Avoiding common mistakes at EOFY

With the approach of the end of another financial year, there are some important things to consider to ensure a smooth completion of an SMSF’s 2019/20 financials and tax return.

Contributions review

As always there are two concerns here: what is the maximum contribution a person can make; and what happens if a person’s contribution is above their concessional or non-concessional contribution cap.

For concessional contributions, there is a universal cap of $25,000 applies, if a person qualifies per financial year. However, if a person’s total super balance on 30 June 2019 was less than $500,000, any unused concessional contributions that are under the universal cap from 2018/19 financial year may be brought forward, and this may be claimed as a personal tax deduction for any concessional contributions made in the 2019/2020 financial year.

It’s important to note time frames apply if a person wishes to claim a tax deduction for personal concessional contributions. An election must be made to an SMSF setting out the amount that will be claimed before the person lodges their personal tax return for the 2019/20 financial year, and no later than the end of the financial year after the contribution was made. It is important to remember the notice needs to be lodged before any part of the contribution is withdrawn or used to start a pension. An SMSF also needs to acknowledge a person’s election before they lodge their income tax return.

A major consideration in making non-concessional (non-tax deductible) contributions (NCC) is the amount of a person’s Total Superannuation Balance. This will determine the amount a person can make to an SMSF without facing a tax penalty. If a person’s Total Super Balance is more than $1.6 million, a penalty may be applied to any NCC made and they could end up having to withdraw any excess that arises.

If a person’s Total Super Balance is less than $1.6 million, and the person is qualified to make NCC to an SMSF, this person may be able to contribute up to $300,000 over a fixed three-year period. The standard NCC is $100,000 but for anyone under the age of 65 it is possible to bring forward up to the next two years standard NCC if a person has a Total Super Balance of less than $1.5 million. The following table sets out the NCCs that can be made to an SMSF without being penalised. If a person’s Total Super Balance is less than $1.4 million, a person can bring forward the next two years standard NCC; and if it is between $1.4 and $1.5 million, an individual can bring forward the next year’s standard NCC.

Notionally, this information is to be available via the MyGov portal, but it will only be accurate if an SMSF’s 2018/19 return has been lodged.

If an individual has triggered the bring forward rule in either 2017/18 or 2018/19 financial year, the person’s aggregate NCCs may be either $300,000 or $200,000, respectively, provided the person does not exceed the maximum of their Total Super Balance for 2019/20 financial year.

Investment strategy review

Ensuring the investment strategy accurately reflects the SMSF’s current asset allocation is an important compliance responsibility. While there is a degree of flexibility with respect to movements in an SMSF’s overall asset allocation, it is good practice to review the SMSF’s current asset allocation against its documented strategy. If the fund’s current allocation falls outside the documented strategy, it would be prudent for the fund to be instructed to make an adjustment so that the SMSF’s investment strategy and asset allocation are aligned.

It is reasonable to expect that an SMSF’s asset allocation will have a degree of tolerance over the short term, which fall either side of the long-term target. But a regular review would be recommended as it’s required by the super law.

Some of the more common situations where an SMSF’s investment strategy should be reviewed include:

• Trustees purchasing property for their fund, but not updating the investment strategy to reflect the purchase;
• An asset class, such as listed shares, being above or below the fund’s target position due significant rises or falls in the underlying holdings;
• Trustees moving from accumulation to pension phase and changing the asset allocation due to cash flow needs but neglecting an investment strategy update.
• Trustees choosing to invest predominantly in one asset, or asset class, which amounts to 90% or more of the fund, may lead to concentration risk. In these situation, the fund’s investment strategy needs to document how the trustees have considered the risks associated with a lack of investment diversification. This should include how high concentrations of investments can meet the fund’s investment objectives, including predicted returns and cash flow requirements.

Asset concentration risk is heightened in highly leveraged funds, such as where the trustee has used a limited recourse borrowing arrangement to acquire the asset. This may expose members to a loss in the value of their retirement savings should there be a decline in the asset’s value. It could also trigger a forced asset sale if loan covenants (for example, the loan to valuation ratio) are breached.

Capital Gains Tax (CGT) review

In the lead up to the end of the financial year, trustees or advisers may wish to undertake tax planning to minimise the CGT position of their SMSF. This is usual where an SMSF has assets with an unrealised loss position. Trustees may seek advice on whether it is worthwhile to crystallise the unrealised losses to reduce any of the fund’s realised gains. It’s important to understand there may be tax consequences arising from simply selling an asset and buying it back immediately.

Asset revaluation

One of the trustee’s most important obligation is to ensure for purposes of preparing the fund’s financial accounts that assets are valued at market value each year. This is a legal requirement and ensures the value of the fund assets and member balances are accurate. The valuation implications for each member’s Total Super Balance, as well as taxing the fund’s income if it is paying pensions.

The value of some of the fund’s investments may be easy to obtain, such as listed company shares and bank account balances. However, when it comes to real estate and other fund investments, market value or a valuation may be required from an appropriately qualified person, such as an independent registered valuer or real estate agent.

For assets where a valuation is not easy to determine, it is necessary to obtain evidence to support the value determined on as it assists when the fund is audited. For the more exotic assets, such as privately held unlisted shares, unit trust holdings or artworks and collectables, the matter can always be raised with the fund’s auditor to see whether the fund has assessed it at fair value.

Pension review

It is essential that at least the minimum pension is paid for existing pensions and the maximum level is not exceeded for Transition to Retirement pensions. When a pension that does not satisfy the payment rules, any income on assets supporting the pension will be taxed at 15% rather than be tax exempt.

When deciding to draw more than the minimum pension, a person may consider taking any amount over the minimum amount as a pension payment, or as a lump sum. The reason is that a lump sum payment of your pension balance will result in a reduction of your Transfer Balance Account and can be used to access additional pension benefits in the future.

An individual may need to instruct their SMSF that they wish to draw a lump sum prior to it being made from their pension balance, otherwise it will be treated as a pension payment. If a person has more than one pension account, or possibly an accumulation account in their SMSF, then part of the decision will be whether any additional payment comes from one or more of those accounts.

Some of the things to consider if you have multiple pension accounts is the tax-free proportion of each pension and whether grandfathering could apply to qualify for Centrelink benefits or Seniors Health Care Card. Also, individuals may like to take into consideration whether the pension is reversionary or non-reversionary, or the impact of any binding death benefit nominations.