ph (08) 8273 3222

The Government has announced a range of superannuation reforms, including:

• taxing earnings in pension phase that exceeds $100,000pa
• recognising deferred annuities for earnings tax concession purposes
• increasing the concessional contributions cap for those aged 50 and over
• increasing the ability to refund excess contributions
• commence deeming account based pensions under the social security income test
• increasing the balance threshold below which lost super must be transferred to the ATO

The majority of these proposed reforms will commence on 1st July 2014.  It is important to note that the changes announced are not yet legislated and may change prior to becoming law.

We are concerned about the conflict of interest within the Industry Superannuation Fund movement which has close ties to the union movement.

Below is an article we have been authorised to reproduce from the Intelligent Investor.

"As many of you will be aware we are currently doing the Intelligent Investor national tour. Returning from Brisbane on the plane yesterday, I grabbed the Australian Financial Review and came across the page two article 'Union super leaders see assets sale conflict ‘.

Now I have to admit to having a bit of a gripe when it comes to industry super funds – the marketing of their outperformance over retail super funds. Not that I am wanting to defend the poor performance of many retail funds but:

1. I don’t think it is an apples and apples comparison and, in any event, the timeframes covered are generally too short to be reliable. Industry funds make a big deal of the fact the asset allocations (between industry and retail) are different. This is the very reason why the comparison is inappropriate. Industry funds may well outperform their retail equivalents but the data that proves it has not been put in front of us yet.

2. More specifically, the performance of industry super funds in the post GFC period benefited from what investment bankers like to refer to as ‘mark to guess’ valuations.

What do I mean by ‘mark to guess’?

Accountants use two broad means of reporting assets on a balance sheet – historical cost (the original price paid for an asset) and mark to market (the current market value). Funds will generally use mark to market to calculate both their assets and their performance for a year.

What is often forgotten is that ‘Mark to Market (or MTM)’ itself consists of two broad subcategories:

1. Actual mark to market – where you look at the price of a security on a public market (for instance the ASX) and use that price. So if I was marking BHP shares to market today I would use $34.

2. Mark to guess – where someone sits at their desk and comes up with a number. Now some ‘mark to guess’ valuations are very accurate (typically where the asset has a strong relationship to a listed security) but others are less so. For instance, if you’ve had a property valuation done, one of the first things they ask is whether it is a ‘stamp duty valuation’ (ie low) or ‘sale/bank valuation’ (ie high). Enron’s energy traders were able to make massive profits (and bonuses) by doing their own mark to guess valuations of the positions they had on their books (nice work if you can get it). So, if BHP were to be de-listed, a mark to guess valuation might put it’s price anywhere between $30 and $40, depending on what the purpose of the valuation was.

Now, in the period post GFC, many assets benefited from the use of ‘mark to guess’. The ‘stock or bond market is not functioning properly’ was a popular excuse for why the market price of an asset wasn’t an appropriate value. Unlisted assets (esp property and infrastructure) were beneficiaries of this phenomena. They were valued more highly than listed assets (similar property and infrastructure) simply because the unlisted asset owners hadn’t been silly enough to have their shares quoted on a stock exchange.

What do industry super funds tend to hold more of than retail funds? Unlisted assets. So their performance benefited from the ‘mark to guess’ phenomena (and it has been a drag in the years since, as the gap between listed and unlisted has closed back up).

The ads were flying thick and fast, trumpeting their GFC performance, but the real message should have been ‘how lucky was that?’ Industry funds may well be better performers than retail funds but being able to use ‘mark to guess’ is not the factor that proves it.

So that’s my gripe explained. Back to the AFR article. In this case some of those with dual hats (union official/industry super board member) have come out and criticized proposals to sell various logistics, energy and water assets.

Whether this is a good idea or not is not the point. What this case highlights is the huge conflict of interest involved in having union officials also sitting on industry super fund boards.  A super fund’s focus should be (and is required to be) the retirement savings of fund members – those working, those approaching retirement and those who have retired. The financial interests of industry super fund members may well be served by having the Government doing a poor job of privatizing these assets. Every dollar the Government misses out on is a dollar that can be made by the buyers of the assets (which could include industry super funds).

Clearly, employees of these businesses (and their union representatives) have a completely different perspective. Again, their interests may clash directly with the financial interests of potential buyers. A cheap (or botched) sale by the Government may be great for the buyer, but not so good for the employees (it may also not be in the national interest – but that’s another point again).

Like a lawyer trying to act as both prosecution and defence, it’s a bridge too far. Sitting on the board of an industry fund, or acting as a union official, are both reasonably lucrative gigs. No-one’s going to starve choosing one or the other.

Of course, there may also be retail fund board members with similar conflicts. In either case I would say, in the interests of members, it’s time to pick a side.

Source:  Intelligent Investor Blog Site (http://blog.walnutreport.com.au/)

The ban on off-market transfers for self-managed superannuation funds (SMSFs) will not go ahead as planned from 1 July 2012, and is likely to be delayed for one year, according to Self-Managed Super Fund Professionals' Association (SPAA) technical directorPeter Burgess.

SPAA understands that the Minister for Financial Services and Superannuation, Bill Shorten, will announce the delay of the measure to 1 July 2013 before the end of the month.

Treasury is currently experiencing some "drafting issues" with the proposed ban on off-market transfers, which is "causing it a few headaches", Burgess said.

"In addition to the brokerage costs that SMSF trustees are going to have to incur because they have to go on market, they also run the risk of the market moving against them," he said.

"Since they can't be the other side to the trade, they have to wait until there's been a market price that determines the asset value. Then they can get into the market and buy it back," Burgess said.

"We continue to advocate for the removal of this proposal and for the introduction of an operating standard," he added.

SPAA director of education Graeme Colley said the ban on off-market transfers would have implications for employee share issue arrangements.

"If a public company wants to issue shares under employee share issue arrangements they can be transferred directly to the superannuation fund," he said.

But things would get complicated if the employee has an SMSF, Colley said.

"The question then becomes: does that company have to put the shares on the market before they can be transferred to the superannuation fund?" he said.

For people who are self employed or persons with substantial taxable income personal deductible contributions are a way of tax deductible contributions to superannuation reducing your taxable income leaving more after tax money for investment. 

What is the strategy?

Making personal deductible contributions reduces a person’s taxable income because the contribution is claimed as a tax deduction.

The contribution is taxed at just 15% which may be less than the tax paid if taken as taxable income. This means more after-tax money is available for investment, which increases a person’s overall retirement benefits.

 Who is suited to this strategy and why?

This strategy is suitable for individuals who are:

• primarily self-employed as a sole trader
• under age 65 and who have not been employed in the income year the contribution is made, or
• employed, but the income earned from employment is less than 10% of their total income.

The benefits of making personal deductible contributions are:

• personal income tax is reduced
• retirement savings are increased, and
• small business owners can diversify their wealth outside of their business.

How the strategy works?

Individuals who are eligible to make personal deductible contributions into superannuation can claim a tax deduction equal to the amount of contribution.

The tax deduction reduces the person’s taxable income thereby reducing income tax.

Personal deductible contributions are taxed at 15% upon entry into super. This means the individual making the contribution will ultimately pay tax at 15% on the contributed amount instead of at their marginal rate.

Notice of Deductibility

To be eligible to claim a deduction for contributions to super, an individual must lodge a Notice of Deductibility form with their superannuation fund by the earlier of:

• the date the individual lodges their tax return for that financial year, or
• the end of the following financial year.

The form must be lodged prior to commencing a pension, rolling the contribution over to another fund or withdrawing the contribution.

Example

Kate is age 40. She runs her own mining engineering consultancy business as a sole trader, earning $185,000 per annum.

Kate’s financial adviser has recommended she contribute $20,000 into her superannuation fund as a personal deductible contribution.

Kate is aware that she won’t be able to access the contribution until she meets a condition of release, but she is interested in building up her retirement savings in a tax-effective manner.

The following table shows that Kate has created a tax saving of $5,100 as a result of implementing the strategy. Her cash flow has reduced by $11,900 but she has saved $17,000 for retirement.

* 2010/11 financial year. Includes relevant tax offsets and the 1.5% Medicare levy.

Risks and implications

• Making personal deductible contributions to superannuation reduces a person’s cash flow.
• Contributions to superannuation are preserved until a ‘condition of release’ is met.
• Personal deductible contributions count towards a person’s concessional contribution cap, as do SG contributions and salary sacrificed contributions. Contributions in excess of the concessional contribution cap are taxed at 46.5% and count towards the non-concessional contribution cap.
• Reducing taxable income too low can result in more tax being paid as the 15% contributions tax paid on deductible contributions may be higher than the individual’s marginal tax rate.
• Individuals who have worked through the year must be certain that they satisfy the 10% rule prior to making the deductible contribution.
• Changes in legislation may reduce the flexibility or benefits that superannuation currently enjoys.

Note: Advice contained in this flyer is general in nature and does not consider your personal situation or needs. Please do not act on this advice until its appropriateness has been determined by a qualified adviser.  While the taxation implications of this strategy have been considered, we are not, nor do we purport to be registered tax agents. We strongly recommend you seek detailed tax advice from an appropriately qualified tax agent before proceeding.  The information provided is current as at May 2011.

Further information on Deductible Super Contributions can be found on our YouTube site which can be accessed via the website below:

Website:  staging.gemcapital.com.au

or to arrange a no-cost, no-obligation first consultation, please contact the office on 08 8273 3222.

Blog Website:  www.investmentadviceadelaide.com

Superannuation measures
 

Accumulation phase and Contribution Measures

Concessional contributions cap will be reduced

The annual cap on concessional superannuation contributions will be reduced to $25,000 from 1 July 2017. There will be one cap for all taxpayers irrespective of their age.

The cap is currently dependent on the age of the taxpayer as on 30 June of the previous financial year:

• under age 49 - $30,000
• aged 49 and over - $35,000

GEM Capital Comment

The reduced concessional contributions cap of $25,000 does not apply until 2017-2018.  Clients should consider taking advantage of the current higher concessional cap of $30,000 (under age 50) and $35,000 (age 50 and over) in the 2015-2016 and 2016-2017 financial years.

Catch-up concessional superannuation contributions will be allowed

From 1 July 2017, individuals will be allowed to make additional concessional contributions where they have not reached their concessional contributions cap in previous years.

Access to the unused cap amounts will be limited to individuals with a superannuation balance less than $500,000.

Amounts are carried forward on a rolling basis for a period of five consecutive years. Only unused amounts accrued from 1 July 2017 can be carried forward.

The Government has recognised that annual concessional caps can limit the ability of people with interrupted work patterns to accumulate superannuation balances commensurate with those who do not take breaks from the workforce. Such individuals would include stay at home parents and/or carers. Allowing them to carry forward their unused concessional cap provides them with the opportunity to ‘catch up’ if they have the capacity to do so, and choose to do so.

The measure will also apply to members of defined benefit schemes. The Government will undertake consultation in this regard.

GEM Capital Comment

The ability to carry forward unused concessional cap amounts appears to apply to everyone who has contributed less than the concessional cap, not just those who take breaks from the workforce such as home parents and carers.
 

Harmonising contribution rules for those aged 65 to 74

From 1 July 2017, the Government will remove the existing restrictions on people aged 65 to 74 from making superannuation contributions for their retirement.

People under the age of 75 will no longer have to satisfy a work test and will be able to receive spouse contributions.

This measure is intended to simplify the superannuation system for older Australians and allow them to increase their retirement savings, especially from sources that may not have been available to them before retirement, including from downsizing their home.

Currently, the work test applies which requires individuals aged 65 or over to be in gainful employment for at least 40 hours within 30 consecutive days in a financial year before their super fund can accept any contributions for them.

Introduction of this measure will effectively make the work test irrelevant past 1 July 2017.

GEM Capital Comment

Clients are currently required to work 40 hours within 30 consecutive days in the financial year they make a contribution over the age of 65.  This proposal will remove this requirement and make it  easier for older clients to contribute to super.

When combined with the life-time non-concessional cap this proposal could allow non-working clients aged 65-74 who were previoulsy not eligible to contribute to make non-concessional contributions of up to $500,000 after 1st July 2017.  It also would appear to open the door to tax deductible super contributions for those 65 - 74 who receive other taxable income such as a Government Superannuation Pension.

Personal superannuation contributions will be tax deductible

From 1 July 2017, all individuals up to age 75 will be able to claim an income tax deduction for personal superannuation contributions. This effectively allows all individuals, regardless of their employment circumstances, to make concessional superannuation contributions up to the concessional cap.

Beneficiaries of this change include:

• individuals who are partially self-employed and partially wage and salary earners; and
• individuals whose employers do not offer salary sacrifice arrangements will benefit from these changed arrangements

Currently, there is ‘a maximum earnings as an employee’ condition which needs to be satisfied in order to claim a deduction for personal superannuation contributions. Broadly, less than 10% of the total of taxpayer’s assessable income, reportable fringe benefits and reportable superannuation contributions may be in relation to an eligible employment activity. This essentially means that many self-employed professionals who work independently but are deemed employees under the superannuation guarantee law cannot make further voluntary deductible contributions to super.

GEM Capital Comment

This announcement will dramatically simplify the eligibility requirements for a member to qualify to claim a deduction for a personal super contribution.  The requirement to not be an employee during the financial year or to satisfy the 10% test will be replaced with a single requirement to be under age 75.

The announcement also gives employees more flexibility and allows them to make personal deductible contributions in addition to super guarantee and salary sacrifice contributions, to use up any unused concessional cap at the end of the year.

A new lifetime cap for non-concessional superannuation contributions

The Government will introduce a $500,000 lifetime non-concessional contributions cap. This lifetime cap will be available to all Australians up to and including the age of 74.

For taxpayers aged 75 and more existing rules will remain – only mandated contributions can be accepted by their superannuation fund.

The cap will take into account all non-concessional contributions made on or after 1 July 2007. This is the time from which the ATO has reliable contributions records.

The measure will commence at 7.30pm (AEST) on 3 May 2016.

Contributions made before commencement cannot result in an excess. However, excess contributions made after commencement will need to be removed, otherwise penalty tax will apply.

The cap will be indexed to average weekly ordinary time earnings.

The cap will replace the existing annual non-concessional contributions caps of $180,000pa (or $540,000 every 3 years for individuals aged under 65).

This measure is intended to improve the sustainability of the superannuation system. According to the Government, the change will continue to provide support for the majority of Australians who make non-concessional contributions well below $500,000. Further, there will be more flexibility around when people choose to contribute to their superannuation.

Existing arrangements in respect of CGT cap (set at $1.415 million for 2016-17 financial year) will be retained. Effectively this means that small business taxpayers eligible for CGT concessions can place proceeds from realising their business into the superannuation system.

GEM Capital Comment

To determine how much of the lifetime non-concessional cap has been utilised with prior non-concessional contributions, clients will need to add their non-concessional contributions since 1 July 2007 from all funds to determine how much counts towards their lifetime non-concessional cap.

While the Government states the ATO has reliable contribution records since 1 July 2007, it is not clear whether clients will be able to access this information.  Clients may need to contact the relevant super funds for confirmation.

Clients who have previoulsy utilised the bring-forward provisions will need to carefully review their situation to determine whether they have exhausted their lifetime cap.

Prior to recommending a non-concessinal contribution, advisers should ascertain the amount of lifetime non-concessional contribution cap that the client has available.

The introduction of the lifetime non-concessional cap may limit the ability to implement a recontribution strategy.  Strategies such as spouse contributions which count against the spouse's lifetime non-concessional cap may assist.

Advisers may wish to refrain from providing advice to make non-concessional contributions until the amount of a clients non-concessional contributions made since 1 July 2007 can be verified.

Improving superannuation balances of low income spouses

From 1 July 2017, the Government will increase access to the low income spouse superannuation tax offset by raising the income threshold for the low income spouse from $10,800 to $37,000.

A new Low Income Superannuation Tax Offset (LISTO)

The Government will introduce a Low Income Superannuation Tax Offset (LISTO) to reduce tax on super contributions for low income earners, from 1 July 2017.

The LISTO is a non-refundable tax offset for superannuation funds, based on the tax paid on concessional contributions made on behalf of low income earners. The offset will be capped at $500.

The LISTO will apply to fund members with adjusted taxable income up to $37,000 that have had a concessional contribution made on their behalf.

This measure is to ensure that low income earners do not pay more tax on savings placed into superannuation than on income earned outside of superannuation.

The measure essentially extends the operation of low income superannuation contribution (LISC), which is set to expire on 30 June 2017, under another name.

Division 293 threshold will be reduced

From 1 July 2017, the Division 293 threshold will be reduced from $300,000 to $250,000. This threshold is the point at which high income earners pay additional 15% contributions tax on concessional contributions.

This measure is designed to improve sustainability and fairness in the superannuation system by limiting the effective tax concessions provided to high income individuals.

Pension phase measures

Introducing a new $1.6 million superannuation transfer balance cap

The Government will introduce a $1.6 million transfer balance cap on the total amount of accumulated superannuation an individual can transfer into the retirement phase. This cap will take effect on 1 July 2017.

Subsequent earnings on these balances will not be restricted.

Where an individual accumulates amounts over $1.6 million, they will be able to maintain this excess amount in an accumulation phase account, where earnings will be taxed at 15%.

This cap will limit the extent to which the tax-free benefits of retirement phase accounts can be used by high wealth individuals. It will effectively force funds in excess of $1.6 million either to remain in accumulation phase with investment earnings taxed at 15% or to be taken out of superannuation system completely if members wish to do so.

For example, Asha had accumulated a superannuation balance of $2.2 million. She can start an account-based pension with a maximum of $1.6 of her balance. The remaining $600,000 will have to remain in an accumulation phase or be taken out as a lump sum.

Further, suppose that she transferred a maximum $1.6 million amount of her balance into the pension phase and commenced an account-based pension. This balance was very well invested and after taking the required minimum pension, investment earnings for the financial year were $200,000. This brings Asha’s pension phase balance to $1.8 million solely because of the investment earnings. This is fine because subsequent earnings on pension phase balances are not affected by the $1.6 million cap.

Members already in the retirement phase with balances above $1.6 million will be required to reduce their balance to $1.6 million by 1 July 2017. Excess balances may be converted to superannuation accumulation phase accounts.

Transferred amounts exceeding the $1.6 million cap (including earnings on these excess transferred amounts) will be taxed, similar to the tax treatment that applies to excess non-concessional contributions.

The amount of cap space remaining for a member seeking to make more than one transfer into a retirement phase account will be determined by apportionment.

Commensurate treatment for members of defined benefit schemes will be achieved through changes to the tax arrangements for pension amounts over $100,000.

The Government will undertake consultation on the implementation of this measure.

GEM Capital Comment

This proposal will allow couples to have a combined pension balance of up to $3.2 million.  However, where most of a couples superannuation savings are in one spouses name the $500,000 lifetime non-concessional cap will restrict a couple's ability to equalise their benefits to take full advantage of the transfer balance cap.

The requirement for member's with balances already in excess of $1.6 million to either withdraw or transfer the amount in excess of the cap back to superannuation (accumulation phase) means that people with pension account balances in excess of $1.6 million have not been grandfathered from these changes.

In this case, this may also result in impacted memebers with Self Managed Super Funds or super wrap accounts disposing of assets prior to transferring back to accumulation so as to ensure any capital gains are crystalised while the assets are still in pension phase and exempt from tax.

Transition to Retirement Income Streams (TTR): removing the tax exemption and an ability to treat pensions as lump sums in certain circumstances

The Government will remove the tax exemption on earnings of assets supporting Transition to Retirement Income Streams (TTR) from 1 July 2017.

Currently, earnings on superannuation balances that support a TTR pension are exempt from income tax of 15% applicable to investment earnings in the accumulation phase.

The Government will also remove a rule that allows individuals to treat certain superannuation income stream payments as lump sums for tax purposes.

These measures are expected to remove the attractiveness of TTR pensions as a tax planning device.

GEM Capital Comment

Taxing earnings on TTR income streams significantly reduces the tax effectiveness of strategies such as TTR and salary sacrifice.  For clients aged 60 or over, TTR strategies may still be worthwhile as pension payments are tax free and allow tax effective salary sacrifice contributions.  However for clients under age 60, the tax benefits are minimal.

The taxation of earnings in pension phase will only apply to "Transition to Retirement' income streams where the client has reached preservation age but not yet retired.  Presumably income streams where the client has met a full condition of release such as retirement will continue to have the earnings tax exemption apply.  Clients may look at arrangements involving ceasing a gainful employment arrangement over age 60 or ceasing work and declaring permanent retirement to meet the retirement condition of release.

From a superannuation fund perspective, administering the taxation of earnings in pension phase for transition to retirement pensions will add complexity.

Superannuation death benefits: removing the anti-detriment provision

From 1 July 2017, the anti-detriment provision will be removed.

The anti-detriment provision can effectively result in a refund of a member’s lifetime super contributions tax payments into an estate, where the beneficiary is the dependant (spouse, former spouse or child) of the member. According to the Government, currently this provision is inconsistently applied by super funds.

Removing the anti-detriment provision will better align the treatment of lump sum death benefits across all super funds and the treatment of bequests outside of super.

Lump sum death benefits to dependants will remain tax free.

This information is of a general nature only and neither represents nor is intended to be personal advice on any particular matter. We strongly suggest that no person should act specifically on the basis of the information contained herein, but should obtain appropriate professional advice based upon their own personal circumstances including personal financial advice from a licensed financial adviser and legal advice. Fortnum Private Wealth Pty Ltd ABN 54 139 889 535 AFSL 357306

There has been much chatter in the media about the possibility that Treasurer Scott Morrison may reduce the maximum contribution limits that individuals can make into their superannuation fund (either on a tax deductible or after tax basis).

While clearly we have no inside knowledge of what is going on in Canberra in the lead up to the Budget which has been bought forward by a week to Tuesday 3rd May 2016, there has been sufficient noise about changes to the superannuation system for us to believe that we are being prepared for changes.

It is with this in mind that we are flagging to investors that if you are intending to make a superannuation contribution this financial year under the existing rules that allow a deductible contribution up to $35,000 for those over age 50 ($30,000 for those under 50), or an after tax contribution of $180,000, then you may wish to do so before the Federal Budget.

We remind investors that the main reason behind investing in the superannuation system is to obtain a tax advantage, therefore before making any contribution we recommend investors seek advice to determine that they will be gaining an advantage by contributing into superannuation.  For instance retirees over age 65 have an effective tax free threshold for income of around $30,000 each ($60,000 per couple) courtesy of the tax free threshold of $18,200 that applies to everyone, plus the seniors rebate.  Therefore some retirees may obtain no benefit what so ever from contributing into superannuation.  Low income earners are another group that may not benefit from contributing into superannuation.

Below is a table summarising the contribution rules that apply to determine whether individuals are eligible to contribute into superannuation in the first place.

The bottom line on the balance of probabilities is that it is reasonable to expect changes to superannuation in the May Budget and we are simply putting a message out there that if you were going to contribute to superannuation before the end of the financial year, it may pay to do this before May 3rd.

It sure will be an interesting Federal Budget and we will have full coverage on it after budget night.

Brendan Coates, Grattan Institute and John Daley, Grattan Institute

Allowing first homebuyers to cash out their super to buy a home is a seductive idea with a long history. Like the nine-headed Hydra, which replaced each severed head with two more, each time the idea is cut down it seems to return even stronger.

Both sides of federal politics took proposals to the 1993 election to let Australians draw down their super. After re-election, then Prime Minister Paul Keating scrapped it amid widespread criticism. Former Treasurer Joe Hockey raised the idea again in March and was roundly criticised by academics and the media. This month the Committee for Economic Development of Australia (CEDA) has again resurrected the idea.

House prices have skyrocketed again over the past two years, particularly in Sydney. So politicians are attracted to any policy that appears to help first homebuyers to build a deposit. Unlike the various first homebuyers’ grants that cost billions each year, letting first homebuyers cash out their super would not hurt the budget bottom line – at least, not in the short term. But the change would worsen housing affordability, leave many people with less to retire on, and cost taxpayers in the long run.

It is a bad idea for five reasons.

First, measures to boost demand for housing, without addressing the well-documented restrictions on supply, do not make housing more affordable. Giving prospective first homebuyers access to their superannuation will help them build a house deposit, but it would worsen affordability for buyers overall. Unless supply increases, more people with deposits would simply bid up the price of existing homes, and the biggest winners would be the people who own them already.

Second, the proposal fails the test of superannuation being used solely to fund an adequate living standard in retirement. The government puts tax concessions on super to help workers provide their own retirement incomes. In return, workers can’t access their superannuation until they reach a certain age without incurring tax penalties.

While paying down a home is an investment, owner-occupiers also benefit from having somewhere to live without paying rent. These benefits that a house provides to the owner-occupier – which economists call housing services – are big, accounting for a sixth of total household consumption in Australia. Using super to buy a home they live in would allow people to consume a significant portion of the value of their superannuation savings as housing services well before they reach retirement.

Third, most first homebuyers who cash out their super would end up with lower overall retirement savings, even after accounting for any extra housing assets. Owner-occupiers give up the rent on their investment. With average gross rental yields sitting between 3% and 5% across major Australian cities, the impact on end retirement savings can be very large. Consequently, owner-occupiers will tend to have lower overall lifetime retirement savings than if the funds were left to compound in a superannuation fund

Frugal homebuyers might maintain the value of their retirement savings if they save all the income they no longer have to pay as rent. In reality, few will have such self-discipline. Compulsory savings through superannuation have led many people to save more than they would otherwise. A recent Reserve Bank study found that each dollar of compulsory super savings added between 70 and 90 cents to total household wealth. If first homebuyers can cash out their super savings early to buy a home that they would have saved for anyway, then many will save less overall.

Fourth, the proposal would hurt government budgets in the long run. Superannuation fund balances are included in the Age Pension assets test. The family home is not. If people funnel some of their super savings into the family home, gaining more home equity but reducing their super fund balance, the government will pay more in pensions in the long-term.

Government would be spared this cost if any home purchased using super were included in the Age Pension assets test, but that would be very hard to implement. For example, do you only include the proportion of the home financed by superannuation? Or would the whole home, including principal repayments made from post-tax income, be included in the assets test? The problems go away if all housing were included in the pension assets test, but this would be a very difficult political reform.

Fifth, early access to super for first homebuyers could make the superannuation system even more unequal than it is today. Many first homebuyers are high-income earners. Allowing them to fund home purchases from concessionally-taxed super would simply add to the many tax mitigation strategies that already abound.

Consider the case of a prospective homebuyer earning A$200,000. Their concessional super contributions are taxed at 15%, rather than at their marginal tax rate of 47%. Once they buy a home, any capital gains that accrue as it appreciates are tax-free, as are the stream of housing services that it provides. Such attractive tax treatment of an investment – more generous than the already highly concessional tax treatment of either superannuation or owner occupied housing – would be prone to massive rorting by high-income earners keen to lower their income tax bills.

What, then, should the federal government do to make housing more affordable?

Helping fix our cities

Above all, new federal Minister for Cities Jamie Briggs should support policies to boost housing supply, especially in the inner and middle ring suburbs of major cities where most people want to live, and which have much better access to the centre of cities where most of the new jobs are being created. The federal government has little control over planning rules, which are administered by state and local governments. But it can use transparent performance reporting, rewards and incentives to stimulate state government action, using the same model as the National Competition Policy reforms of the 1990s.

Other reforms, such as reducing the 50% discount on capital gains tax and tightening negative gearing, would also reduce pressure on house prices and could be implemented straight away. Such favourable tax treatment drives up house prices because it increases the after-tax returns to housing investors. The number of negatively geared individuals doubled in the 10 years after the capital gains tax discount was introduced in 1999. More than 1.2 million Australian taxpayers own a negatively geared property, and they claimed A$14 billion in net rental losses in 2011-12.

There are no quick fixes to housing affordability in Australia. Yet any government that can solve the problem by boosting housing supply in inner and middle suburbs, while refraining from further measures to boost demand, will almost certainly find itself rewarded, by voters and by history.

Brendan Coates, Senior Associate, Grattan Institute and John Daley, Chief Executive Officer , Grattan Institute

This article was originally published on The Conversation. Read the original article.

As 30th of June approaches there are many things SMSF trustees should consider to make the most of their SMSF. Better not to leave the following until the last minute:

1. Valuation. The assets in your SMSF must be valued each financial year based on objective and supportive data. Refer to ATO publication, ‘Valuation guidelines for SMSFs’.
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2. Contributions. Ensure contributions are received on or before 30 June, especially if made by electronic funds transfer. A day too late could cause problems.
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3. Employer contributions. Check whether Superannuation Guarantee contributions for the June 2014 quarter have been received by your SMSF in July 2014. If so, include the contribution in your concessional contribution cap for the 2014/2015 financial year.
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4. Salary sacrifice contributions. Salary sacrifice contributions are concessional contributions. Check your records before contributing more to avoid exceeding your concessional contributions cap.
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5. Tax deduction on your contributions. If you are eligible to claim a tax deduction then you will need to lodge a ‘Notice of intention to claim a tax deduction’ with your SMSF trustee before you lodge your personal income tax return. Your SMSF trustee must also provide you with an acknowledgement of your intention to claim the deduction.
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6. Spouse contributions. Spouse contributions must be received on or before 30 June in order for you to claim a tax offset on your contributions. The maximum tax offset claimable is 18% of non-concessional contributions of up to $3,000. Your spouse’s income must be $10,800 or less in a financial year. The tax offset decreases as your spouse’s income exceeds $10,800 and cuts off when their income is $13,800 or more.
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7. Contribution splitting. The maximum amount that can be split for a financial year is 85% of concessional contributions up to the concessional contributions cap. You must make the split in the financial year immediately after the one in which your contributions were made. This means you can split concessional contributions made during the 2013/2014 financial year in the 2014/2015 financial year. You can only split contributions you have made in the current financial year if your entire benefit is being withdrawn from your SMSF before 30 June 2015 as a rollover, transfer, lump sum benefit or a combination of these.
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8. Superannuation co-contribution. To be eligible for the co-contribution, you must earn at least 10% of your income from business and/or employment, be a permanent resident of Australia, and under 71 years of age at the end of the financial year. The government will contribute 50 cents for each $1 of your non-concessional contribution to a maximum of $1,000 made by 30 June 2015. To receive the maximum co-contribution of $500, your total income must be less than $34,488. The co-contribution progressively reduces for income over $34,488 and cuts out altogether once your income is $49,488 or more.
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9. Low income superannuation contribution. If your income is under $37,000 and you and/or your employer have made concessional contributions by 30 June 2015, then you will be entitled to a refund of the 15% contribution tax up to $500 paid by your SMSF on your concessional contributions. To be eligible, at least 10% of your income must be from business and/or employment and you must not hold a temporary residence visa.
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10. Minimum pension payment. Ensure that the minimum pension amount is paid by your SMSF by 30 June 2015 in order to receive the tax exemption. If you are accessing a pension under the ‘Transition to Retirement’, then ensure you do not exceed the maximum limit also

Gordon Mackenzie, UNSW Australia Business School

In announcing it would change the way is superannuation is taxed if elected, Labor has grasped the superannuation reform nettle by the hand.

Labor says it wants to change superannuation to redress what it considers are inequities in the current system that substantially benefits wealthier superannuants.

Briefly, they are proposing two additional taxes: first, those on incomes over $250,000 would pay an extra 15%, in addition to the 15% already payable, on contributions to their super. Second, super fund earnings over $75,000 per annum would be taxed at 15%. These would not start until 2017 and any gains from assets that funds already own would be excluded.

How it works now

It’s worthwhile to first get a base-line on how super is taxed now. It is often said that super tax is one of the most complicated of all taxes, but simply put, super can be taxed at three points: 15% when you contribute, 15% on annual earnings and, if you take it out before you turn 60, depending on the amount, it might be zero or 15% on a lump sum, or at marginal tax rates less 15% on a pension, but no further tax after age 60.

In effect then, you will have only paid 15% tax on your super received after age 60 and, more importantly, the fund will not have paid tax on its annual earnings after age 60 if it is paying you a pension.

Given that is the way super is currently taxed, one view of the proposed increase in tax on contributions if income is over $250,000 and on fund income over $75,000 pa is, in effect, putting “progressivity” (or more progressivity in the case of the 15% contributions tax) into the super tax system.

Progressivity simply means the wealthy you are, the higher rate of tax you pay.

In the current system the fact there are no fund or benefit taxes after the age of 60 acts as an incentive for people to take a pension rather than a lump sum.

But before 2007, encouraged to put as much after tax money into their super as they could, superannuants built up large balances. At the time, when they took the earnings out, they paid the highest tax rate above what was deemed as a certain reasonable amount.

But under current rules, the earnings after 60 on those large amounts are not taxed, either in the fund or when paid.

Proposal to tax the wealthier

The proposal to tax fund income has been seen before, when in 2013 Labor proposed that it apply from $100,000, which translated to a fund account of A$2 million.

The superannuation industry had real problems with that proposal because it would cause them (and fund members) significant administration costs. For example, a lot of people have more than one fund and the only people who know what the aggregate income of all those funds are is the Australian Taxation Office, and even then they don’t know until two years after the event because that is how long it takes for them to get the data.

Also, how do you deal with tax on fund income that has built up over a long time? This problem is called “bunching”: if you had got the gains progressively each year you wouldn’t have had any tax, but because they are all “bunched” into one year you have to pay tax.

Taxing retirement income over $75,000

Another problem is how you measure the $75,000 per annum of income? Is it on a member account basis, or total fund income divided by all the accounts, and is it only on income that the trustee credits to the member - or all income earned by the trustee?

On the other hand, excluding existing accrued gains is sensible from a number of perspectives - it’s easy to do and it means that gains accruing before the tax commences will not be taxed (another “bunching” issue).

The fund tax starts at $75,000 on the basis that an account of $1.5 million would earn that, it only affects 60,000 people and it won’t affect full or part time age pensioners.

As noted, the previous proposal of taxing fund income over $100,000 was based on the assumption that you needed $2 million in your account to earn that, in which case it was a reasonable threshold. The Association of Superannuation Funds of Australia (ASFA) has suggested that the tax should only be paid on earnings from accounts over $2.5 million, as they considered that a reasonable figure to fund your retirement.

A 2017 start date will create planning opportunities, such as people transferring some of their super balance to their spouse - “income splitting” in other words.

Through the super courses we have been asked by Chartered Accountants and the CPA to provide for their members, we are being told that some people - particularly those with self-managed super funds - are already planning for taxation of fund income by selling and “reacquiring” their assets - which means they will pay zero tax when they finally get rid of the asset.

(As an aside, it works this way: my super fund bought 100 shares 10 years ago at $1 per share. In 2015 the shares are worth $10 per share - a $9 gain. The fund, which is paying a pension so it doesn’t pay tax now on the gain ($9 per share) if it sold the shares, expects that it (the fund) will pay tax in 2017.

What it will do is sell the shares now, realise a $9 per share gain which is not taxed and then buy the shares back at $10. So it sold the shares for $10 and bought them back for $10. When it ultimately sells the shares in 2018, say, the gain it will pay tax on is calculated on the $10 that it paid for them in 2015, not the $1 that it paid in 2005.)

Will Labor’s policy deliver what it promises?

Overall then, Labor’s proposals raise a couple of questions. First, the super industry has already made it clear that a fund tax will probably not work, so just changing the threshold hasn’t addressed that problem. In any case, assuming it does come in, it will distort where funds invest as it will be a bigger incentive for funds to invest in Australian companies paying imputation credits that can reduce the tax bill.

In terms of the additional 15% contributions tax, given that the maximum someone over 50 can contribute without paying more tax is $35,000, the government will only collect an additional $5,250 per person, but there are not that many people earning over $250,000. It is 170,000 of 23 million people.

It would have been good to have some deeper explanation of both these thresholds other than just the number of Australians who are going to pay more tax. Is that what is considered a reasonable tax-free retirement, for example?

Anecdotes we’ve garnered from our work with the accounting professions suggests some elderly clients are getting large untaxed pensions which they do not know what to do with and, to be frank, would not be averse to paying some tax. If that is correct, then the real issue is, at what threshold?

Finally, would these changes make super fairer and more equitable? Probably not in a meaningful way. It’s just tinkering around the edges and making a complex retirement funding system more complex.

This article was originally published on The Conversation. Read the original article.

The maximum personal contribution (i.e. non-concessional contribution) into an SMSF (or any superannuation fund) increased on 1 July 2014 to $180,000 per year or $540,000 using the two year bring forward rule. Many SMSF members are confused as to how to use the bring forward rule. The questions that I am often asked are: when does the clock start, which financial years are counted, and can you only make three years worth of contributions while you are under the age of 65?

Let me explain.

Firstly, the two year bring forward rule will be triggered automatically as soon as you make personal contributions totalling more than $180,000 in one financial year. This will occur even if you only exceeded the annual amount by one dollar.

Secondly, under the superannuation law, you are entitled to use the bring forward rule as long as you were under 65 years of age in the first year of contribution. You just need to make sure that atany time in the first financial year (from 1 July to 30 June) you were under 65 years of age. If your birthday falls on 2 July and you turned 65 on that date, you qualify because you were under 65 years on 1 July. It doesn’t matter that you are no longer under 65 years of age the rest of the first financial year or the following two financial years.

Thirdly, if you are aged 65 to 74, then you will need to be working at least 40 hours in a period of not more than 30 consecutive days in a financial year to be entitled to make a contribution into your SMSF. If you did trigger the bring forward rule in the first financial year when you were under the age of 65 and you have made some non-concessional contributions towards the $540,000 limit, and you are planning to contribute the remainder of your $540,000 after you turned 65, you will need to meet the part-time work test. The work test only has to be met once in a financial year. You can make contributions once you have met the work test. You do not need to be working every month to make further contributions.

The fourth point is once you have triggered the bring forward rule, you cannot make further non-concessional contributions into your SMSF until after the third financial year. So if you triggered the bring forward rule in the 2014/2015 financial year and contributed the full amount of $540,000, you cannot make any more personal contributions until 1 July 2017. This is because you have used up your annual limits for three financial years being 2014/2015, 2015/2016, and 2016/2017.

Finally, for those that have already triggered the two year bring forward rule in the last financial year (i.e. 2013/2014), you are stuck with the $450,000 limit (three times the old $150,000 cap) and cannot use the increased limit of $540,000 until your bring forward time period is over. Don’t make the mistake of claiming a further $90,000 under the three year cap by making further contributions. Your three year limit is still $450,000 because you triggered it prior to the change in the limit taking effect. Making a contribution in excess of your limit will be considered an excess contribution and you will be penalised.

A lot of people have missed a good opportunity to make larger contributions into their SMSF simply because they have not stayed informed of changes to government policy. It pays to have a good understanding of how the limits apply to your personal circumstances.

Note: Advice contained in this flyer is general in nature and does not consider your personal situation or needs. Please do not act on this advice until its appropriateness has been determined by a qualified adviser.  While the taxation implications of this strategy have been considered, we are not, nor do we purport to be registered tax agents. We strongly recommend you seek detailed tax advice from an appropriately qualified tax agent before proceeding.  The information provided is current as at July 2014