Director Identification Numbers (director IDs). The requirement to obtain a director ID also applies to individuals who have an SMSF with a corporate trustee. With over 60% of all SMSFs having a corporate trustee, the directors will need to apply for their own director ID before the prescribed deadlines. The SMSF Association has provided regular, member-only updates and resources to help you communicate this change with your SMSF clients.
You may have heard about the new rules which require directors of Australian companies to obtain a Director Identification Number (director ID). The new requirement to obtain a director ID also applies to individuals who have an SMSF with a corporate trustee, which is why I wanted to bring this new requirement to your attention. All directors of your corporate trustee will need to apply for their own director ID by the prescribed deadline.
An application for a director ID must be made individually and only by those who are applying for the director ID. As you are required to prove your identity as part of the process, our firm, or any other third party, is not able to apply for a director ID on your behalf.
Setting up an SMSF can be complicated. Not getting it right can materially affect your financial situation and retirement plans.
The first question you need to be sure about is whether an SMSF is the right fit. Seeking specialised financial advice can help you determine this answer. Some considerations include:
You must ensure you have an appropriate superannuation balance before considering an SMSF. While a low balance can be a red flag, it is not always a barrier to entry. Establishing an SMSF with a small balance may not be in your best interests. This is because SMSFs tend to be more cost-efficient with larger balances. Therefore, before rolling over your superannuation balance to an SMSF, you should establish and justify that by doing so you are likely to end up in a better position in retirement.
You must also understand your motivation for establishing an SMSF. The most common motivation SMSF trustees indicate is control. Control of an SMSF allows individuals to have a wide range of investment choice, flexibility and engagement with their superannuation. However, superannuation law is complex and you need to ensure your ambitions are allowed under the law and will be able to achieved in an SMSF.
Costs and time
SMSFs incur a wide range of costs in establishment and the day to day running of the fund. Ensure you are across the estimated establishment, accounting and audit costs that will be incurred by your SMSF. Speak with your advisers so you are across all other incidental costs, which unlike large super funds generally occur with fixed rates rather than as a proportion of your balance.
SMSFs also require dedicated attention from trustees which will take time out of your daily life to manage. Understanding from the outset your legislated responsibilities and obligations before establishing an SMSF is important.
Once you have decided that an SMSF is right for you, the process of establishing the fund can commence. A Specialist SMSF adviser is the best person to help you with this process which generally involves choosing a trustee structure, selecting a trust deed, completing the ATO registration, opening a unique fund bank account, getting an electronic service address and arranging for rollovers to the fund to occur.
Investment Strategy and Insurance
Upon establishment you must also create an investment strategy which must be regularly reviewed.
Your investment strategy should be in writing and must consider:
• Diversification (investing in a range of assets and asset classes).
• The liquidity of the fund’s assets (how easily they can be converted to cash to meet fund expenses).
• The fund’s ability to pay benefits (when members retire) and other costs it incurs.
• The members’ needs and circumstances (for example, their age and retirement needs).
• Whether to hold insurance in your SMSF.
It is also common for SMSF trustees to be motivated by investing in property when establishing an SMSF. You should be sure that any investment in property, particularly when gearing is involved, is appropriate for your circumstances. Holding properties in an SMSF can also require some complex structures to ensure the law is being followed and specialist advice may be needed before making an investment choice. A lack of diversification, low balances and inappropriate property investments can have a detrimental impact on your retirement savings.
How can we help?
If you are considering an SMSF, please feel free to give me a call to arrange a time to meet so that we can discuss your particular requirements and circumstances in more detail.
1 July 2021, saw the Transfer Balance Cap (TBC) indexed for the first time to $1.7 million from the original $1.6 million limit which was introduced on 1 July 2017. Indexation of the TBC means there is no longer a single cap that applies to all individuals. Instead, every member has their own personal TBC of between $1.6 million and $1.7 million, depending on their circumstances. If you are already in receipt of a pension, it is important to review your personal TBC and seek help if you unsure how to calculate, or locate, your personal TBC
The TBC not only imposes a limit on the amount of capital that you can transfer to the retirement phase of super, but it also has an impact on what happens to your superannuation when you die. The $1.7 million TBC applies to pensions paid to your dependants after you die (called death benefit pensions or reversionary pensions) meaning it has a substantial impact on estate planning.
When it comes to the TBC, the main issues that you need to plan for in the event of death include:
Given the significant shift in the landscape with respect to SMSFs and estate planning, we also strongly recommend that trustees have their SMSF trust deed reviewed to ensure maximum flexibility when dealing with excess TBC amounts, rollover of death benefits, reversionary pensions and child pensions. This should be done alongside the review of any binding death benefit nomination(s) you have in place to ensure that they too are valid and provide the certainty in how your death benefits will be dealt with upon your death.
The payment and tax treatment of death benefits paid from an SMSF has traditionally been a complex area, with the need to obtain advice from a specialist. With the recent introduction of the TBC, the need for specialist advice has never been more important.
When you are moving from Working Holiday Maker (WHHM) Visa to a Temporary Skills Shortage 482 (TSS482) you need to ensure that you complete the attached Withholding Declaration form and give it to your employer.
The ATO receives your tax status from your employer, so without doing this you could end up under or over paying tax. It could come as quite a shock when you are completing your end-of-year tax returns.
“If you’re on a working holiday visa, you’ll be taxed at 15% for the first $37,000 you earn. If your residency status changes during the financial year, you’ll need to notify your employer by completing a withholding declaration to notify them of the change in your residency status and you elect to start claiming the tax-free threshold.
When your residency status changes partway through a financial year, you’ll be entitled to a pro-rata tax-free threshold based on the number of months you’ve been a resident of Australia. If you’re concerned you won’t have enough tax withheld based on your situation, you can request extra tax to be withheld by completing an upwards variation form.”
Should you have any queries in relation to your working visa please contact our office at firstname.lastname@example.org.
An SMSF is a very important financial planning decision. When operated within the rules they provide a powerful wealth creation tool, however too often SMSF trustees drift ‘outside the flags’ and end up in need of rescue.
To ensure you ‘stay between the flags’ complete our comprehensive SMSF Trustee Program, which comprises 7 lessons. This course is suitable if you have received an education direction from the Australian Taxation Office (ATO) and are required to complete an approved ATO education course.
The Government has announced that the temporary reduction in super minimum drawdown rates has been extended until 30th June 2022.
As expected, this year’s Federal Budget has a strong emphasis on job growth and women’s security. From an SMSF perspective, there were some welcome surprises for SMSF trustees, the key measures that you should be aware of are outlined below.
All measures outlined below, other than the proposed changes to legacy retirement products, are expected to commence from 1 July 2022, once they have received Royal Assent.
Repealing the work test for voluntary contributions
Reducing the eligibility age for downsizer contributions
The eligibility age to make downsizer contributions into superannuation will be reduced from 65 to 60 years of age. All other eligibility criteria remains unchanged, allowing individuals to make a one-off, post-tax contribution to their superannuation of up to $300,000, per person, from the proceeds of selling their home. These contributions will continue not to count towards non-concessional contribution caps.
Relaxing residency requirements for SMSFs
SMSFs and small APRA funds will have relaxed residency requirements through the extension of the central management and control test safe harbour from two to five years. The active member test will also be removed, allowing members who are temporarily absent to continue to contribute to their SMSF.
Removing the $450 per month threshold for superannuation guarantee eligibility
Legacy retirement product conversions
Individuals will be able to exit a specified range of legacy retirement products, together with any associated reserves over a two-year period. The specified range of legacy retirement products includes market-linked, life expectancy and lifetime products, but not flexi-pension products or a lifetime product in a large APRA-regulated or public sector defined benefit scheme.
Currently, these products can only be converted into another like product and limits apply to the allocation of any associated reserves without counting towards an individual’s contribution cap.
Social security and taxation treatment will not be grandfathered for any new products commenced with commuted funds. Amounts commuted from reserves will be taxed as an assessable contribution but will not count towards an individual’s concessional contribution cap or give rise to excess contributions.
This measure will take effect from the first financial year after the date of Royal Assent of the enabling legislation.
SMSF trustees need to truly understand diversification and better diversify their portfolios.
The benefits of a well-diversified portfolio are numerous but the key ones that SMSF trustees should focus on are the benefits of mitigating volatility and short-term downside investment risks, preserving capital and the long-run benefits of higher overall returns. By spreading an SMSF’s investments across different asset classes and markets offering different risks and returns, SMSFs can better position themselves for a secure retirement.
However, did you know that 82% of SMSF trustees believe that diversification is important but in practice many do not achieve it?
This is because half the SMSF population cite barriers to achieving diversification. The top being that it is not a primary goal for SMSF trustees, and they believe they have a lack of funds to implement it.
Furthermore, 36% of SMSF trustees say they have made a significant (10%) asset allocation change to their SMSF over the last 12 months. This demonstrates that SMSFs may not be actively restructuring their portfolio on an annual basis to respond to changing market conditions.
Another clear problem regarding diversification is the amount of SMSFs with half or more of their SMSF invested in a single investment. SMSF trustees say they primarily invest in shares to achieve diversification in their SMSF, while just a quarter say they invest in at least four asset classes to achieve this.
The bias and significant allocation to domestic SMSF equities conversely may highlight the fact that SMSFs are not adequately diversified, especially across international markets and other asset classes.
So what can you do?
Some of the steps you, with the help of an SMSF Specialist, can take to diversify your retirement savings and control your investments in a disciplined and planned way include:
Always remember to document your actions and decisions, as well as your reasons, and keep them as a record in order to demonstrate that you have satisfied your obligations as a trustee.
Given the importance of having an appropriately diversified portfolio and its impacts on quality of life in retirement trustees ought to consider professional assistance in managing this important aspect of an SMSF.
How can we help?
If you need assistance with diversification with your fund, please feel free to contact us so that we can discuss your particular circumstances in more detail, or refer to the SMSF Association Trustee Knowledge Centre.
Family Trusts are used for holding assets or for running family-based businesses. It is referred to as “inter vivos discretionary Trust” which means that an individual establishes a family Trust throughout their lifetime to maintain or manage investments, assets and to support beneficiaries including the family members of the individual.
There are several advantages to having a family Trust, they are beneficial for protecting the assets from going bankrupt or from business failures. The Trustees own the assets in the Trust instead of the beneficiaries therefore, they cannot be utilised to pay off creditors of the beneficiaries, unless they were invested in the Trust with the intention of paying off the creditors.
They are also beneficial to protect the family assets in context of divorces and marriage breakdowns. When an event involves property settlement in terms of law of a family, the assets that are invested in the family Trust fund are likely to be excluded from the property settlement than the assets which are directly held by the individual. Family Trusts can also ensure that challenges of Will are avoided considering any of the assets in the Trust will not be considered as part of the deceased’s estate. It can also be considered as a motivator to retain assets within a family group for a family business, example a family farm. In a Trust that is fully discretionary, the Trustee makes the decision of who gets to access the Trust assets and is responsible for splitting the assets. In Australia, the Family Law Courts considers the Trust assets owned by the Trusts that are discretionary and the spouses are the beneficiaries, as sources of finance and include this into their judgments regarding splitting the assets during divorce.
In Australia, most of the working individuals aim to live a comfortable retired life which is natural. Almost all Australian working individuals create their retirement funds through superannuation, the discretionary Trust plays can play an efficient role in supplementing this earning. The Trust does not have limits to contribution unlike the funds of superannuation. They do not even have any restrictions on where the funds are invested, neither do have any limits to borrowing. Throughout one’s life, they can flexibly give and take from the Trust as they deem necessary which enables an increased financial flexibility.
A large number of Australian businesses run on discretionary Trusts, especially when they are family businesses. The beneficiaries of this Trusts include the immediate or extended family of the individual. The beneficiaries do not hold any interest or rights in the property or assets of the Trust unless the Trustee distributes the assets as they see fit to the beneficiaries.
Tax Purposes can also be a reason Trusts are advantageous when the Trustees have a higher tax bracket, and the beneficiaries fall under a lower one. The effective distribution income to beneficiaries through marginal rates that are low will result in a low amount of tax payment.
If you would like to know more, please contact us.
We are honoured to be featured on page 8 of the Public Accountant, the ‘Official Journal of the Institute of Public Accountants’, as the ACT 2020 Practice of the Year.
The Institute of Public Accountants (IPA) is one of Australia’s oldest representative professional bodies, formed over 90 years ago. Commencing operations in 1923, their evolution has seen them grow to their current position with over 37,000 students and members internationally.
Throughout all phases of history, they have supported and championed our members and the profession. They are here to protect and support our members as well as the SME/SMP sector.