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30 JUNE 2016 Year End SMSF Strategy Checklist

taking a smsf loan? We have a smsf checklist to help you

The end of the financial year is fast approaching us, so now is the time to think about key strategies for your SMSF before 30 June 2016. There is still time!

Self managed superannuation funds (“SMSF’s) are about strategy. There are many SMSF strategies available which can be utilised to boost your retirement savings as well as minimize tax.

Recently, there has been a major shake up in Super announced in the 2016/17 Federal Budget on 3 May 2016 – which are in draft form however it is important to consider these changes for the current year in the event that the proposed changes come into law post 30 June

We have developed your 2015/16 year-end checklist to explain a list of key strategies for you and your SMSF preparation for 30 June 2016.

Concessional Contribution Caps

Proposed changes to the concessional contributions cap announced in the Budget from 1 July 2017 will reduce the concessional cap down to $25,000 across the board, regardless of your age.

Be sure to take advantage of the current concessional cap before 30 June 2016, to maximize your concessional contribution cap of $30,000 if you are under 49 years of age or $35,000 if you are 49 years of age or over.

Concessional contributions include:

  • Employer super contributions (compulsory 9.5%)

  • Salary sacrifice contributions

  • Personal contributions that you are eligible to claim a personal income tax deduction

There are many contributions strategies including contribution reserving, contribution splitting, spouse contributions, and salary sacrifice contributions amongst others.

Please find a link to our article on contribution reserving – double your contributions and save tax. Its an awesome strategy to implement pre-30 June.

Timing of Contributions

Be careful of transferring contributions to your fund after 27th June as you risk transfers of funds not being received by year end. Contributions must be appear in the funds bank account by 30 June to be included in the 2015/16 financial year. Otherwise, they risk being treated in the following financial year being 2016/17.

Where a contribution is not received in the SMSF bank account until July, it will be treated as a contribution in the 2016/17 financial year.

Claiming a Tax Deduction for Personal Contributions

Are you eligible to claim a tax deduction for personal super contributions?

If you are self-employed, an investor, in receipt of a pension and receive less than 10% of your income, including fringe benefits and other related payments from employment, you may qualify for a personal tax deduction to superannuation.

Self-employed may include sole traders, partnerships, investors, or contractors.

If you intend to claim a personal tax deduction, you must ensure that you provide the relevant ATO notice of intent to claim or vary a deduction forms to your SMSF accountant.

If you are unsure whether you are eligible to claim a tax deduction for your personal contributions, then please contact us for personalized advice.

Non-Concessional Contributions (after tax)

Proposed changes to the non-concessional contribution cap announced in the Budget will limit contributions to a lifetime cap of $500,000 from 3 May 2016. The lifetime non-concessional contribution cap will include all non-concessional contributions (after tax) made from 1 July 2007.

If implemented, the proposed lifetime cap of $500,000 will replace the existing annual cap of $180,000 (or $540,000 every three years under the bring-forward rule).

Therefore, although not law you will need to take into account your total non-concessional contributions made into super from 1 July 2007 in order to determine your remaining non-concessional contribution cap of the $500,000 lifetime cap available.

Where a person had exceeded $500,000 in non-concessional contributions from 1 July 2007 up to 7.30pm (AEST) 3 May 2016, 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. This announcement is fresh and the Treasurer is currently backtracking on the reform and we don’t see this as concrete as yet. In any case, it is important to understand the impact of the non-concessional contribution lifetime cap in the near future particularly if you are in the midst of a property purchase and relying on a non-concessional contribution to settle the property.

Can you claim the Spouse Contribution Tax Offset?

If your spouse is not working or is on low income and less than 70 years of age, then you may qualify for the spouse contribution tax offset of up to $540. For each $1 of spouse contributions you make, up to a maximum of $3,000, a tax offset of 18% is available.

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

 

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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

 

Claim the $500 Government Co-Contribution for Low-Income Earners

If you are under 71 years of age at the end of the financial year and your income is below $35,454 (full co-contribution), or between $50,454 and $35,454 (partial co-contribution), then you may be eligible for the government co-contribution of up to $500. If you qualify, you will need to contribute up to $1,000 as a personal contribution (after tax) to claim the maximum co-contribution available to you based on your income.

Salary Sacrifice

Salary sacrificing is an arrangement between an employer and employee, where the employee agrees to substitute part of their future salary in return for the employer providing them with other benefits of a similar value. Examples of salary sacrificing can include; superannuation, fringe benefits (employer provides employee with assets such as a car or paying personal expenses, health insurance or school fees), or exempt benefits (work-related benefits that employee may also use for personal use such as a laptop or mobile phone are exempt items not subject to FBT).

Salary sacrificing can be a useful strategy to reduce your individual taxable income by sacrificing a portion of your salary into superannuation up to the maximum allowable concessional contribution cap. In superannuation, your wages are taxed at 15% compared to your individual marginal tax rate if received as a salary.

Consider using this strategy to salary sacrifice a portion of your salary or a bonus paid to you before year-end. Now is an ideal time to implement a salary sacrificing arrangement with your employer for the 2016/17 year to maximize your concessional contribution caps by sacrificing an additional portion of your salary into super each pay period.

Note – salary sacrificing must be arranged with your employer before the work is carried out and cannot be implemented retrospectively.

Minimum pension payments

If you have an account-based pension or transition to retirement pension for your SMSF, please ensure you have satisfied at least the minimum amount to be paid from your SMSF under Superannuation Law by 30 June 2016 to continue to receive tax exemptions. Pension payments must be paid in cash from the SMSF bank account by 30 June 2016 to be included in the 2015/16 financial year.

The minimum pension amount is determined by your age and the percentage value of your pension account balance at either commencement date of the pension or 1 July each year, and are detailed below for 2015/16.

 

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Age

Minimum pension %

Under age 65

4

65 – 74

5

75 – 79

6

80 – 84

7

85 – 89

9

90 – 94

11

95 +

14

 

If you commence a pension during the financial year then your minimum pension amount is calculated pro-rata based on the number of days remaining in the financial year. For example, If you are under 65 and commence a pension on 1 January 2016 with a balance of $100,000, then your minimum pension amount will be (4% x $100,000 x 182/365) = $1,995 minimum payment.

If you are in a Transition to Retirement Pension, you must ensure that you do not exceed the maximum limit of 10%.

Property Valuation

All SMSF assets need to be recorded at Market/ fair value in your financial statements each year. There are a few options to support market / fair value of a commercial or residential property in a SMSF, including an independent valuation of the property by a licensed estate agent. Generally, the SMSF auditor will require sufficient appropriate audit evidence to support the valuation of the asset. The ATO has released “Valuation Guidelines for SMSF’s”. SMSFs in pension phase must receive an independent valuation each year. In any case, be sure that your valuation is reasonable.

Given the attention on SMSF Property by the ATO & ASIC, be sure to support the valuation and existence of the property particularly if held under a Limited Recourse Borrowing Arrangements (“LRBA”).

SMSF Insurance

SMSFs are required to consider insurance within the SMSF as part of the investment strategy of the fund. Ensure your investment strategy is up to date as well as your Trust Deed. Ensure your SMSF Insurance Policies are held in the correct name i.e. the fund should be the policy owner not you personally. If you do not have insurance and are seeking a personalised insurance review, please contact us to determine your best insurance strategy.

Related Party Loans

SMSFs that have a Limited Recourse Borrowing Arrangement (LRBA) related party loan are at risk of being non-compliant!

You need to review the terms of your LRBA related party loans to ensure these are compliant under the new ATO Practical Compliance Guidelines 2015/16. The ATO recently released a Practical Compliance Guideline publication to outline acceptable commercial terms for related party loan LRBAs. Key considerations as outlined in Safe Harbour 1 for related party LRBAs used to acquire real property (such as real estate) include, but are not limited to:

  • Interest Rate must reflect commercial interest rate (rate is 5.75% for 2015/16 year);

  • Fixed / Variable Interest, Terms of the loan (15 year maximum loan term);

  • Loan to Market Value Ratio (LVR) are limited to a maximum of 70% LVR for both commercial and residential property;

  • Security (mortgages must be registered over the property); and

  • Loan Repayments must be paid monthly of both principal and interest.

Please find further details available through the Practical Compliance Guidelines 2015/16 publication.

ATO has announced an extension to 31 January 2017 for LRBA related party loan compliance. Now is the time to start planning your strategy to ensure that your LRBA related party loan remains compliant.

Pre 1 July 2011 Collectables & Personal Use Assets

Funds that hold pre 1 July 2011 Collectables and 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, otherwise they risk being non-compliant.

Collectables and personal use assets are things like artworks, jewellery, vehicles, boats and wine.

The new rules specifically apply to areas such as; usage (not for personal use), display or storage (must not be stored in private residences), insurance (policies must be held in the name of the fund), leasing and selling. Refer to the ATO website for further guidance.

It’s time to review your SMSF auditor

While considering your strategy, you may also consider a free approach from a leading SMSF Auditor. If you are borrowing to invest in property, the ATO will focus on your fund in the 2016 – it is important to engage a SMSF auditor that understands the ins and outs of SMSF Property – choose Redwood.

We can help!

Don’t leave it to the last minute – review your SMSF strategy now and seek advice from a SMSF Specialist to assist you with end of year superannuation planning. Contact us on 1300 790 110 or service@redwoodadvisory.com.au to get a fresh perspective on your SMSF and GET YOUR SUPER MOVING….

Please note this article is for information purposes only and does not constitute financial or legal advice. Should you have any queries or require more information, please contact the team at Redwood on 1300 790 110.

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AUTHOR

Ivan Filipovic

Ivan Filipovic is an experienced, independent Property, SMSF and Finance Expert and the founder of Redwood Advisory. Ivan has been educating and coaching investors for over 15 years and has built a successful property portfolio with a number of positive geared properties across Australia.  Ivan provides valuable and honest guidance by educating Australians on how to invest successfully protect yourself with knowledge, contact Ivan today for a complimentary consultation on 1300 790 110 or email ivan@redwoodadvisory.com.au

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