By Graeme Colley
With the approach of the end of another financial year it is time to ensure that you have everything ready to allow a smooth completion of your SMSF’s 2019/20 financials and tax return. While most requirements are unchanged there are some things that have been affected by COVID-19 changes for you to consider.
As always there are two concerns here, what is the maximum contributions you can make and what happens if you go over your concessional or non-concessional contribution cap.
For concessional contributions, there is a universal cap of $25,000 that applies if you qualify. But if your total super balance on 30 June 2019 is less than $500,000 you can bring forward any unused concessional contributions that are under the universal cap from 2018/19, and can claim personal tax deductions for any concessional contributions you make.
It’s important to note time frames apply if you wish to claim a tax deduction for personal concessional contributions. An election must be made to your SMSF setting out the amount you will be claiming before you lodge your personal tax return for the 2019/20 financial year and no later than the end of the financial year after the contribution was made. Remember the notice needs to be lodged before any part of the contribution is withdrawn or used to start a pension. Your SMSF also needs to acknowledge your election before you lodge your income tax return.
A major consideration in making non-concessional (non-tax deductible) contributions (NCC) is the amount of your Total Superannuation Balance which determines the amount you can make to your SMSF without facing a tax penalty. If your Total Super Balance is more than $1.6 million a penalty will apply to any (NCC) you make and you could end up having to withdraw any excess that arises.
If you have a Total Super Balance of less than $1.6 million and you qualify to make (NCC) to your SMSF, you may be able to make up to $300,000 over a fixed three-year period. 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 you have a Total Super Balance of less than $1.5 million. The following table sets out the NCCs you can made to your SMSF without being penalised. If your Total Super Balance is less than $1.4 million you can bring forward the next two years standard NCC and if it is between $1.4 and $1.5 million you can bring forward the next years standard NCC.
Notionally, this information is to be available for trustees via the MyGov portal, but it will only be accurate if the SMSF’s 2018/19 return has been lodged.
If you have triggered the bring forward rule in either 2017/18 or 2018/19 your aggregate NCCs may be either $300,000 or $200,000 respectively provided you do not exceed the maximum of your Total Super Balance for 2019/20.
Investment strategy review
Ensuring your investment strategy accurately reflects the SMSF’s current asset allocation is an important compliance responsibility. While there is a degree of flexibility with respect to movements in your overall asset allocation, it is good practice to review your current asset allocation against your documented strategy. If the fund’s current allocation falls outside the documented strategy you may wish to make an adjustment to either so they fall into line.
It is reasonable to expect that your SMSF’s asset allocation will have a degree of tolerance over the short term which fall either side of the long term target. But a regular review is something you should get in the habit of doing as it’s required by the super law.
Some of the more common situations where your SMSF’s investment strategy should be reviewed include:
Asset concentration risk is heightened in highly leveraged funds, such as where the trustee 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 CGT 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 arising from simply selling an asset and buying it back immediately.
One of the trustee’s most important obligation is to ensure for purposes of preparing the 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. The valuation implications for each member’s Total Super Balance as well as taxing the fund’s income if it is paying pensions.
The value of some of the 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 it assists when the fund is audited. For the more exotic assets such as privately held unlisted shares, unit trust holdings or artworks and collectables the matter can always be raised with the fund’s auditor to see whether the fund is on the right track.
It is essential that at least the minimum pension is paid for existing pensions and the maximum level is not exceeded for Transition to Retirement pensions. A pension that does not satisfy the payment rules any income on assets supporting the pension will be taxed at 15% rather than be tax exempt.
When deciding to draw more than the minimum pension you 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 your pension balance will result in a reduction of your Transfer Balance Account and can be used to access additional pension benefits in future.
You need to instruct your SMSF that you are drawing a lump sum prior to it being made from your pension balance, otherwise it will be treated as a pension payment. If you have more than one pension account or possibly an accumulation account in your 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 you have multiple pension accounts is the tax-free proportion of each pension and whether grandfathering could apply to qualify for Centrelink benefits or Seniors Health Care 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.