DIY countdown to June 30

With the end of the financial year fast approaching, it's time to review your SMSF and make preparations.

PORTFOLIO POINT: The countdown to June 30 has started. Here’s your SMSF preparation checklist to make the most of this year.

While superannuation isn’t a race, there are aspects of it that take on great urgency at times.

And, for those who run their own SMSF, this concept is especially true. Leaving everything to the last minute only creates stress – or worse, missed deadlines.

The fact is that June 30 is a significant day for super (as well as for tax); it’s the cut-off day. The start of a fresh year inevitably means many things, including new contribution limits to be planned for.

So, with this in mind, here are nine things you should be sorting out before June 30.

1. Maximise concessional contributions

For many of you, this will be the last year in which you can get $50,000 into super via concessional contributions (those taxed at just 15%). From July 1, for the vast majority of Australians, the concessional contribution limit falls to $25,000.

(The exception is the 50-50-500 rule but, at the risk of sounding like a broken record, we’re still waiting on the detail. Hopefully that will come in the federal budget on May 8.)

If you’ve got more than $500,000 already in your super fund, it might well be worth making an extra sacrifice prior to June 30, knowing that you won’t be able to shovel as much into super afterwards.

That is, over FY12 and FY13, the over-50s will be able to put in a total of $75,000. It might be worth suffering a little pain in the last couple of months of this year to get that $50k in. You can ease up on the contributions after July 1.

2. Super is a partnership deal

Most couples consider themselves to be a team, and further plan many things as part of a financial team. One of the great powers of SMSFs is using the team mentality to maximise super taxation benefits.

If you’re running your own business, are you and your partner using joint forces to maximise your SMSF?

As I outlined in this column, SMSFs are a particularly useful way of maximising super for couples. Strategies for contributions, transition-to-retirement and spouse super contributions can be used highly effectively by those who wish to play the arbitrage on each member of the couple’s marginal tax rate.

If one of you is on the highest marginal tax rate (46.5%) and the other is on the “average” MTR (of 31.5%), several strategies could be employed.

For instance, if you are considering some end-of-year salary sacrificing, for the lower earner, it might make sense for the higher earner to make the sacrifice (up to their concessional limit) and then use the “spouse splitting” rules to transfer that super into the other’s super account. For more details, see Team Super.

3. Sunset for in specie transfers

As I wrote recently, the ability to make trading-cost free, in specie transfers to your super fund ends soon. From July 1, if you’ve got shares you want to contribute into super, you’ll have to pay something.

You’ll either have to pay by selling the shares outside of super and then repurchasing them inside super. Or you’ll have to make the transfer through an existing market, which is also likely to come with a fee to process the transfer.

But until June 30, you can potentially get shares into super without having to pay transaction costs. It can be done, potentially, as either a concessional or non-concessional contribution. But you’ll need to act fast.

(Be aware of the wash-sale rules – the purchase and sale of shares that is simply done to avoid tax. The ATO takes a dim view of it and can penalise it heavily.)

4. Beat the cuts to co-contributions

Even the co-contribution – designed to add to the super balances of below-average income earning Australians – copped a knife in last year’s budget.

Until June 30, an after-tax contribution of up to $1000 will be matched dollar-for-dollar by the federal government, if you’re earning less than $31,920. Between $31,920 and $61,920, the figure reduces by 3.33c for each dollar over the $31,920 figure.

That is, if you earn $46,920 and you put in $500, the government will add $500 to your super account. If you contribute $1000, the government will still only contribute $500. So, from that aspect – and given that you might not do your taxes for some time after the end of the financial year – it can be a bit of a guessing game.

But from July 1, the scheme has received a big haircut, partly because of LISC (coming up next). For a start, the maximum will be $500. And you won’t get a cent once you earn more than $46,920. And between $31,920 and $46,920, it will fall by 3.33c per dollar again.

5. Make a spouse contribution

Partners can earn tax rebates on contributions for low-income earning spouses. The rebate can be up to 18% on contributions of up to $3000.

For the full benefit, the spouse needs to earn less than $10,800. If the partner makes a spouse contribution of $3000 (which is non-concessional and no tax deduction has elsewhere been claimed for it), they will be able to claim a tax rebate of up to $540.

This rebate operates on a sliding scale between $10,800 and $13,800. It’s also important to note the “addbacks”. If salary sacrifice or fringe benefits have been used to reduce taxable income, they will be added back for the purposes of this tax rebate.

6. Prepare for LISC

This is the “low-income superannuation contribution”, and it hasn’t had much airplay to date. That’s largely because it’s designed to act like a software update – just something that happens in the background. But it’s going to become a very important contributor to super balances for low-income earners.

From July 1, if you earn less than $37,000 a year, you won’t even have to pay the 15% tax on your Superannuation Guarantee contributions that is normally paid on super contributions.

That is, the 9% that is paid into your super fund will be refunded, up to an annual salary of $37,000.

If you’re paid $30,000, normally your boss (including you, if you’re self-employed) would put in 9% of that as the Superannuation Guarantee contribution (i.e. $2700). When that $2700 is contributed to super, $405 is normally stripped off in contributions tax. With LISC, the $405 will be refunded to your super fund.

7. Review (and study) salary sacrifice arrangements

If you are an employee, have you timed your salary sacrifice payments properly?

One rule you might not be aware of is that employers are, essentially, able to make the final super contribution of the year to suit themselves from a tax perspective.

When a company makes its super contribution for the month of June (or even the June quarter), it is only liable to make that contribution before July 28. However, if the company chooses to, it can make that contribution prior to June 30.

You might have planned your super contributions (SG and salary sacrifice) to hit exactly $49,500, for instance. Your employer might normally make your June contribution of $1500 on June 30, instead of July 28, including your monthly salary sacrifice of $2600 at the same time.

All of a sudden, instead of contributing $49,500 for the year, you’ve contributed $53,600. And then you’re hit with an excess contributions tax notice.

It can pay to speak to your super fund AND your pay office to find out when super contributions are going to be made for the year ending June 30.

8. Review your pension

Have you turned 60 during the year? Is your pension going to start coming to you tax-free, rather than just with a 15% rebate? Have you recently turned 55 and want to turn on a transition-to-retirement pension? Have you been taking too much pension? Too little?

While being proactive is important, a good strategy can be just as much about being defensive and making sure that you haven’t taken too much pension. Here are the minimum pensions that need to be taken for this financial year:

-Table 1: Pension minimums
Age Legislated minimums (%) FY2011-12 minimums (%)
Under 65
4
3
65-74
5
3.75
75-79
6
4.5
80-84
7
5.25
85-89
9
6.75
90-94
11
8.25
95
14
10.5

If you’re between 55 and 65 and on a transition-to-retirement pension, then your maximum pension is 10%.

9. Review your investment strategy

An investment strategy is a legal requirement for SMSF trustees. But it’s not just the piece of paper that sits in the back of the SMSF file.

Investment strategies need to be carefully thought out and stuck to. Are your current investments sitting within the guidelines of your investment strategy? Or is your investment strategy a little out of date and therefore requires a review?

Spending a little time between now and June 30 making sure you get this year right can add some cream to your super pie.

  • SMSF numbers were back up in 2011 after shrinking in the three previous years, according to the ATO’s SMSF 2009-2010 Statistical Overview. Since 2007, the net number of new funds has averaged 29,500 a year. The data confirms that the SMSF sector has responded to economic and government policy changes with asset holdings moving towards listed shares and away from cash and term deposits. The report also found SMSFs’ return on assets was back in positive territory in the year to June 30 2010, after two years of negative returns – a trend similar to that of larger super funds.
  • The Australian Crime Commission has warned that SMSFs are at risk of organised investment fraud, in a submission to the Parliamentary inquiry into the collapse of Trio Capital. ACC head John Lawler said the Galilee Task Force found multi-million dollar losses to investors, including 51 SMSFs, and said it was “likely that Australian investors will continue to be targeted by offshore investment frauds.”
  • The collapse of Trio has also drawn attention to how much more information SMSF trustees need on the risks of investing their super outside the normal prudential regulatory framework. During a Parliamentary Committee session on the Trio fraud, former Labor minister Nick Sherry quizzed APRA on why some trustees didn’t know they weren’t eligible for government compensation. "Surely you would believe it appropriate that, if a person does move outside the prudentially regulated sector'¦ an individual should be informed as to the level of risk they may be taking if things do not work out?" he said.
  • The fact that SMSFs are outperforming large funds points to fundamental problems in asset allocation in the wider industry, Rice Warner says in its April report. It said large funds should be expected to give better investment returns, given their size and fund manager experience. However, the report showed average SMSF returns for the six years to 2010 beating those in APRA funds, and said it was due to asset allocation flexibility and the ability to take advantage of tax breaks.
  • Debate over asset allocations and equity exposure in super funds has helped reinforce the benefits of SMSFs, the Self-Managed Super Funds Professionals Association has said. SPAA CEO Andrea Slattery says there is “no 'one size fits all’ when it comes to saving for retirement” and the ability to achieve optimal individual weighting in an SMSF is a key reason for superior performance of self-managed funds.
  • On tax, a man has lost an appeal against the Commissioner of Taxation in the Administrative Appeals Tribunal for tax payable on super funds he transferred from preserved benefits into a non-bona fide SMSF for the purpose of accessing them early. The tribunal upheld an administrative penalty of 25% on the tax shortfall.

The information contained in this column should be treated as general advice only. It has not taken anyone’s specific circumstances into account. If you are considering a strategy such as those mentioned here, you are advised to consult your financial adviser, as some of the strategies used in these columns are highly complex and require high-level technical compliance.

Bruce Brammall is director of Castellan Financial Consulting and author of Debt Man Walking.