When was the trust deed last updated?
Too often, trust deeds don’t allow for the effects on income streams of changes in legislation, and specifically transition-to-retirement income streams and account-based pensions. Anecdotal evidence suggests there are trustees operating transition-to-retirement income streams with trust deeds that don’t allow for them.
No written investment strategy that considers insurance
This is simply the biggest problem across the spectrum of SMSF administrators, and SMSFs practitioners need to be across it. The client’s SMSF must have a regularly updated investment strategy (reviewed at least annually is recommended) and it must consider insurance (but not necessarily purchase insurance if it’s unnecessary).
The investment strategy for the client’s SMSF will need to cover the topics of liquidity, risk and return, diversification, meeting liabilities and, importantly, insurance.
Also note that if your client has an investment strategy comprising of an asset allocation of between zero and 100 per cent in cash and zero and 100 per cent in Australian shares, this will not be viewed as not adequate in the eyes of the ATO.
Binding death nominations out of date
Always ensure your client’s binding death nominations are up to date. God forbid your client take an early visit to the pearly gates and one of their aggrieved children is put in charge of their estate and skips off with the assets. It’s happened before (see classic legal case Katz v Grossman). As the name suggests, a binding nomination binds the trustees (executors) to pay out the SMSF trustee’s nest egg to their desired beneficiaries, ensuring their wishes are carried out as intended.
Legislation suggests a binding death nomination is only good for three years, but newer trust deeds provide for perpetual binding death nominations. SMSF practitioners should consider their client's SMSF in relation to their will and their powers of attorney.
Transition-to-retirement pension not being utilised
Unless the client is able to maximise both their concessional contributions ($30,000 or $35,000 a year, depending on their age) as well as their non-concessional contributions ($180,000 a year or up to $540,000 over three years), then a transition-to-retirement income stream is probably the best option for the SMSF trustee if they’re still working and aged 55 to 64.
The assets that are invested in the pension are free from capital gains tax and earnings tax, and the income is tax-free when they’re over 60 or taxable under 60 but with a 15 per cent rebate. In years when the client’s fund is making 12 per cent, the tax savings alone will guarantee them better returns. Not to mention having the ability to reduce their mortgage, increase their tax-free contributions or even allow the client to even up member balances with their partner.
Minimum pension not drawn
June 30 is two weeks away, so if the client wants to be in pension mode and pay no capital gains tax and no earnings tax, and no income tax and they’re over 60, then make sure they draw their pension. If the client fails to do so their fund will be deemed to be in accumulation mode and thus subject to 15 per cent earnings tax and 10 to 15 per cent capital gains tax. In a year where the client may have earned 10 to 15 per cent returns, that can make a big difference!
Contributions not being optimised
If the client was 49 on June 30 last year, they’re eligible to put $35,000 into super and claim a tax deduction (under that age the limit is $30,000). If the client is self-employed (10 per cent or more of their income from self-employment), they can make a lump sum contribution but if they’re employed under a salary arrangement, they need to have salary-sacrificed that amount throughout the year. The SMSF trustee may have the option of putting a larger portion of their next pay packet or two into super before June 30. Remember, if they are able to do this, and can afford it, it will reduce their taxable income and boost their super.
Ensure SMSF tax returns are on time
If a client is disorganised and consistently late getting back to their SMSF accountant or adviser, they may want to consider if an SMSF is actually right for them and if they’re cut out for the work required in running a compliant fund.
Sam Henderson, cheif executive, Henderson Maxwell Private Wealth Management