We all would like to reduce our tax exposure and minimise the risk of an audit by the regulators. This end of financial year update series outlines the actions you can take to do exactly that! This particular blog is targeted for those with a SMSF.
What’s new
Carry forward unused concessional contributions
If you have:
- A total superannuation balance below $500,000 as at 30 June; and
- Not utilised your entire concessional contributions cap ($25,000) for the year
then you can ‘carry forward’ the unused amount on a rolling 5 year basis.
Concessional contributions include employer contributions (super guarantee and salary sacrifice) and personal contributions where you have claimed a tax deduction.
2018-19 is the first year where these amounts can be carried forward. For example, if your total concessional contributions in the 2018-19 financial year were $10,000 and you meet the eligibility criteria, then you can carry forward the unused $15,000 over the next 5 years. You may then be able to make a higher deductible personal contribution in a later financial year. If you are selling an asset and likely to make a taxable capital gain, a higher deductible personal contribution may assist in reducing your tax liability in the year of sale.
Remember:
- Your total superannuation balance must be below $500,000 on 30 June of the prior year before you utilise any carried forward amount (within the 5 year term); and
- In some cases, an additional 15% tax can apply (30% total) to concessional contributions made to super where income and concessional contributions exceeds certain thresholds ($250,000 in 2018-19). Your income could be higher than usual in the year when you sell an asset for a capital gain.
This is an excellent concession to help you top up your superannuation, especially where you are out of the workforce at some stage.
Work-test exemption for recent retirees
The work-test exemption provides a one-year exemption from the work test to allow recent retirees to boost their superannuation balances. Currently, to make voluntary superannuation contributions, individuals need to meet a work-test, that is, the member must have worked at least 40 hours within 30 consecutive days in that financial year before the SMSF can accept voluntary contributions from them.
Recent regulation changes mean that if the member passed the work-test in the previous financial year, they can make contributions over the following financial year without passing the work-test.
Fund house-keeping
Minimum pension payments
In order to be able to receive the tax-free income associated with having a retirement-phase 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 you 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.
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 no later than 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 $2,100 applies for non-compliance.
- Rectification directions – requiring the SMSF’s trustee/director to take specific action to rectify the contravention within a specific timeframe.
- Administrative penalties – penalties from $1,050 to $12,600 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:
- Breaches the sole purpose test
- Lends to members of the fund
- Breaches the borrowing rules
- Breaches the in-house asset rules
- Enters into prohibited avoidance schemes
- Fails to notify the regulator of significant adverse events
- Breaches the arm’s length rules for an investment
- Promotes an illegal early release scheme
These powers also enable the ATO to look back to any breaches from previous years that were unresolved at 30 June 2019.
Review the fund’s investment strategy
Trustees are required to ‘regularly review’ the fund’s investment strategy. We recommend that trustees review the strategy and document the review at least annually or when the circumstances of the fund change.
Where an SMSF has entered into a borrowing arrangement to acquire an asset, trustees should seek advice to structure insurance cover either inside or outside the SMSF 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 insurance 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. If your firm provides financial planning insert: (Adviser Name) is available to assist you with any questions you might have or to help you correctly structure your insurances. You can reach him/her on (insert email) or by phone on (insert phone).
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 fund’s 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.
- 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.
If you use software with data feeds, please ensure you adapt this section to remove items you do not need from the client such as bank statements, and some investment information.
- Bank statements (including any new accounts including term deposits) from 1 July 2018 to 30 June 2019.
- Contributions:
- A breakdown by member of the types of contributions received by the fund.
- Pensions:
- A breakdown by member of the types of contributions received by the fund.
- Documentation supporting any pensions commenced during the 2018-19 financial year.
- Investments:
- Portfolio valuation as at 30 June 2019 and transaction history reports (if applicable)
- All documentation from your portfolio or wrap provider including year end tax statements
- All dividend & tax statements
- Buy & sell contracts for shares sold or purchased
- 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
- Any other document relating to an investment held within the fund which has not been covered above
- Property:
- 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 2019
- A copy of the current lease/rental agreement (if not already provided)
- 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
- Rental appraisal & market valuation from an agent (if you are using one to manage your property)
- Rollovers:
- Copy of any Rollover Benefits Statements for money rolled into the fund during the period 1 July 2018 to 30 June 2019
- Insurance:
- Copy of life insurance policy annual renewal documentation form (the ownership of the policy should always be in the name of the superannuation fund)
- Copy of documentation relating to any new insurance policies from 1 July 2018.
- Other:
- If you have transactions in your fund that do not fall into the above categories, please ensure that you provide us with full details
Best of luck!