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CEO of the SMSF AssociationJohn Maroney provides some end of financial year tips for SMSF trustees.
What things should SMSF trustees review at EOFY?
Certainly contributions are a key area. A lot of people think about making extra contributions or for those that make them on their own behalf as we get into the last month of the year. So one of the interesting aspects is there will be indexation of contribution caps applying from the start of next year. And that affects both the total amounts. So for non-concessional contributions the annual limit at the moment is $100,000. That will increase to $110,000.
But for those that activate their bring-forward arrangements, three years of contributions can be made. So at the moment, that’s a total of $300,000. So if you haven’t yet activated, that would be $300,000 starting from this year for the next two years. If you wait until next month, it’s three lots of $110,000, which increases that to $330,000. And one of the key things is making sure that you track all the contributions that have been made if you are contributing to different funds over the course of the year, so that you don’t exceed that $100,000 limit unintentionally.
And similarly, indexation will apply to the concessional cap, which is $25,000 this year, going up to $27,500 next year. And in that case, you need into take account what any employers have contributed on your behalf, because there’s also the opportunity for you to make personal concessional contributions for the balance of that amount. So, again, important to track all those contributions going in.
And there also is the potential, if you’ve had, depending on your balance, any unused concessional contributions from prior years back to the 2017–18 tax year and any period since then, there may be an ability to make catch-up contributions.
Is EOFY a good time to review an SMSF’s investment strategy?
Yes, an investment strategy we would recommend that should be checked on an annual basis, particularly after a year like we’ve just had with the amount of market volatility, major falls in different asset classes and major recoveries, and markets are pretty much at an all-time high in several aspects.
So, one it’s necessary to ensure you’re complying with the investment strategy each year as part of annual compliance obligations. It’s also good to look at it ‘does the investment strategy properly reflect what the trustees are wanting to do in the next year and in future years?’ Also, an obligation to check on insurance arrangements, liquidity arrangements if people are in the retirement phase or there may be rollovers being paid for whatever sort of reason – for either members departing the fund or those that may choose to be moving money around.
So all those things that should be looked at as part of an annual review of the investment strategy and how members are and trustees are actually ensuring that they meet the terms of that strategy.
Particular liquidity requirements relate to where there’s large illiquid assets. Property is the most common one in self-managed super funds. And if you have a large proportion of the assets of the fund in property, particularly if there is borrowing there, which is through a limited recourse borrowing arrangement, then it’s important to make sure that you have the capacity to keep the the loan repayments happening. And that can be an issue as people move into the retirement phase and may no longer have contributions coming in. So all those aspects should be reviewed regularly as part of the review of the investment strategy.
What about members in retirement phase?
So for those retirement phase, there is a requirement to drawdown the minimum drawdown amount, which starts at 4% in normal times. It goes up to 14% for those at older ages. The government did reduce that by half as part of the reaction to the COVID pandemic last year. And we and other groups advocated that. So very pleased that the government did initially reduce that by half last year, this financial year, and most recently last month, the Prime Minister announced they would have a further extension of that till the end of the next financial year, through till the end of 30 June 2022.
Now that will help those that have been affected by reduced income flows, which can still apply for those in commercial properties where there’s still issues in terms of returning to a normal rent-paying situation, or just in other areas where people have had reductions in dividends, a reduction in the income from cash and term deposit investments. And so this will give more time for those who are wanting to readjust their investments to shift into higher income earning assets or have the rental payments resumed or hopefully dividends restored to the levels that were anticipated before the pandemic. So they are all good measures to help give people more time for adjustment.
And people should know that if they don’t meet those minimum requirements, then they can lose the tax exemption on their earnings from the investments backing their pensions. And that would be a 15% tax on those earnings compared to zero if you are making the minimum drawdown requirement. So it’s quite an important area to make sure that you are aware of what the quantum is and ensuring that is met during the course of each financial year.
What are the upcoming changes to the transfer balance cap and total superannuation balance?
There is a cap in terms of the amount of money that you’re able to transfer into retirement phase, and that’s currently $1.6m, and that will be indexed up to $1.7m as a maximum for those that haven’t yet moved any money into the retirement phase.
If you have already moved some money into the retirement phase then you’ll only get partial indexation, and that amount will have to be calculated individually by the tax office, and it will be somewhere between $1.6m and $1.7m. If you’d used half of the cap, i.e. you previously transferred $800,000, you get half of the indexation, which means your new cap would be $1.65m. So you get half of that indexation amount. Every part of it helps. It’s a bit of a complex system. And again, people may need advice to work out just where it is for their particular circumstances, plus access to the ATO’s information once it gets updated.
And there’s also the $1.6m level of the total superannuation balance, which affects whether you can make non-concessional contributions. And again, that will be getting indexed. And again, different transition rules apply if you’re over, or you’re getting close to that limit. So it’s a little bit complex. But again, the indexation helps protect the real value of people moving into retirement. And for those who are already partially there, there is the benefit of partial indexation.
What are the lodgment obligations at this time of year?
So the main obligation for most trustees is to lodge their annual return and tax return to the tax office by the middle of May each year. If it’s a new fund, the deadlines are earlier than that. October is the earliest sort of deadline, which can be a bit of an issue in terms of getting all the statements from different investment managers if you’re using various managed funds that have to reconcile their own information and provide the statements.
But for most people, it’s the middle of May. There is the facility for your tax agent to apply for an extension. And the tax office actively encourages anyone. Even still, if you haven’t been able to make the lodgment to make an application for extension through your tax agent, they are aware that some people have been affected through the COVID pandemic.
And there’s been a lot of pressure on small businesses and tax agents and accounting firms and others. So they are certainly willing to look at ways of easing the pressure. But it does require an individual application this year for extension. Last year there was a general sort of extension for all tax agents in the self-managed super fund area and other areas.
But this year there is no general extension. And so the obligation is on the tax agents working with each of their trustee clients to make sure if they need an extension, they apply as early as possible, because if you don’t get an extension and you’re late in lodging, then there are implications where the tax office may remove your fund from a complying fund status, and that can impact on the ability to receive super guarantee contributions from your employer or to activate rollovers. And it can cause a few operational issues.
So the best thing is to lodge on time. If you can’t lodge on time, make sure your tax agent applies for an extension and get the paperwork and returns lodged as soon as you can so that you’re back in full compliance with the obligations.