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New Year kick-off: 5 things SMSF trustees should consider right now

Jan 29, 2018, 15:36 PM

By Mark Ellem


Into a new calendar year and more than half way through FY 2017/18, now’s the perfect time to take stock of the super reform issues that need to be attended to.

CGT relief – Is your SMSF eligible?

CGT relief is available for SMSFs that, between 9 November 2016 and 30 June 2017, had members that:

  • Took action to comply with the $1.6m transfer balance cap; or
  • Had in place a transition to retirement income stream (TRIS).

The relief is specific to FY 2016/17. Those intending to access the relief must make an election to do so by the due date of their 2016/17 SMSF annual return. The ATO has announced that all SMSFs have until 2 July 2018 to lodge their 2016/17 SMSF annual return.

Accessing the CGT relief may have tax consequences, particularly for SMSFs using the unsegregated or proportionate method to claim tax exemption on current pension income in 2016/17. The proportionate method is available to SMSFs in pension and accumulation phase that use an actuary to determine the percentage of fund income that is tax exempt.

As we prepare 2016/17 draft financial statements we will send a CGT relief decision pack out to any SMSF clients who provided us with a pension commutation request to avoid exceeding the $1.6 million transfer balance cap or, who according to our records, were in receipt of a TRIS in the previous income year. The pack includes a trustee minute template and instruction guide that can be used to choose to apply relief. If you have any questions or require advice on CGT relief, please contact your Client Service Manager to arrange an appointment with one of our technical staff who can guide you through the rules.

Are you ‘retired’ and under age 65? This bit is important

If you have reached your preservation age but are under age 65, being ‘retired’ can be important especially if you are currently receiving a TRIS. From 1 July 2017, the income earned on fund investments paying a TRIS are taxed at 15% if it is not in ‘retirement phase’. Previously they were tax exempt.

The removal of the tax exemption has created the concept of a ‘TRIS in retirement phase’ and a ‘TRIS not in retirement phase’. A TRIS in retirement phase is exempt from tax on any income earned on fund investments that support it. The value of a TRIS in retirement phase is counted against the member’s transfer balance cap.

A TRIS moves from not being in retirement phase to retirement phase if the fund has been notified that the member is totally and permanently disabled, is terminally ill or has reached their preservation age but is under age 65 and has ‘retired’. If the fund has not been notified of one of these events it will remain a ‘TRIS not in retirement phase’.

The notion of retirement for some may mean the gold watch, retirement party and oversized ‘Sad to see you go’ card – but under the super law it is quite different. Retirement for super purposes depends on retirement age, your intentions and ceasing work. Anyone who is between 60 and 65 is considered to have ‘retired’ when an employment arrangement has ceased.

Case study

David is aged 61 and is an employee for company A. He receives a better employment offer from Company B and so resigns from Company A. He finishes on a Friday with Company A and starts with Company B on the following Monday. In David’s mind, he’s changed jobs, but, under superannuation law he has retired.

If David was receiving a TRIS, such an event would result in his TRIS becoming a ‘TRIS in retirement phase’, which means the fund will be tax exempt on the earnings allocated to the TRIS and it will count towards David’s transfer balance cap. Consequently, it is important for David to notify his fund that such an event has occurred. In an SMSF context, this may mean notifying his fund accountant or service provider that he has retired.

Be mindful of the reduced concessional contribution cap

The concessional contribution cap for everyone, no matter their age, is $25,000 for 2017/18. If you have salary sacrifice arrangements in place you should check that no more than $25,000 in employer and personal deductible contributions will be made to super in 2017/18.

It’s also worth noting that there are changes proposed which, effective 1 July 2018, will remove salary sacrifice contributions from offsetting an employer’s SG liability, which in turn may result in additional contributions being included and counted under the reduced cap.

Split contributions where it makes sense to do so

With the introduction of the transfer balance cap, you should consider longer-term strategies designed to equalise balances between couples. The ability to split up to 85% of concessional contributions from one spouse to another can help equalise members’ accounts over time. The current concessional cap is $25,000 which allows a spouse to effectively allocate $21,250 to the other spouse in the financial year after the contribution has been made. This strategy can provide some estate planning benefits if it is put in place effectively.

One of the benefits of equalising account balances between spouses is that it may assist in keeping one or both spouses under the non-concessional cap thresholds.

Case study

Rob has concessional contributions of $25,000 made to his SMSF in the 2017/18 financial year. He has a total super balance of just under $1.4m and decides to split 85% of the concessional contributions during the 2018/19 financial year to his spouse, Narelle, who has a total super balance of more $1.6m. By keeping the total super balance below $1.4 million Rob is able to access the two year bring forward rule if he wishes to maximise non-concessional contributions, provided all the other conditions are met.

Estate planning is not set and forget

Any estate plan should be regularly reviewed so that it meets your family’s changing needs and your wishes. The introduction of the super reforms is a trigger to review the appropriateness of your estate plan, even where you are not affected by the $1.6m transfer balance cap. A couple with combined transfer balance account balances of more than $1.6m could have an estate plan that is now out of date with their wishes. This may be due to the restricted amount that can be retained in retirement phase.

Dust off that estate plan, have a read and consider its appropriateness.

If you’re still not sure, contact your Client Service Manager to book an appointment with a member of our technical team.

Wishing you all the very best for the year ahead.