SMSF’s are they worth it …. you betcha!

More and more Australians are looking to take greater control and be involved in their superannuation. With over 1/3 of the total superannuation pool of funds in this sector the Self Managed Super Fund (SMSF) appears to be becoming the retirement vehicle of choice for many Australians. There are now more than 503, 320 funds in existence covering 958,092 members, with the value of assets residing in these vehicles currently standing at close to $496 billion rising faster than any other sector. (source: Self-managed super fund statistical report – March 2013) 

Most commentators attribute the rise in SMSFs to the desire by baby boomers (those born 1946-64) to take control over their retirement assets, rather than leave it to platforms or fund managers they struggle to understand. It’s often not that they believe they can seriously do better themselves but more the fact that they would prefer to have the ultimate control and know that if funds are earning or not earning that they can clearly see why and adapt if needed. Also a clear trend in the last 2 years has been the rise in Gen X (born 1965 to 1980) starting SMSFs as they have had superannuation for most of their working lives and are now meeting the “rough guideline” of $200K to open a Self-Managed Super Fund.

However, there are other key benefits that along with this control over investment choice, that make Self Managed Superannuation such an attractive retirement funding vehicle.

Investment choice:

 

The key attribute of SMSFs has always been investment control, and the wider investment choice (such as direct shares, residential and commercial property, collectibles, art work etc) that trustees have compared to retail and industry super funds. You also have access to using derivatives and other more complex strategies to implement some downside protection or hedging of portfolio risk. One of the main reasons we recommend SMSFs is for small business owners to have business real property ( ie. that is used by their business) owned their SMSF and leased back to the business. This provides a steady income for the SMSF and frees up capital to grow your business as well as provide a secure tenancy.

Borrowing:

 

With the rules now allowing SMSFs to borrow we can aim for larger properties or to implement the strategy earlier in the lives of the members. This ties in with the flexibility of SMSFs and added benefits over and above a retail or industry super fund mentioned earlier.

Tax Minimisation:

 

All Superannuation funds (let’s ignore Defined Benefit Schemes for now), offer the ability to take tax-free pension income streams in retirement which is a big incentive to keep your funds within the superannuation environment. You don’t need to have all your assets in superannuation, especially with the increase in the tax-free thresholds; however, by cleverly balancing the amount inside and outside of super you can minimise your tax on a relatively large income and possibly access benefits you thought beyond reach such as the Commonwealth Seniors Healthcare Card or even some Aged Pension.

Tax Control:

 

A further benefit of SMSFs is the control and flexibility that trustees can exert over the tax position of the fund. Through structuring and timing pensions (in some cases multiple pensions) and tilting investment strategies to use the concessional tax treatment of the funds (such as targeting franking credits) tax can be significantly reduced and in for many retirement phase clients refunds can be claimed from the ATO for excess credits!. There is also added flexibility in terms of dealing with the tax liabilities of the fund, as the fund only does one tax return even though there can be up to 4 different members in the fund and each could have an accumulation and numerous pension accounts.

Passing on Tax Benefits:

 

Using strategies such as Anti-Detriment Payments or Future Service Benefit Deductions your family members can benefit from large tax deductions that may make the fund tax-free many years on the death of a member.

 

Cut out unnecessary CGT, brokerage and buy/sell spread costs:

 

When it comes time to enter the pension phase through a Transition to Retirement while still working or a full Account Based Pension on retiring, an SMSF structure allows an almost seamless transition from accumulation into pension or drawdown mode. You do not have to sell down your assets incurring various fees or taxes in the process as you simply minute the move to pension phase via a Pension Kit and retain your investments as is, no need to change. .

Passing on your wealth – Superannuation Estate Planning:

 

There are many useful estate planning benefits built into the superannuation system and even more so via SMSFs. First, you need to be clear that your Will does not control your superannuation benefits unless you specifically nominate this option. Keeping your superannuation assets outside of your will may be a smart move especially in these days of blended families and “No Win-No Fee” lawyers willing to challenge any and all estates. Within a SMSF you can design a strategy to accomplish exactly what you are after, with superior tax outcomes. This includes being able to leave “taxable” pensions to SIS Dependants who can receive them TAX FREE and tax-free or substantially tax-free lump sums to non-dependants . Likewise you can structure very tax effective income streams to dependant beneficiaries such as a disabled child or sick spouse with control around when they receive pensions and even lump sums and to effectively look after that person long after you are gone. Like the more up to date retail funds, through your SMSF you can make non-lapsing binding nominations unlike older super funds which have to be continually updated a real nightmare if you have an onset of dementia or illness preventing you renewing them).

Asset Protection:

 

The Asset protection afforded in all superannuation vehicles is crucial in a world where litigation and bankruptcy has become commonplace. In either of these events, your benefits are protected, even if you withdraw some of this to live on. From time to time we advise those in a failing business not to try to prop up the business by accessing their super but rather leave the funds protected to give themselves some chance of getting back on their feet and taking care of their family.

Are you starting to see the trend when it comes to the benefits of an SMSF? It’s all about flexibility and control of outcomes. But what about COST which is often the major initial driver of interest in an SMSF.

 

Cost / Cost Savings :

 

This may be an over rated benefit as I find that once people start using the strategies and benefits mentioned above that the cost becomes a minor issue in running a fund. But for some the cost of running a SMSF can be significantly lower than the alternative platforms, especially as service providers bring technological and labour-saving ideas to bear in the administration of the funds. As a guide the average cost of the annual administration of a fund will be around about $2,000 to $2,500 pa including accounting and audit fees. Yes there are cheaper but you pay for what you get.

As with all vehicles you have the option to drive the strategies yourself to minimise advice costs or take on a co-driver(s) via an SMSF Specialist Advisor™, Financial Planner, Accountant or Lawyer. Look for professionals with experience in the strategies that suit your needs. The power of the SMSF solution is that you have ultimate control of what advice you seek and how you pay for that advice through negotiation with your chosen advisor and the ability to end the relationship and move on with limited hindrances.

As a SMSF Specialist Advisor™ we are openly biased when we urge you to look for someone with specific accreditation in the SMSF arena as it is complex area and the strategies available to you are broader than the plain vanilla strategies offered by your typical bank planner or Industry fund planner. Look for someone who explores the strategies available to you and has a passion for the sector as this maybe your biggest asset in retirement and you don’t want a taxi driver in control of your B-double road train!

In summary SMSFs have become popular and effective retirement vehicle through satisfied users passing their feedback on to others. However you must also be willing to take on the responsibilities that being a SMSF trustee entails but a good advisor team will guide and educate you along the way if you are prepared to learn.

If you are, then the potential for what we call “The Sleep Factor” is within reach. The ability to have comfortable night’s sleep knowing you have control of your finances, understand your investments, maximised tax effectiveness and implemented effective estate planning along with some asset protection.

Now pick up your last Superannuation Statement and see if that gives you the same feeling! 

I hope this guidance has been helpful and please feel free to leave a comment. Feedback always appreciated. 

Have a great day 

Luke Eres CFP SSA 

RBA Cuts Rates

For the second time this year the Reserve Bank of Australia has today cut official interest rates by 25 basis points to a 1959 low of 2.5%.  Not since 1990 have interest rates been cut during an election campaign and the political grenades have already been launched sparking debate about the relative strength of the Australian economy.

Here’s what the Governor had to say;

Statement by Glenn Stevens, Governor: Monetary Policy Decision

At its meeting today, the Board decided to lower the cash rate  by 25 basis points to 2.5 per cent, effective 7 August 2013.

Recent information is consistent with global growth running a  bit below average this year, with reasonable prospects of a pick-up next year.  Commodity prices have declined but, overall, remain at high levels by  historical standards. Inflation has moderated over recent months in a number of  countries.

Globally, financial conditions remain very  accommodative, though the recent reassessment by markets of the outlook for US monetary  policy has seen a noticeable rise in  sovereign bond yields, from exceptionally low levels. Volatility in financial  markets has increased and has affected a number of emerging market economies in  particular.

In Australia, the economy has been growing a  bit below trend over the past year. This is expected to continue in the near  term as the economy adjusts to lower levels of mining investment. The  unemployment rate has edged higher. Recent data confirm that inflation has been  consistent with the medium-term target. With growth in labour costs moderating,  this is expected to remain the case over the next one to two years, even with the  effects of the recent depreciation of the exchange rate.

The easing in monetary policy over the past  18 months has supported interest-sensitive spending and asset values, and  further effects can be expected over time. The pace of borrowing has remained  relatively subdued, though recently there are signs of increased demand for  finance by households.

The Australian dollar has depreciated by  around 15 per cent since early April, although it remains at a high level. It  is possible that the exchange rate will depreciate further over time, which  would help to foster a rebalancing of growth in the economy.

The Board has previously noted that the  inflation outlook could provide some scope to ease policy further, should that be  required to support demand. At today’s meeting, and taking account of recent  information on prices and activity, the Board judged that a further decline in  the cash rate was appropriate. The Board will continue to assess the outlook  and adjust policy as needed to foster sustainable growth in demand and  inflation outcomes consistent with the inflation target over time.

Is it just me …. or is it ground hog day again

Morning All, 

OK I will admit it. 

I am a self proclaimed political tragic and I loved nothing better than sitting down last night to watch the drama unfold before my very eyes. 

That said I am a little intrigued by what Mr Rudd said. 

According to Mr Rudd, Australian politics had let the people of Australia down …. WTF. 

No Mr Rudd, Australian politics has not let the Australian people down. It has been you and your fellow cohorts who have let the people down by becoming self absorbed and thus allowing Mr Abbott and his merry band of followers to assume Government with little or no resistance. 

While I do believe that an Abbott Government is a given (and deservedly so), you would do this country a great favour by focusing on the task at hand and at least providing the Australian people with an alternative and perhaps challenging Mr Abbott ….. just a thought

Happy days to all

Luke Eres CFP SSA  

Superannuation Changes – Alert Update

This week there have been a number of long awaited changes to superannuation law that have passed the parliament. This Alert outlines some of the key changes that we should be focusing on and how this may impact your future retirement planning strategy.

 

Off market transfers

The Tax and Superannuation Laws Amendment (2013 Measures No. 1) Act 2013 was passed on 25 June with the significant amendment of the removal of Schedule 4 which contained the proposed changes in respect of acquisitions of assets by SMSFs from related parties and the disposals of assets by SMSFs to related parties.  Importantly, this means there are no additional restrictions or requirements to trade off market in respect of related party transactions with SMSFs.

Schedule 4 of the Bill was introduced as the outcome of the Government’s announcement to ban off market transfers to and from SMSFs where a market exists, following such a recommendation from the Cooper Review .  The bill was set to introduce new section 66A of the SIS  Act specific to SMSFs which proposed that SMSFs must not acquire an asset from a related party (subject to a number of exemptions) and that SMSFs must not dispose of an asset to a related party (subject to a number of exemptions).  The acquisitions exemptions provided for listed securities acquired in a way prescribed by the regulations, however no draft regulations had been released.  Business real property and in-house assets were also proposed exemptions, provided that they were acquired at market value as determined by a qualified independent valuer.  Similar exemptions were proposed in respect of disposals.

The proposed amendments contained a number of issues in respect of their interaction with Corporations law and existing wash sale rules.  Together with the lack of any accompanying regulations , it seemed unlikely that the necessary package of legislative changes could have been prepared and implemented by 30 June 2013.

Whilst the back down is welcome, it is a timely reminder that requirements already exist in respect of off market transfers.  The timing of valuation for the purpose of making off market contributions is the date transfer forms are ready to be lodged with the relevant registry.  There are also requirements for off market disposals of certain collectables to be conducted at a price no less than that determined by a qualified independent valuer.

The removal of the proposed changes means there will be no additional brokerage and valuation costs for SMSFs to trade with related parties. There will also be no potential barriers to closing SMSFs where disposal of frozen funds or unique assets would have caused valuation difficulties.

Higher concessional contribution cap

Tax and Superannuation Laws Amendment (Increased Concessional Contributions Cap and Other Measures) Act 2013 was passed on 24 June.  The measure increases the concessional contributions cap to $35,000 for individuals age 60 years and over for the 2013-14 financial year and to $35,000 for individuals aged 50 years and over for the 2014-15 financial year and later financial years.  The temporary cap will cease when the indexed general cap becomes $35,000.

Lower tax concessions for those earning over $300,000

Superannuation (Sustaining the Superannuation Contribution Concession) Imposition Act 2013 was also passed on 25 June.  The measure increases the tax paid on concessional contributions from 15 per cent to 30 per cent for individuals with income above $300,000. The amendments apply to contributions made on or after 1 July 2012.

An individual will pay this tax for an income year if their income for surcharge purposes (less reportable super contributions) plus their low tax contributions for a financial year exceed $300,000.  Special rules apply for defined benefit funds, where the value of contributions will be determined by an Actuary.  Judges who are members of a fund established under the Judges’ Pensions Act 1968 are exempt, as are some senior employee members of constitutionally protected funds.

Superannuation contributions to which the changes apply will be known as low tax contributions and include:
 – employer contributions to accumulation interests
 – personal contributions which are claimed as an income tax deduction
 – contributions for defined benefit interests (valued by an actuary)
 – salary packaged contributions to constitutionally protected funds

The Australian Taxation Office (ATO) will work out an individual’s low tax contributions based on the member contribution statements required to be lodged by super funds each year.  The ATO will also work out an individual’s income for surcharge purposes from their tax return.  It will then issue a notice of assessment. The tax is generally due and payable 21 days after the ATO gives the notice of assessment. The ATO will also provide a release authority so that the individual may request an amount from their super fund (other than a defined benefit fund) to make the payment to the ATO.

SMSF levy

Superannuation Legislation Amendment (Reform of Self-Managed Superannuation Funds Supervisory Levy Arrangements) Act 2013 was passed on 16 May 2013.

The measure increases the maximum amount of the annual levy from $200 to $300 from the 2013/14 financial year.  The actual levy amount for a specific income year is prescribed in the relevant regulations and is $191 for the 2012/13 year and the government has announced an increase to $259 for the 2013/14 year.  The Act also changes the timing of collection of the levy.  Previously the levy was payable upon lodgement of the fund’s annual return whereas now the levy will be due and payable on the day specified in the regulations.

The changes are intended to ensure that the levy is collected from SMSFs in a more timely way (consistent with the collection of levies for APRA regulated funds) and that the ATO’s costs of regulating the sector are fully recovered.

Member benefit protection

On 16 May 2013, the Superannuation Industry (Supervision) Amendment Regulation 2013 (No. 2) was made to repeal the member benefit protection rules with effect from 1 July 2013.  The member benefit protection rules were such that members with balances under $1,000 could not ordinarily be charged more in administration fees than the investment returns earned on their account.

The repeal of the member benefit protect rules were necessary in order to resolve the conflict between the requirement to protect the benefits of certain members and the MySuper prohibition on charging differential fees to members.

As you can see it has been a busy time in Canberra …. So much for simple super 

Happy Days 

Luke Eres CFP SSA 

 

 

2013 Federal Budget Summary

2013 FEDERAL BUDGET SUMMARY

The 2013 Federal Budget was the 6th Budget delivered by the current Treasurer and incumbent Government. Delivered exactly 4 months out from the next Federal election, it may prove to be their “swan song”.
The announcements made on 14 May 2013 were largely non-surprising with virtually all major announcements (from a financial planning perspective) having been rumoured and confirmed in the days and weeks leading up to this night.
The key Budget measures and announcements are summarised below:

TAXATION

Deferral of changes to personal income tax regime
Deferred from 1 July 2015 until certain requirements met
Announced in the week before the 2013 Budget, the changes to personal marginal tax rates and thresholds has been deferred from their intended start date of 1 July 2015. Funding for these changes was linked to the price for carbon and the revenue expected to be generated from the Carbon Pricing Scheme. As the projected price of carbon is lower than initially expected, the changes in personal tax rates and thresholds will not commence until the price of carbon in a future Budget is estimated to be above $25.40. Based on current projections, this will not be until at least 1 July 2018 and may be later.
The current and future thresholds are shown in the following table:

Whilst not specifically stated, it is expected the previously announced and legislated changes to the low income tax offset will also be deferred until the same thresholds are reached.

Increase in the Medicare levy low income thresholds
Effective date: 1 July 2012

The Government has announced new Medicare levy thresholds that are applicable for the current financial year (ending 30 June 2013). These are $20,542 for individuals (previously $19,404) and $33,693 for families (previously $32,743). The increase on these thresholds for each dependent child or student will be $3,094.
The low income threshold for single pensioners below age pension age has been increased to $32,279 for the year ending 30 June 2013. This will ensure such pensioners do not pay the Medicare levy when they do not have an income tax liability.

Increase in the Medicare levy for DisabilityCare Australia
Effective date: 1 July 2014
As announced in the lead up to the Federal Budget, the Government will increase the rate of the Medicare levy by 0.5% from 1.5% of taxable income to 2.0% of taxable income with effect from 1 July 2014. This increase will be used to fund DisabilityCare Australia (previously known as the national disability insurance scheme or NDIS).
This increased levy will apply to all taxpayers who are subject to the Medicare levy based on their taxable income, and will result in a reduction of after tax income. The following table shows the additional amount of overall tax that will be payable on certain levels of taxable income:

Net Medical Expenses Tax Offset
Effective date: 1 July 2013
After making significant reforms to the Net Medical Expense Tax Offset (NMETO) in the 2012 Budget (including the proposed introduction of means testing and a reduction in the amount claimable), the Government has now decided that from 1 July 2013 the NMETO will be phased out completely.
Whilst the NMETO will continue to be available until 30 June 2019 for out of pocket medical expenses related to disability aids, attendant care or aged care expenses, it will only be available for the year commencing 1 July 2013 if a claim is made for the current year (i.e. the year ended 30 June 2013). If a claim is made in the year commencing 1 July 2013, then it will also be available in the year commencing 1 July 2014, but not thereafter.
Importantly, any claims to be made in the years commencing 1 July 2012, 2013 or 2014 will still be subject to means testing thresholds introduced in the 2012 Budget.

Limitations on deductions for work-related self-education expenses
Effective date: 1 July 2014
Announced on 13 April 2013, an annual cap on the deduction for work-related self education expenses will apply from 1 July 2014. Deductions will be limited to $2,000 per annum.
This change applies to individuals seeking to claim such deductions, and may have a significant impact on self employed people running their own businesses. It may lead to a trend to corporatise such businesses so as to not limit the deduction. This is because where the expense is paid by an employer on behalf of an employee, the benefit is exempt from fringe benefits tax (FBT) and the employer is entitled to a full deduction.
However, the Government has indicated that where an employee now chooses to salary sacrifice towards these forms of education expenses, the FBT exemption will no longer apply.

Changes for non-resident taxpayers on sale of Australian property
Effective date: 1 July 2016
With effect from 1 July 2016, where a non-resident sells a property located within Australia, a new (non-final) withholding tax regime will apply. This measure is designed to ensure that the appropriate amount of tax is recovered by the Australian Government on taxable capital gains that arise when such properties are sold.
These measures will apply to all Australian taxable property, other than:
• where the property is owned and sold by an Australian resident (ie it applies to non-resident taxpayers only)
• residential properties valued at less than $2.5 million.
Under this measure, the purchaser of the property will need to withhold 10% of the purchase price and forward it to the ATO as a form of withholding tax. As a result, the vendor will only receive 90% of the sale proceeds up-front. They will need to lodge a tax return if they want to receive any of the remaining 10%.

Targeting dividend washing arrangements
Effective date: 1 July 2013
The Government intends to legislate to close an existing loophole in the dividend imputation rules that may currently be targeted by “sophisticated” investors.
Whilst the Government has indicated it will consult on the development of the relevant legislation, the intent is to prevent a “dividend washing” arrangement whereby an investor sells a parcel of shares ex-dividend and then immediately purchasing an identical parcel of shares cum-dividend (i.e. still carrying the right to a dividend). This practice currently enables some investors to qualify for a doubling of their franking credit entitlements. Under the proposed measure, only one set of franking credit entitlements may arise.
Whilst intended to only apply to “sophisticated” investors, the actual qualification criteria indicated by the Government is that it will apply to investors with franking credit entitlements in excess of $5,000 on a single stock parcel. As a result, its application may be wider than first anticipated.

Removal of discount for early HELP payments
Effective date: 1 July 2014
Currently discounts are available for up-front and voluntary payments made under the Higher Education Loan Program. These discounts currently are:
• 10% for students electing to pay their student contribution up-front; and
• 5% on voluntary payments to the ATO of $500 or more.
From 1 January 2014, these discount arrangements will be removed.

SUPERANNUATION
No extension of draw-down relief for income streams
Effective date: 1 July 2013
Conspicuous by its absence, the Government has not announced any further extension of the minimum draw down relief for superannuation income streams. In recognition of the constrained markets at the time, over the last few years the Government has granted relief on minimum pension payment drawdowns, with a 25% reduction applying to the current financial year.

In the absence of any subsequent announcements, minimum pension drawdowns will return to their standard level from 1 July 2013 as shown in the following table:

Higher tax on concessional contributions for high income earners
Effective date: 1 July 2012Previously announced in the 2012 Budget and recent the subject of draft legislation released for consultation, individuals with “total income” in excess of $300,000 will be subject to an additional 15% tax on their concessional contributions into superannuation up to their relevant concessional contribution cap limit.
In this year’s Budget, the Government has announced some minor technical amendments to the measure (and addressed in the draft legislation). These minor amendments include:
• Exempting certain employer contributions for Federal Judges sitting on or after 1 July 2012 and certain employer contributions made to constitutionally protected funds.
• Amending the definition of “total income” to that used for calculating liability for the Medicare levy surcharge.
The draft legislation released for comment has also confirmed that this additional tax will be collected via a mechanism similar to that currently applying to excess contributions tax.
It will also be important to be aware that the potential for this additional tax will also apply to the higher concessional cap of $35,000 proposed for those aged 60 and above from 1 July 2013 and those aged 50 and above from 1 July 2014.

Changes to tax free treatment of superannuation in pension phase
Effective date: 1 July 2014
As previously announced on 5 April 2013, the existing tax free treatment applying to assets supporting a superannuation income stream will be limited to the first $100,000 of earnings on those assets. Any earnings above that limit will be subject to the standard 15% tax rate applying to complying superannuation funds. The $100,000 threshold will be indexed to CPI and increase in $10,000 increments.
Transitional rules will apply in respect of capital gains that accrue on assets acquired before the commencement of this measure (i.e. pre 1 July 2014). These rules are as follows:
• For assets acquired prior to these announcements (i.e. pre 5 April 2013), any capital gains realised (as a result of the assets being sold by the superannuation fund) before 1 July 2024 will remain tax free and will not be included in the calculation of the $100,000 threshold. Where the asset is sold after that time, only the gain that accrues from 1 July 2024 is included in the calculation.
• For assets acquired between 5 April 2013 and 30 June 2014, individuals will have the choice to apply the reform to the entire gain on disposal, or only that part of the gain that accrues from 1 July 2014.
• For assets acquired on or after 1 July 2014, the entire capital gain will be included in the calculation.
Whilst not providing details on how this tax will be collected when it applies, the Budget announcements have confirmed that the $100,000 threshold applies across all pension accounts held by an individual – not per pension account.

Changes to concessional contribution caps
Effective date: 1 July 2013
As announced on 5 April 2013, from 1 July 2013 a higher concessional contribution cap of $35,000 will apply to people aged 60 and over. This higher cap will then become available to people aged 50 and over from 1 July 2014.

This cap will not be indexed in future years, and it is projected that the existing $25,000 concessional cap will reach $35,000 in July 2018. At that time, the same cap will again apply to everyone regardless of age.
Whilst this higher cap is less than that previously due to come into effect from 1 July 2014 (being $50,000), the requirement to have less than $500,000 in total superannuation savings has been removed.
Draft legislation for this measure has been released, which contains an important technical amendment, with qualification being based on the individual’s age at the 30 June preceding the start of the relevant financial year. This ensures that in a year where a member dies before reaching the qualification age in that year, they will be eligible for the higher cap.

Changes to excess concessional contributions
Applies to excess concessional contributions made from 1 July 2013From 1 July 2013, individuals will have the ability to withdraw any excess concessional contributions and have them taxed personally at their marginal tax rate. An interest charge would also apply to the excess amount, reflecting the delay in the collection of the relevant tax by the Australian Taxation Office (ATO).
This will replace the current limited withdrawal option which is only available where clients exceed their cap by less than $10,000 and is only available once. The new measure can be used each time a client exceeds their concessional contributions cap.

Extending concessional tax treatment to deferred lifetime annuities
Effective date: 1 July 2014From 1 July 2014, the Government will extend the concessional tax treatment applying to superannuation to deferred lifetime annuities. These investments currently attract the same tax free treatment as superannuation income streams once payments commence, but are still subject to 15% tax on earnings during the deferral period.
Under the announcement, the tax free status will also apply during the deferral period.
This measure was previously announced with other superannuation reforms on 5 April 2013.

Additional reforms for lost super
Effective date: 31 December 2015
In the 2012/13 Mid Year Economic & Fiscal Outlook (released in October 2012), the Government announced that the account balance threshold for inactive accounts and accounts of uncontactable (i.e. lost) members required to be transferred to the ATO would increase to $2,000 and interest would be paid on these accounts at a rate equivalent to the CPI inflation.
The Government has announced it will now increase the threshold to $2,500 from 31 December 2015 and then to $3,000 from 31 December 2016
This change will increase the number of accounts transferred to the ATO, but may assist in consolidating more lost accounts and aiding clients to find their lost super.

Low income superannuation contributions
Effective date: 1 July 2012
The low income super contribution was introduced with effect from 1 July 2012 and essentially provides a refund of the 15% contributions tax for those on incomes of up to $37,000.
Under the existing rules, if the amount of low income super contribution a person was eligible for was less than $20, no payment would be made.
This technical issue has been amended, so that anyone on an income up to $37,000 and otherwise eligible will have the payment made to their super fund. Where the amount of the payment is calculated as less than $10, the entitlement will be rounded up to $10.

SOCIAL SECURITY & WELFARE PAYMENTS

Deeming superannuation account based income streams
Effective for new income streams commencing from 1 January 2015
For Centrelink income test purposes, superannuation income streams are concessionally treated as a result of the calculation of a “deductible amount” that reduces the income amount assessed for benefit calculation purposes.
This concession will continue indefinitely for existing income streams. However, new superannuation account-based income streams starting on or after 1 January 2015 will be assessed under deeming arrangements applying to other financial investments.
This change is in line with a recommendation from the previous Australia’s Future Tax System Review (Henry review), and was previously announced on 5 April 2013.

Continued pausing of indexation of Child Care Rebate
Effective date: 1 July 2013For a further three years, the Government will freeze any indexation of the Child Care Rebate. The maximum level of rebate that can be paid in a year will remain at $7,500 until 30 June 2017. This won’t reduce the level of payment currently available, nor change the method of calculation, but correspondingly won’t lead to an increase in entitlements.

Increased level of income before allowance payments reduced
Effective date: 20 March 2014Currently, allowance recipients can earn $62 per fortnight before there is reduction in the amount of the allowance payment they can receive. For the first time in over ten years, this threshold will be lifted. With effect from 20 March 2014, the threshold will increase by $38 per fortnight to $100 per fortnight. This equates to an annual increase in income under the income free threshold of $988.
In addition, from 1 July 2015, this new $100 threshold will also be indexed annually in line with movements in the CPI.
The payments impacted by these changes are Newstart Allowance, Sickness Allowance, Parenting Payment Partnered, Widow Allowance, Partner Allowance Benefit and Partner Allowance Pension.

Reduction in time overseas before payments are impacted
Effective date: 1 July 2014Currently, it is possible for certain benefit recipients to be temporarily absent from Australia for up to three years before benefit payments cease. From 1 July 2014, this will be reduced to one year for certain payments, including Family Tax Benefit Part A, Schoolkids Bonus and Paid Parental Leave.

Continued indexation pausing on certain benefit thresholds
Effective date: 1 July 2013For a further three years (until 30 June 2017), the Government will pause any further indexation of the higher income thresholds for family payments and supplement amounts.
The existing $150,000 upper income test limit for Family Tax Benefit Part B, dependency tax offsets, Paid Parental Leave Scheme and Dad and Partner Pay will remain. The Family Tax Benefit Part A upper income free area will remain at $94,316 plus an additional $3,796 for each child after the first.

Replacement of existing Baby Bonus
Effective date: 1 July 2014From 1 July 2014, the existing Baby Bonus scheme will be removed. Instead, for families eligible for Family Tax Benefit Part A, increased benefits of $2,000 will be paid in the year following the birth (or adoption) of a child, and a $1,000 increase for second or subsequent children. The additional amounts will be paid as an upfront payment of $500 with the remainder to be spread over the next seven fortnightly payments.
The increase in Family Tax Benefit Part A will not be available for parents who have taken up the Paid Parental Leave option, but they will qualify for improved access to the Paid Parental Leave for subsequent children.
As an additional measure to make it easier for working mums with children born in close succession to qualify for Paid Parental Leave for subsequent children, the government will allow parents to count periods of government paid parental leave as work under the work test.

Changes to age eligibility for Family Tax Benefit Part A
Effective date: 1 January 2014From 1 January 2014, the age at which Family Tax Benefit Part A payments will cease in respect of children aged 16 and over will change. Payments will cease at the end of the year when the child completes schooling.
Individuals who no longer qualify may instead be eligible to receive the Youth Allowance.

Family Tax Benefit and Child Care Assistance tax claims
Effective from the 2012/13 FYFamily Tax Benefit and Child Care Assistance can be claimed through the income tax return process. From the 2012/13 financial year, families will have 12 months from the end of the financial year to file their claim rather than the current 24 months.

Pension Bonus Scheme closure
Effective date: 1 March 2014The Pension Bonus Scheme ceased to be available for those of age pension age from 20 September 2009. However registration is still possible for persons who were of age pension age as at 19 September 2009.
Under this new measure, no new registrations will be accepted from 1 March 2014. The Work Bonus remains available for those of age pension age who continue to participate in employment.

Pilot programme for Age Pension recipients downsizing their principal residence
Effective date: 1 July 2014 to 1 July 2017The Government will implement a 3 year pilot programme aimed at removing the Social Security disincentive for Age Pension recipients to downsize their principal residence. Under this measure, up to $200,000 of the proceeds from a principal residence sale may be deposited into a ‘special account’ (providers must be an authorised deposit taking institution, but other details are currently unknown). These accounts (including future earnings) will receive an exemption from Age Pension income and assets tests for up to 10 years.
To obtain access to the scheme, the following requirements must be met:
• At least 80% of the ‘excess’ sale proceeds (up to $200,000) must be deposited into a ‘special account’.
• The principal residence sold must have been owned by the Age Pension recipient for at least 25 years.
• The Age Pension recipient must move into a new principal home, granny flat, or retirement village (i.e. it is not available to those who move into residential aged care).
• The means test exemption ceases if the account holder makes any withdrawals from the account.

Extension of the Pensioner Education Supplement for single parents
Effective date: 1 January 2014The Government announced an extension of the Pensioner Education Supplement (PES) of up to $62.40 per fortnight to all Newstart Allowance (NSA) single principal carer recipients. This measure expands on the current arrangement that limits access to the PES to single principal carer recipients of NSA who were receiving the supplement prior to transitioning off Parent Payment single.

Extended Pensioner Concession Card entitlements for single parents
Effective date: 1 January 2014
Single parents who become ineligible for parenting payment due to the age of their youngest child and who do not qualify for any other income support payment due to employment income will no longer immediately lose access to the Pensioner Concession Card. The budget measures allow eligible single parents to retain eligibility for a period of 12 weeks.

SUMMARY

Overall, it was a Budget with many small measures, but no significant changes of any magnitude that weren’t already known. In an election year, it was perhaps lacking for the expected concessions that are often promised as part of an election pitch. For many, it may actually prove to be a tough Budget with more to be paid in the future. However, this appears to be what the Government was actually aiming for – a socially and economically responsible Budget (where expenditures equated to revenues) as a step to trying to return the Budget to surplus in the future.

It’s always important to remember that virtually all measures announced will still need legislation to be introduced, and will have to pass through Parliament, so the final version of the changes may differ to the announcements made in the Budget. Some of the measures have already been released in draft legislative format for comment, but no draft legislation is guaranteed to be passed in what will be a very limited and busy sitting time for the Parliament before it ceases on 11 August in advance of the September election.

As part of our ongoing service, we will review existing client files to determine whether the proposed changes will impact you. If so, we will be in touch with you in due course.

That said, should you wish to discuss the proposed changes sooner, please feel free to contact our office on (03) 9336 7800.

Best wishes,

RetireCare Personal Wealth Management

High Income Earners … Well hello Superannuation Surcharge

Howdy All, 

The Government for all its mismanagement is at it again declaring that high income earners will again be subject to a surcharge rate of tax on superannuation contributions. 

While I am all for an equitable tax structure, I am becoming increasingly annoyed by the actions of this Government. Rather than focusing on a class war, they should instead stop spending money on gimmicks which ultimately will amount to nothing more than increased waste. 

Fortunately this will all be resolved by September of this year but in the interim we have to put up with idiotic ideas as the one which is being proposed for high income earners. 

Listed below is an extract of what we understand will apply once the legislation is enacted. 

In this alert, we explore the more complex aspects of the Government’s draft legislation to reduce the tax concessions that individuals with annual income above $300,000 receive on their concessional contributions.

The application of the new tax to defined benefit arrangements, departing temporary residents and to scenarios involving excess and potentially excess contributions are summarised below.
 

Review

An individual will have a liability for Division 293 tax for an income year if in a given financial year their income for surcharge purposes, less their reportable super contributions plus their low tax contributions, exceed $300,000.

It is worth recalling three definitions which are fundamental to understanding the calculation process:

• Low tax contributions include employer contributions to accumulation interests, personal contributions where a tax deduction is claimed, contributions to a defined benefit interest (valued by an actuary), salary packaged contributions to constitutionally protected funds and amounts allocated by the trustee (as prescribed in income tax regulations for the purposes of determining concessional contributions).
• Income for surcharge purposes (as defined in ITAA 97) includes taxable income, reportable super contributions, reportable fringe benefits and total net investment losses.
• Reportable super contributions are reportable employer super contributions (generally employer contributions other than award or SG) and personal contributions for which the individual claims a tax deduction.
   

Impact issues

Taxable income is a major component in the calculation of ‘income’ for surcharge purposes. Remember that lump sum payments are included in an individual’s taxable income, even though they may be subject to a prescribed rate of tax, rather than the individual’s marginal rate. Such payments include:

• the taxable component of lump-sum death benefits paid to non-dependants for tax purposes (for example, an adult child)
• employment termination payments
• payments of unused annual and long service leave
• a capital gain on the sale of property.

Receiving payments of this type may result in a breach of the $300,000 threshold and thus trigger Division 293 tax on the recipient’s low tax contributions for that year.

Treatment of excess and potentially excess concessional contributions

Excess concessional contributions can be refunded and potentially excess concessional contributions can be disregarded or allocated to another year using the Commissioner’s discretion. These variations impact the inclusion or exclusion of these contributions in the calculation of low tax contributions and the $300,000 threshold.

The following table, based on the table provided in the Explanatory Memorandum issued with the draft legislation, summarises the treatment of excess and potentially excess concessional contributions for the purposes of Division 293 tax.

Treatment of excess and potentially excess concessional contributions

Scenario	Include in low tax contributions?	Include in $300,000 threshold?
Excess concessional contributions subject to excess concessional contribution tax.	No. These amounts are already subject to tax at the highest individual marginal tax rate.*	No.
Excess concessional contributions that are disregarded (once-off refund of excess concessional contributions under $10,000)	No. These amounts are included in the individual’s assessable income and subject to tax at the individual’s marginal rate.	Yes. These amounts form part of normal assessable income within the definition of income for surcharge purposes.
Concessional contributions which would be excessive but for the application of the Commissioner’s discretion to disregard them	Yes. These are low tax contributions because they are not excess contributions.	Yes. Because these amounts are low tax contributions, they are included in the calculation of the $300,000 threshold.
Concessional contributions which would be excessive in the year in which they are made, but for the application of the Commissioner’s discretion to allocate them to another year	Yes. These are low tax contributions in the year that they are made. These are low tax contributions because they are not excess contributions. They are not low tax contributions in the year to which they are allocated.	Yes. Because these amounts are low tax contributions, they are included in the calculation of the $300,000 threshold in the year in which they are made. They are not included in the calculations of the $300,000 threshold in the year to which they are allocated.

* This tax treatment may change as a result of the Government’s announcements on 5 April 2013 that it would reform the treatment of excess concessional contributions.

Defined benefit arrangements

Low tax contributions for people with defined benefit arrangements will consist of:

• low tax contributed amounts made to non-defined benefit interests
• less excess concessional contributions
• plus defined benefit contributions in respect of defined benefit interests (calculated using a method to be set out in regulations).

The defined benefit contributions calculated using the prescribed methodology will not necessarily be the same as ‘notional taxed contributions’ which are used for determining an individual’s concessional contributions for excess contributions tax purposes. Certain notional taxed contributions which are above the dollar amount of the relevant concessional contributions cap are deemed to be within the cap due to grandfathering arrangements. There will be no grandfathering of defined benefit contributions for the purposes of calculating a person’s low tax contributions.

Where Division 293 tax applies to low tax contributions attributable to a defined benefit arrangement, the ATO will make a deferred payment determination and a debt account will be maintained by the ATO until the first benefit is paid from that defined benefit interest, when payment of the accrued amount will be required. The ATO will issue a release authority to enable payment to be made from the superannuation fund.

Alternatively, the Division 293 tax may be paid by the individual from other sources, as it arises. The ATO will also issue a release authority at the time the Division 293 tax arises so that where the individual also has an interest in a non-defined benefit superannuation fund, they may use the release authority to make voluntary payments to reduce the tax.

The Explanatory Memorandum provides a series of examples of how to calculate low tax contributions where contributions to a defined benefit interest are involved.

Special rules – Contributions to constitutionally protected funds

Low tax contributions in respect of certain state higher level office holders (to be defined in regulations) are calculated in the same manner as described for contributions to accumulation style funds and defined benefit contributions, except that where those contributions (defined benefit or otherwise) are made to a constitutionally protected fund, only salary sacrificed amounts are counted as low tax contributions.

However, all low tax contributed amounts (whether resulting from salary sacrifice arrangements or not), including defined benefit contributions are included in the calculation to determine whether the $300,000 threshold is breached.

Special rules – Commonwealth justices and judges

Defined benefit contributions for a defined benefit interest in a superannuation fund established under the Judges’ Pensions Act 1968 are not included as low tax contributions and therefore not subject to Division 293 tax. These special rules only apply to justices and judges who have a defined benefit interest in a superannuation fund established under the Judges’ Pensions Act 1968.

You should note however, that a calculation of low tax contributions will still be made, based on these defined benefit contributions, and will be included in the calculation to determine whether the $300,000 threshold is breached. This will be relevant if other low tax contributions have been made to a superannuation fund in respect of these individuals.

Special rules – summary

Contributions	Include in low tax contributions?	Include in $300,000 threshold?
Contributions to constitutionally protected funds for state higher level office holders	No. Not included as low tax contributions and therefore not subject to Division 293 tax, unless part of a salary package arrangement.	Yes. All low tax contributed amounts, including defined benefit contributions are included in the calculation to determine whether the $300,000 threshold is breached.
Defined benefit contributions for a defined benefit interest in a superannuation fund established under the Judges’ Pensions Act 1968	No. Not included as low tax contributions and there not subject to Division 293 tax.	Yes. These defined benefit contributions will be included as low tax contributions in the calculation to determine whether the $300,000 threshold has been breached. Division 293 tax may be payable on other low tax contributions.

Temporary residents departing Australia

Individuals who receive a departing Australia superannuation payments (DASP) will be entitled to a refund of Division 293 tax they have paid. This is because any concessional tax treatment of their superannuation contributions is removed by the final withholding tax which applies to DASPs.
 

Conclusion

The closing date for submissions on this draft legislation is Wednesday 8 May 2013, allowing only a week for the industry to review and comment.

As we have seen, the implementation of this measure requires some complex calculations to determine whether a liability for the new Division 293 tax will arise and taxpayers who would not generally be considered to be very high income earners may be caught by the new rules.

We will as a matter of course be reviewing all affected individuals and we will be in touch with possible solutions in due course. 

Bidding you all a wonderful weekend ahead ….. Go Bombers 

Luke Eres CFP SSA 

 

 

Down Down……Interest Rates Are Down

As soon as you heard that 70 percent of economists had predicted that there would be no change in interest rates today you should have known that there would be an interest rate change today! The RBA today lowered rates by 0.25% to the rate of 2.75% the lowest rate we have had in 53 years.

This is what the Governor had to say;

Statement by Glenn Stevens, Governor: Monetary Policy Decision

At its meeting today, the Board decided to lower the cash rate by 25 basis points to 2.75 per cent, effective 8 May 2013.

The global economy is likely to record growth a little below trend this year, before picking up next year. Among the major regions, the United States continues on a path of moderate expansion and China’s growth is running at a more sustainable, but still robust, pace. Japan has announced significant new policy initiatives aimed at strengthening demand and ending deflation. The euro area remains in recession. Commodity prices have moderated a little in recent months though they remain high by historical standards.

Financial conditions internationally continue to be very accommodative, with risk spreads reduced, funding conditions for most financial institutions improved and borrowing costs for well-rated corporates and sovereigns exceptionally low.

Growth in Australia was close to trend in 2012 overall, but was a bit below trend in the second half of the year, and this appears to have continued into 2013. Employment has continued to grow but more slowly than the labour force, so that the rate of unemployment has increased a little, though it remains relatively low.
With the peak in the level of resources sector investment likely to occur this year, there is scope for other areas of demand to grow more strongly over the next couple of years. There has been a strengthening in consumption and a modest firming in dwelling investment, and prospects are for some increase in business investment outside the resources sector over the next year. Exports of raw materials are increasing as increased capacity comes on stream. These developments, some of which have been assisted by the reductions in interest rates that began 18 months ago, will all be helpful in sustaining growth.

Recent data on prices confirm that inflation is consistent with the target and, if anything, a little lower than expected. The CPI rose by 2½ per cent over the past year, and measures of underlying inflation gave a broadly similar outcome. These results have been pushed up a little by the impact of the carbon price. Growth of labour costs has moderated slightly over recent quarters while productivity growth appears to be improving. This should help to lessen increases in prices for non-tradables. The Bank’s forecast remains that inflation over the next one to two years will be consistent with the target.
Over recent meetings, the Board has noted that interest rates have already been reduced substantially, with borrowing rates approaching previous lows, and that the effects of this on the economy are continuing to emerge. Savers have been changing their portfolios towards assets with higher expected returns, asset values have risen and some interest-sensitive areas of spending have increased.

The exchange rate, on the other hand, has been little changed at a historically high level over the past 18 months, which is unusual given the decline in export prices and interest rates during that time. Moreover, the demand for credit remains, at this point, relatively subdued.
The Board has previously noted that the inflation outlook would afford scope to ease further, should that be necessary to support demand. At today’s meeting the Board decided to use some of that scope. It judged that a further decline in the cash rate was appropriate to encourage sustainable growth in the economy, consistent with achieving the inflation target.

RPWM US Tour Day 11 – April 23

Last scheduled meeting this morning in New Jersey, about 45 minutes out of Manhattan.

We met with a firm that employs forty people and is as a result about four times our size. Our opening question was “so we suppose that you have four times the headaches that we do”.

It is a firm that has recently gone through a rebranding exercise as we have been doing, so it was good to exchange war stories about that process. We did a presentation to their firm and then had the opportunity to look at their impressive process infrastructure that maintains a client base of in excess of 1,000 people.

We finish off our last meeting promptly remove our ties (yes we wore ties!) and head back to Manhattan to experience more of the New York City action.

Took this pic today on the subway, there are certainly some interesting characters on the train network there. Dog, in a bag, catching the train.

 

You can see why everyone is wearing headphones and just not trying to make eye contact in the subway system. Mind you, it is a much safer place than what it used to be and I think the zero tolerance regime has been good for the city. For example there was a sign on the train that basically said that if you assault transit police you are looking at 7 years imprisonment. Perhaps we could take a leaf out of that book given some of the recent goings on our public transport system.

We finish off this evening with an NBA basketball playoff game that sees us watch New York Nicks defeat the Boston Celtics to go 2-0 up in the series. Big sell-out crowd of 20 odd thousand at Madison Square Garden to watch the game. Pretty feral atmosphere, but I suppose this is to be expected given they sell full strength beer in buckets there.

This will be the last you hear from us until we are back. We leave tomorrow for home, cannot wait to get back and see our respective families and friends. Not looking forward to the 30 odd hours of door to door travel.

Take Care,

Mirko, Luke & Shane

RPWM US Tour Day 10 – April 22

Meeting this morning with a firm that surprisingly have a similar model to that of ours, which means very different to a lot of the firms we have been speaking to. This firm is a traditional financial planning firm with a strong focus on strategic advice as opposed to the “how much money do you have for us to manage” approach. It is quite a refreshing discussion with a philosophically aligned firm.

Our next meeting takes us to Park Avenue. Most of you are familiar with our story on fund manager selection, and the idea that unless we can eyeball the people that actually run the money we do not recommend the fund. We have recently placed a fund on our recommended list, and they have since had a merger and moved offices so like many of our clients that drive past our office to ensure we are still there we paid their new offices a visit. Pretty impressive setup, no questions on where the management fees go!

This is what the view from the 31^st floor on Park Avenue looks like (very similar to the view out of our offices! NOT!)

One of the highlights of this trip without question was a visit to the New York Stock Exchange (NYSE) on Wall Street. As official guests of the NYSE We had the opportunity to walk the floor and for those of you up early enough you probably saw us on TV during CNBC’s live cross from the floor of the exchange. Our timing was great, as we were there for the ringing of the closing bell.

ReireCare on the floor of the New York Stock Exchange.

 

A view of the world’s biggest TAB!!

From Wall Street we walk down to the emotional place of the 9/11 Memorial. For those of you that have ever seen the Twin Towers it is unbelievable to imagine that they are gone from the Manhattan skyline. They have done an amazing job with the memorial park and serves as a reminder of an event that changed the world for ever.

Some moving words from the 9/11 Memorial Mission Statement:

May the lives remembered, the deeds recognised, and the spirit reawakened be eternal beacons, which reaffirm respect for life, strengthen our resolve to preserve freedom, and inspire an end to hatred, ignorance, and intolerance.

Take Care,

Luke, Mirko & Shane

RPWM US Tour Day 9 – April 21

Sunday morning meeting in New York, with a lovely lady that runs a virtual family office out of a penthouse uptown. She utilises an amazing model to successfully deliver her value proposition to clients. She said something that I really thought resonated – “I advise you decide” meaning her job is not to make decisions for her clients but rather give them the necessary advice to enable them to make the correct decisions.

Here is a photo of Uptown New York. Really nice part of town, I am surprised they let us in! The doorman took one look at us and advised that the service entrance was around the side.

As we had hit it off with our newly met colleague we end up going to lunch at a local favourite restaurant Atlantic Grill. Very nice and not overly priced either. Place was packed with people enjoying a beautiful Sunday afternoon.

In case you haven’t picked up on it we really do like our sports, and having accommodation across the road from Madison Square Garden gives us a perfect excuse to catch any sort of game. We pick up tickets to an Ice Hockey Game – New York Rangers vs New Jersey Devils. We correctly jump on the home team Rangers who manage a comfortable 4-1 win (ironically same score line in soccer last night). Fanatical crowd that provided for some entertainment. I asked the guy sitting next to me what they were chanting at one stage in the game, and he tells me they were chanting the Devils goal keepers name, I asked why and he promptly advised “to let him know he had conceded a couple of goals tonight” very funny!

Dinner tonight we venture to Little Italy, and you may as well be in Italy with the precinct full of Italian restaurants. We dine in a restaurant where the owner is operating out of the premises his grandmother started in 1945 when she immigrated to the US. Fantastic meal in a nice setting.

 

Take Care,

Mirko, Luke & Shane