SMSF Alert: March 2015

Liam Shorte and Richard Livingston highlight the past month’s key SMSF developments.

Key Points

  • Government releases 2015 Intergenerational Report
  • New superannuation thresholds for 2015/16
  • Reminders provided by recent court decisions

It’s been a good month in the world of super, if only for the fact that not too much has happened. Let’s take a look at what has.

Intergenerational Report

The 2015 Intergenerational Report, released every five years, assesses the long-term sustainability of policies and the impacts of changes in population and age profile on the economy, workforce and public finances over the next 40 years.

The main takeaway is that due to increasing life expectancies Australian’s population is expected to grow and age substantially in the coming decades, placing pressure on public finances.

There’s been various thought bubbles from politicians and others on what this might mean for the superannuation system and age pension. No-one really knows how this will play out but it’s a fair bet the superannuation and age pension systems will become less generous in coming decades.

When doing your retirement forecasting, expect to pay more (or at least some) tax on super, – especially if you’ve got a multi-million dollar balance, or expect to make large capital gains. Qualification for the age pension is likely to become tougher and payments less generous.

The Report should is also a reminder to use strategies that reduce your exposure to ‘change of law risk’. For instance, re-contribution strategies (withdrawing your super and re-contributing it) can be used to convert the taxable component of your super balance into tax-free and even up the balances between spouses. Super splitting is another way to even up balances.

Adopting strategies like these should mean you face a reduced risk of being taxed on your pension super account down the track.

New superannuation thresholds for 2015/16

The Tax Office has updated its website with the latest superannuation caps, rates and thresholds.  Key points to note are:

  1. Contributions Caps.There’s been no change to the general concessional contributions cap ($30,000), the special concessional cap for those aged 49 years or over on 30 June of previous year ($35,000) or the non-concessional contributions cap ($180,000).
     
  2. Low Rate Cap Amount. The lump sum low rate cap will jump from $185,000 to $195,000 from 1 July 2015. The low rate cap is the lifetime cap that allows you to withdraw a certain amount of the taxable component of your super tax-free, regardless of your age (assuming you’ve met a condition of release).
     
  3. Maximum Super Contribution Base.The maximum amount on which employers are required to make compulsory super contributions will increase to $50,810 per quarter. This means someone earning over the maximum will have over $19,000 of contributions to super before any voluntary contributions are made.

The complete list of updated superannuation rates, caps and thresholds can be found at the Tax Office website.

Tribunal and court decisions

Two recent decisions serve as a reminder of what not to do if you have an SMSF.

In the first decision, an SMSF trustee was ordered to serve 80 hours of community work for failing to lodge annual returns over a number of years, despite reminders to do so. He only narrowly avoided a gaol term.

The second decision (Morrison and Commissioner of Taxation) saw a deposit and loan arrangement involving an SMSF, a Samoan bank and a couple (the fund members) disregarded as a ‘sham’. The couple had their SMSF deposit $600,000 with the bank and then borrowed an identical amount a few days later.

Rather than accepting the transactions on their face, the Tax Office treated the amount as a withdrawal from the fund and taxed them heavily on the amount, including substantial penalties. With a small exception, the tribunal confirmed the Tax Office’s decision.

The decision highlights why it’s so important not to play games with self-managed super. The Tax Office is likely to come down hard on any people or products it sees as breaching the spirit of the rules.

Other recent developments

You may also be interested in the following:

  1.  SMSF annual returns: Reporting limited recourse borrowing arrangements – The Tax Office has published instructions on how to report limited recourse borrowing arrangements in your SMSF’s annual return.
     
  2. Tax Office focus on ECPI claims – The Tax Office has indicated that it intends to increase its focus on the calculation and reporting of exempt current pension income (ECPI) claims by pension mode SMSFs, particularly the offsetting of tax losses.

Liam and Richard are founders of Eviser.

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