Budget 2018

BUDGET 2018

 

A very benign May budget was handed down by the government, compared to last years, with very few changes to super. We have highlighted the significant changes that will impact SMSF trustees and members in this article.

 

Lost Super

The government has proposed that from 1 July 2019 the ATO will assist with lost super accounts with less than $6,000 in value which will be forwarded to the ATO by retail and industry funds. The ATO is further proposing to consolidate lost super funds to this value with the already active funds in the market using data matching for active member accounts. This will result in an increase of around $6 billion in super being matched with 3 million active super accounts.

 

Work Test

Members with low super balances below the value of $300,000

Will be given a one-year exemption from the work test for voluntary contributions to super for people aged 65-74. This will enable many older Australians the opportunity of contributing more funds to super to maximise their retirement.

Example:

John retires on the 1st of June 2020 with only $150,000 in super. He does not meet the work test. Under the new rules, he could put $45,000 at concessional rates (using the carry forward arrangements) and $100,000 in non-concessional contributions.

Examples provided in the budget work papers

SMSF’s will be allowed 6 members in a fund from 1 July 2018 which represents an increase of 2 people from the current maximum of 4 persons allowed in an SMSF to cater for larger families

Division 293 – High income earners

Those of you that earn over $263,157 with multiple employers will be able to nominate which contractors or employers are exempt from Superannuation Guarantee payments from 1 July 2018. This measure is intended to reduce the number of people who breach the $25,000 cap on concessional contributions and it further, allows these high-income earners the ability to negotiate a higher income without impacting their super contribution levels.

SMSF Audits

SMSF’s with a clean up to date tax history extending to

  • Individual tax returns
  • Company’s; Trusts,

 

Will be allowed to be audited every (3) three years instead of annually where the fund has a clean audit history

 

New Tax Rates and thresholds:

 Taxable income V super tax and savings
2018-19
Taxable IncomeTax Rate*Tax in superTax benefit
$0 to $20,542*0%0%**NIL
$20,543 to $37,00021%0%**21%
$37,001 to $87,00034.50%15%19.50%
$87,001 to $180,00039%15%24%
$180,001 to $250,00047%15%32%
$250,000 +47%30%17%
*include low income offset
** low income super offset

 

NOTE: From I July 2024 the 39% tax bracket will be removed

Pension Loan Scheme

You may qualify if:

  1. You are of age pension age 60 -65 and are a qualified resident
  2. You own a home with a mortgage and you have available equity
  3. You receive less from the age pension due to failing the income or assets test, but not both.

You receive one of the following types of pensions

  • Age Pension /Bereavement Allowance/Carer Payment / Disability Support Pension/ Widow B Pension / Wife Pension

Loan Interest rates are 5.25% and the payments are not taxable, and the amount of the loan will be determined based on what is required, equity in your property and a few other variables.

So,overall a very easy budget to digest and its certainly enhanced the attractiveness of SMSF’s.

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SMSF Crypto Currency investing

Bitcoin, Ethereum and Ripple along with the over 1500 Altcoin investments are proving very popular investments for smsf investors.

There are a lot of things people need to be aware of before embarking on bitcoin or crypto investing, in an SMSF.

3 Things to check, to remain compliant

  1. Who owns the asset ?  – make sure you open a trading account in the SMSF’s name
  2. How are the holdings stored – you cannot store bitcoin or other coins in a software, paper or hardware wallet and keep the wallet at your home or office. It must be independently stored, just like all collectables
  3. Does your trust deed allow for derivatives and collectable investments? and is your investment strategy up to date to reflect the crypto assets?

The Super Laws – SIS Act 1993

Of particular importance to SMSF investors are the super laws and what they say about whether you can or cannot buy bitcoins or altcoins. The good news here is that the super laws ( SIS Act 1994) does not dictate what is allowed and what is not allowed to be invested in super. It does provide guidance on the responsibilities of trustee/members in selecting appropriate investments which are suitable for investing for the fund members retirement. Here are some of the key sections of the super laws that highlight the importance of managing bitcoin and other such assets.

Sis Act Section 62– sole purpose test, requires that investments are suitable for retirement and the provision of death benefits ; the core purpose.

Sis Act Section 4.09–  Requires SMSF members to regularly review and update their investment strategy considering, risk, age and suitable asset allocations within the fund relative to a members circumstances. Crypto assets should be classed as a separate asset class, as they don not conform with existing asset classes.

Sis Act Section 4.09a –  Requires members to identify investments held by an SMSF as owned by the SMSF and clearly separate assets held by members of the fund personally

Sis Act Section 13.18aa highlights the treatment of collectables. What is acceptable and how these assets are maintained.  In particular storage so no personal benefit or present day benefit is gained

http://www7.austlii.edu.au/cgi-bin/viewdoc/au/legis/cth/consol_reg/sir1994582/s13.18aa.html

Sis Act Sections 66  – A trustee or a member of an SMSF  must not intentionally acquire an asset from a related party of the fund. The only exception is in the acquisitions of business real property and listed securities

Sis Act section 71   – In -house assets are a investment made by an SMSF with a member/ trustee of the fund, such as a loan, any direct type of investment or via a trust and a lease to a member of the fund. A fund may invest in no more than 5% of the funds value in in-house assets, calculated each financial year. Note:Exemptions exist for business real property.

Sis Act section 109– All transactions must be at arms length, so at commercial rates neither below or above market value

The super laws show that, just as with owning jewellery; which may be used by a member for personal benefit; or a race horse;which could be considered a hobby interest with a present day benefit; or a car collection which is not housed independent of the member;  that, bitcoins held by a member personally via a paper wallet, software wallet or hardware wallet, in the members home or office or within their control, will breach these provisions and thereby render a fund non compliant and  subject to penalties from the ATO.

It is important to check your SMSF trust deed to make sure there are no restrictions on investing in collectables or bitcoin and it is very important that the funds investment strategy shows the level of investment and considerations of risks, asset allocations into such an asset, having regard for members age and time frame to retirement. Research reports on the investment, can further provide evidence of due diligence undertaken, relating to bitcoin investing by the fund.

An SMSF Bitcoin auditor will check the following

a) Where the bitcoins or altcoins are stored and a wallet address will not suffice !

b) The value of the holdings from a reputable exchange  and transaction receipts for buy/sell trades during the year

c) A receipt of proof for the purchase of a hardware wallet in the SMSF’s name and proof of storage services engaged to maintain the assets at arms length in compliance with the SIS regulations

In order to invest in bitcoins and altcoins and remain compliant with super laws, there needs to be measures put in place to ensure that these investment are maintained at arms length, that the fund and its members are not party to early access of super monies or providing financial assistance to ( via a loan ) a member of the fund and that the assets are purchased and stored properly, just as with collectable investments. Some crypto investments involve leverage and others provide distribution payments, which might be deemed as a contribution to the fund. It is therefore important to understand the risks entailed with purchasing some crypto assets, as not all will comply with super laws.

Warning: Always seek legal and financial advice when investing in crypto currency due to the high volatility and uncertainty around this sector

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Contribution Splitting in a SMSF

Splitting concessional contributions amongst members or spouses can be an effective strategy provided that you benefit in the following ways.

1) It creates a Tax-free portion for the receiving spouse – like a re-contribution strategy

2) It’s tax deductible for the contributing spouse ( subject to PSI or the 10% income test) if they are self-employed

3) It can provide early access to pension payments and TTR pensions, for the spouse who is receiving the  payment particularly if they are older than the contributing spouse

So how does it work?

Example:

Tony is 51 years old his wife Amanda is 55 and works part time. Tony wants to split his super ( concessional contributions) with his wife so she can start a tax-free pension as she has met preservation age.

Tony contributes $35,000 in 2014-15 Financial year and claims the split in the 2015-16 financial year

  • Tony (self employed) $35,000 ( 2014-15 FY)
  • Minus tax                $5,250
  • Contribution applied $29,750  to spouse’s account

The super fund or accountant will apply 85% of the contribution ( minus 15% super tax) recorded as a contribution for Tony, who makes the contribution. It is received by Amanda and recorded in her member statement as a tax-free component.

As SMSF’s mainly operate a pooled strategy, there is no money to transfer to another fund in an SMSF. It is simply recorded as received by the spouse on her member balance, as an amount in the tax-free component of her member balance for the financial year where the split was applied.

  • When Amanda is 60, she is able to commence a TRIS or TTR Pension with tax-free money
  • Tony claims a tax deduction for the contribution split
  • Amanda is able to draw an income sooner from a tax-free source, which further creates a succession benefit for their adult children

These are the conditions:

  1. The contribution to be split must be applied to the following year from the year it is received
  2. The receiving member must be under age 65 and not retired
  3. Only 85% of the contribution ( excluding super tax of 15%)  may be applied to the receiving member
  4. You only split concessional contributions, both employer paid and salary sacrificed amounts
  5. A contribution split form must be received by the super fund

 

Warning: Always seek advice on these arrangements as they are complex to administer.

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Depreciation Changes Budget 2017

Depreciation is the natural wear and tear that occurs to a building and the assets within it over time and it’s one of three (3) key tools property investors use to make holding investment property more affordable and tax effective.

The proposed new laws to depreciation will result in a reduction in the depreciation for plant and equipment assets or fittings for a new residential (investment) property. Commercial properties are exempt from these changes. The key date for new property investors is the 9th of May 2017, contract exchanged; where after this date; investors will be entitled to building write-offs or capital works depreciation, which is the wear and tear to the building itself.

Here is a comparison of depreciation savings Before and After:

$550,000 APARTMENT -NSW BEFORE          AFTER NEW LAWS – May 2017

Year 1     $15,812.50Year 1 $7,562.5
Year 2     $12,375Year 2  $7,562.5
Year 3     $11,000Year 3 $7,562.5
Year 4     $9,625Year 4  $7,562.5
Year 5     $8937.5Year 5  $7,562.5
Year 6     $8,250Year 6  $7,562.5
Year 7     $8,250Year 7  $7,562.5
Year 8     $7,562.50Year 8  $7,562.5
Year 9     $7,562.50Year 9  $7,562.5
Year 10   $6,875Year 10 $7,562.5

Residential property investors will still be able to depreciate plant and equipment fittings if they pay for these fittings. Now, this is hardly an appealing prospect, given that this is an extra cost to the property investor. However, market practice might see, developers building units, without key fittings, such as microwaves, dryers, washing machines, and ovens. This will reduce the cost of investment properties and it will allow investors that purchase these items to depreciate these fittings.

So, let’s summarise the key changes to residential property depreciation:

  • Properties purchased before 9th of May 2017, will not lose plant & fittings depreciation benefits. Happy days for these people
  • Brand new properties will offer the greatest depreciation benefits, compared to buying existing property.
  • Existing investment property depreciation benefits are still available; they are not as much as prior to the 9th of May 2017.

These changes mean that property investing outside super, will be harder for many average income investors, as compared to investing in super; which is typically funded by employer super contributions and rental income which are all concessionally taxed at 15%; using tax deductions to reduce the holding costs of new property, is a key tool for property investors outside super. In the first 3-5 years when acquisitions costs are higher, it is these tax deductions that make holding property and funding property, cash flow neutral.  Therefore, investors must calculate their property holding costs, in net dollar terms, given the drop in depreciation deductions and rental property travel costs; as is done with super property investments; to get a clear indication of the cost of holding an investment property. These changes were passed on the 15th of November 2017 making these changes law, from the 9th of May 2017.

Warning: This is general information only and it is no substitute for advice. Always obtain a depreciation schedule for all investment property purchases in an SMSF and particularly when purchasing outside super.

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