Having your SMSF capitalise on a market recovery

The last month or so has seen the ASX recover strongly after a disastrous start to the new financial year.  Whilst we are well short of the ASX highs of mid-2007, we may start to see some further gains with some hopeful news emerging from Europe and other parts of the world.

As a result of this recent positive change, it is important from a strategic point of view, to start thinking about some of the key strategies that will bolster you or your client’s superannuation savings in a market recovery:

1. Boost the 10% pension limit with a Transition to Retirement ‘reboot’ – an effectively implemented transition to retirement strategy can add tens of thousands of dollars to a member’s retirement savings.  For some clients who regularly take a 10% maximum pension, recovering markets can provide the ability to roll back the existing income stream and reset the pension with a higher balance.  Conversely, if clients are looking to take the smallest pension possible, especially in light of the 25% reduced minimum for the 2011/12 financial year, now may be an opportune time to roll back their pension to accumulation to reduce the amount required to be taken for the financial year.

2. Locking in tax-free proportions – the use of recontribution strategies is still one of the most effective tools to build greater tax efficiency into income streams under age 60 and also for estate planning purposes.  The creation of multiple pensions with additional contributions or recontributions allows a member to potentially benefit from a higher tax-free proportion when drawing an income stream from the fund.  Subject to the level of pension taken each financial year, you can continue to grow the higher tax-free super balance when markets rebound.

In poor markets, there is some significant tax savings that can be obtained by rolling back pensions to accumulation phase (full commutation) to ‘absorb’ the negative returns against the member’s taxable component, rather than proportionately against their tax-free and taxable components.  At an appropriate time in response to recovering markets, the ability to recommence the pension allows for the member to lock in a higher tax-free component, saving tax on pensions taken prior to 60 and providing long-term benefits for non-dependant beneficiaries.

3. Have you considered segregation? – to further benefit the use of multiple pensions, trustees have the ability to segregate specific assets to different members, pools of members or different superannuation interests.  For example, by applying the fund’s growth assets to a member’s super interest with a 100% tax-free proportion, it can potentially:

  • accelerate the grow of the account balance;
  • provide a greater pension amount that can be withdrawn under a transition to retirement income stream; and
  • decrease the fund’s potential future exposure to death benefits tax for non-dependants.

Segregation may also be useful where the fund is not 100% in pension phase (i.e. one member in accumulation, one in pension).  It could be used to assist in the realisation of a particular asset which has risen significantly off a low cost-base.  By applying segregation, the particular asset(s) with a significant capital gain is fully exempt from tax, rather than partially exempt by having an unsegregated fund.  It is important that any segregation strategy is appropriately documented by the trustees to show specific assets being applied to a particular member, interest or pool of members.

4. Time to build reserves? –  Reserves within a self-managed super fund can play an important current day and longer term estate planning role.  For the majority of SMSFs, you typically see any positive returns applied towards each member’s balance.  However, it is important to consider whether to capture some of these positive earnings into fund reserves to look at implementing a range of strategies including future anti-detriment payments, self-insuring members, enabling future crediting of 100% tax-free pensions, etc.

Fund Reserves can play an integral role in any SMSF and are typically generated by earnings over time.  Planning to capitalise on recovering markets allows for SMSFs to implement many of these reserving strategies effectively.

These are just some strategies that you can start to plan with your clients to help bolster your client’s superannuation savings in recovering markets.

Announcing the SMSF InPractice Workshops

The SMSF Academy is pleased to introduce the October 2011 half-day SMSF workshops on Pensions and Estate Planning.

These SMSF workshops will work through case studies to outline key issues and strategies in these topical areas, in particular in light of the ATO’s draft ruling TR 2011/D3, when a pension commences & ceases.

Due to the workshop format, numbers are strictly limited.

SPAA & FPA CPD points available, along with hours counting towards CPD hours for professional Accounting Bodies (CPA, ICAA, IPA).

Find out more and register here.

Register for anti detriment webinar

I am pleased to announce the next SMSF Academy InPractice webinar on “Using an anti-detriment strategy effectively within a SMSF”.

This one (1) hour webinar will work through:

  • How the anti-detriment tax saving amount is calculated, including discussing the ATO’s recent view’s on this matter;
  • Why it’s now very important to consider claiming an anti-detriment payment where a member dies;
  • How the anti-detriment amount can be ‘funded’ within a SMSF;
  • How a further tax deduction for the Future Liability to pay benefits can also be used and applied
  • Case studies to demonstrate the power of these strategies; and
  • Work through the strategy using the SMSF Academy best-practice tools (to document & implement the strategy).
Further details about this web-training event and registration can be found on The SMSF Academy website.

Anti detriment is back as a popular strategy for SMSFs

The use of anti-detriment within SMSFs as a strategy has been stymied over the past couple of years since the Australian Taxation Office (ATO) indicated that any allocation from a reserve for the purposes of paying this tax saving amount was to be counted as a concessional contribution.  Subject to the amount of the allocation, and other levels of contributions, it appeared likely that this amount was going to incur excess contributions tax (ECT).  As a result, the benefit of the strategy would be eroded by the potential excess contributions tax.

There has been some uncertainty within the industry about the amount to be included for the calculation of the anti-detriment tax deduction since the introduction of section 295-485 of the Income Tax Assessment Act 1997 (ITAA 1997).  The old section 279D within the ITAA 1936 required the whole balance to be paid out as lump sum to qualify for the deduction.  However, this didn’t necessarily appear to be the case when interpreting the new laws.

A question was raised at the March 2011 NTLG Superannuation Technical Committee meeting as to how much of a member’s account balance must be paid as a superannuation lump sum in order for a super fund to qualify for a tax deduction under section 295-485 of the ITAA 1997?

The good news from the ATO’s interpretation is that the tax deduction for the tax saving amount can be claimed on the amount paid out as a lump sum; it does not require the entire benefit to be paid out (as a lump sum).  In other words, a member could receive a combination of income stream and lump sum and claim the deduction for the tax saving amount on the proportion paid as lump sum only.

To demonstrate this, let’s use the following example:


Frank (58) recently died and was survived by his wife, Maria. He had a balance of $550,000 in his SMSF, in which Maria wishes to take a lump sum of $150,000, with the balance to be taken in the form of an account based pension.

Use the SMSF Academy Anti-detriment calculator

From the above calculation, the tax saving amount is calculated as $72,056 on the entire benefit.  As $150,000 has been taken as a lump sum, the proportionate tax saving amount is $19,652 (15/55 x $72,056).  This would mean that an amount of $169,652 would be paid to Maria by way of lump sum. The SMSF would be entitled to a tax deduction of $131,013 ($19,652/0.15).

The ATO’s views expressed from the NTLG March 2011 meeting in my view brings anti-detriment right back into play as a key estate planning strategy for SMSFs.  Whilst still having to consider the issue of allocations from reserves as concessional contributions, there appears now to be a greater scope for planning around the level of deduction that may be required within fund, rather than simply determining it based on the deceased member’s entire benefit.  This deduction may be used to mitigate CGT or simply to benefit future generations of fund members.

Furthermore, there is greater scope to consider how the anti-detriment amount may be ‘funded’ within the SMSF without necessarily having to use reserves.

This positive news means all advisers dealing in the area of SMSFs should again turn their attention to how this strategy may benefit their client’s overall estate plan.

Register your interest to attend the SMSF Academy InPractice August Webinar on Anti-detriment and Future Liability to pay benefits.  Free for SMSF Academy members, $77 for non-members.  Details of this session to be announced shortly.

Understanding SMSF loan products

I’ve spent the past week presenting at professional development days for National Mortgage Brokers (NMB) on the topic of SMSF borrowing.  As part of these PD days I’ve had the opportunity to hear from many of the major financial institutions about their SMSF loan products.

What resonated most with me hearing from the banks is the differences of each lender with their SMSF loan products.

When thinking about undertaking a SMSF loan through one of the banks, credit unions, building societies or other lenders, consider some of these important items below:

  1. Trustee Structure is paramount – the difference between a corporate vs individual trustee can determine a large range of variables with SMSF loans.  These include things from the Loan-to-Value (LVR) ratio to the deal actually going ahead.  Some banks will not provide a loan unless a corporate trustee is in place; some will discount their LVR based on a fund having individual trustees.  It is important you understand these issues up front to ensure that the trustee structure is right the first time!!
  2. Bundled vs Unbundled packages – most banks will require trustees to obtain all the documentation, including SMSF trust deed, trustee structures and bare trust documentation.  However, CBA by comparison provide trustees with a ‘pre-packaged’ solution whereby they will bundle and manage the custodian arrangement for the super fund (currently at $45 p/mth).  Where the trustees arrange for all documents, the bank’s internal or external lawyers will review these documents with a fine-tooth comb (and charge accordingly). Trustees need to consider weighing up an upfront once-off cost to establish the bare trust, against an ongoing fee for setup and ongoing management of the borrowing.
  3. Loan Servicing varies – Banks all have different requirements to look at the serviceability of the loan; some will include employer contributions for interest coverage, some won’t.  You need to understand not only the interest coverage required (e.g. 125%), but how the bank is going to assess the income and contributions of the fund (in particular the patterns of contributions being made).
  4. Varying Loan Amounts – the entry point for many of these loan types can start from as little as $50,000, with most major lenders looking at minimum loans closer to the $200k mark.  There is further distinction between residential, commercial and rural. Maximum loan amounts also vary.  Some banks will also allow for offset accounts, which may be advantageous for trustees to save on interest.
  5. Pricing is mainstream – the good news is that interest rates on SMSF loan products is very much in the mainstream lending category.  Interest-only periods of 5 or more years are also available, which allow for further flexibility in tax planning for the fund (in particular for concessional contributions being paid into the fund).
I will shortly be providing a comprehensive SMSF loan product comparison for members of The SMSF Academy to allow member to further understand the different parameters of each product currently in the marketplace.

Last chance to register for the SMSF Limited Recourse Borrowing days:

  • Sydney – Tuesday, 24th May – Dockside, Cockle Bay Wharf, Darling Harbour
  • Melbourne – Thursday, 26th May – Laureate Room, Etihad Stadium, Docklands
(C) The SMSF Academy 2012
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