The end of another financial year is only a few weeks away, making it the perfect time to ensure you have everything ready so your clients’ 2020/21 SMSF financials and tax returns can be completed without fuss.
Due to COVID-19 having an impact on SMSFs, such as the extended early release of super, this year there are a few things to which you need to pay more attention. We’ve put together a summary of the key considerations so your clients are ready for 30 June.
Contributions review
As always there are two concerns here, especially if you wish to maximise the contributions your clients can make and the dangers of going over their concessional or non-concessional contribution cap.
For concessional contributions, there is a universal standard cap of $25,000 that applies if your clients qualify. But if their total super balance (TSB) on 30 June 2020 is less than $500,000, they can have the benefit of carrying forward any unused concessional contributions. These are the concessional contributions under the cap that haven’t been fully used since 1 July 2018.
Time frames are always important to note if your clients wish to claim a tax deduction for personal concessional contributions. An election must be made to their SMSF, setting out the amount they will be claiming, and must be lodged with the fund. This must be done before their personal tax return is sent to the ATO for the 2021 financial year and no later than the end of the financial year after the contribution was made. Remember, there’s a bit of a twist as you need to lodge the notice with the fund before any part of the contribution is withdrawn or used to start a pension. The SMSF also needs to acknowledge its election before you lodge the income tax return.
A major consideration in making non-concessional contributions (NCC), which are not tax-deductible, is the amount of a client’s TSB. You can find out what this is from their tax adviser or through their myGov portal. The TSB determines the amount they can contribute to their SMSF without facing a tax penalty. If a client’s TSB is more than $1.6 million, a penalty will apply to any NCC they make and they could end up having to withdraw any excess that arises.
If your clients have a TSB of less than $1.6 million, and they qualify to make an NCC to their SMSF, they may be able to make up to $300,000 over a fixed three-year period immediately. The standard NCC is $100,000, but for anyone under 65 it is possible to bring forward up to the next two years’ standard NCC if they have a TSB of less than $1.5 million. If their TSB is less than $1.4 million, they can bring forward the next two years’ standard NCC and if it is between $1.4 million and $1.5 million, they can bring forward just one year’s standard NCC.
If your clients have triggered the bring-forward rule in either 2018/19 or 2019/20, their total NCC may be either $300,000 or $200,000 respectively, provided they have not exceeded the maximum of their TSB as at 30 June 2020.
Indexation of caps – strategy and seeking advice
From 1 July 2021, the TSB will increase to $1.7 million and the standard NCC will rise to $110,000. For clients under 65 thinking of using the bring-forward provisions this financial year, they may wish to seek further advice from you to see what can provide them with the greatest benefit. Where the amount of the caps changes, there are nearly always strategic advantages out of the timing of NCCs when this happens. Your clients may end up with advantages in making some contributions in late June and taking advantage of the indexed amounts from 1 July this year.
Investment strategy review
Ensuring a client’s investment strategy accurately reflects their SMSF’s current asset allocation is an important compliance responsibility. While there is a degree of flexibility with respect to movements in their overall asset allocation, it is good practice to review a client’s current asset allocation against their documented strategy. If the fund’s current allocation falls outside the documented strategy, they may wish to make an adjustment to either so they fall into line.
It is reasonable to expect clients’ asset allocation will have a degree of tolerance over the short term that falls either side of the long-term target. But a regular review is something your clients should get into the habit of doing as it’s required by super law.
Some of the more common situations where SMSF investment strategies should be reviewed include:
- trustees purchasing property for their fund, but not updating the investment strategy to reflect the purchase,
- an asset class, such as listed shares, being over the fund’s target position due to significant rises or falls in the underlying holdings,
- trustees moving from accumulation to pension phase and changing asset allocation due to cash-flow needs, but neglecting an investment strategy update, and
- trustees choosing to invest in predominantly one asset or asset class – 90 per cent or more of the fund – can lead to concentration risk.
In this situation, a fund’s investment strategy needs to document how the trustees have considered the risks associated with a lack of investment diversification. This should include how high concentrations of assets can meet the fund’s investment objectives, including predicted returns and cash-flow requirements.
Asset concentration risk is heightened in leveraged funds, especially where the fund has used a limited recourse borrowing arrangement to acquire the asset. This can expose members to a loss in the value of their retirement savings should the asset decline in value. It could also trigger a forced asset sale if loan covenants (for example, the loan-to-valuation ratio) are breached.
Capital gains tax review
In the lead-up to the end of the financial year, trustees or advisers may wish to undertake tax planning to minimise the capital gains tax position of their SMSF. This is usual where an SMSF has assets with an unrealised loss position. Trustees may seek advice on whether it is worthwhile to crystallise the unrealised losses to reduce any of the fund’s realised gains. It’s important to understand there may be tax consequences from simply selling an asset and buying it back immediately.
Asset revaluation
As an adviser, one of your most important obligations is to ensure, for the purposes of preparing a fund’s financial accounts, that assets are valued at market value each year. This is a legal requirement and ensures the value of the fund assets and member balances are accurate. There are valuation implications for each member’s TSB, as well as taxing the fund’s income if it is paying pensions.
The value of some of a fund’s investments may be easy to obtain, such as listed company shares and bank account balances. However, when it comes to real estate and other fund investments, market value may not be that obvious and a valuation may be required from an appropriately qualified person, such as an independent registered valuer or real estate agent.
For assets where a valuation is not easy to determine, it is necessary to obtain evidence to support whatever value you decide on as this will assist when the fund is audited. For more exotic assets, such as privately held unlisted shares, unit trust holdings or artworks and collectables, the matter can always be raised with a fund’s auditor to see whether the fund is on the right track.
Pension review
Make sure at least the minimum pension is paid for any existing pensions and the maximum level is not exceeded for transition-to-retirement income streams. A pension that does not satisfy the payment rules will mean any income on assets supporting the pension will be taxed at 15 per cent rather than be tax-exempt.
When deciding to draw more than the minimum pension, a client may wish to consider taking any amount over the minimum as a pension payment or as a lump sum. The reason is that lump sum commutations of a client’s pension balance will result in a reduction of their transfer balance account and can be used to access additional pension benefits in future.
If a client wishes to draw a lump sum from their pension balance, it is worthwhile to keep a note of it in the SMSF’s records, otherwise it may be treated as a pension payment. If they have more than one pension account or possibly an accumulation account in their SMSF, then part of the decision will be whether any additional payment comes from one or more of those accounts.
Some of the things to consider if a client has multiple pension accounts is the tax-free proportion of each pension and whether grandfathering could apply to qualify for Centrelink benefits or the Commonwealth Seniors Health Card. Also, you may like to take into consideration whether the pension is reversionary or non-reversionary or the impact of any binding death benefit nominations.
Conclusion
These are just some of the things you should be considering for your clients as you wrap up this financial year.
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Graeme Colley is SMSF technical and private wealth executive manager at SuperConcepts.