Mulcahy & Co SMSF Matters Winter 2016 by getsmartdesign

smsfmatters

Winter 2016

SUPER CO-CONTRIBUTIONS | BUYING PROPERTY IS A SMSF | COLLECTABLES & PERSONAL USE ASSETS | FEDERAL BUDGET PROPOSED SUPER CHANGES

ATO Super CoContributions

The super co-contribution is intended to help eligible people boost their retirement savings. If you are a low or middle-income earner and make non-concessional (after-tax) super contributions to your super fund, the government also makes a contribution (called a co-contribution) up to a maximum amount of $500. The amount of government co-contribution you can receive depends on how much you contribute and what your income is. You don’t need to apply for the cocontribution. If you’re eligible and the fund has your tax file number (TFN) the Australian Taxation Office will pay it to your fund account automatically.

You will be eligible for the super co-contribution if you can answer yes to all of the following: •

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CONTACT Thayne Turley 0409 855 876 Faye Douglass 0419 360 660

you pass the two income tests • your total income for the financial year is less than the higher income threshold($50,454 for 2015-16) •

10% or more of your total income comes from eligible employmentrelated activities or carrying on a business, or a combination of both

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you were less than 71 years old at the end of the financial year

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you did not hold a temporary visa at any time during the financial year (unless you are a New Zealand citizen or it was a prescribed visa)

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you lodged your tax return for the relevant financial year.

The way your co-contribution is calculated depends on the financial year in which you made your personal super contributions.

you made one or more eligible non-concessional (after tax) super contributions to your super account during the financial year

You are not entitled to a super cocontribution for personal contributions you have been allowed as a tax deduction.

Spouse Offset CAN I TAKE ADVANTAGE OF THE SPOUSE OFFSET AND SAVE UP TO $540 IN TAX? If an individual has assessable income [plus reportable fringe benefits (RFB) plus reportable employer super contributions (RESC)] of less than $13,800, then his or her spouse can make non-concessional contributions on behalf of the low-income spouse and claim a tax offset. The maximum tax offset available is $540, when a spouse contributes $3,000 or more to their low-income spouse’s super account. If an individual receives $10,800 or less in assessable income (plus RFB plus RESC), then his or her spouse can access the maximum tax offset of $540, provided an after-tax (non-concessional) contribution of at least $3,000 is made. The tax offset is progressively reduced until the tax offset reaches zero for spouses who earn $13,800 or more in assessable income (plus RFB plus RESC) in a year. Note that the income threshold could potentially increase from $10,800 to $37,000 from July 2017 (this should be confirmed after the 2016 Federal Election).

Disclaimer: This newsletter does not constitute advice. Clients should not act solely on the basis of the material contained in this newsletter. Items herein are general comments only and do not constitute or convey advice per se. Also changes in legislation may occur quickly and therefore recommend that our formal advice be sought before acting in any of these areas. This newsletter is issued as a helpful guide and for their private information. Some content has been resourced from financialstandard.com.au and supercorp.com.au

P 03 5330 7200 | financialplanning@mulcahy.com.au | 300B Gillies Street, Ballarat

Buying Property in an SMSF

Before buying a property in a Self Managed Superannuation Fund (SMSF), it is important that you do all the necessary checks particularly where borrowing is involved.

1. IS IT THE RIGHT INVESTMENT FOR THE SUPERANNUATION FUND? The investment strategy of the SMSF needs to be considered in regards to the range of investments available to the trustee. If it is noted that the purchase of a property will cause the range of investments permitted under the investment strategy to be out of alignment, the trustees should meet to consider amending the investment strategy

2. DOES THE FUND HAVE THE RESOURCES TO PURCHASE THE PROPERTY OUTRIGHT? Initial questions that the trustee needs to answer are: •

Will the property be purchased using the available resources of the SMSF?;

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Is the SMSF prepared to commit a significant portion of the assets held towards the purchase of a property at the expense of diversification?; and

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Would it be more prudent to purchase a property of a value greater than the available resources?

3. SHOULD THE PROPERTY BE PURCHASED IN THE SMSF OR IN ANOTHER ENTITY? Once the decision has been made in regards to the property to be purchased, the next consideration is the proper structure in which the property will be owned. Will the trustee of the SMSF own the property or will the SMSF own units in a unit trust that will in turn own the property? Owning the property in a Unit Trust can provide a number of advantages in comparison to holding the property in the SMSF, such as:

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providing protection for other assets of the SMSF in the event of accidental injury at the property; or enabling activities that would not be permitted if the property was being purchased by the SMSF/bare trustee under a SMSF borrowing arrangement, e.g. significant improvements or development of the property.

MULTIPLE TITLES Generally purchases under the SMSF borrowing arrangements must be under a single title to meet the single acquirable asset provisions. Exceptions to this rule include apartments and car parks that cannot, be separated, and farms and factories that have major buildings across multiple titles

4. WILL THE TRUSTEE BORROW TO ACQUIRE THE PROPERTY?

DEVELOPMENT OR IMPROVEMENT

Having decided on the purchase and the structure, the next decision will be whether the SMSF will be borrowing from a bank or other financial institution, or from a related party? Further to that, the amount that would be available for purchase under the borrowing would need to be ascertained.

If the proposal is to develop or significantly improve the property, a standard SMSF LRBA is unlikely to suit. In this case, the property can be purchased through a unit trust, most likely using related-party lending.

5. HOW WILL THE PROPERTY BE MANAGED FOLLOWING THE DEATH OF A MEMBER? Once the SMSF has purchased an asset, such as property, which forms a significant portion of the assets in the SMSF, consideration needs to be given to what would happen in the event of the death of a member. For example, it may be necessary for the property to be sold or transferred to beneficiaries, if the entitlements of those beneficiaries were required to be paid out of the SMSF. That would most likely occur when adult children or more remote dependents are the beneficiaries.

Some other factors to consider when purchasing a property in an smsf are: LIQUIDITY In the event of the disability of a member, particularly when the expected contributions in respect of that member are committed to meeting loan repayments, the fund can incur significant financial difficulties. Planning for this should be taken into consideration at the time of purchase.

ANCILLARY ITEMS The single acquirable asset provisions would be breached if the borrowing is used to purchase ancillary assets, such as furniture in an apartment, machinery in a factory or equipment on a farm, Those items should be purchased using SMSF funds, rather than borrowed funds. DOCUMENTATION AND SIGNING THE CONTRACT: The trustee of the SMSF should not sign the contract. Preferably the bare trust documentation should be available prior to entering into the contract so as to avoid any subsequent repercussions. Rules as to the timing of signing both the bare trust documents and the contract of sale vary across each state or territory.

VENDOR If the vendor is a related party to the members of the SMSF, there are limitations on the assets that may be acquired. In particular, residential property could not be acquired from a related party.

TENANT Similarly, if the proposed tenant is a related party to members of the SMSF, the SIS legislation permits such an arrangement so long as the property is business real property and the lease is legally enforceable. If the property is residential, it must not be leased to a related party.

P 03 5330 7200 | financialplanning@mulcahy.com.au | 300B Gillies Street, Ballarat

NEWS

Collectables and Personal Use Assets

Collectables and personal use assets are items such as artworks, jewellery, vehicles, boats and wine. Investments in such items must be made for genuine retirement purposes, not to provide any presentday benefit. So collectables and personal use assets can’t be: •

leased to, or part of a lease arrangement with, a related party

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used by a related party

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stored or displayed in a private residence of a related party.

In addition: •

your investment must comply with all other relevant investment restrictions, including the sole purpose test

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the decision on where the item is stored must be documented (for example, in the minutes of a meeting of trustees) and the written record kept

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the item must be insured in the fund’s name within seven days of the fund acquiring it

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if the item is transferred to a related party, this must be at market price as determined by a qualified, independent valuer.

For collectables and personal use assets that you held before 1 July 2011 you have until 30 June 2016 to comply with these rules. If you own collectables within your SMSF it is imperative that you are meeting all of the requirements prior to 30 June, 2016. If you require assistance meeting any of the requirements please contact our office.

Low Income Super Contribution WHAT IS THE LOW INCOME SUPER CONTRIBUTION? The low income super contribution (LISC) is a government superannuation payment of up to $500 to help low-income earners save for retirement. If you earn $37,000 or less a year, you may be eligible to receive a LISC payment directly into your super fund. You don’t need to do anything to receive a LISC. If you lodge an income tax return – The Australian Taxation Office (ATO) will pay your LISC into your super fund when they have received information from your super fund about your contributions. If you do not lodge an income tax return – they will work out your eligibility using information held about your income, and information from your super fund.

The LISC is 15% of the concessional (before tax) super contributions you or your employer pays into your super fund. The maximum payment you can receive for a financial year is $500, and the minimum is $10. Are you eligible for the LISC?

YOU ARE ELIGIBLE FOR THE LISC IF YOU SATISFY ALL THE FOLLOWING REQUIREMENTS: you or your employer pays concessional (before tax) contributions for the year made to a complying super fund – this includes super guarantee amounts •

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you have not held a temporary resident visa at any time during the income year (note that New Zealand citizens in Australia are eligible for the payment)

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you lodge an income tax return and 10% or more of your total income comes from business and/or employment, or you do not lodge an income tax return and 10% or more of your total income comes from your employment.

you earn $37,000 or less a year – to work out your eligibility for payment, the ATO uses your actual or estimated ‘adjusted taxable income’

P 03 5330 7200 | financialplanning@mulcahy.com.au | 300B Gillies Street, Ballarat

NEWS

Federal Budget Proposed Superannuation Changes

A number of proposed measures were announced in the 2016 federal budget. It is important to be aware of these potential changes, however be mindful that the changes are still subject to legislation and subject to the July 2016 federal election.

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The tax-exempt status of income from assets supporting transition to retirement (TTR) income streams will be removed, with earnings taxed at 15%. This change will apply regardless of when the TTR income stream commenced.

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A transfer balance cap of $1.6 million (per individual) will be introduced to restrict the total amount of super that can be transferred from the accumulation phase to the pension phase. If an individual accumulates more than $1.6 million, they will be able to maintain the excess in the accumulation phase (where earnings will be taxed at 15%). Those already in the pension phase on 1 July 2017 and whose balances exceed $1.6 million will need to either withdraw the excess or transfer it back into the accumulation phase.

FROM 3 MAY 2016 •

A lifetime cap of $500,000 for nonconcessional contributions will replace the existing annual cap of $180,000 (or $540,000 every three years under the bring-forward rule). The lifetime cap takes into account all non-concessional contributions made from 1 July 2007. Contributions made from 7.30pm AEST on 3 May 2016 that exceed the cap (taking into account all previous nonconcessional contributions) will need to be removed or will be subject to the current penalty tax arrangements.

FROM 1 JULY 2017 •

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The cap on concessional contributions will reduce to $25,000 a year for everyone, regardless of age. Currently the concessional contributions cap is $30,000 under age 50 and $35,000 for ages 50 and over. Individuals with super balances under $500,000 who don’t reach their concessional cap in a given year will be able to carry forward their unused cap amounts on a rolling basis over five consecutive years. The current work test that applies for people making voluntary contributions between age 65 and 74 will be removed. Individuals will also be able to make contributions for a spouse aged under 75 without requiring the spouse to satisfy a work test.

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Division 293 tax — an additional 15% contributions tax payable by high income earners with earnings over $300,000 — will also apply to those with incomes above $250,000.

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A Low Income Superannuation Tax Offset (LISTO) will be introduced to reduce the tax on contributions for low income earners. The LISTO will provide a non-refundable tax offset to super funds, based on the tax paid on concessional contributions up to a cap of $500. It will apply to members with adjusted taxable income up to $37,000 that have had a concessional contribution made on their behalf.

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The threshold for the spouse super tax offset will increase from $10,800 to $37,000. A contributing spouse will be eligible for an 18% offset worth up to $540 for contributions made to an eligible spouse’s super account.

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Australians under 75 will be able to claim an income tax deduction for any personal contributions made to a complying super fund up to their concessional cap. Individuals will need to notify their super fund or retirement savings provider of their intention to claim the deduction, before lodging their tax return.

At Mulcahy & Co our highly specialised SMSF team will provide expert assistance. Not only will we ensure your SMSF meets all compliance requirements, but we will also investigate every opportunity to maximise your SMSF’s potential and tax savings. Our business is set up so that you can access the advice needed. We also have experts in areas of Accounting & Taxation, Financial Planning, Lending, Legal and IT to provide proactive and ongoing assistance.

We offer a free no obligation meeting to review your situation. Call us today on 03 5330 7200 and take advantage of this valuable offer. ARE YOU FINANCIALLY SECURE? At Mulcahy & Co we are in a unique position to provide the expert advice and solutions of accounting, financial planning, lending, legal and information technology all under the one roof. This makes a normally complicated process seamless to help you on your way to becoming financially secure. FOLLOW OUR 10 STEPS TO SUCCESS TO ACHIEVE FINANCIAL SECURITY... Visit www.mulcahy.com.au for more information

P 03 5330 7200 | financialplanning@mulcahy.com.au | 300B Gillies Street, Ballarat