Self Managed Super Funds

A Grade Tax is able to assist with the establishment of Self Managed Superannuation Funds for those people wanting to take control of their superannuation investment.

We can also assist with explaining the tax advantages associated with Self Managed Superannuation Funds and assist you to comply with your ongoing obligations as a Trustee of a Self Managed Superannuation Fund. A key responsibility is the provision of audited Financial Reports and Tax Returns for the Fund.

Super Splitting

Super splitting is a powerful tool to access the higher concessional contribution cap in order to maximise the tax effectiveness of salary sacrificing into superannuation over the age of 50. It is particularly relevant where one member of a couple is approaching the new $500,000 member balance that determines eligibility for either the $25,000 or $50,000 concessional contribution per annum.

Tax Effective Investments in Super

Superannuation has the potential to be a very tax effective investment, and is one of the best vehicles to fund retirement. But what are some options to consider?

Employees: Salary sacrificing into super. To ‘salary sacrifice’ means to contribute before-tax income, or to swap your salary for increased employer super contributions. This means that it is possible to avoid paying your own Marginal Tax Rate (or your income tax rate) in favour of the super rate of up to 15%. When you salary sacrifice your income into super, this type of super contribution is only taxed up to 15%. On top of this, salary sacrificing effectively reduces your assessable income – this could mean pushing your assessable income into a lower tax bracket and consequently paying less overall tax outside of super as well! For example, John is on a $90,000 salary (on a 39.5% Marginal Tax Rate (MTR). By salary sacrificing 20% of his income into super, his taxable income will reduce to $72,000, and income taxes paid will decrease by $6,470. 

Self-employed: Claim your super contribution as a tax deduction. Since 1 July 2007, contributions for self employed individuals are 100% deductible but with limits of $25,000 in this financial year if you are under 50, and $50,000 until 2012 if you are over 50.

If you are considering a contribution to super, ask us at A Grade Tax about the most beneficial timing and strategy for you.

You can now renovate properties bought using SMSF Borrowings.
 

by David Moss, Director, Accountable Financial Group

 The ATO has decided to give SMSF’s a break. Previously, the ATO said that if you purchased a property in your SMSF with a Borrowing Arrangement, it was illegal for the SMSF to renovate and improve that property.

However, the ATO has changed its mind. The ATO now says we can use SMSF money to improve this SMSF borrowing arrangement property. Watch your step, some harsh conditions still apply.

Summarising the impact of the new Draft Self Managed Superannuation Fund Ruling 2011/D1, let's assume you have a SMSF that has borrowed to purchase a property.

1.Repairs – Initial repairs to a property are allowed after its purchase to bring it back to the state it was in when brand new. This may include repairs such as painting, fixing broken windows and repairing damaged walls. However, the ATO views purchasing an older property in a rundown state and entirely restoring it as moving past 'repairs' and into 'improvement' of the property.

 Payment for the repairs is allowed from the borrowed money or alternatively clients can use other money held by the SMSF.

 As you can see, the definition of 'repairs' in relation to SMSF borrowing rules is completely different to the definition of 'repairs' for tax purposes.

2.Renovations&Improvements –Non-borrowed money held by the SMSF can be used to pay for renovations and make improvements to the property.

 However, SMSF borrowing arrangement money cannot be used for renovations and improvements. This is a change of interpretation by the ATO. The previous view was that this was illegal.

3.Creation of a new asset – If repairs, renovations and improvements done to the property effectively result in a new asset being created, this will result in a breach of the superannuation borrowing rules.

 The SMSF auditor will be required to lodge a contravention report with the ATO and, should the ATO follow up this report, it will require the SMSF to rectify the problem or face losing half the fund in non-compliance penalties.

 So, when is a new asset considered to have been created?

Examples from the ATO include:

Taking a vacant block of land and building on it,
A block of land being subdivided, and
After a house burning down, two townhouses being built in its place.

 ATO ruling kills some tax free SMSF pensions

by David Moss, Director, Accountable Financial Group

 The ATO has now clarified their view on what happens to a superannuation pension on death. Does it continue? Does it die with the person? Can the SMSF choose to have the pension continue to a spouse?

 Unfortunately, the ATO view is the one that will give the worst tax outcome. Surprised?

Upon the death of a SMSF member, the superannuation pension will end, unless you ensure it is setup as a “reversionary pension”.

When clients want to start accessing their superannuation, most choose to take the money out progressively over a period of years. This is normally done through an Account Based Pension (ABP) or a Transition to Retirement Income Stream (TRIS) pension.

 The advantage of using a superannuation pension is that income from investing the money in a superannuation fund becomes tax free. However, should a pension be terminated, the income generated from investing will again become taxable.

 Some people say that when you die your superannuation pension ends with you. Other people say when you die your superannuation pension can automatically go to your spouse and continue. Why do we care?

Because if the pension continues there is no tax, but if it ends the family can be up for a large tax bill.

 This is where the ATO has now created a problem. Draft Taxation Ruling 2011/D3 was released to confirm their view that upon death a superannuation pension will cease and tax will become payable.

 Truth be told, this makes complete sense and has always been my view. However, before this Ruling at least I could say: ‘My view is the pension ends. An alternative view is the pension continues and the ATO currently has no view’. You at least had a choice on how to treat the deceased’s pension.

 Unfortunately, the ATO’s view is now clear. The pension ends, so your SMSF auditor will lodge a contravention if you don’t follow this view.

 Enough with the doom and gloom. What you now want to know is, how can you potentially avoid this problem?

It’s simple enough. When the documentation to commence the superannuation pension is prepared, a statement such as the below can be included:

"This pension is to be 100% reversionary to (THEIR NAME) in the event of death, being the spouse of (YOUR NAME)"

 Upon death, the pension will automatically continue to the spouse. However, the client needs to ensure they want their superannuation going to their spouse upon death.

 If the SMSF member is already receiving a superannuation pension, they could consider cancelling it and immediately restarting it, with the above mentioned statement included in the new pension documentation.

 However, as the current pension could have special features or advantages they are not aware of no action should be taken without a superannuation specialist first looking over the current pension documentation.