SMSF Alert: March 2014

Liam Shorte and Richard Livingston highlight last month's key SMSF developments

Key Points

  • Increase in contribution caps
  • Tax Office confirms system doesn’t automatically recognise ‘contribution reserving’ strategy
  • Threat to Commonwealth Seniors Healthcare Card access for SMSF pension members
  • Tax Office goes after those double dipping franking credits

It’s been a good news, bad news kind of month. The annual contributions caps have increased due to indexation; the Tax Office has confirmed headaches for those using the ‘reserving strategy’; the Government is rumoured to be considering restricting access to Seniors Healthcare Cards; and the Tax Office is seeking back taxes from those doing ‘dividend washing’.

Know Your Limits  - 2014/15 contribution caps

The Tax Office has released the superannuation contribution limits to apply for the 2014/15 financial year (commencing 1 July 2014). The new limits are:

  • Concessional contributions cap increased from $25,000 to $30,000 (includes self-employed member deductible contributions, SGC and salary sacrifice)
     
  • Special ‘concessional contributions cap for baby-boomers’ of $35,000 will apply to anyone aged 49 or more on 30 June 2014
     
  • Non-concessional contributions cap increased from $150,000 to $180,000 (it is based on six times the base concessional cap)
     
  • Three year ‘bring forward’ of the non-concessional contributions cap increased from $450,000 to $540,000 in line with increase to annual cap
     
  • Small business CGT non-concessional contributions cap increased from $1,315,000 to $1,355,000
     
  • Low rate tax-free threshold cap for withdrawals between age 55-59, increased from $180,000 to $185,000

These new limits are based on the normal indexation rules. There is still a risk the Government could impose specific rules in the May budget, but we’ll keep our fingers crossed.

Action point: If you’re thinking of triggering the ‘bring forward rule’, consider whether it’s worth waiting until July to increase the total cap to $540,000. If you’ve already triggered it, or do so before 1 July, you’ll be limited to $450,000.

Remember also that you need to make sure you qualify for the bring forward rule (and to make a contribution) in the subsequent year.

Contributions reserving approved but process is uncertain and costly

In SMSF Alert: October 2013 we explained the ‘reserving strategy’ and the fact the Tax Office were issuing those that had used the strategy with Excess Contributions Tax assessments. The problem is that the Tax Office system doesn’t recognise the strategy – it’s assumed the taxpayer has contributed too much and they’re penalised.

Whilst the Tax Office accepts the strategy can work, it has said there’s no way for your administrator to tell them beforehand. So the process for everyone that uses it will be the Tax Office issuing an Excess Contribution notice, then you and your administrator lodging an objection (an official challenge to a Tax Office decision) to get the correct treatment.

This means submitting forms and supporting documentation to the Tax Office, increasing accounting or legal costs. It’s a degree of inconvenience, uncertainty and cost for those relying on the strategy, so be sure the numbers stack up.

Action point: If you are considering using this strategy then see ATO ID 2012/16 and TD 2013/22 for more detail and examples of how the strategy should be implemented. Make sure you factor in all costs and that your administrator is involved from the outset.

Commonwealth Seniors Healthcare Card eligibility

To the benefit of many SMSF members and other superannuation pension recipients, Superannuation Income Streams (pensions) are not included in the income test for the seniors’ healthcare card. There have been reports that the Audit Commission (into Government spending) will recommend including super pensions in the test. This would cause many to miss out on the card, which helps manage rising healthcare and medication costs as people age.

The government will not comment on the report but the Prime Minister has said the government has a ‘crystal clear’ commitment to index the income threshold for the card, which was aimed at boosting eligibility. The emphasis on the clarity of the commitment worries us that they might be about to give with one hand and take with the other.

In a period of low returns for cash and fixed interest, this would be another ‘inflationary pressure’ on retirement budgets as the cost of healthcare is rising much faster than the inflation.

Action Point: If you are an author of letters to the editor, or bump in to your local member, let them know how you feel about any move in this direction.

Tax Office goes after dividend ‘double dipping’

It’s been reported that the Tax Office has issued letters to those involved in ‘dividend washing’ trades (discussed in SMSF Alert: November 2013) requesting that they amend recent years’ tax returns and pay the extra tax, or face a tax bill with penalties and interest.

If anyone has been involved in these trades at the behest of their stockbroker, you should take independent legal advice as soon as possible. Some parties have been complaining that the Tax Office’s actions are retrospective but, as we highlighted in Franking credits: Don’t push the envelope, many doing the trades were ignorant of the law and we suspect the Tax Office is confident of its legal position.

Other recent developments

Members may also have an interest in the following:

  • Tax Office guidance on accepting contributions and rollovers – The Tax Office has updated its website with information on allowable contributions, in-specie contributions, rollovers and transfers.
  • SMSFD 2014/6 – The Tax Office has confirmed an adult child in receipt of Youth Allowance is a tax ‘dependent’ and is able to get tax-free death benefits from super.
  • Lisa Ho’s case – This serves as yet another lesson on investments that are ‘too good to be true’.

Note: Liam Shorte is an SMSF Specialist Advisor™ with Verante Financial Planning and author of The SMSF Coach.

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