INFOGRAPHIC: Latest ATO Excess Contributions Tax statistics


The ATO has recently updated its website with the latest statistics regarding excess contributions tax (ECT), which continues to show individuals predominantly getting caught with their concessional contribution (i.e. salary sacrifice arrangements).  After a 314% increase in ECT notices in 2009-10, there has been a reduction again in 2010-11 to date, however it is significantly higher against historical statistics.   After collecting a whopping $176.6 million in ECT revenue in 2009-10, statistics for 2010-11 already show a further $100 million of revenue collected so far.

The newly introduced “one-off” refund of concessional contributions will appear to get a heavy workout in its first year of operation (2011-12) based on current statistics!

I have created an interactive infographic that details that latest ECT statistics (click on image below to view):

View the Infographic

You can access the latest ATO excess contribution tax statistical report here.

 

 

Budget delivers a fix for now but problems for the future


A band-aid approach to superannuation is hurting retirement savings strategies and confidence in the sector.

It was a budget that certainly delivered on news that the Government was tightening its belt to deliver a budget surplus for 2012-13 and superannuation was certainly not immune from this pain.  Unfortunately though, as a result of the announced changes in tonight’s budget, we are likely to see confidence in the superannuation sector erode as the Government takes a narrow view to retirement savings policy for the sake of short-term popularity to endeavour to re-build public credibility of the Labor Party.

The measures about the additional contributions tax for individuals earning more than $300,000 made public a week ago started the bandwagon of criticism about a Government again using superannuation as a political football to kick a few financial goals.  Unfortunately, the news delivered within the budget extended beyond this measure, sending a clear message about discouraging Australians to save for retirement.

So, here’s delivering the news:

30% contributions tax rate for individuals with income of more than $300,000

From 1 July 2012, individuals with income greater than $300,000 have a 30% tax rate apply on concessional contributions, rather than the 15% flat tax rate currently available.

The definition of “income” will be quite broad providing a greater catchment area of individuals subject to the higher contributions tax rate.  This will include taxable income, concessional superannuation contributions (e.g. superannuation guarantee contributions and salary sacrificed contributions), adjusted fringe benefits, total net investment loss, target foreign income and tax-free government pensions and benefits, less child support.

There was some concern that an effective tax rate of 108% could apply where an individual breached the concessional and non-concessional contribution cap (calculated as 30% contributions tax + 31.5% ECT concessional contributions + 46.5% ECT non-concessional contributions).  However, the Government has announced that the 30% tax rate will not apply to contributions that exceed the concessional cap.  This effectively means that the highest marginal tax rate (46.5%) will still apply to excessive contributions.

It is unclear how the ATO will collect this additional contributions tax and what additional reporting will be required by super funds, in particular with tax-free benefit payments.  If the super surcharge system was anything to go by, this could amount to another administrative disaster.  Measures could apply to allow the ATO to collect this additional tax under the compulsory release authority that applies for non-concessional contributions.

Join us for a webinar about the impact of the Federal Budget and what it means for SMSFs

Deferral on proposed extension of concessional contribution cap for over 50’s to 1 July 2014

With the transitional period for concessional contributions for those over 50 finishing at 30 June 2012, the Government back in May 2010 announced as part of their ‘fairer super’ package an extension of the concessional contribution cap where an individual’s super balance was less than $500,000.  A deferral of the start date to 1 July 2014, is effectively an acknowledgement by Government that this policy decision is administratively difficult and that currently inadequate systems and reporting exists to appropriately manage the extension to the cap.

As a result of this deferral, all taxpayers, regardless of age, will be subject to a concessional contributions cap of $25,000 for the 2012-13 and 2013-14 income years (remembering that the Government in the Mid Year Economic & Fiscal Outlook; MYEFO) announced a freezing of indexation in 2013-14).  When these measures are finally expected to commence in 2014-15, indexation of the concessional cap should occur to $30,000, meaning eligible individuals will be able to make concessional contributions up to $55,000 where 50 years of age an over.

Accordingly to Minister Shorten, deferring the start date to 1 July 2014 will allow implementation to occur in conjunction with changes to super fund reporting and systems that will be occurring under the SuperStream reforms.  With the ATO developing an online reporting facility to manage member super balance, this deferral will allow for sufficient time to provide access to for member to comprehensive account balance information.

This changes are going to have a significant impact on individuals salary sacrificing into superannuation, in particular those with transition to retirement strategies.

SMSF Auditor Registration

The SMSF Approved Auditor role has been subject to significant reform as a result of recommendations from the Cooper Review to address issues of competency in the sector.  Final details of the auditor registration along with the replacement rule for the accountant’s exemption are long overdue and have become a key source of frustration for the accounting industry.

The Government announced that it will provide $10.7m over 4 years to ASIC to develop and maintain an on-line registration system for auditors of self managed superannuation funds (SMSFs).  As part of the registration process, ASIC will develop a competency exam for SMSF auditors. ASIC will also be responsible for the de-registration of non-compliant auditors.  It is unclear whether the competency exam will apply to all approved auditors, or only to those who don’t meet minimum criteria such as number of funds audited each year?

Auditors may begin to register with ASIC from 31 January 2013.

In addition, a further $10.6m over 5 years (including $1.5m in capital funding in 2011-12) will be provided to the Tax Office to police registered auditors, check their compliance with competency standards set by ASIC and refer auditors to ASIC for enforcement action. The cost of this measure will be offset by increases in the SMSF levy and fees charged by ASIC for sitting the competency exam.

Still no word from Minister Shorten on the accountant’s exemption replacement.  

We do need to overlay these budget announcements with some of the More Super measures to increase SGC from 9% to 12%, introducing a $500 credit for low-income workers and abolishing the age limit for SGC payments, which were applauded by the industry.  However, many people looking to self-fund their retirement have been dealt a blow, and will challenge advisers as to the worth of individual’s building superannuation savings at the risk of the Government moving the goal posts again and again in the future.

Join us for a webinar about the impact of the Federal Budget and what it means for SMSFs

12 things NOT to do with your SMSF


The ability to take control of your retirement savings is a key driver in the continued growth of SMSFs.  However, being a trustee comes with responsibility to ensure that your fund meets strict regulatory and compliance obligations.  Failure to meet these can result in significant penalties, along with the potential loss of the fund’s complying status.

Here is a list of 12 things not to do with your SMSF:

1. Do not setup a fund to illegally access your super

The approach taken to illegal early release of superannuation benefits by the ATO has seen a significant increase in the amount of people setting up SMSFs to gain access to their retirement savings.  Even with existing funds, it can be tempting to access money from the SMSF bank account where a business is in financial difficulty.  You should avoid this as significant penalties and criminal sanctions can be applied by the Regulator.  In addition, any benefits withdrawn are likely to be assessed personally at the highest marginal tax rate. It is important to remember that there are options available to access part of your superannuation under financial hardship or compassionate grounds.

2. Do not transfer residential property you own into your SMSF

This is one of the most common questions I get asked by individuals as people begin to take a greater interest of shifting wealth into superannuation.  Superannuation law does not allow for the acquisition of assets from members (s.66, SIS Act).  There are however exceptions to this rule including listed shares (until 30 June 2012), widely held trusts, business real property and in-house assets (up to 5%).  Residential property is not an exception and therefore not allowed to be acquired or contributed into the fund from a member.

3. Do not provide financial assistance to you or a family member from your SMSF

Another common question is whether a property purchased by Mum & Dad in their SMSF can be leased (at arm’s length) to a child or other family member.  Whilst the intention may be to deal on ‘commercial terms’ (arms-length) with the tenant, the fact that they are related prohibits the ability to do so.  You are deemed to be providing financial assistance, along with breaches of various other aspects of super law (e.g. sole purpose test).

4. Do not try to re-report contributions just because you’re now in an Excess Contributions Tax position

A key focus of 2011/12 ATO compliance program is to investigate re-reporting of contributions for members through the SMSF Annual Return.  An updated Superannuation Prosecution Plan for July 2011 to June 2014, outlined that the ATO intended to target issues of excessive contributions where SMSF members seek to avoid or reduce the excess contributions tax by falsely reporting contributions (including amending). You don’t want to find yourself on the wrong end of the stick with this issue – as penalties and criminal sanctions on top of an ECT liability will make things look very ugly!!

5. Do not lodge your SMSF Annual Returns beyond the due date

It must frustrate the ATO that year after year the on-time lodgement statistics are not better than what they are.  In a speech conducted by Stuart Forysth, Assistant Commissioner, Superannuation in September last year, he commented that 79.39% of all 2010 lodgements had been achieved by 5 July 2011.  That’s more 20% not done 12 months after the end of the financial year.  The ATO will be pleased with the increased powers they are to receive from 1 July 2012 via the Stronger Super reforms to penalise trustees for tardiness.  There is however scope for the ATO to enforce non-compliance on SMSFs, however this ‘nuclear’ option is rarely enforced.  See my previous post on this topic.

6. Do not have the title to a property held by the trustee where SMSF limited recourse borrowing arrangement is in place.  

I have heard of some ‘horror stories’ of how certain limited recourse borrowing arrangements have unfortunately been established.  Most common is the title to the acquired property is held in the name of the SMSF trustee, not the custodial trustee.  You must ensure the asset is held in the bare/holding trust whilst the loan is in existence, which means the title must be held by the trustee of the bare trust.  You need to consider state-by-state jurisdictions around stamp duty requirements, but I always recommend having the custodial trustee established before purchase (rather than rely on a nomination clause – as allowed in some states).

7. Do not use borrowed funds to make property improvements

With clarity in September 2010 by the ATO on key concepts with limited recourse borrowing arrangements, SMSFs can now make improvements to property assets to the extent that you don’t change it into a different asset (i.e. character and nature of property changes).  Importantly, SMSFR 2011/D1 confirms that improvements can be made with the SMSF’s own resources (e.g. cash), but not with borrowed funds – this is an important distinction between the two!!  s.67A(1)(a)(i) only allows for borrowings to be maintained for the acquisition of a single acquirable asset along with any associated costs in repairing or maintaining the asset – no improvements!!

8. Do not have the fund assets mixed up with your personal or business assets

All fund money and assets must be kept separate from personal or business money and assets. You mustn’t use the fund’s money for personal or business purposes under any circumstances.  This is a covenant with superannuation law to ensure that fund investments are made only to provide for members in retirement.

9. Do not have you super fund audited by the same tax agent that prepares your SMSF financials and Annual Return

The issue of independence within the SMSF audit community has been progressively improving through increases in professional standards requirements and now we’ll see further improvements through the Stronger Super reforms (ASIC auditor registration).  As a trustee you need to be conscious that it is highly probable that where an accountant providing the administration is also auditing the fund is in breach of their professional obligations (referring to APES 110 – Code of Ethics for Professional Accountants).  This is predominantly relevant to sole practitioners and smaller public practices.

10. Do not contribute into superannuation if your were 65 or older from 1 July 2011 and you have met the ‘work test’

Unless you meet a work test of completing 40 hours work within a 30 day consecutive period, you are in eligible take make personal contributions into super.  Any contributions made into superannuation cannot be accepted by the fund and must be returned.

11. Do not access your superannuation unless you have met a ‘condition of release’

We discussed illegal early release earlier, but it is important to understand that to access superannuation money by lump sum or pension you must meet a condition of release, for example retirement.

12. Do not take an amount less than your prescribed minimum pension for the financial year

The ATO has confirmed within tax ruling TR 2011/D3 that where a member does not meeting their minimum pension obligation for the financial year, the fund loses its tax exemption from the start of the financial year and all benefits are treated as lump sums.  This means that the fund moves from a 0% tax rate in pension phase back to 15%.  This will also affect the tax-free/taxable proportions of, the pension accounts, including where multiple pensions were running the accounts move back to a single member interest in the fund.

The Government’s Stronger Super reforms to take effect from 1 July 2012 are providing the ATO with greater powers to adopt a sliding scale administrative penalty regime based on the seriousness of breaches conducted by trustees.  It is commonly known up until this stage the ATO really only had two options to enforce compliance – a feather duster or the ‘nuclear’ option; there was no in between.  These new powers will allow the Regulator to determine how hard they need to hit to ensure trustees comply with their obligations, which may include mandatory education.

I’d be interested to hear from my readers further areas that trustees should ensure that they ‘steer clear’ of when it comes to maintaining the complying status of their SMSF?

What super changes will occur in the Federal Budget?


Budget night in May each year regularly throws up changes and challenges, and this one appears to be no different.

Retirement policy with an aging population continues to grow in importance, but it is an area that Governments can’t help themselves to fiddle with when endeavoring to “balance the budget”.

This year appears to be an interesting budget with the government already talking about a “tightening of the purse strings”.  This tightening will be expected to flow through to superannuation as well, but to-date the Government has remained tight-lipped on any details.

What we have heard is that the Government through Minister Bill Shorten has announced positive changes to address the unfairness of Excess Contributions Tax (ECT).  Whilst this is positive news, the real question is how far is the government going to go with this?  My suspicion is a change to the 93% tax rate, but not much else!!  Don’t expect it to be retrospective either, therefore meaning that clients who have already been issued assessments are stuck with them…

Listen to the webinar, “Dealing with Excess Contributions Tax

Below is my wish-list for Budget night:

  • An increase to $800,000 as an account balance to allow $50,000 of concessional contributions – whilst this legislation is complex and an administration nightmare (read my previous article), it appears we are going to have to live with it for the time being…  a key problem with the legislation is that the $500k limit suggests to Australian’s that this is an adequate super balance for retirement, when clearly it is not.
  • Abolition of age-based limits for super guarantee – individuals regardless for the length of time they work should receive super guarantee payments (9% SGC).  Let’s hope for some positive news beyond the proposed extensions to age 75.
  • Abolition of the work test to contribute beyond age 65 – I would like to see an ability for people to be able to continue to contribute into super to age 75 regardless of working status.  I have no problems in limiting the use of the ‘bring-forward’ rule to age 65, but the more we encourage retirement savings the less reliance on government through age pension.
  • Removal of the 10% rule for super contribution – wouldn’t it be great if regardless of the levels of employment income and source of contributions, that a member could receive either $25k or $50k of concessional contributions.  With “Reportable Employer Super Contributions” now also having to be factored in, this area is unnecessarily complex.
  • Further extension to the 50% reduction for minimum pensions – We have now had 3 years of minimum pensions at half the normal pension percentages that apply for account based pensions.  Unfortunately, I don’t think we are out of the financial doldrums yet, and further pension relief appears warranted.

Any potential “bombshells”?

It is worth remembering that the Government is sitting on many of the recommendations prepared for them from the Henry Review.  These recommendations include the introduction of a flat 7.5% rate of taxation across both accumulation and pension phase.  Would the government be so bold to introduce something like this?

The only thing we know for sure is that the Government has made a commitment to return the budget to surplus by 2012/13.  This will mean difficult changes that will impact all Australians.  Superannuation seems like the easy tax grab – just look at the halving of the contribution caps 2 years ago fill the coffers!!

I look forward to providing a full wrap of the budget impact for SMSF on Wednesday.

Have you visited the new SMSF Academy website?

Special Webinar Event: The impact of “Stronger Super” for SMSFs


Today saw the announcement by the Assistant Treasurer and Minister for Financial Services and Superannuation, Mr Bill Shorten of the Government’s response to the Super System Review (Cooper Review) recommendations, which include self-managed super funds.

These “Stronger Super” reforms aim to address 139 of the 177 recommendations regarding the operation, efficiency, structure and operation of Australia’s Superannuation System.

The changes are significant for trustees and professionals working within the SMSF industry.

Join us for this important and special update on the impact of these reforms on the Self-Managed Super Fund industry.

Title: Stronger Super – The impact for SMSFs
Date: Tuesday, December 21, 2010
Time: 4:00 PM – 5:00 PM AEDT

After registering you will receive a confirmation email containing information about joining the Webinar.

Space is limited.
Reserve your Webinar seat now at:
https://www1.gotomeeting.com/register/872395169

(C) The SMSF Academy 2012
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