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How Your SMSF Can Have A Better Year Ahead


The start of the new financial year is a great opportunity for trustees to reflect on how they have progressed and what this means for their investment strategy and asset allocation.

Firstly, the Australian Economy Snapshot by the Reserve Bank of Australia (RBA) revealed that economic growth has nearly halved from 3.1 per cent to 1.7 per cent. Retail, as the harbinger of consumer sentiment, has taken a hit--several retail chains have gone into voluntary administration.

Things we use and wear seem to be going under, from homewares (Howards Storage World) and fashion (Marcs and David Lawrence, Topshop), to children's clothing (Pumpkin Patch) and shoes (Payless Shoes).

All is not lost, however, with the Australian Prudential Regulation Authority (APRA) bringing the good news of five-year average annualised rate of return trends above 8 per cent in super savings.

Slowing economic growth does not warrant lower inflation, however, with the CPI having climbed from 1.3 per cent to 2.1 per cent. Australian Bureau of Statistics' (ABS) March quarterly figures may cause your eyes to pop when you're at the petrol station, with a rise of nearly 6 per cent in petrol compared to just six months ago.

The cash rate isn't doing savers any favours either, with the interest rate hovering at 1.5 per cent for months. Pensioners will be feeling the pinch.

Nevertheless, one hopes the housing property ladder will be an easier climb. But it's hard to have hope when the average price of a residential dwelling rose 7.3 per cent from $612,000 to $656,800.

We may be high on aspirations when it comes to direct property investing through limited recourse borrowing arrangements (LRBA) with a choice of lenders, yet coming up short with savings to catch up with increasing deposit requirements.

Working for a pay rise and saving enough are even more challenging pursuits, with average weekly earnings hardly increasing from $1,146 to $1,164. This measly $18 may be just enough to buy some smashed avocado on toast to celebrate the fact that one is still employed--after all, of the 24.2 million population, less than half of us are working.

If you have a spouse on a low income and you are the high-income earner, consider helping your spouse to save while enjoying the increased spouse contribution tax offset with a lifted threshold at $40,000.

The current 18 per cent tax offset of up to $540 will remain as is, when you contribute to your spouse whose income is up to $37,000, and phase out above $40,000.

Besides stagnant wages, the superannuation guarantee (SG) rate will remain at 9.5 per cent until 2021. The other way to save and contribute more is to spend less, but this is increasingly difficult when the household savings ratio has fallen from 8.1 per cent to 4.7 per cent.

It's little wonder the government in the 2016 Federal Budget felt it would be appropriate to reduce annual concessional contribution caps to $25,000--to breach the cap, we must earn and contribute enough in the first place.

If you are a generous parent and want to help by chipping in with your children's SMSF, it is possible via joining as a member and rolling over your super benefits, contributing personal savings yourself, or contributing your own savings on behalf of your child.

On another note, to comply with the sole purpose test, residential property held within the SMSF is not to be used by any members and their related parties, and is best rented to an unrelated tenant at market rates.

In addition to speaking with your financial adviser about whether this is suitable for you and your child when you consider these options, check your personal non-concessional contribution cap history.

If you haven't brought forward any caps, you may contribute up to $100,000 annually or up to $300,000 by triggering the three-year brought-forward rule. For older parents, be mindful with the work test once you reach 65. Also, look at your gifting history if you receive Centrelink benefits.

For the grassroots senior pensioners, you may find keeping up with bulging bills more difficult and therefore plan to downsize. But there is good news in 2017 Federal Budget. From 1 July 2018, if you are over age 65, you will be able to make a non-concessional contribution into super up to $300,000 from the proceeds of selling your home.

Under this downsizing cap, you will not be required to comply with age-based voluntary contribution rules and the $1.6-million transfer balance cap. The only requirement is to have your home as your principal place of residence held for at least 10 years.

Both members of a couple can apply this measure for the same home, meaning $600,000 per couple can be contributed to super through the downsizing cap.

If you have leftovers, you may make additional contributions under standard contribution arrangements. If you receive Centrelink benefits, this change in the super balance may be assessable.

The two-speed economy, with increasing housing values and higher inflation but stagnant wages, has affected Australians in many ways. It is up to you as to how to make the best out of your situation. Speak to your financial adviser to plan for a better year ahead and the years to follow.

Victoria Kuok

Morningstar

10 July 2017


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