Pension Payments

Superannuation fund members who had an existing pension account as at 1 July 2010 or commenced a pension during the 2011 financial year are required to satisfy the minimum payment standards.

Pension payments must be withdrawn as cash from the superannuation fund’s account and the total for the year must meet at least the minimum pension payment requirement by 30 June 2011.

Members who have a Transition-to-Retirement Income Stream should also ensure that they have not exceeded the maximum amount allowable for the year.

Government Co-Contributions

To be eligible for the government co-contribution, a non-concessional contribution must be received by your Fund prior to 30 June 2011. The Government will match eligible contributions dollar for dollar up to a maximum of $1,000.

Individuals with total income at or below $31,920 will receive the maximum amount and the contribution will phase out completely once the individual’s total income exceeds $61,920.

Spouse Contribution

Taxpayers can claim an 18% tax offset on non-concessional contributions of up to $3,000 made on behalf of their low-income of non-working spouse. The maximum tax offset is $540 and is available where the spouse’s total income is less than $10,800. The eligible spouse contribution is then reduced by $1 for each $1 above this lower amount and completely phased out where the spouse’s total income exceeds $13,799.

Concessional Contributions

Individuals who are 50 on or before 30 June 2011 have access to the higher $50,000 concessional contributions cap.

Individuals 49 and under have a concessional contributions cap of $25,000.

Individuals with multiple employers should be cautious of exceeding the concessional contributions cap, as the total of all employer contributions applies to the single cap amount. Unfortunately for individuals with multiple employers and their 9% Superannuation Guarantee payment exceeds their concessional contributions cap, there is no way around this.

Where employers are paying expenses on behalf of the superannuation fund such as life insurance and are not reimbursed, these amounts are also included as contributions and as such are included in the concessional contributions cap.

Any excess concessional contributions above the cap amount will liable for the excess contribution tax (31.5%) and will also be included in the individual’s non-concessional contributions cap in the same financial year.

Non-concessional Contributions

An individual under the age of 65 is able to make a non-concessional contribution of $150,000 per year. Any unused portion of this cap cannot be carried forward to future years.

An individual aged 64 or under on 1 July 2010 is eligible to use the ‘bring forward’ provision and contribute up to the next two year’s worth of contributions in the current year. The current bring forward non-concessional cap is $450,000 for a 3 year period.

Once aged 65, an individual must meet the work test (at least 40 hours over a 30 day period in which the contribution is made) to make non-concessional contributions.

Individuals aged 65 on 1 July 2010 are only able to contribute a maximum of $150,000 non-concessional contributions during the financial year provided they meet the work test, with no option of using the ‘bring forward’ provision.

There are a number of reasons why an increasing number of investors have been turning to self managed superannuation funds (SMSF) as the investment vehicle of choice within Australia over the past few years. SMSF investments total about $390 billion, being almost one quarter of the total superannuation system investment pool. Traditionally employees and investors have preferred to hold their superannuation balances in retail superannuation funds that offer limited control over flexibility and investment choices, a reduced number of taxation planning opportunities and percentage based annual fees. However investors today are becoming increasingly sophisticated and financial advisors are much more active in directing their clients towards establishing an SMSF, utilising their investment flexibility and potential taxation benefits.

SMSF taxation structure

Superannuation is an attractive investment vehicle for investors due to its concessionally taxed environment. A differentiation must be made between assets held in accumulation and pension phase within the SMSF for taxation purposes. A fund member during accumulation phase will pay tax at a rate of 15% on all taxable income (10% where capital gains held for greater that 12 months), whilst in pension phase the member pays 0% tax. Now when you make the comparison to the other investment vehicle options being, companies where income is taxed at 30% or trusts where the income will ultimately be distributed out at the beneficiaries marginal tax rate, you can see the tax effectiveness of holding savings inside superannuation.

What constitutes accumulation and pension phases within an SMSF?

All members will remain in accumulation phase until such time as reaching preservation age, currently age 55, and a condition of release.

From age 55 the member has the option to then commence drawing a pension from their superannuation fund whether they continue to actively work via what is known as a “Transition to Retirement Pension“ or permanently retire from the workplace, through an “Account Based Pension”. Obviously significant benefits can then be achieved through transferring the member’s accumulation balance across to pension phase.

Whilst between 55 and 59 years of age a Transition to Retirement Pension may significantly benefit the net tax position of a member inside an SMSF, it is important to understand that in pension phase a pension amount needs to be drawn from the fund each year. The concessional or taxable component of the member account will form part of the member’s personal taxable income, however a 15% tax offset may be claimed. It is worth noting that inside a Transition to Retirement Pension a member has the option of drawing anywhere between 4 – 10% of the value of their member account at the commencement of the financial period.

Upon reaching age 60 most superannuation fund members will be advantaged by commencing a Pension. In addition to the tax free status of income on assets supporting the pension inside the superannuation fund, all pension amounts withdrawn by the member are now tax free. Keeping this in mind you can see the great benefits in holding investments within a super fund once reaching what we term a “condition of release”

From age 65, or after the member has permanently retired from the workforce, a Transition to Retirement pension will revert to an account based pension. The main difference between the two pension types is the removal of the 10% limit on pension drawdowns each year.

Why should I consider transferring my superannuation money from a retail fund to an SMSF?

An SMSF provides members with a level of flexibility and control that far exceeds any of the other offerings. Your SMSF may directly hold both residential and commercial property and invest into a much wider variety of asset classes and products, including antiques and collectibles that are not possible with a retail fund. Every SMSF must have an investment strategy that is developed and agreed to by all members, but with the flexibility to update and change as their investment focus changes. An SMSF also has the option of leveraging which opens the door to a greater variety of asset classes

Cost is a significant factor when considering retirement savings. Within a retail fund both a husband and wife’s account may pay fees of up to 3% (often hidden) resulting in a combined balance of $500,000 paying management expenses in the vicinity of $10,000 – $15,000 each year, however within an SMSF the same $500,000 balance may only attract annual fees of $2,500 for administration and $400 for audit, with the advantage of remaining relatively constant despite any overall growth in SMSF assets.

Taxation advantages of an SMSF

Investment assets accumulated within an SMSF carrying significant unrealised capital gains can be disposed of free of tax once the member reaches age 55 and commences a pension. Within retail funds it is very common for members to have all investments effectively sold off prior to entering pension phase and of course triggering “unnecessary” capital gains tax prior to commencing the pension. The timing and choice of SMSF investment disposals remains in the hands of its members and their advisers and is crucial in the overall minimisation of tax within the fund.

Income generated on SMSF investment assets is taxed at a flat rate of 15%. Unlike a retail fund where a net investment balance movement is periodically attributed to their members, SMSF investments are directly owned and all income and their various components are retained. All Imputation and franking credits associated with dividends and trust distributions generated by the fund are able to be used to offset any income or contributions tax during the year and excess credits may result in a fund tax refund at year end. Where members are in pension phase most advantage is achieved, as all income and capital gains are tax free and the fund is still able to claim back the full amount of any tax credits generated.

An advantage may be gained due the difference in timing of tax payments by an SMSF. Any taxable contributions made to a retail fund are reduced by the 15% contributions tax on the date they are received by the fund, hence only 85% of the contribution actually makes the members account. Now compare this with an SMSF where the full 100% of the contribution is available for investment with any tax generally payable at a later date or as far as 10 months after the end of the financial year the contribution is made. By having a member in both accumulation and pension phase the fund may never have to remit any contributions tax to the government due to tax credits generated on income offsetting this amount and the annual net tax position of the fund being a refundable one.

Major reasons for SMSF breaches resulting in Non Compliance -

• Late and non lodgement of SMSF annual returns,

• Early release of funds from the SMSF bank account (i.e. prior to satisfying a condition of release),

• Loans to members of the SMSF (or related parties)

• Assets of the fund with incorrect title.

W hat then does non-complying mean to the fund?

Implications of having your SMSF deemed non-complying-

• The market value of the fund in the year prior to becoming non-complying (less any non-concessional contributions of the fund) is included in the assessable income of the fund in the year the SMSF receives it’s non complying status,

• The tax rate payable is at the highest marginal tax rate being 46.5% as opposed to the superannuation tax rate of 15%

• Any pension tax free exemption is lost,

• A general interest charge may also be charged from the financial year when the SMSF received a non-complying status up until such time as payment is made.

The Process of becoming Non-Complying-

• Firstly the SMSF auditor will lodge a contravention report,

• The ATO then forwards out a letter to the trustee of the fund titled “Notification of audit for your action” outlining the aim to complete an audit within a set time frame and for the trustee of the fund to respond ,

• From the information received back from the trustee the ATO then has the discretion of whether to issue a notice of non-compliance,

• If a notice of non-compliance is received, the ATO will supply the trustee with the opportunity to submit reasons as to why the fund should not be made non-complying,

• And following this, either accept those trustee reasons or issue the notice of non-compliance and the amended assessments will follow,

• The trustee may then request a review of the ATO’s decision and an objection against the assessment.

Where a contravention has occurred the ATO will not necessarily issue a notice of non-complying but may chose to

• Accept an undertaking from the trustee to rectify the contravention

• Disqualify individual trustees prohibiting them to act as SMSF trustees or a director of a corporate trustee of an SMSF,

• Freeze the assets of the SMSF if they fear the member may access funds which remain preserved,

• Seek civil / criminal penalties through the courts,

Conclusions-

• Where contraventions are identified they need to be rectified as soon as possible,

• When a contravention report is lodged it is always favourable to show the ATO that the breach has been diligently rectified and measures taken to ensure such actions never result again,

If unable to rectify immediately an undertaking should be offered to the ATO detailing how the contravention is to be fixed and the time frame.

There are in excess of 350,000 SMSF’s in existence and up to 2,500 SMSF’s created each month.

Why are they so popular? What are the pros and cons? This article could cover a whole newsletter, but following is a brief summary:

Pros

• Management – you manage the superfund yourself. You make the management decisions about where you get investment advice from, where you get accounting and audit advice from, where you get financial planning and insurance advice from, what record keeping you want to do and what you want someone else to do. You may in fact decide to do most of this yourself or bring in trusted advisors to help you with your decisions.
• Investment – you make the investment decisions. Many SMSF’s start when the members are disillusioned with their superannuation earning negative returns, but still having to pay investment manager fees. Many SMSF’s have invested in term deposits or property over the past 12-24 months to avoid negative returns from equity investments exposure. They would have had less control to be able to do this if they were with a retail or public fund.

Recent legislation now allows for SMSF’s to borrow in order to acquire investments allowing more funds to enter the property market and to take advantage of the recent economic downturn via greater exposure. SMSF’s further allow for members to purchase private and unlisted public investments as well as alternative investments including artwork and collectables.

• Cost – you can better control the costs. A SMSF will pay an accountant to prepare the fund’s annual financial statements. This could range from $1,100 – $5,500+ depending upon the size of the fund and the number of investments and transactions. A SMSF will pay an auditor to audit the fund’s annual financial statements. This could range from $330 – $1,100+, again depending upon the size of the fund and the number of investments and transactions. A SMSF could also pay a stockbroker (usually brokerage per buy or sell share trade), a financial planner (percentage of assets or hourly rate – or possibly $NIL if only insurance products obtained as their fees are currently paid by the insurance company).

These contrast with a public or retail super fund and industry funds which charge a management fee equal to a percentage of the account balance (usually 1% – 2%). For example: the annual running costs of an average SMSF could be around $3,850 ($2,200 accounting, $550 audit and allowing $1,100 for brokerage or financial planner). If the balance of the fund was $500,000 this would represent running costs of 0.77% contrasted to a public fund which may charge between 1% – 2% or $5,000 – $10,000.

• Flexibility – you control the flexibility. Since the legislation was changed from 1 July, 2007 regarding pensions many SMSF’s now pay a pension (or multiple pensions). SMSF’s are very flexible when it comes to retirement planning and the tax savings a pension can provide.

For example a member may have two running pension accounts with one having a high concessional component with the other having a low concessional component with the strategy that any annual pension payments in excess of the minimum requirement be allocated against the higher concessional component balance to reduce the tax payable upon death of the member.

Cons

• Management – you manage the superfund yourself. There are some very strict rules on what a SMSF can and can’t do. If you get it wrong the penalties can be very expensive. This is where it would pay to have an Administration company to be able to look after everything for you so there is no risk that you will get it wrong.
• Investment – you make the investment decisions. Do you have the expertise to outperform a professional fund manager? Some SMSF’s may have continued to be invested since March in term deposits earning 4% per annum to avoid negative returns, but those funds have missed out on the 50% rebound in the stock market over the past 6 months.
• Cost – If you have a small fund (ie < $200,000) the costs may be more than a public or retail fund. As seen above it becomes a cost saving the larger the fund becomes. The other cost is the cost of your time if you try to do it yourself. This can be avoided if you appoint an Administration company to look after it all for you.

Setting up a SMSF (which can cost from around $900- $1,500) and running your own SMSF is not a decision you should take lightly. You MUST talk to your advisor first to ensure you fully understand what is required and where to get additional education from

As expected the superannuation industry has been targeted with this year’s federal budget with the federal government aiming to save around $4.2 billion over the following 4 years by making changes to salary sacrificing and co-contribution arrangements. In short-

1. The government co-contribution will be temporarily reduced with the reduction in the matching rate from 150 percent to 100 percent for contributions made for the 2009/10, 2010/11 and 2011/12 income years. It is intended that these arrangements are only temporary and that co-contributions be gradually increased back up to $1.25 for each $1 contributed to a maximum of $1,250 in the 2012/13 and 2013/14 financial years and back to $1.50 for each $1 contributed to a maximum $1,500 in 2014/15 and onwards.
2. Currently concessional contribution caps stand at $100,000 for those aged 50 and above and $50,000 for under age 50. Under budget changes commencing 1 July 2009 concessional caps will be halved to $50,000 for those over 50 and $25,000 for those under 50. The transitional arrangement ending 30 June 2012 will now see all concessional contributions capped to $25,000.
3. Back in February 2009 the government suspended the minimum draw down requirement for the second half of the 2008-09 financial year resulting in a 50% reduction on pension payments from superannuation. As per the budget this halving of the minimum amount payable from such pensions will be extended for the 2009/10 year.
4. There was much pre budget speculation however a number highly anticipated changes did not eventuate including changes to the non concessional contributions cap which continues to stand at $150,000 per annum or up to $450,000 for those under age 65 using the 3 year averaging provision, the removal of the transition to retirement pension which continues to act as tax effective strategy for those who qualify, and changes to the tax free pension and lump sum draw down for those who have reached age 60.

Other Recent News -

1. The Australian Taxation office has backed down on their draft ATO ruling in November that extended payment of the 9% superannuation guarantee levy to overtime and other allowances. The ATO stated employees were not eligible to receive superannuation on overtime earnings because the concept of salary and wages paid in the ‘ordinary hours of work’ did not extend to overtime.
2. From 1 July 2009 employers must show salary sacrifice contributions on the employees PAYG summary which will affect the individuals ability to qualify for benefits including the self-employed contribution (10% test) and the government co-contribution.

Excess Contributions Tax-

1. The Tax Office has urged individuals to assess superannuation contributions in the current financial year to avoid breaching contribution caps. The Tax Office has identified around 24,000 cases with individuals being notified in writing in May via excess contribution tax assessments for the 2007/08 year. For the 2007-08 and 2008-09 financial year the concessional contribution cap is $50,000 per person and for those aged 50 years and over the cap is $100,000 with the non concessional cap being $150,000 per person and for people under age 65 for any part of a financial year being able to contribute up to $450,000 over 3 years. Note that excessive contributions are taxed at 31.5% and excess non concessional contributions are taxed at 46.5%.
2. There are a number of options available to make payment of excess contributions tax being
   • pay the tax yourself without drawing on your super,
   • pay the tax yourself and use the voluntary release authority to ask your super fund to release the money to you,
   • use the voluntary release authority to instruct your fund to pay the money to the ATO on your behalf,
   • pay using a combination of these options.
3. Contributions can be disregarded or reallocated in special circumstances. You may apply to have all or part of your contributions disregarded or reallocated to another financial year. To do so you must apply within 60 days of receiving an excess contributions tax assessment