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By Graeme Colley

AMP Capital

Graeme Colley shares five more common mistakes SMSFs make and how to avoid them.

Separating contributions and pensions

“There are strict rules about what can be added to a pension account balance once it has commenced. You cannot add contributions or transfers from other superannuation funds after a pension has commenced. If you wish to add these amounts to a pension, it must be stopped, and a new pension commenced based on a new set of calculations.”

Each pension in an SMSF must be established under a separate account as well as any amount a member has in accumulation phase. There are many tax benefits of keeping pension and accumulation accounts separate.

Not withdrawing lump sums or pensions correctly  

The benefit of having an SMSF is the tax concessions available to build benefits for retirement, death, disability, and similar circumstances. It is also possible to access superannuation after you reach 65 or as a transition to retirement income stream once you reach preservation age, currently 57, although you have not retired.

The type of benefits that can be paid from the fund is in the trust deed. The deed may authorise payment of lump sums, account-based pensions, transition to retirement pensions or a combination to be paid to you or, on your death, to your dependants. In some circumstances you may wish to direct your superannuation benefits to your surviving spouse, children, other dependants, or to your estate.

From 1 July 2017 a cap of $1.6 million applies to the amount you can transfer into retirement phase. Depending on how your pension is drawn down you can maximise use of the cap and the amount you can ultimately transfer into retirement phase.

If you take your money from your SMSF earlier than the superannuation rules permit the amount withdrawn can be taxed at penalty rates, the fund loses its tax concessions and the trustees penalised for allowing the money to be released early. Early release of money from superannuation can be approved if you are experiencing severe financial hardship or for compassionate purposes.

Contributions

Accepting contributions to the fund under the correct circumstances is essential and helps to avoid penalty taxes if the amount contributed is more than the tax deductible and non-deductible caps.

A contribution to an SMSF can be anything that directly or indirectly increases the value of the fund with the intention that it is used to provide benefits to members. It excludes income and capital gains that the fund earns from its investments.

“Most contributions are made to an SMSF as cash, by cheque or the electronic transfer of money. However, it is possible for some approved investments to be transferred to the fund and the value at the time of transfer is treated as a contribution”, says Colley. A contribution can also include expenses paid by a member on behalf of the fund which are not reimbursed or government payments such as the co-contribution or low-income superannuation fund tax offset. These amounts are usually credited to a member’s accumulation account in the SMSF.

Colley says that when accepting contributions to the fund a trustee should check:

• who has made the contribution,
•  the age of the member,
• whether the member satisfies the work test if they are under 18 or older than 65, and
• whether they have quoted their tax file number.

If a member intends to claim a tax deduction for a superannuation contribution an election must be provided to the fund which is required to be acknowledged.

While there is no limit to the amount of contributions that can be made to superannuation, a tax penalty may apply to any excess over certain amounts. The excess depends on the member’s age, the type of contribution and the amount of the member’s total superannuation balance on 30 June in the previous tax year.

Death benefits and your will 

“People often think that the payment of superannuation benefits is covered by their will. Generally, this is not the case as superannuation benefits are paid as authorised by the trust deed of the superannuation fund and any nominations the member may have made for the distribution of their death benefits.”

If you wish to have your superannuation paid to your estate, it is worthwhile providing a clear direction to the fund trustee that on your death any benefit is paid to your legal personal representative who will include the amount in your estate. If no clear direction is provided to the trustee for the payment of the benefit, it is possible that it may not be paid in accordance with the member’s wishes.

Binding Death Benefit Nominations  

Death benefits can be paid to your surviving spouse, children, other dependants or to your estate via your legal personal representative.

It is possible for your spouse to receive a continuing pension on your death as a reversionary pension. However, you may provide instructions for the payment of death benefits in a binding death benefit nomination. The nomination will require you as trustee to pay your death benefit to your spouse, dependants or even your estate as you choose.

If there are no reversionary pensions or binding death benefit nominations the rules of the fund’s trust deed will provide information on how and to whom the benefits can be distributed. If your death benefits are paid to an estate, your superannuation benefits will be distributed as provided in your will.

The trustee of an SMSF is obliged to ensure that benefits are paid in accordance with the member’s or dependant’s instructions or the fund’s trust deed. It is essential that the binding death benefit nomination is valid and properly witnessed. If it is not valid the trustee may be bound to follow the provisions of the trust deed which may not be consistent with the wishes of the deceased.

 

Important notes

While every care has been taken in the preparation of this article, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This article is solely for the use of the party to whom it is provided.

 

Dr Shane Oliver

Head of Investment Strategy and Economics and Chief Economist, AMP Capital

Investors might be confused about the mixed news coming out late last year for the Australian economy and what it means for returns and rates.

Economic growth has been okay, and unemployment has fallen to five per cent which is quite low by Australian standards. But we’re also seeing ongoing weakness in house prices. Some say house price falls could be worse that those seen during the global financial crisis, and, ultimately, I think they will be.

So what’s going on here?

How we avoided recession

Basically, we’re seeing ‘desynchronisation’ across key sectors in the Australian economy – that is, when one part of the economy weakens, another picks up.

Desynchronisation partly explains why the Australian economy has dodged recession for almost 28 years.

We enjoyed a mining boom. When that came to an end, the mining-exposed parts of the economy, notably Western Australia, suffered. But that enabled lower interest rates and a lower Australian dollar which helped stimulate the economy. The housing market also strengthened and we had a housing boom in Sydney and Melbourne.

A new rotation

The economy is now rotating again, creating another two-speed economy.

On the positive side, we’re getting close to the end of the mining investment slump, which is taking pressure off Western Australia, the Northern Territory and parts of Queensland. We’re also seeing good signs in terms of non-mining investment and export values are doing ok.

But on the negative side, the housing boom is coming to an end and the key drivers for weaker housing returns remain in place:

• Credit tightening
• Rising supply in the unit market
• Reduced foreign buyer demand
• A lot of investors having to switch from interest-only loans to principle and interest loans.
• Uncertainty about changes to taxation concessions around negative gearing and capital gains tax should Labor win the upcoming federal election

Also evident is a psychological change in attitudes to the housing market from ‘I’ve got to get in now otherwise I’ll miss out’ – (fear or missing out or FOMO); to ‘if I don’t get out now, I’ll be in trouble’ – (Fear of not getting out or FONGO).

So we’re likely to see more weakness in house prices as we go through 2019, particularly in Sydney and Melbourne where prices could come off another 10 per cent or so, probably more in Melbourne which has lagged a little bit going into this downturn.

That would take top to bottom falls in Sydney and Melbourne to around 20 per cent (10 per cent in 2019). Other parts of Australia will hold up a bit better, with the national average prices having top to bottom fall of around 10 per cent.

That’s going to cause a degree of weakness in terms of consumer spending in Australia because we will get a negative wealth effect flowing through. (When house prices fall, Australians are likely to feel less wealthy and trim consumption). That will also be a bit of a constraint for the banks.

Rate cut risk

When we put all this together, it’s going to mean an ongoing environment where wages growth remains low and inflation remains low, and so we’re unlikely to see the Reserve Bank raise interest rates in 2019.

In fact, the likelihood is that the Reserve Bank ends up cutting interest rates in 2019. If they do that as we expect, it could well be a second half 2019 story because it will take them a while to come around to the view rates need to be cut.

It’s a close call, but we think rates will be cut in 2019 and that there will be no rise.

Avoiding recession

Despite the negatives, when I look at the Australian economy, I don’t see a recession.
There are areas of the economy which are quite strong, and which will keep growth going to counter the other areas which will constrain it.

This year we’re probably looking at overall economic growth of around 2.5 to 3 per cent; we’re looking at unemployment going sideways – it may come down a little bit, but nothing to get excited about; and we’re looking at ongoing weak wages growth and low inflation.

What this means for investors

This outlook above has a number of implications for investors, including:

• Returns from bank deposits will remain poor,
• With a rate cut likely in Australia and further rate rises likely in the US, albeit at a slower rate, the Australian dollar is likely to fall into the high $US0.60s,
• Australian bonds are likely to outperform global bonds,
• Australian shares will remain great for income, but global shares will deliver better capital growth, and
• The housing downturn will hit retailers, retail property, banks and building material stocks.

 Important notes

While every care has been taken in the preparation of this article, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This article is solely for the use of the party to whom it is provided.

January 2018

Legislation has passed that will enable people aged 65 or over to make additional super contributions of up to $300,000 per person from the proceeds of the sale of their home from 1 July 2018.

These are known as ‘downsizer contributions’ and they can be made on top of the existing contribution caps, without having to meet certain contribution rules and restrictions.

The opportunity

The downsizer contribution rules remove some of the barriers that prevent or restrict the ability to make super contributions at age 65 or over.

Provided certain other conditions are met (see below) eligible people will be able to contribute up to $300,000 per person (or $600,000 per couple) from the proceeds of selling their home on or after 1 July 2018.

The contributions won’t count towards the concessional (pre-tax) or non-concessional (after-tax) contribution caps and there is no maximum age limit. Also, the ‘work test’ (for people aged 65 to 74) and the ‘total super balance’ test won’t apply.

Key requirements

There are a number of conditions that will need to be met to be eligible to make downsizer contributions, including:

• The individual must be aged 65 or over at the time the contribution is made.
• The property must have been owned by the individual or their spouse (but not necessarily both) for at least 10 years prior to the disposal.
• The contract for sale must be entered into on or after 1 July 2018.
• The property must qualify for the main residence capital gains tax exemption in whole or part, so properties held purely for investment purposes won’t qualify.
• The contribution must be made within 90 days of the change of ownership.
• An election needs to be made to treat the contribution as a downsizer contribution.
• No tax deduction can be claimed for the contribution.

Other conditions may also apply. For more information, please visit the ATO website at www.ato.gov.au

Key considerations

There are some key issues that should be considered when assessing whether making downsizer contributions could be a suitable strategy, including:

• The property being sold to fund the contributions doesn’t have to be the current home. It can be a former home which meets the requirements. Also, a new home doesn’t need to be purchased.
• Once contributed, downsizer contributions will count towards the ‘total super balance’ which could impact capacity to make future contributions.
• Downsizer contributions can’t be transferred into a tax-free ‘retirement phase income stream’ if the ‘transfer balance cap’ has been used up. The transfer balance cap is $1.6 million in 2017/18.
• If the transfer balance cap has already been used up, the contribution must remain in the ‘accumulation phase’ of super, where investment earnings are taxed at a maximum rate of 15%.
• Money held in the accumulation or retirement phase of super is assessed for both social security and aged care purposes.

Could you benefit from downsizer contributions?

If you are thinking about selling your home after 1 July 2018, we can help you decide whether making downsizer super contributions is a suitable strategy for you and assess other options.

Important information and disclaimer

This document has been published by Michael Campbell, Authorised Representative of Godfrey Pembroke Limited (ABN 23 002 336 254) (“Licensee”), an Australian Financial Services Licensee, registered office at 105 –153 Miller St North Sydney NSW 2060 and a member of the National Australia Bank Limited group of companies (“NAB Group”).

Any advice in this publication is of a general nature only and has not been tailored to your personal circumstances. Accordingly, reliance should not be placed on the information contained in this document as the basis for making any financial investment, insurance or other decision. Please seek personal advice prior to acting on this information.

While it is believed the information in this publication is accurate and reliable, the accuracy of that information is not guaranteed in any way. Opinions constitute our judgement at the time of issue and are subject to change. Neither the Licensee nor any member of the NAB Group, nor their employees or directors give any warranty of accuracy, accept any responsibility for errors or omissions in this document.

Any general tax information provided in this publication is intended as a guide only and is based on our general understanding of taxation laws. It is not intended to be a substitute for specialised taxation advice or an assessment of your liabilities, obligations or claim entitlements that arise, or could arise, under taxation law, and we recommend you consult with a registered tax agent.

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