9 Dakota Drive Parafield Airport South Australia 5106 POSTAL ADDRESS PO Box 68 Salisbury South SA 5106 TELEPHONE 08 8250 0035 FACSIMILE 08 8281 3522 EMAIL <admin@obrienco.com.au> ABN 95 183 102 609 SELF MANAGED SUPER FUNDS Important EOFY actions Reducing your tax exposure, maximising the opportunities available to you, and reducing your risk of an audit by the regulators is in your best interests. With the end of the financial year fast approaching, this update will help you do exactly that: In brief - A summary of key changes and actions. What s new - An explanation of key changes that may affect your SMSF. Fund house-keeping Essential pre 30 June actions. What we need from you - an outline of what we need to manage your 2016-17 fund compliance. There are a number of significant changes that apply to superannuation fund from 1 July 2017. We briefly explain these in this letter but please call us if you would like to better understand how these changes impact on your fund. We want to help you achieve the best result for you and your SMSF. If there is any additional assistance we can provide, or if you would like us to review your situation, please contact us. In brief Date Pre 30 June 2017 Changes and actions Understand the total superannuation balance of fund members - for significant assets, a valuation may be required. Ensure that contributions are made and received by 30 June. If contributions are by EFT, ensure that the contribution is recognised in the bank account as at 30 June. Where applicable, ensure minimum pension payments have been withdrawn from the fund s bank account by 30 June. Review investment strategy including any insurance held by the SMSF Rectify any outstanding compliance issues noted by your auditor. Review any salary sacrifice arrangements to ensure they are consistent with the new contribution caps and still appropriate. 30 June 2017 Tax exemption for transition to retirement pensions ends From 1 July 2017 The requirement that an individual must earn less than 10% of their income from employment activities to be able to claim a deduction for personal superannuation contributions ends. Cap on concessional contributions (before tax) reduces to $25,000 for everyone. Cap on non-concessional contributions (after tax) reduces to $100,000. Page 1 of 7
$1.6 million transfer balance cap limits how much money a member can transfer into or hold in a tax-free pension account. Excess amounts are subject to a transfer balance tax. Threshold to access the tax offset for contributions to a spouse increased to $37,000 (partial offset available up to $40,000). Threshold for low income super tax offset increased to $37,000. The threshold at which high-income earners pay Division 293 tax on their concessionally taxed superannuation contributions reduced to $250,000 (from 300,000). 1 July 2018 Ability to make catch up superannuation contributions introduced for people with super balances below $500,000. What s new Concessions intended to commence for over 65s who contribute the sale proceeds of their family home to super. The wide-ranging superannuation reforms come into effect on 1 July 2017. There are a number of significant changes that will impact on SMSFs and their members: Understand the total superannuation balance of member accounts At 30 June 2017, SMSF Trustees will need to know the total superannuation balance held by members. If you have assets such as real estate in your SMSF, and to an extent other assets such as collectables, and artwork, you will need to have a current valuation of those assets. Real estate property values in particular may have varied dramatically over the last few years and should be reviewed. The value of the asset needs to be arrived at using a fair and reasonable process. Because of the extent of the changes, it is worth considering the use of an independent and qualified valuer for some assets. Your total superannuation balance is the total value of your accumulation and retirement phase interests and any rollover amounts not included in those interests. The balance is valued at 30 June each year and it is this value that may determine what you can and can t do during the following year. For example, if your total super balance is $1.6m or more at 30 June, you are restricted from making further nonconcessional contributions in the next year as these contributions may create an excess contribution. And, if your balance is close to the $1.6m cap then the fund can only accept limited non-concessional contributions. Introduction of the $1.6m transfer balance cap Fund members receiving a pension or annuity are subject to a $1.6m transfer balance cap on amounts in tax-free pension accounts. The cap is essentially a limit on how much money a member can transfer into or hold in a tax-free pension account. If you have $1.6m or more in a pension phase account, you will need to reduce the pension value level back to the cap before 30 June. If the excess amount is not removed from the pension phase account the amount will be subject to a transfer balance tax. If you opt to sell fund assets to manage the cap, transitional capital gains tax relief may be available to manage any adverse tax outcomes. Please talk to us before taking action to ensure you are fully aware of the implications on your individual scenario. Page 2 of 7
Tax exemption for transition to retirement pensions ends The tax exemption on the earnings on assets supporting Transition to Retirement Income Streams will be removed from 1 July 2017. For tax purposes, earnings on transition to retirement pensions will be treated in a similar way to accumulation account earnings. The rule that allows individuals to treat certain superannuation income stream payments as lump sums for tax purposes will also be removed from 1 July 2017. New superannuation contribution caps The superannuation contributions caps will change from 1 July 2017. Non-concessional contribution cap Concessional contribution cap 2016-17 2017-18 $180,000 $100,000* <49 at 30 June 2016 $30,000 49+ at 30 June 2016 $35,000 All ages $25,000 *subject to your total superannuation balance at 30 June 2017. Deductibility of super The ability to claim a tax deduction for superannuation contributions will be broadened from 1 July 2017. Currently, to claim a tax deduction for super contributions members need to earn less than 10% of their income from salary or wages etc. From 1 July 2017, the 10% rule will be abolished. More high income earners pay additional tax on super contributions The additional tax paid by high income earners on concessionally taxed superannuation contributions will apply to more people from 1 July 2017 when the threshold for this tax reduces from $300,000 to $250,000. The tax is applied at 15% of an individual s taxable concessional contributions above the threshold. Tax relief extended for merging super funds The Government intends to extend the current tax relief for merging superannuation funds until 1 July 2020. Since December 2008, tax relief has been available for superannuation funds to transfer capital and revenue losses to a new merged fund, and to defer taxation consequences on gains and losses from revenue and capital assets. This tax relief was due to lapse on 1 July 2017. Using super to save a deposit for first home owners The Government has announced that from 1 July 2017, it intends to allow would be first home buyers to make voluntary contributions to superannuation that can then be withdrawn for a first home deposit, along with associated deemed earnings. While contributions made under the First Home Super Savers Scheme can be made from 1 July 2017, the first withdrawal cannot be made until at least 1 July 2018. Page 3 of 7
In practice, first home buyers will be able to save for a deposit by salary sacrificing into their superannuation fund over and above their normal compulsory superannuation contributions. Encouraging the over 65s to downsize The Government intends to allow those over the age of 65 to make a non-concessional contribution of up to $300,000 from the proceeds of selling their home from 1 July 2018. This non-concessional contribution will be excluded from the existing age test, work test and the $1.6 million balance threshold (but will not be exempt from the $1.6m transfer balance cap). The Government is enabling both members of a couple to take advantage of the concession for the same home. So, if you have joint ownership of the property and meet the other criteria, both people can make a non-concessional contribution up to $300,000 ($600,000 per couple). The measure will apply to sales of a principal residence owned for the past ten or more years. Sale proceeds contributed to superannuation under this measure will count towards the Age Pension assets test. Fund house-keeping Minimum pension payments In order to be able to receive the tax-free income associated with having a pension, the minimum pension payment needs to be withdrawn from the fund s bank account prior to 30 June. The minimum pension amount would have been outlined to you, but please let us know if need to reconfirm this amount. Valuing SMSF assets SMSFs are required to value their assets at market value. Depending on the situation, a market valuation may be undertaken by a: Registered valuer Professional valuation service provider Member of a recognised professional valuation body, or A person without formal valuation qualifications but who has specific experience or knowledge in a particular area. For real property, the valuation may be undertaken by anyone as long it is based on objective and supportable data. A valuation undertaken by a property valuation service provider, including online services or a real estate agent is acceptable. However, where the value of the asset represents a significant proportion of the fund s value or where the nature of the asset indicates that the valuation is likely to be complex, you should consider the use of a qualified independent valuer. Page 4 of 7
In general, real estate does not necessarily need a formal valuation each year by a licenced valuer unless there is a significant event that occurs during the year which may affect the previous valuation. A significant event could be one that directly involves the property itself, the fund on a general level such as one of the fund s members going into pension mode, or if the asset represents a significant portion of the fund s value. Contributions must be received by 30 June To claim a tax deduction for super contributions (as an employer or as an individual), the payment needs to be received by the fund before 30 June. Merely incurring a liability is not enough. If you are making a personal superannuation contribution that you want to claim as a tax deduction, you need to write to your fund in their approved form and advise them of the amount you intend to claim as a deduction. The superannuation fund then needs to acknowledge your notice of intent and agree to the amount you intend to claim as a deduction. This will normally be in the form of a notice or certificate from the fund to confirm the tax deductibility of the contribution. Review and rectify any outstanding compliance issues If your auditor has highlighted any breaches or issues in previous year fund audits, you should review and rectify these issues by 30 June. SMSF compliance is taken very seriously by the Australian Taxation Office (ATO) and they have a number of powers to address non-compliance: Education directions - require the trustee/director to complete an ATO approved education course within a specific timeframe. An administrative penalty of $900 applies for non-compliance. Rectification directions - requiring the SMSF s trustee/director to take specific action to rectify the contravention within a specific timeframe. A penalty of up to $1,800 per breach applies for noncompliance. Administrative penalties - penalties from $900 to $10,800 apply to specific breaches. Each individual trustee is liable for the penalty and directors of a corporate trustee are jointly and severally liable. The penalties are payable by the trustee/ director and not refunded by the SMSF. Informal arrangements to rectify minor breaches Enforceable undertakings Disqualification of a trustee Allowing the SMSF to wind up Notice of non-compliance Freezing an SMSF s assets Civil and criminal penalties where the fund: o Breaches the sole purpose test o Lends to members of the fund o Breaches the borrowing rules o Breaches the in-house asset rules o Enters into prohibited avoidance schemes o Fails to notify the regulator of significant adverse events o Breaches the arm's length rules for an investment o Promotes an illegal early release scheme Theses powers also enable the ATO to look back to any breaches from previous years that were unresolved at 30 June 2017. Page 5 of 7
Review the fund s investment strategy Trustees are required to regularly review the fund s investment strategy. We recommend that trustees review the strategy at least annually or when the circumstances of the fund change, and document this review. Where a SMSF has entered into a borrowing arrangement to acquire an asset, trustees should consider the need for any insurance cover inside the fund to assist in meeting the on-going obligations of the debt repayments. The fund s ability to meet the on-going debt repayments can be severely jeopardised where one member of the fund dies, as the fund may have needed to utilise contributions that were being made for that member to meet the repayments. Such a scenario could result in the fund having to sell the property. Review insurance inside your SMSF SMSF trustees need to consider the need for insurance cover for the fund members when formulating and reviewing the fund s investment strategy. Superannuation funds are only able to offer or take out new insurance cover where the definitions are consistent with the death, terminal illness, permanent incapacity and temporary incapacity conditions of release under the Superannuation Industry Supervision Act. It s important that you review superannuation inside your SMSF not just for compliance with the law but also effectiveness. An important issue to consider is how any insurance inside your fund should be structured; that is, from where the premiums are paid from the fund and what account any policy proceeds will be paid to inside the fund. Correctly structuring insurance inside your fund can be complex. We recommend that SMSF Trustees seek the advice of their financial adviser to achieve the most tax effective outcomes for insurance proceeds, especially on the death of a member. Contributions you didn t know you made A contribution to a fund can be more than just a deposit of money into the bank account of a superannuation fund. It could include: Money In-specie asset transfers Paying fund expenses Increasing the value of a fund asset Forgiving a funds debt Meeting a fund liability Rendering services to the fund at less than market value Guarantor arrangements Some Discretionary Trust distributions Trustees can often be surprised by what is considered to be a contribution, for example: In-specie transfer - If an asset is transferred or acquired from a related party for less than fair market value, the difference may be treated as a contribution. Capital improvements - Capital improvements to existing fund assets for no consideration or less than arm s length consideration may be treated as a contribution. Debt forgiveness - A contribution is made if a loan, entered into by the fund, is forgiven by the lender (related party). The contribution is made when the deed of release is executed that then relieves the fund from the obligation of repaying the debt. Page 6 of 7
Guarantor arrangements - A contribution occurs if a guarantor to a debt of the fund (trustees in their own right) satisfies a loan obligation of the fund and then forgoes the right of redemption against the fund (trustees) itself. What we need from you This is a general list of what we need to complete your fund s tax and accounting requirements. Bank statements (including any new accounts including term deposits) from 1 July 2015 to 30 June 2016 Contributions: o A breakdown by member of the types of contributions received by the fund. Pensions: o A breakdown by member of the types of contributions received by the fund. o Documentation supporting any pensions commenced during the 2015-16 financial year. Investments: o Portfolio valuation as at 30 June 2016 and transaction history reports (if applicable) o All documentation from your portfolio or wrap provider including year-end tax statements o All dividend & tax statements o Buy & sell contracts for shares sold or purchased o Any other documentation received during the year that relates to takeovers, restructures, bonus shares, consolidations etc., for shares held by the fund. Usually these documents advise you to retain them for taxation purposes o Any other document relating to an investment held within the fund which has not been covered above Property: o Agent statements (either monthly or annual) if using an agent to manage property, otherwise, all invoices and rent receipts for the year ending 30 June 2016 o A copy of the current lease/rental agreement (if not already provided) o Documents for property bought or sold, including the date you entered the contract and the date the asset was first used or installed ready for use Rollovers: o Copy of any Rollover Benefits Statements for money rolled into the fund during the period 1 July 2015 to 30 June 2016 Insurance: o Copy of life insurance policy annual renewal documentation form (the ownership of the policy should always be in the name of the superannuation fund) o Copy of documentation relating to any new insurance policies from 1 July 2015 Other: o If you have transactions in your fund that do not fall into the above categories, please ensure that you provide us with full details Page 7 of 7