SMSF trustees should sit down with their adviser to review their fund and check how the legislative and regulatory changes of 2016 affect them.
SMSF trustees had a busy 2016, with a raft of government changes and policy flip-flops keeping the industry on its toes. With the countdown to 30 June underway, what areas should advisers and trustees focus on ahead of the financial year-end?
Trustees will be hoping for no major budget surprises in 2017, after the federal government was forced to back down on budget changes last year. The backflip included replacing the proposed $500,000 lifetime non-concessional contributions cap with an annual $100,000 limit, and barring individuals with a super balance exceeding $1.6 million from making further non-concessional contributions from 1 July 2017.
Already this year, the Australian Taxation Office (ATO) has warned SMSF advisers and trustees about the need to comply with arms-length terms concerning limited recourse borrowing arrangements (LRBAs) by 31 January, or terminate the fund if necessary. The ATO has previously warned that SMSFs will face a full evaluation should incorrectly-structured LRBAs not be rectified by the financial year-end.
Other changes have included the new-year introduction of changes to the pension assets test, with higher assets test thresholds and a doubling of the taper rate. However, according to Accurium, "the biggest change is likely to be the timings of when payments are received, rather than the overall level of entitlements".
Meanwhile, for those likely to have super balances at or over $1.6 million by 1 July, there are plenty of issues to consider, including whether to commute the excess from pension back to accumulation phase, or withdraw the excess from super and invest it outside super in a less tax-friendly environment.
Under the changes, trustees have a grace period where amounts up to $100,000 over the cap will not incur the excess transfer balance tax, provided the breach is rectified within six months. This does not give trustees much time to finalise their 2017 accounts to determine their 30 June 2017 pension balances, as Accurium notes.
Changes to the contributions cap may also require a review of salary sacrificing arrangements, while time is fast running out for those needing to make any extra contributions to satisfy LRBA obligations.
Also, from 1 July, access to the three-year bring forward rule for non-concessional contributions will be restricted not only by the individual's age, but also by how close their total super balance is to $1.6 million at the most recent financial year-end before the contribution year. Another issue for retirees is the ability to claim capital gains tax (CGT) relief on any investments in their pension, which will become taxable from 1 July. Claiming CGT relief can also become more complex where a fund has two members or more.
What to discuss
Liam Shorte, director at Verante and an SMSF specialist adviser, suggests SMSF trustees should sit down with their adviser before May to review their fund and check whether the new rules affect them.
He suggests the following agenda for the meeting:
• Consider pre-July 2017 opportunities, including CGT relief options, re-contributions and CGT triggering, and possibly using the three-year bring forward rule,
• Check current member balances and future contribution strategies,
• Consider super splitting, where appropriate,
• Consider whether insurance should be moved out of the fund, due to the new caps,
• Check if you have an enduring power of attorney that covers your SMSF needs if you become ill or injured or are planning to go overseas,
• If in transition to retirement, check whether you can meet the full condition of release by 1 July 2017 to move to an account-based pension and avoid the 15 per cent tax on earnings,
• Consider the tax implications of member balances above $1.6 million (for all super accounts).
"From current enquiries I am getting, I expect to stop taking enquiries from new clients from 1 February and I expect many SMSF advisers will need to do the same to take care of existing clients' strategies pre-July," Shorte said.
After the major legislative and regulatory changes of 2016, SMSF trustees and advisers will be hoping for a more stable year in 2017 to digest the new rules.