Expert SMSF insights

26 May, 2016

Your SMSF year-end checklist

By Mark Ellem

Mark Ellem SuperConcepts SMSF Expert

With just over one month left in the current financial year, time is running out to make sure that your SMSF clients have their house in order before the end of the 2016 financial year. Here is a ‘baker’s dozen’ of considerations to start with.

1. Maximise concessional contributions up to the caps

With the budget proposing a cut in the concessional contribution cap to $25,000 from 1 July 2017, 2015/16 could be the second last income year to utilise a higher standard concessional contribution cap.

The standard concessional contribution cap for 2015/16 is $30,000, however, if you were at least age 49 on 30 June 2015, you have a higher transitional 2015/16 concessional cap of $35,000.

Remind your clients that concessional contributions include:

  • Their employer’s super contribution (the compulsory 9.5%);
  • Any amount they contribute via salary sacrifice; and
  • Any personal superannuation contribution that they are eligible and do claim as a personal income tax deduction.

Also note that allocations from a superannuation fund reserve to a member will count against the member’s concessional contribution cap. Some limited exceptions apply.

For those who qualify for the higher $35,000 concessional cap, if the proposed reduction to the concessional cap becomes law, then you will also be subject to the lower $25,000 concessional cap from 1 July 2017. There will be no higher cap for older members. So 2015/16 and 2016/17 are the income years to maximise your higher transitional cap, with an additional $20,000 in concessional contributions over the proposed reduced $25,000 cap.

2. Claiming personal superannuation contributions as an income tax deduction – make sure you qualify

Where a member is planning to claim a personal superannuation contribution as an income tax deduction, make sure they are eligible for a deduction. Where they have some employment related income, they need to satisfy what is referred to as the “10% rule” to be eligible to claim a personal superannuation contribution as an income tax deduction (the removal of the “10% rule” was announced as a proposed change to have effect from 1 July 2017, but still applies for 2015/16 and 2016/17 income years).

Further, for personal contributions claimed as an income tax deduction, the relevant notice of deductibility and acknowledgement by the fund trustee(s) is required. It is important that the correct notice and acknowledgement are provided to substantiate any claim in the event of a review by the ATO, particularly of a member’s personal tax return.

If a pension has been commenced during the income year or a lump sum benefit paid and included personal contributions that will be claimed as an income tax deduction in the member’s personal tax return, be sure that the notice of deductibility was provided prior to the pension being commenced or the lump sum benefit is paid, otherwise the notice can be deemed invalid and the deduction denied. 

3. Uncertainty around non-concessional contributions

Prior to the Budget, the non-concessional contributions cap was set at 6 times the standard concessional cap - $180,000 for 2015/16. Further, if a member was under age 65 at any time during the income year, they could use what is commonly referred to as the “bring forward rule”, which allowed eligible persons to bring forward the next 2 years of their non-concessional cap. This effectively allowed them to contribute a maximum of $540,000 non-concessional contributions in the one income year.

Prior to the Budget, a year end check would be to utilise the annual non-concessional cap and if you had clients that attained age 65 during the 2015/16 income year, that it would be the last opportunity to trigger the “bring forward rule”. However, the Budget proposed a $500,000 lifetime non-concessional contributions cap, effective from Budget night, which will include all non-concessional contributions made since 1 July 2007. Whilst there has been considerable debate about whether this proposal is retrospective law, there is no doubt that it has a retrospective effect on a person’s contribution and retirement plans.

Where a person had exceeded $500,000 in non-concessional contributions from 1 July 2007 up to 7.30pm (AEST) budget night, these will not be treated as excessive and can remain within the superannuation fund, however, any post budget night excessive non-concessional contributions will need to be removed or be subject to penalty tax.

Whilst not law, individuals wishing to make non-concessional contributions after budget night will need to take into consideration all of their non-concessional contributions made since 1 July 2007 and what effect exceeding the proposed $500,000 lifetime limit, post Budget night, will have on them, should the proposal become law.

Just to note, it is our understanding that the CGT lifetime cap for qualifying small business owners and the Personal Injury election for structured settlements will continue to operate separately from the proposed $500,000 lifetime non-concessional contribution cap.

4. Make sure the super fund can accept a contribution

The age of the member will also determine the circumstances that a superannuation fund can accept a contribution either from or on behalf of a member. There are no restrictions on acceptance of contributions for people under 65, other than the contribution caps. However, between 65 and 74, a fund can only accept a contribution if the member meets what is commonly referred to as the “work test” (40 hours paid employment over any 30-day consecutive period during the financial year). It is accepted that the “work test’ should be satisfied prior to the contribution being accepted by the fund. Once you have turned 75, or more precisely, 28 days after the end of the month your turn 75, your fund can only accept employer-mandated contributions (the compulsory 9.5%).

Note that the 2016 Federal Budget proposes to remove the “work test”, from 1 July 2017, for those aged 65 to 74. However, even if passed, the “work test” will still apply for the 2015/16 and 2016/17 income years.

5. Don’t leave contributions to the last minute

While 30 June 2016 is a Thursday, it is best that you make contributions well before then to make sure they will be treated as contributions received in the 2015/16 income year. This is particularly so when it comes to electronic transfer of superannuation contributions, as the tax office ruling TR 2010/1 states that where a contribution is made by way of electronic transfer, it is considered as being received by the superannuation fund only when the monies are credited to the superannuation fund’s bank account. Where taxpayers have salary sacrifice arrangements in place and are using all of their concessional contribution cap, they should confirm with their employer as to when the electronic payment of their contribution will be made to ascertain whether or not it will hit their SMSF bank account by 30 June 2016, consequently being treated as a 2015/16 contribution and counting towards their 2015/16 concessional cap. If credited to the SMSF’s bank account after 30 June 2016 it will count towards their 2016/17 concessional cap, which may require an unwanted adjustment to their 2016/17 salary sacrifice arrangements. Care should be taken with any contribution made by way of electronic transfer on 30 June 2016 as they are most likely not going to show as a deposit in the SMSF’s bank account until at least 1 July 2016, which is too late for the 2015/16 income year.

However, the old fashioned contribution by way of cheque method may provide a solution for the last minute contribution, as TR 2010/1 states that where a contribution is made by way of personal cheque, the contribution is made when the personal cheque is received by the fund, so long as the cheque is promptly presented and honoured.  Again, however, best practise would be to be able to show the contribution as a deposit in the fund’s bank account no later than 30 June 2016.

6. Spouse contributions – can your client access the $540 tax offset for their spouse?

If your client has a non-working or low-income spouse, who is less than 70 years of age, then they may be eligible for a tax offset of up to $540. For each $1 of spouse contribution they make, up to the maximum of $3,000, a tax offset of 18% is available ($3,000 x 18% = $540).

Their spouse’s income (which includes assessable income, reportable fringe benefits and reportable employer super contributions) is tested as follows:

Spouse’s Income

Tax Offset

Less than $10,800

Eligible for full offset ($540)

$10,800 to $13,799

Partial tax offset

$13,800 pa or more

No tax offset

 

Above a spousal income of $10,800, the maximum spouse contribution is reduced on a dollar for dollar basis, so that it is fully phased out when the spousal income exceeds $13,800.

If the spouse is aged 65 to 69, he/she must meet the work test. Once the spouse turns 70, a spouse contribution cannot be accepted. Whilst these rules apply to the receiving spouse, there are no work, age or income conditions applying to the contributing spouse.

Note that the 2016 Federal Budget proposes to remove the “work test”, from 1 July 2017, for those aged 65 to 74 and consequently a spouse contribution will be able to be made for a non-working spouse up to age 74.

7. Co-contribution from the government of $500 for low-income earners

There aren’t too many handouts from the government – and despite being downsized over the years to only $500, the co-contribution remains one of them. If your client has a low-income spouse or partner engaged in employment, or even an adult child working part-time who they may wish to assist, you should make them aware of, or remind them of, this government benefit.

The co-contribution is a contribution by the government to a taxpayer’s super fund (including an SMSF) when the taxpayer makes a personal super contribution, that they do not claim as an income tax deduction.

To access the co-contribution:

  • The taxpayer’s income must be less than $50,454. The full co-contribution is available if the taxpayer’s income is below $35,454. Between $35,454 and $50,454 the maximum co-contribution is reduced by 3.333 cents for every $1 in excess;
  • At least 10% of the taxpayer’s income must come from employment related activities or carrying on a business (i.e. self-employed);
  • The taxpayer makes a personal (non-deductible) super contribution – the government matches this on a $1 for every $2 made, up to a maximum personal super contribution of $1,000; and
  • The taxpayer must be under 71 years of age at the end of the financial year.

The maximum co-contribution is $500, which is made when a taxpayer earns less than $35,454 and makes a personal super contribution of $1,000.

Income includes assessable income, reportable fringe benefits and reportable employer super contributions (most commonly, salary sacrifice amount).

8. Taking a pension – has your client taken enough?

If your client is taking an account-based pension (including a transition to retirement pension), make sure they take at least the minimum payment amount. There can be significant taxation costs if they don’t – potentially, the earnings on all the assets supporting that pension will be taxed at the full fund tax rate of 15% , rather than being completely exempt.

The minimum payment is a percentage of the account balance as at 1 July (i.e. 1/7/2015), and is fixed for the year, regardless of any changes in the account balance. If your client commenced a pension during the year, it is a percentage of the account balance at the commencement, and pro-rated based on the number of days remaining in the financial year (except if commenced on or after 1 June when the minimum is set at zero).

Minimum payments are based on age at the start of the year (or age when commencing a pension during the year), and for 2015/16 are below.

Age

Minimum pension %

Under age 65

4

65 – 74

5

75 – 79

6

80 – 84

7

85 – 89

9

90 – 94

11

95 +

14

 

Also, where the pension is a Transition to Retirement Pension, ensure that they do not exceed the 10% maximum limit. Unlike the minimum pension, where a Transition to Retirement Pension starts part way through the income year, the 10% maximum pension payment is not required to be pro-rated. For example, a Transition to Retirement Pension that commences on 5 June 2016 with $400,000 will have a minimum required pension for 2015/16 of nil (as the pension commenced on or after 1 June in the income year), however, the maximum pension allowed will be $40,000, with no requirement to pro-rata.

It is also worthy to note that this 10% maximum limit for a Transition to Retirement Pension must take into account any PAYG Withholding in relation to a pension paid to a person under age 60.

Exceeding this 10% maximum limit for a Transition to Retirement Pension will result in all payments being treated as lump sum benefit payments and not pension payments. As a Transition to Retirement Pension usually consists of ‘preserved’ monies, any payments which will be treated as lump sum benefit payments will be in breach of the preservation rules. The member may be treated by the ATO as illegally accessing preserved benefits, which will result in all of the payments from the Transition to Retirement Pension being taxed at their personal marginal tax rate, regardless of tax components, age and with no 15% tax offset.

9. Make the pension payment by 30 June 2016

It is vitally important to ensure that pension payments meant for 2015/16 will actually count in the 2015/16 income year. Making a pension payment at the end of 2015/16 via electronic transfer can easily result in that pension payment not going through until after 30 June 2016 and consequently counting in 2016/17. The ATO has on several occasions outlined their view of the timing of pension payments, similar to their view on the timing of contributions, as outlined above. Make sure that clients attend to the required minimum pension payment well before 30 June 2016.  

10. Pension payment must be cash

It is the view of the ATO and APRA that a pension payment must be a cash payment and cannot be made in kind (also known as an ‘in-specie’ payment). This has, in the past, ruled out making in-specie pension payments. However, with the ATO issuing SMSFD 2013/1 and 2014/2 which confirmed that a partial commutation counts towards satisfying the minimum pension payment requirement, an in-specie payment from a member’s pension account can be effected by way of a partial commutation of the pension. Note, if the member is under age 60, the fund will require the cash to satisfy any PAYG Withholding requirements, see next.

11. Don’t forget PAYG Withholding for benefit payments to members under age 60

Where a pension is paid to a member under age 60, the fund is required to abide by the PAYG Withholding requirements in relation to the taxable component. Any PAYG Withholding remitted to the ATO as part of the June 2016 Activity Statement will count as a payment in the 2015/16 income year and towards the 2015/16 minimum pension payment and, for a Transition to Retirement Pension, the 10% maximum pension allowed. The fund will also be required to issue the relevant PAYG Summary Statement to the member by the relevant due date.

Lump sum benefit payments to members under age 60 at the time of the payment, are also subject to the PAYG Withholding rules and whilst there is a $195,000 low rate cap for 2015/16, there is still the requirement for the fund to register as a PAYG Withholder and issue the relevant PAYG Summary Statement after 30 June.

12. Market valuation of assets

Although this is a simple process for assets that have a quoted market price, like listed stocks and managed funds, if your client’s SMSF have assets that are not on-market, such as real estate and collectables, it’s a good idea to line up the relevant assessors, where needed, early. External valuations may not be required every year, however, the superannuation law requires the SMSF trustee(s) to determine market value for each year’s set of financial statements.

13. Review the fund for any amounts owing by members or related parties

Now is a good time to review your client's SMSF and address any contraventions that may have occurred during the year without your knowledge. SMSFs lending money or providing financial assistance to members and relatives, and breaches of the in-house asset rules, are common problem areas. Under the new SMSF Penalty Regime such contraventions can lead to penalties as high as $10,800 per trustee, so best to have them tidied up before year end.

Specific Year End issues for 2015/16

In addition to the previous (baker’s) dozen of year end considerations, here are a few more that are specific to the 2015/16 income year:

Pre 1 July 2011 Collectables & Personal Use Assets

Funds that hold pre 1 July 2011 Collectables & Personal Use assets must comply with the specific rules for these types of assets from 1 July 2016 or dispose of these assets by 30 June 2016. For information about these rules please refer to my blog article “SMSFs with Collectables? Decision Time!

Non-commercial related party loans under an LRBA

Funds that have a related party loan as part of a Limited Recourse Borrowing Arrangement (LRBA) must review the terms of the loan for commerciality. The ATO published a Practical Compliance Guideline on how to ensure such loans are regarded as commercial so that the income from the LRBA is not treated as Non-Arm’s Length income (NALI). For information on the ATO guidelines and what must be done by 30 June 2016 please refer to my blog article “ATO ‘safe harbour’ guidelines for related party LRBA

STOP PRESS! - ATO announces extension to 31 January 2017 for LRBA related party loan compliance

It has been reported by SMSF Adviser online (30 May 2016) that the ATO has extended the 30 June 2016 deadline for SMSF trustees that have a related party loan under an LRBA to ensure that the related party loan is on commercial terms or complies with the safe harbour guidelines. The deadline has been extended to 31 January 2017.

This extended deadline means that the ATO will not select an SMSF for a review purely based on it having an LRBA for the 2014/15 or earlier year, provided the related party loan is on commercial terms or the LRBA is brought to an end, by 31 January 2017. It also requires the SMSF to make loan repayments of principal and interest for the year ended 30 June 2016, based on commercial terms, by 31 January 2017.

SuperConcepts can assist you and your SMSF clients with our related party loan review service. We will review your client's SMSF related party loan terms and advise on what needs to be done for the arrangement to comply with the safe harbour guidelines. Contact us on 07 3850 1200 and ask to speak to Mark Ellem for further details about this service.

Licensing for accountants advising in SMSFs

I am sure you are sick of hearing about it, however, 1 July is the start of the new licensing regime for accountants wanting to continue to advise on SMSFs, other than providing administration, compliance, audit and tax services. Latest figures from ASIC, as reported by SMSF Adviser (23 May 2016) is that ASIC has approved 149 applications for a limited license, with a further 308 applications under assessment.

Accountants who provide SMSF product advice from 1 July 2016 without the appropriate license can expect ASIC to take action.

“Frankly, if you decide after 1 July to give advice on establishing or operating an SMSF and you don’t have the requisite licence, where you’re not operating under a licence for someone who does, you’re acting illegally,” said Mr Greg Tanzer, ASIC Commissioner to SMSF Adviser.

And on that note…………………………

Happy End of Financial Year!

 

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