Does your LRBA comply with the new ATO requirements?

Since the rules around using an SMSF to purchase property were relaxed, first in 2007 and with further amendments in 2010, thousands of SMSF trustees used this as an opportunity to invest in both residential and commercial property. However, loans were restricted to a limited recourse borrowing arrangement or LRBA and this practice continued for a decade.

Two issues arose in that time, and the first was concern by the Reserve Bank of Australia about the number of SMSFs going into significant debt to acquire property. The second came from the ATO (Australian Taxation Office) and the possibility that some taxpayers were dodging superannuation caps. By using LRBAs, they could place extra money into their super funds where they would be taxed at concessional rates.

As a result, the ATO issued new guidelines to SMSFs choosing to use related-party loans rather than bank finance to purchase property. Trustees had until 31 January 2017 to review their fund arrangements and it is possible that some trustees have not yet made the necessary arrangements to ensure compliance with the new rules.

Trustees must understand that any loan terms they have accepted to buy property must be “an arms-length commercial arrangement”. In some cases, LRBAs have been established with related-party lenders on terms that would not typically be accepted as a commercial arrangement. Usually these terms are more generous than bank finance with lower interest rates, excessively long loan terms and no requirement to make regular payments.

While this may seem a good deal at the time, it puts at risk the overriding purpose of establishing an SMSF, which is to provide retirement income for the fund members. There are key issues with some LRBAs that put this purpose at risk such as:

  • The possibility that there will be insufficient income and contributions into the SMSF to service the loan;
  • How the members would pay out the loan when they have retired and are no longer making contributions to the fund; and
  • Whether the property or properties will be sufficiently liquid or earning enough income to pay pensions to members in retirement.

SMSF trustees who did not use bank finance for their property purchases and who have not sought information about the new rules themselves or by consulting SMSF service providers such as SMSF Assure should act immediately. It could be that they need to wind up the LRBA or refinance their loans on commercial terms, and notify the ATO that this has been done.

These are major changes to previously accepted loan arrangements that will have financial consequences for members if they are not addressed. The income from these properties can be taxed at the highest rate of 47% instead of the 15% concessional rate. If you are a fund trustee and have not addressed this issue yet, get professional advice on what steps to take, and act now.

Setting Up Your Own SMSF? With Rewards Come Risks

Setting up your own SMSF (self-managed superannuation fund) is a bit like becoming a parent. Everyone thinks it is a great idea, many of us become one at some stage, but we don’t know how it feels until it happens. We look for advice so we can be good parents, but at the beginning, we can only imagine the joys and the challenges before us.

How is that like setting up an SMSF? Well, everyone thinks it is a great idea; many Australians have one but until it is up and running, the trustees can only guess at the responsibility and the time involved to get the best result for their retirement. Will the challenges outweigh the joys? Can investment decisions be made while keeping the administration up to date?

Initially, the idea of taking the reins yourself may seem exciting. You may be getting statements from your current superannuation fund and questioning its fees and performance. It is not such a great leap from wondering what is happening to thinking you could do better yourself, but what are the risks if you go your own way?

Lack of time and administration skills are the two obvious risks for trustees of an SMSF. However, there are other, lesser known risks to be aware of. For example, if the SMSF suffers a loss due to fraud or theft in the underlying assets, the members are not eligible for compensation under the superannuation laws. They also do not have access to the Superannuation Complaints Tribunal if there is a disagreement between fund members. There are other avenues open, such as legal action, but these are at the members’ expense.

Limited access to life insurance is another risk worth considering. In a large superannuation fund, life and disability insurance is easy to access, with default levels of cover often given without a medical assessment. With thousands of members, these funds negotiate reduced premiums but for an SMSF, insurance may be difficult to obtain and more expensive.

Also, most people are usually not considering an exit strategy at the beginning, but there are several trigger events that may need one. For example, a trustee may become a disqualified person through bankruptcy. Loss of capacity, losing residency status and the death of a member are other scenarios that could trigger the wind-up of the SMSF.

To ease the time constraints and administration tasks, most SMSF trustees work with experienced SMSF administrators similar to SMSF Assure who are up-to-date with the relevant legislation. They assist fund trustees with lodging returns, compliance issues and other administrative tasks, and generally lighten the load.

As any sole parent will tell you, the biggest challenge they have is being solely responsible for every aspect of their child’s wellbeing. This is not something they can hand to someone else. An SMSF trustee, however, can access the technical expertise of a dedicated and experienced superannuation team.

While the trustees are still solely responsible for the performance of their fund, just being able to talk things through with someone who knows the industry well makes running their own fund less of a burden. Trustees who know the risks as well as the rewards at the start are making a genuinely informed decision.

The Foundation of a Successful SMSF – Informed Decision-making

The number of self-managed superannuation funds (SMSF) in Australia continues to grow as people set up their own funds and take control over how their money is invested for retirement. They are willingly taking on the role of a trustee with the awareness that this control comes with the responsibility for making all the investment decisions.

This is a role that should not be undertaken lightly, and trustees should do their own research before they take the first steps to set up the fund. Many people who consider this step assume that any professional organisation that advertises SMSF services is also able to give financial planning advice. However, this is not the case.

The role of companies such as SMSF Assure is to arrange the establishment of the fund, making sure that every requirement of the ATO (Australian Taxation Office) has been met in the process. They also manage the ongoing administration on behalf of the trustees, which includes meeting reporting deadlines and all other relevant compliance issues, but they do not provide financial product advice.

To provide such advice to an SMSF trustee, an organisation must hold an Australian Financial Services Licence. There are specific, ongoing obligations attached to holding this licence, including compliance with financial services laws. This is just one of many others.

This is an important difference for trustees to understand, especially as they are still responsible for the decisions made on behalf of the fund. This applies even if they have sought and followed the investment advice of one of these licensed professionals.

The fund trustees are responsible for establishing an investment plan for their SMSF when they first set up the fund. This is the point where they make the first of many decisions that will determine the financial circumstances of the fund members when they retire.

Having a well thought out investment plan helps them make those decisions, not only at the outset, but also throughout the life of the SMSF. The plan must be reviewed at least annually to keep it current and responsive to market variations and changes in the life circumstances of its members.

Some trustees are very knowledgeable about finance and investment, and have the confidence to make these decisions without seeking outside advice. For those who are not, the first decision they usually make is to engage a reputable company such as SMSF Assure to help them manage the administration and compliance. Their second decision is to choose a licensed financial services professional to work with them on an investment strategy.

Like any good decision-making process, they then need to:

  • Gather information, review, analyse and check for accuracy;
  • Discard what is not relevant;
  • Use what remains to make a short list of companies that will suit their objectives;
  • Do further investigation including making appointments to meet key people in the chosen companies;
  • Do a final review incorporating any new information; and
  • Select the company they believe will give them the best result in building the assets in their fund.

There is no magic formula to creating a successful SMSF. It is a serious undertaking requiring cool heads, financial knowledge and the clear, long-term goal of a financially satisfying retirement income.

Thinking About Starting an Smsf? The Time to Act Is Now!

Australia’s superannuation industry is the fourth-largest private retirement/pension fund in the world and still growing. Our combined superannuation assets have long since passed the $2 trillion mark and of these, 22.7% of superannuation assets are currently held by self-managed superannuation funds (SMSFs).

Most members of retail, industry or employer superannuation funds are not particularly interested in how their fund is managed. They are content to trust their investments to fund managers whom they perceive to be more knowledgeable than they are, and therefore more likely to make better investment decisions.

Other people who are more financially aware than most of the superannuate population have taken steps to start their own SMSF and there are now approximately 600,000 of these funds in Australia. This growth has been escalated by changes to borrowing rules in 2007, which allowed SMSFs to borrow funds to purchase investments, including residential property.

The opportunity still exists for people with reasonable financial knowledge to set up their own SMSF and start planning for retirement. There is also a thriving support network of specialist SMSF administrators such as SMSF Assure to help with administrative and compliance requirements. With that in mind, here are three reasons to start working on setting up your own SMSF right now.

The first is the amount of control the SMSF trustees have over their own destiny. They decide on the types of investments in their portfolio, and the level of risk they are prepared to take to reach their goals. They are also in charge of distributing pensions and death benefits, so there is a high level of responsibility involved. This close involvement in the activities of the fund increases the level of engagement in its performance.

The second reason is the amount of flexibility that overseeing the fund affords the trustees. They can invest in a wide range of asset classes within the confines of the superannuation regulations and the terms of their SMSF trust deed. Most SMSF trustees will still invest in traditional assets but they can also invest in other assets such as works of art, collectibles and residential real estate. This flexibility also means they can change their investment portfolio to meet market and regulatory changes.

The third reason is the changes to borrowing rules mentioned earlier. SMSF trustees can acquire assets like residential or commercial property, which, prior to 2007, were out of the reach of superannuation funds. The concessional tax rates on the earnings from these investments are attractive and this gives the trustees and members the opportunity to build their super balances faster than would previously have been possible.

If those are not enough reasons for you to take charge of your retirement income, there is one more reason that is an overriding factor. The sooner you start, the more opportunity you have to build your investment portfolio. The longer your superannuation fund is active in the market, the more chance there is to grow the returns, allowing you to work towards the retirement lifestyle you desire.

Do the New Superannuation Laws Affect Your SMSF?

While superannuation was originally destined to provide an income in retirement, for several years, this objective was not taken seriously and it became for many people a vehicle for legal tax minimisation and estate planning purposes. The government has sought to address this by declaring in legislation that the objective of superannuation is to provide income in retirement to substitute or supplement the Age Pension.

They have introduced a range of legislative changes that will better target tax concessions to those who need incentives to save. They are limiting taxpayer support for tax-free retirement phase accounts, increasing the tax rate on some concessional contributions and making changes to the cap amounts on concessional and non-concessional contributions.

If you are a trustee of an SMSF (self managed superannuation fund), these important changes to the superannuation laws come into effect on 1 July 2017 and may affect you. That date is now alarmingly close, so if you have not yet reviewed these changes to see how they will affect your fund, now is the time to act. There are three things in particular that are important to know about, and need to be acted on before 30 June.

Retirement Pensions and the Transfer Balance Cap

You must determine if you have exceeded the $1.6 million transfer balance cap that is being introduced on 1 July. This change will put a limit on taxpayer support for tax-free retirement phase accounts, and will affect both current retirees and those yet to reach that stage of their lives.

It is important to note that this limit applies to the total value of all your pensions, and not just per superannuation fund. If you have other pensions, you will need to include the Special Value of those pensions when checking if you have exceeded the transfer balance cap. Remember that your total superannuation balance as at 30 June 2017 is used to assess your eligibility to make non-concessional contributions from 1 July so you must check this immediately.

Timing of Contributions

Make sure any contributions you make to your SMSF or any other super fund is received on or before 30 June 2017. This allows you still to use the higher limits available under the current legislation. Miss that by one day and you could exceed the new limits.

Also check to see if the bring forward provision has been triggered as this may affect the amount you can contribute both this financial year and from 1 July 2017. This could be advantageous now, as contribution limits will be reduced from 1 July for both concessional and non-concessional contributions. From that date, anyone with more than $1.6 million in superannuation will be unable to make additional non-concessional contributions.

Employer and Salary Sacrificed Contributions

If you are receiving employer contributions via the Superannuation Guarantee system, check that those for the June 2016 quarter were received by your SMSF in July 2016. These should be included in your concessional contribution cap for the 2016/2017 financial year.

Watch that you do not exceed the cap for the current year by neglecting to include salary sacrificed contributions. These are concessional and must be part of your calculations.

An Easier Alternative

These are just three of the changes that the new laws have created, placing a lot of pressure on SMSF trustees to understand the changes and make sure they have taken everything into account for the benefit of their members. If you have any doubts and you are still managing your SMSF without assistance, you still have time to contact a professional organisation such as SMSF Assure if you act now.