Managing your SMSF leading up to 30 June
By Colin Lewis
A self-managed super fund (SMSF) is one type of vehicle to manage your superannuation savings. So, the usual end-of-year super strategies, especially those relating to contributions and managing the contribution caps, apply equally across the spectrum of funds, e.g. public offer (retail) funds, industry funds, corporate funds, SMSFs etc.
In addition to these strategies, there are certain matters you need to be particularly aware of with an SMSF both throughout the year and in the lead up to 30 June. Some are unique to SMSFs whilst others are not, but if you are running your own fund you must be vigilant and across them all as you’re responsible!
There are certain actions you may take that can impact the contribution caps. For example, if you pay an expense of the SMSF from your personal account, you are deemed to have made a contribution to the fund and it counts towards the cap.
If your SMSF has borrowed via a limited recourse borrowing arrangement and the lender has forgiven part of the loan, or a guarantor has made a payment on behalf of the trustee, this may also be treated as a contribution.
You may wish to consider the appropriateness of a ‘contribution reserving strategy’ to maximise a tax deduction in 2017-18. This is where you make a personal deductible contribution in June to a contribution reserve in the fund and then allocate it to your member account by 28 July. Be careful of the process and aware of reporting to the Australian Taxation Office (ATO) if you do this!
On the topic of reserves, if funds are being allocated from a reserve account to a member’s account, these may be treated as a concessional contribution subject to the cap.
When it comes to pensions, be mindful of the $1.6 million transfer balance cap (TBC) when commencing a retirement phase pension – a popular strategy in June as a pension payment does not have to be taken.
If your SMSF is running an account-based pension, ensure the minimum annual pension payment is made before 30 June. If less than the minimum is paid, then generally the pension will lose the tax exemption on income and capital gains for assets backing the pension for the entire year.
For the first time in 2017-18, partial commutations, i.e. lump sum withdrawals, from a pension no longer count towards the minimum annual pension payment requirement.
Also, for the first time, pension payments cannot be treated as lump sum withdrawals for tax purposes. Thus, members between preservation age and age 60 can no longer elect to treat taxable pension payments as lump sums to receive the payment tax-free by using the low rate cap.
If your fund is running a transition to retirement income stream (TRIS), ensure the maximum pension payment is not exceeded. And for the first time in 2017-18, fund earnings and capital gains on assets supporting a TRIS are no longer tax-free.
Trustees can no longer use the ‘segregated method’ for determining exempt current pension income (ECPI) where
- the fund has a member in retirement phase, and
- at 1 July 2017 either that member, or another member, has a total superannuation balance (TSB) of more than $1.6 million which includes a retirement phase income stream, even if that income stream is paid from another fund.
Where these factors apply, the fund is required to use the ‘proportionate method’ in calculating ECPI and must obtain an actuarial certificate for this calculation.
The industry practice of funds being able to claim a full tax exemption on income earned on segregated assets without needing an actuarial certificate, i.e. the ability to apply the segregated or unsegregated method for the entire year, has been brought into line with the ATO’s correct interpretation of the law. An SMSF allowed to be segregated (discussed above) may have to claim their ECPI exemption by breaking the year up into multiple periods. Thus, if a fund’s assets are segregated for only part of the year and the trustees wish to claim ECPI for the remainder of the year when assets are unsegregated, they must now obtain an actuarial certificate for the period the fund’s assets are unsegregated.
With the introduction of the TBC and TSB on 1 July 2017, trustees are required to report to the ATO ‘events’ that impact members’ transfer balance accounts. The mechanism for reporting member events is the transfer balance account report (TBAR). Your fund’s administrator will have this under control!
If strict eligibility criteria are met, trustees may reset the cost base of fund assets to market value if you were required to reduce your retirement phase pension balance to $1.6 million by 1 July 2017, or you had a TRIS. The election for capital gains tax relief is done in the fund’s annual return due for lodgement by 30 June 2018, if not already lodged.
Still on the topic of investments, you should check that the value of any in-house assets (IHAs) is less than five percent of the total value of the fund. If the value of IHAs exceeds this as at 30 June, you must dispose of the excess IHAs in 2018-19. If asset values have fallen to the extent that IHAs may exceed five percent, consider making contributions to remain within the limit.
Finally, the fund’s investment strategy must be reviewed regularly – at least annually and when circumstances change significantly – to ensure it continues to reflect the purpose and circumstances of the fund and its members. And, make sure the fund’s investments are consistent with the strategy – the two should go ‘hand-in-glove’!