Balance and contribution caps are just part of the new regime.
There have been dramatic changes in the past few years – and more this July – to the administration, reporting and compliance of self-managed super funds, and it’s crucial that an SMSF trustee is up to speed on how they affect their fund.
Below are some of the key changes to discuss with an SMSF accountant to ensure the fund remains compliant, avoids penalties and employs the best strategies to improve retirement outcomes.
1. The ins and outs of TBAR reporting
For some, the mention of TBAR recalls lifts gliding up snow-covered mountains. From an SMSF perspective, the acronym stands for Transfer Balance Accounting Reporting.
TBAR is an Australian Taxation Office event-based reporting initiative and part of a longer-term move towards real-time reporting. It came into effect on 1 July 2018 and in simple terms means that when you complete certain events in the SMSF they need to be reported to the ATO in defined timeframes.
This helps the ATO keep track of which SMSF members are within the new $1.6-million Transfer Balance Cap and to issue an Excess Transfer Balance Determination to those that stray outside.
The ins and outs of TBAR are complex. For example, it is not just about the $1.6-million cap. Various events in your super may need to be reported once your balance reaches $1.4 million or $1.5 million, and the required frequency of reporting will probably change when the balance reaches $1 million.
When and how often do you need to report?
All SMSF members with pre-existing income streams at 30 June 2017 needed to report their balances on TBAR on or before 1 July 2018. A pre-existing income stream is a non-TRIS pension being received from super.
Since 1 July, all SMSFs need to report any events that affect the transfer balance. This includes any events from 1 July 2017. The timeframes for reporting are determined by the total superannuation balance (TSB) of an SMSF’s members.
If all members of the SMSF have a TSB (comprising both SMSF and other super balances) of less than $1 million, you need to report any relevant events when you lodge an SMSF annual return. If any members have a TSB of $1 million or more, you need to report events affecting the transfer balance within 28 days after the end of the quarter in which the event occurred.
Some examples of reportable events include super income streams that have begun in retirement phase; some limited recourse borrowing arrangement (LRBA) repayments; and pension commutations. Every SMSF will be affected differently. You can read more on the ATO website, or work with your SMSF administrator to identify what to do to remain compliant.
2. Your personal minimum drawdown
If you are in pension mode it is important to be clear on the strict minimum annual payments you must withdraw from your fund. If this minimum is not met, your super income may cease. As a general guide, those under 65 must draw down 4 per cent per annum and this increases with age.
The exact minimum will vary between funds, especially for market-linked income streams, so you need to identify your own minimum to ensure compliance.
Once you have met your minimum drawdown, there are other strategies you may employ. You could draw additional money from your accumulation account and leave as much in pension phase as you can. Or you may elect to commute assets into your accumulation account, or withdraw a lump sum and in doing so give yourself the option to transfer more money into pension phase in the future.
The use of these strategies will vary for different SMSFs, so you need to do some research or seek advice on what best suits your needs.
3. Be clear on contribution caps
It is important to be clear on the different types of contributions and caps that now apply post-reform. Anyone who exceeds the caps may be liable for additional tax on the excess contributions.
Concessional contributions are taxed in your SMSF at a concessional rate of 15 per cent, often referred to as “contributions tax”. The most common types of concessional contributions are employer contributions, such as super guarantee and salary sacriﬁce contributions, and personal contributions where you claim a tax deduction. All other contributions are non-concessional.
Contributions are subject to a yearly cap and the general concessional cap is $25,000 for all individuals, regardless of age. Effective from 1 July 2017, the annual non-concessional contribution cap was reduced from $180,000 to $100,000 for the 2017-18 and future financial years.
There are many strategies around contributions. For example, you might be able to carry forward concessional contributions or bring forward non-concessional contributions. It is important to be across contribution cap limits and how strategies such as contribution splitting and recontribution may be adopted to remain compliant.
4. Getting the balance right
Since 1 July 2017, a $1.6 million limit applies to the amount that can be transferred to a superannuation retirement phase account (i.e. pension account). This is known as the Transfer Balance Cap (TBC).
It is worth noting that 71 per cent of SMSFs have two members, typically spouses, and the average balance for the first member is 82 per cent higher than the second (source: SMSF Benchmark Report). A popular goal is to even up the balances and keep as much in pension phase as possible, potentially up to $3.2 million for a couple.
The first strategy to achieve this is rebalancing. Essentially, this is taking money from the larger balance and where the contribution cap allows, recontributing it for the member with the smaller balance.
Another strategy is contribution splitting. This involves the member with the higher balance directing their concessional contributions to the member with the lower balance. Note that the contribution still counts towards the cap of the initial member.
There are a raft of rules and considerations for rebalancing and contribution splitting strategies, so do research or seek advice from an accountant or adviser.
5. Boost your super by downsizing (or even upsizing) your family home
Many older Australians reach a stage where they would be happy with a smaller home. Downsizing property can be a great way to release equity to help pay for retirement living expenses, but being unable to contribute house sale proceeds into super has discouraged many people from doing so.
The Federal Government’s new downsizing policy means you can contribute some of your house sale proceeds to your super. The measure is designed to encourage older people to move to property more suited to their needs, and to free up more housing stock for younger families.
Since 1 July 2018, Australians aged 65 years or over can make a non-concessional (after-tax) contribution to their super of up to $300,000 following the sale of their family home. The measure applies to a principal place of residence that has been held for at least 10 years.
Couples can contribute $600,000 – up to $300,000 each. Contributions must be made within 90 days of settlement, but do not have to come directly from the house sale proceeds. The contribution can only be made once, as the result of the sale of one home.
The existing voluntary contribution rules for anyone aged 65 and older, and restrictions on non-concessional contributions for people with super balances above $1.6 million, do not apply to any contributions made under this new measure.
Interestingly, despite this being called a downsizing measure, the rules do not specify that you must move to a smaller property (or any property at all). So long as you sell a principal place of residence you have held for 10 years, you can still make a super contribution.
Many other rules and considerations apply to the new measure, so read the details on the ATO website or discuss the implications with an accountant or financial planner.