As we are well into the new calendar year and almost three quarters of the way through the 2018 financial year, now is an important time to take stock of the various recent super reform issues to ensure SMSF trustees are maximising their personal financial position. Here are five items to consider:
1. Is your SMSF eligible for Capital Gains Tax (CGT) relief?
This is a particularly important action item for SMSF members with significant fund balances and anecdotally, it appears some fund members (and their advisers) are overlooking and/or failing to apply the CGT relief.
As a result of the 2017 super reforms, anyone with more than $1.6 million of super in pension phase as at 1 July 2017, is forced to withdraw the excess over that amount from the retirement phase, and move it back to accumulation phase, or withdraw it from the super system.
If you moved, or are planning to move, the excess funds (above $1.6 million) into the accumulation phase of a super fund or had in place a transition to retirement income stream (TRIS) and you have accumulated capital gains before 1 July 2017, you may be eligible for capital gains tax relief for that gain.
Those intending to access the relief must make an election by the due date of their FY17 SMSF annual return. The ATO has announced that all SMSFs have until 2 July 2018 to lodge their FY17 SMSF annual return.
These CGT relief measures are particularly complicated, but action must be taken given the significant tax consequences, particularly for SMSFs using the unsegregated or proportionate method to claim a tax exemption on current pension income in FY17.
2. Retired and under age 65
If you have reached your preservation age but are under age 65, being ‘retired’ can be important especially if you are currently receiving a TRIS. From 1 July 2017, the income earned on fund investments paying a transition to retirement income stream (TRIS) will be taxed at 15% if it is not in a ‘retirement phase’. Previously such income was tax exempt.
The removal of the tax exemption has created a distinction between a ‘TRIS in retirement phase’ and a ‘TRIS not in retirement phase’. A TRIS in retirement phase is exempt from tax on any income earned on fund investments that support it. However, the value of a TRIS in retirement phase is counted against the member’s transfer balance cap.
A TRIS moves from not being in retirement phase to retirement phase if the fund has been notified that the member is totally and permanently disabled, is terminally ill, or has reached their preservation age but is under age 65 and has ‘retired’. If the fund has not been notified of one of these events, it will remain a ‘TRIS not in retirement phase’.
The notion of retirement for some may mean the gold watch, a retirement party or an oversized ‘Sad to see you go’ card – but under the super law it is quite different. Retirement for super purposes depends on retirement age, your intentions and ceasing work. Anyone who is between 60 and 65 is considered to have ‘retired’ when an employment arrangement has ceased.
3. The reduced concessional contribution cap
The concessional contribution cap for everyone, no matter their age, is $25,000 for FY18. If you have salary sacrifice arrangements in place, check that no more than $25,000 in employer and personal deductible contributions will be made to super in FY18. There are changes proposed which, effective 1 July 2018, will remove salary sacrifice contributions from offsetting an employer’s Superannuation Guarantee liability, which in turn may result in additional contributions being included under the reduced cap.
4. Split contributions where it makes sense to do so
With the introduction of the transfer balance cap, consider longer-term strategies designed to equalise balances between couples. The ability to split up to 85% of concessional contributions from one spouse to another can help equalise members’ accounts over time.
The current concessional cap of $25,000 allows a spouse to effectively allocate $21,250 to the other spouse in the financial year after the contribution has been made. This strategy can provide some estate planning benefits. One of the benefits of equalising account balances between spouses is that it may assist in keeping one or both spouses under the non-concessional cap thresholds.
5. Estate planning
Any estate plan should be regularly reviewed so it meets a family’s changing needs and wishes. The introduction of the super reforms is a trigger to review the appropriateness of estate plans, even when not affected by the $1.6 million transfer balance cap. A couple with combined transfer balance account balances of more than $1.6 million could have an estate plan that is now out of date with their wishes. This may be due to the restricted amount that can be retained in retirement phase. Dust off that estate plan, have a read, and consider its appropriateness.
Conclusion
SMSF trustees need to be aware of the above matters and seek appropriate advice to determine what, if any, action may be required before the end of June 2018 in order to maximise their personal financial position.
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