Posts Categorized: SMSF

A super asset protection story

I have just read an interesting super asset protection story.

Most people understand that super is a low tax rate environment and one of the strongest forms of asset protection. The extent of that asset protection now seems to be much stronger than previously thought.

Put simply, one can have their pants sued off, but one’s super will be protected except for last minute contributions made to defeat creditors.

In the case of The Trustees of the Property of Morris (Bankrupt) v Morris (Bankrupt) 2016, a widow received two lump sum payments out of her late husband’s super.  Her late husband was a bankrupt and she was also declared bankrupt after his death.  It was held that those lump sum amounts could not be paid over to her trustee in bankruptcy and shared with creditors.  So the asset protection of super lasted beyond the deceased’s lifetime as the lump sums were held to be a crystallised interest in his super fund.  Arguably this protection would also extend to reversionary pensions and binding death benefit nominations.

Perhaps this court case is a timely reminder of the benefits of super when recent changes have some re-evaluating how much they hold within super whilst others may find it harder to accumulate super given the upcoming reduction in the contributions caps.  As has always been the case, a specialist estate planning lawyer can guide you through all of the important matters.

At MRS, we will spend today planning for your success tomorrow.

Beware of the $1,600,000 pension cap

Beware of the $1,600,000 pension cap. If you thought it was straight forward, then think again. 

It’s complex and the costs of getting it wrong are high as evidenced by:-

  • You have to monitor your position. You have to know the balance of your transfer balance cap (your amount in pension mode) against the general transfer balance limit (the allowable limit).
  • If you exceed your transfer balance cap at 30th June 2017, you will receive an excess notice which will require you to pay tax and withdraw sufficient monies to get beneath the general transfer balance limit. Doing nothing is not an option if you currently exceed or may exceed your transfer balance cap. Thankfully our SMSF clients will know where they are at with our real time SMSF reporting system and will be able to take prompt action. Those with public funds may know their balance as of the day before but will find it, to say the least, difficult to bring themselves sufficiently under their cap as redemptions can take weeks to process.
  • Many with their own super fund may well know the value of their super interests.  But what if the fund’s assets include  assets that aren’t valued daily such as properties?  One needs to have a very good understanding of the value of all fund assets.  And keep in mind that Melbourne property prices posted double digit growth for 2016.
  • You need to be aware that the very useful estate planning tool of reversionary pensions may no longer be such a wonderful solution. The reversionary pension will count against your transfer balance cap – although one has 12 months grace in pulling money out as a lump sum.
  • The growth in your pension assets doesn’t count against your transfer balance cap. Think carefully about what assets you keep / put into pension mode.
  • And here is a real nasty one. If you exceed your transfer balance cap, then you will be denied taking advantage of any further increases in the cap. So when it increases from $1,600,000 to $1,700,000,  to $1,800,000 and so on, you will be denied these increases if you have ever exceeded your transfer balance cap.

These are just some of the issues to be addressed well before July 2017.

Inaction can be the worst action.

With the removal of the accountant’s exemption as from June 2016, accountants can no longer provide any form of financial planning advice.  The only way for you to properly address your situation is to obtain financial planning advice and do so from a financial planner who understands these complex tax rules.

So what are the ins and outs of the $1,600,000 pension cap?

July is now not that far away and by then the amount of monies you can have pension mode will be limited to $1.6 million. So what are the ins and outs of the $1,600,000 pension cap?

The $1,600,000 will be indexed in $100,000 increments. It will also be recorded and tracked like a general ledger account with various transactions and events either adding to or reducing the balance.

Items that will count against the balance include:-

  • The balance of any pension account as at 30 June 2017.
  • Reversionary pensions commenced between 1 July 2016 and 30 June 2017 (and which will be subject to a separate blog).
  • Superannuation pensions started after 30 June 2017.
  • Reversionary pensions started after 30 June 2017.
  • Excess transfer balance earnings (a.k.a. the penalty for exceeding a pension cap).
  • Reversionary death benefits (and which will also be subject to a separate blog).
  • Defined benefit income streams (as rare as they are these days).

Items that will reduce one’s balance include:-

  • Amounts converted back into accumulation mode.
  • Structured settlement contributions (being personal injury payments).
  • Losses due to fraud.
  • Transactions voided under the Bankruptcy Act.
  • Family Law superannuation splits.
  • Pensions that fail to comply with the standards (with the most typical occurance being a pension that ceases as the minimum pension has not been made).

It is important to note that the pension payment will not be reduced by:-

  • Pension payments.
  • Investment losses – although the government’s 364 page Explanatory Memorandum contemplates the impact of another 2008/2009 financial meltdown. Paragraph 3.103 states at the government will review the impact of the transfer balance in the event of a microeconomic shock that substantially affects retirement incomes. It is only a stated intention to review – it doesn’t say they will do anything and doesn’t say how big a shock it has to be.

The superannuation changes are complex (as evidenced by a 364 page explanatory memorandum) and require many to properly review their affair and to do so well before July.

In this blog, we have simply outlined the technicalities of the new pension cap. In future blogs we will explore various aspects of this in more detail as well as addressing some of the other more significant super changes. 

At MRS, we will spend today planning for your success tomorrow.

The new $1,600,000 pension cap

The new super rules first announced in this year’s Budget and passed by the Senate last month will include a new limit as to how much money one holds within pension mode. As from June 2017, there will be a $1,600,000 pension cap (which will be indexed in $100,000 lots). 

The threshold will be calculated as the accumulated amounts one has commuted into pension mode less any commutations. Pension payments do not reduce your limit.

If Fred was to move part of his super accumulation balance into pension mode in June 2016 and do so with $1,600,000, he will not be able to move any further monies into pension mode until the threshold is indexed to $1,700,000. If that $1,600,000 grows to $3,200,000, he is entitled to keep that within pension mode.  That’s great.  On the flip side though, if it falls to $800,000, then that will be doubly unfortunate as Fred will not be able to top up.

Those in pension mode are going to have to think very seriously about what assets they put into pension mode and when they do so.

There is also another issue here in that if Fred only put $800,000 into pension mode in June 2017 and thereby only use half of his threshold, he can then only top up with $50,000 when the threshold increases to $1,700,000. It’s a strange system and careful planning is required.

At MRS, we will spend today planning for your success tomorrow.

New concessional contribution limit

The super changes first announced in this year’s Budget were passed by the Senate on Wednesday 23rd November. With that we will now have a much lower concessional (deductible) contribution limit from July next year.

The limit for the current 2016/17 financial year is $35,000 per annum for those aged 49 or older on 30th June 2016; $30,000 for those younger.  The limit for everyone will fall to $25,000 as from the 2017/18 year.  And with the non-concessional limit then also falling to $100,000 (subject to transitional and bring forward rules), many people will have to re-calculate how they are going to accumulate sufficient capital upon which they can retire.  Long gone are the days when one could rectify years of no planning for retirement by making concessional contributions of around $100,000 over a few years.  Retirement planning need to now start at an earlier age.

Thankfully one of the positive changes ignore by the press is one that allows those that have been out of the work force for an extended period to make catch up on contributions in excess of the annual limit. They 10% employment income test will also be removed.  It’s not all bad news.

At MRS, we will spend today planning for your success tomorrow.

New non-concessional contribution limits

The super changes first announced in this year’s Budget were passed by the Senate on Wednesday. With that we now have a much lower new non-concessional contribution limit; that being the after tax contributions one can make into their super fund which are not taxed when received by a super fund – that is those monies that go into a super fund tax free and which come out tax free.

The current limit is $180,000 per annum but that will fall to $100,000 from July 2017. And with the concessional limit then also falling to $25,000, many people will have to re-calculate how they are going to accumulate sufficient capital upon which they can retire.

The bring forward rule will remain. That rule allows those under 65 to make three year’s worth of non-concessional contributions in one year whether that be from an inheritance, windfall or proceeds from an asset sale.  In the future, this means that no more than $300,000 can be contributed in any one year.  The limit to 30th June 2017 remains at $540,000 but is subject to what has already been described by some as an unusual and complicated transitional rule.  Whilst the limit may remain at $540,000 for this financial year, it will be less for those who under contributed in 2015/16 or do so in 2016/17.  Make sure you understand what your limit is before making any non-concessional contributions before 30th June 2017.

At MRS, we will spend today planning for your success tomorrow.

New super rules now law

Those largely unpleasant superannuation changes announced in this year’s Budget are now law.  The Senate passed them yesterday.

As we explained to out clients in a seminar on Tuesday night, wile some of the changes are quite positive, many them will have substantial impacts upon how people can accumulate wealth for retirement.  Indeed, with a new concessional (deductible) cap of only $25,000 from July 2017, it will become difficult for many to fund their retirement through super as their parents did.  If it wasn’t already true enough, many people will be forced to address their retirement planning at a much earlier stage in life.

Ignorance and inaction rarely pay off and doing nothing will cost some a great deal.  It is critical you understand what you need to do under the adverse changes and what you can do to make the most of the positive changes.

Should your SMSF be registered for GST

Should your SMSF be registered for GST?  Unless it has to be because of its turnover, I suggest not. 

A fund can’t claim back all of the GST on its accounting, actuarial and audit fees. It therefore means that the cost of the time required by the trustees and the accountant are usually far less than any minor GST claim.

If your fund is registered for GST because of commercial rents, then that may be a different story. The fund will be able to claim back all of the GST it incurs on commercial property expenses – but gain it is an equation of time & cost versus GST claimed back.

We welcome your call if you are not sure what is best for your fund.

At MRS, we will spend today planning for your success tomorrow.

 

When a SMSF is no longer an option

What do you do when a SMSF is no longer an option?

This is a situation that confronts those with their own self managed super fund (SMSF) when they:-

  • Lose mental capacity,
  • Otherwise no longer have the time or inclination to fulfil all SMSF trustee obligations,
  • Have become disqualified from continuing to act as a SMSF trustee (after having become bankrupt or convicted of an act of dishonesty), or
  • Are about to move overseas for more than two years and become a non-resident of Australia tax purposes.

There are a couple of options. One commonly unknown option is to replace the current members as trustee(s) either in their own names or as a director of a corporate trustee and replace them/it with an APRA approved trustee.  One key benefit of this option is that the super fund has not been deemed to dispose of its assets and therefore does not crystallise any capital gains tax liability.

In addition to this important taxation consideration, there are some other important options, advantages and disadvantages. You can discuss these financial planning considerations with a financial planner.

At MRS, we will spend today planning for your success tomorrow.

 

Three proposed changes to super

On Thursday, the Treasurer Mr Scott Morrison announced three proposed changes to super.

The three changes to those changes announced in this year’s Budget are:-

  1. A new non-concessional contribution (non-deductible) limit system.
  2. Deferment of the concessional catch-up system.
  3. Abandonment of the proposal for those aged between 65 and 74 to be able make concessional and non-concessional contributions without having to first satisfy a work test.

Yet not all is as bad as what the press may have you believe. Yes, some of the changes are unpalatable.  Yes, future generations will not be able to accumulate significant sums in super as previous generations have.  But that all said, there are still some sensible and attractive reform announcements from this year’s Budget.  If you want to read more about those tax changes, email accountants@mrsaccountants.com.au and we will forward you a copy of our 2016 Budget briefing paper and addendum thereto.

With all this negativity and uncertainty about super, it is important to remember two things:-

  1. Super is before all else a low tax environment with current tax rates being 15% on contributions, 15% on earnings within accumulation mode (10% for capital gains) and 0% on the earnings on the balance in pension mode. These tax rates are less than those for many working Australians, often significantly so.
  2. It is arguably the best asset protection vehicle.

So don’t be misled by all the negativity and political debate. It would though just be nice to return to the position we had from 1983 until 2006 when we had a prolonged period of sustained stability and promotion of super (as both Keating and then Costello understood the benefit to the government purse on encouraging people to look after themselves rather than relying on the age pension at a time of rapidly ageing population).

 

At MRS, we will spend today planning for your success tomorrow.