The 2019-2020 financial year is like none we have experienced in recent memory, with the Coronavirus pandemic throwing societies and economies into unknown territory. Despite this, it's still important for anyone who holds a self-managed superannuation fund (SMSF) to think long-term about this critical investment.
Therefore, with the end of the 2020 financial year rapidly approaching, we think it's appropriate to update you about opportunities and issues you might need to consider with respect to your SMSF.
- The transfer balance account reporting obligations are now well entrenched. These obligations require SMSF trustees to report certain information to the Australian Tax Office (ATO) when a member of their fund commences drawing a pension, or commutes all or part of a previously reported pension.
- The transfer balance cap restricts the amount that a member of a super fund can transfer to the pension phase of superannuation. The current maximum is $1.6 million. Once transferred to the pension phase, a pension account may grow in value to more than $1.6 million in value with investment earnings without the need for the excess over $1.6 million to be withdrawn.
- The trustees of each SMSF are required to make, regularly review, and invest in accordance with their fund’s investment strategy. Investment strategies should be formally reviewed yearly and more often if the circumstances of the fund change. Reviewing the investment strategy will be of particular importance this year as a result of the significant impact the market downturn has had on investment markets.
- As part of the investment strategy, trustees are required to consider insurance on the lives of members of the fund. A requirement to regularly review the insurance also applies. Decisions of the trustees should be recorded in writing.
- Borrowing money for investment purposes has been a popular strategy used by an increasing number of SMSFs. Borrowings must comply with strict requirements imposed by legislation and the Regulator. Where money has been borrowed other than from a bank, the loan must be structured on commercial terms, as if the loan was provided by a bank. Many SMSFs borrow from a related party or a non-bank lender. For loans that have been provided by a related party to the SMSF, such as by a member of the fund, a family trust, or other related entity, certain loan conditions need to be met, including the term of the loan and the interest rate being paid. Limited recourse borrowing arrangements should be reviewed to ensure they reflect the current requirements of the Australian Taxation Office (ATO). Failure to comply may result in the SMSF being taxed at a rate of 45%.
- Trustees of SMSFs are required to ensure the assets of their fund are valued at current market value. While this does not necessarily require a formal valuation to be undertaken by an independent registered valuer, the valuations must at least be provided by someone with the necessary skills and experience. This is particularly important for SMSFs investing in property. Assets should be valued at least annually.
- SMSFs that invest in, or make loans to related entities, are investing in in-house assets. The maximum amount that a fund can have in in-house assets is 5% of the market value of the fund’s total assets. It is advisable for SMSF trustees to review their investment in in-house assets, based on up-to-date valuations, before the end of the financial year so that corrective action can be taken if necessary. While the ATO has recognised that the unique conditions brought about by the Coronavirus pandemic may impact on SMSFs and their ability to comply with a number of specific requirements, it is imperative that SMSF trustees remain vigilant to ensure their fund remains compliant.
- SMSFs that have members in both the accumulation and pension phases of superannuation have two options when it comes to determining the portion of the funds income that is tax-exempt. Trustees may either use the segregated or the proportional (unsegregated) method. Where the proportional method is used, an actuarial certificate is required each year. From 01 July 2017, trustees of SMSFs may no longer use the segregated method where the fund has both accumulation and pension interests and has at least one member with a total superannuation balance (all their superannuation funds combined) of more than $1.6 million.
- Pension drawdowns. For SMSFs that are paying members an income stream from and account based pension or market linked income stream (often also referred to as a term allocated pension), the minimum drawdown limits have been reduced by 50% for 2019-2020 and 2020-2021. This will take some pressure off SMSFs from having to sell down assets in a depressed market in order to be able to pay pensions.
If you have questions about any of the issues in this article, or if you would like us to review your SMSF to make sure that everything is on track, feel free to contact me or our Financial Advisers to discuss the next steps.