Why SMSFs are perfectly placed for the incoming super reforms

Why SMSFs are perfectly placed for the incoming super reforms

Witi Suma, GFM

While the looming changes to Australia’s superannuation system may have retail and industry fund members worried, SMSFs can breathe a sigh of relief knowing they’re holding the best retirement vehicle to navigate the reforms. 

In light of the upcoming changes to superannuation from July 2017, self-managed super funds are without doubt the best placed to adapt to the changes, given the key attributes of SMSFs are the flexibility, choice and control that they provide to members. In comparison, many of the strategies needed to cope with the changes would be impractical, if not impossible, for members of retail and industry super funds.

Maximising super contributions before July 1

 

As you would now be well aware, this financial year represents the last opportunity for individuals, subject to eligibility, to deposit full three years’ worth of non-concessional contributions (NCC) of $540,000, given the annual NCC cap is reducing to $100,000 per member from July. An NCC is simply a personal after-tax contribution to super, which can come from sources such as savings, an inheritance, a redundancy payment, or the sale of shares or a property.

In addition to cash contributions, members of SMSFs have the ability to transfer assets from their own names to the fund, such as listed shares and managed funds. This is a useful strategy to boost your super balance if you hold investments in your own name but do not have the available cash to make a contribution. Notably, this cannot be done if you are member of a retail or industry fund.

Small business owners might also want to consider transferring their business premises to their SMSF, because significantly, the transfer of a business property into super – if eligible for the small business CGT concessions – could be exempt from an individual’s non-concessional annual cap. This provides a way for certain small business owners to boost their super balance without breaching the annual cap on the sale of their business. Of course, adding to super in this way will indirectly affect the member’s ability to make further non-concessional contributions if it brings them closer to the $1.6 million cap. However, it is definitely worth considering if you are a small business owner and in a position to take advantage of this strategy. Again, this can only be done in an SMSF.

Dealing with the $1.6 million pension transfer balance cap

A very popular strategy that has been available to utilise for many years now is where a member of a superannuation fund – subject to meeting a condition of release – can make a withdrawal from their benefit and re-contribute that to their or their spouse’s member account as a non-concessional contribution (subject to the receiving member meeting the work test if older than 65). This is commonly known as a ‘re-contribution strategy’, and is one that will become very useful in the lead-up to July as a way of dealing with the $1.6 million limit on tax-free retirement balance per member and achieving more parity between a couple’s respective super balances. From a practical perspective, this strategy is far simpler to arrange when the couple are members of the same fund (i.e. an SMSF), as opposed to being in separate funds. 

Also, with the changes to transition to retirement pensions taking effect from July, whereby the earnings on these pension assets will no longer be tax-free, a re-contribution strategy could be particularly useful where one member of a couple who is still working, shifts money into the member account of the spouse who has retired and therefore has tax-free earnings.

In addition to being able to withdraw funds and re-contribute to the spouse’s account, another strategy is to split concessional super contributions between members. For instance, if a member of a fund is getting close to having a balance of $1.6 million or is already over that amount, they have the ability to divert their ongoing concessional super contributions to their spouse’s member benefit. Again, this strategy would be rather cumbersome to put into place if the spouses were members of different funds.

Obtaining member data ‘on demand’ will be critical

Under the proposed changes, SMSF trustees will be given the opportunity to disregard breaches of the $1.6 million cap of less than $100,000 provided that the breach is rectified within six months. What this means is that super funds have a very short time frame in which to determine the 30 June 2017 member balances. Fortunately, for the vast majority of our clients who have engaged our accounting services for their SMSFs, the preparation of annual accounts can be done in a very short time frame due to the fact that we process transactions on a daily basis rather than wait until year end (which the majority of super fund trustees elect to do). SMSF trustees generally have an advantage over retail and industry funds in this regard. Trustees can request their accounts to be completed in a time frame that suits them, whereas retail and industry super fund members are at the mercy of their fund trustee’s timetable and have no choice but to wait.

Further to this, we utilise advanced SMSF accounting software that gives us the ability to calculate ‘up to the minute’ member balances on request, as well as to ascertain at a glance, the amount of contributions made per member over any given period and each member’s balance. 

One of the budget proposals set to take effect from July 2018 is the ability for individuals, who haven’t utilised their full annual concessional contribution limit, to carry forward the unused amount on a five-year rolling basis (subject to the member’s super balance not exceeding $500,000). Our accounting software is easily able to verify how much of the annual concessional contribution cap a member has utilised, how much has been carried forward and when that five-year rolling period expires for each member.

Conclusion

It is vital to plan ahead of the changes that come into effect on 1 July 2017 and get expert, specialist advice to ensure you are aware of all your options, and that the right strategies are put in place well before the changes come into effect. Fortunately, if you are a member of an SMSF, in particular one that GFM manages, you are well-positioned to take advantage of some of these suggested strategies and can adapt, with less of the hassle and complications experienced by members of retail and industry funds.

Witi Suma, head of SMSF, GFM Wealth Advisory

Why SMSFs are perfectly placed for the incoming super reforms
nestegg logo
Promoted Content
Recommended by Spike Native Network