2022-23 Federal Budget Update – A quiet night for SMSFs

This year’s Federal Budget cost-of-living relief, job growth and women’s security. The key measures that you should be aware of as an SMSF trustee are outlined below. Should you wish to discuss how these may impact your personal circumstances or retirement plans please contact me to arrange a time to chat.

Extension of the temporary reduction in superannuation minimum draw down rates

The Government has extended the 50 per cent reduction of the superannuation minimum drawdown requirements for account-based pensions and similar products for a further year to 30 June 2023. The minimum drawdown requirements determine the minimum amount of a pension that a retiree must draw from their superannuation in order to qualify for tax concessions.

Given ongoing volatility, this change will allow retirees to avoid selling assets to satisfy the minimum drawdown requirements.

Digitalising trust income reporting and processing

The Government will digitalise trust and beneficiary income reporting and processing, by allowing all trust tax return filers the option to lodge income tax returns electronically, increasing pre-filling and automating ATO assurance processes. The measure will commence from 1 July 2024, subject to advice from software providers about their capacity to deliver.

Trust income reporting and assessment calculation processes have not been automated to the same extent as individual or company tax returns, resulting in longer processing times and limited pre-filling opportunities. This measure will reduce the compliance burdens on SMSF trustees (taxpayers), reduce processing times and enhance ATO processes. The Government will consult with affected stakeholders, tax practitioners and digital service providers to finalise the policy scope, design and specifications.

 

Superannuation death benefits – Review succession plans

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:

  • If your death benefit will be paid as a death benefit pension, your beneficiary’s TBC will be relevant in determining how much can be paid as a pension to them. Any excess death benefit above their TBC must be paid as a lump sum to them.  This limits the amount of money that can now be retained within the superannuation environment upon your death.
  • Where your dependant has already used some of their TBC, you may need to consider strategies which maximise the amount of your benefits that can remain in the SMSF on your death and minimize the amount that would need to be paid to your beneficiaries as a lump sum.
  • The special rules which delay when the reversionary pension counts towards the new recipient’s TBC and the differences between how reversionary and non-reversionary pensions are counted towards the new recipient’s TBC.
  • The special rules that operate to modify the TBC of a child in receipt of a death benefit pension to ensure that their personal TBC is not exhausted.
  • The ability for a recipient of a death benefit pension to rollover the pension to another super fund (note, to satisfy the regulatory rules, a new death benefit pension must be commenced in the new fund or the amount must be withdrawn from the superannuation environment as a lump sum death benefit).

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 did you last review your SMSF’s investment strategy?

You may be aware that the Australian Tax Office (ATO) has issued letters to nearly 18,000 SMSF trustees as part of a campaign to ensure trustees are aware of their investment obligations.

Of key concern is ensuring that trustees have considered diversification and liquidity of their assets when formulating and executing their fund’s investment strategy.

Importantly, it must be noted that the ATO letters are not an attempt to regulate and limit the control and freedom that SMSF trustees have but rather ensuring that if trustees wish to invest their assets in a certain way that they must clearly articulate their reasons for doing so.

An investment strategy should be considering the SMSF’s blueprint when dealing with the fund’s assets to ensure the SMSF’s investment objectives and members’ goals are met. It provides the parameters to ensure you invest your money in accordance with that strategy. This is where the ATO has a primary function to ensure that trustees act in accordance with these obligations.

An SMSF investment strategy must take into account the following items:

  • The risks involving in making, holding and realising the SMSFs investments, their expected return and cash flow requirements of your SMSF.
  • The diversification and composition of your SMSF investments.
  • The liquidity of your SMSF investments, having regard to expected cash flow requirements.
  • The SMSFs ability to pay your current and future liabilities, including benefits to the members.
  • Considering whether to hold insurance cover for each member of your SMSF.

An important requirement for you as trustee of your SMSF is to have an investment objective and a strategy to achieve that objective in place, before you start to make decisions about how you want to invest your SMSF money.

Of equal importance is that the investment objective and strategy is not set in stone. You can choose to change the investment objectives you have set for your SMSF at any time.

It’s not uncommon for SMSFs with lower member balances to find diversification a challenge as there is limited money to invest. Nonetheless, you are still required to demonstrate that you adequately understand and mitigate the associated investment risks.

If you find yourself in this position, it is important your investment strategy reflects these risks.

For example, if you have invested in a large illiquid asset such as real property which may form the majority of your fund, it is timely to ensure your strategy reflects the concentration and liquidity risk associated with this investment.

Where you have in place an adequate investment strategy that deals with these risks and can provide the necessary evidence to support your investment decisions, no further action is expected.

Where your fund has not complied with its investment strategy requirements under superannuation law, you may be liable to administrative penalties being imposed by the ATO, as Regulator of the SMSF sector.

Your investment strategy does need to be reviewed at least once a year and this will be evidenced by your approved SMSF auditor. It is also important to review your strategy whenever the circumstances of any of your members change or as often as you feel it is necessary. The following practical tips will help you keep on top of your obligations:

  • Put your investment objective and strategy in writing
  • Set an investment objective that you can comfortable achieve with the underlying investments you are comfortable to invest in
  • There is no template for an investment object and strategy, but make sure they reflect how you intent to invest your SMSF money
  • The investments you actually make must be accommodated by the investment strategy you have set
  • Most importantly, document your actions and decisions, as well as your reasons, and keep them as a record in order to demonstrate that you have indeed satisfied your obligations as a trustee in this important area