SMSF Year-end Planning 30 June 2013
SMSF Planning Checklist (2013)
We sent our client the attached checklist to assist them in the following areas:
- Checking you have completed all year end SMSF transactions
- Regulatory changes which impact Trustees preparing information for the audit of their funds for the year ended 30 June 2013
- SMSF regulatory changes for the upcoming year which you may need to consider in planning for the year ahead
Year end planning (2013)
- As 30 June 2013 falls on a Sunday you will need to ensure any year end transactions, particularly contributions to the fund or pension payments are processed by the bank before the close of business on Friday 28 June 2013. Different banks have different processing times so you may need to check with your bank that late transactions will be recorded as completed on or before 30 June
- Watch the contribution caps – this year the concessional contribution cap for all members regardless of age is $25,000 per member. Exceeding the cap is not an audit contravention but will result in excess contributions taxes.
- Pension payments – if your fund is paying a pension you need to ensure you have paid at least the minimum required pension amount in order for the fund to be able to claim Exempt Current Pension Income (“ECPI”). By claiming ECPI the earnings of the fund related to the pension are free of tax inside the fund. It is therefore important to ensure the minimum pension is paid before year end – this amount must be physically transferred out of the funds’ bank account by 30 June 2013. The minimum pension amount is calculated by multiplying your opening pension account balance multiplied by a percentage factor which is determined by your age. There are a couple of tricks in the calculation and if you need additional information (including what happens if you underpay) please read the following article on our website I’ve Underpaid my SMSF Pension – what happens next?
Regulatory Changes which impact on audit of Funds for year ending 30 June 2013
There are several changes which will impact on SMSF accounts and records for the year ending 30 June 2013:
- SMSF trustees are now required to ‘regularly review’ the fund’s investment strategy;
- SMSF trustees are now required to consider insurance for their members as part of the fund’s investment strategy;
- Fund assets to be valued at market value for reporting purposes; and
- ATO now has the power to enforce the requirement for SMSF trustees to keep money and other assets of an SMSF separate from those held by a trustee personally.
Investment Strategy & Insurance changes
Previously it was only a requirement to formulate and give effect to an investment strategy. Whilst most people would generally review their investment strategy fairly regularly in an ad hoc fashion, you are now required by legislation to regularly review your Investment Strategy. The ATO has stated that these reviews “should occur on a regular basis and could be evidenced by documenting decisions made in the minutes of meetings held during the income year”.
Whilst the legislation does not define “regularly” we expect that anything less than an annual review would not fulfil the definition. If the fund’s Investment Strategy has not changed then Trustees could include a comment in the minutes to the effect “we have reviewed and considered the investment Strategy and concluded that no change is necessary”.
The Investment Strategy must be consistent with the current assets held by the fund and should be updated where a fund has significantly altered the assets held (e.g. purchased a property), has acquired a collectable asset, has acquired derivative investments (e.g. options). The Investment Strategy should also be reviewed following the occurrence of other significant events such as when a new member joins or leaves the fund, or when the fund commences to pay a pension.
Trustees are now also required to consider “whether the trustees of the fund should hold a contract of insurance that provides insurance cover for one or more members of the fund.”
Importantly, the new regulations do not impose a requirement that an SMSF actually obtains an insurance policy. SMSF trustees will simply need to consider the personal circumstances of fund members when preparing or reviewing the fund’s investment strategy.
Many Trustees will conclude that following a considered review of the fund’s existing investment strategy, and after taking into account the personal circumstances of fund members, the trustees will arrive at a position where they do not believe it necessary to hold insurance cover for any of its members (e.g. as the members have significant assets inside/outside the SMSF to render insurance unnecessary, insurance is not available on a cost effective basis due to age or health issues, members have appropriate pre-existing insurance arrangements etc). If this is your situation you need to include words similar to this in your fund’s annual minutes – the key is to provide the documentary evidence that you considered the need for insurance in either the Investment Strategy or the fund minutes.
For those Trustees who wish to update their funds Investment Strategy (including consideration of insurance) we have an Investment Strategy template on our website which you can use as a starting point. Please go to Investment Strategy Template with Insurance
In the financial accounts for the 2012-13 and future financial years, SMSF assets must be valued at “market value” (rather than historical value). The new rule will require SMSF trustees to determine the market value of the fund’s assets as at 30 June 2013.
While doing so should be relatively easy in relation to investments having a ready market (such as securities), it could pose difficulties in valuing collectables or real property. In relation to real property Trustees are not required to obtain an independent valuation – they can provide their own valuation provided it is based on reasonable assumptions, takes into account all relevant factors (including sale costs) etc. Typically we look at prices of comparable properties to ensure the valuation is consistent with market value.
Planning issues for 2013/14 financial year
Changed Minimum Pension Percentages
At the start of the GFC the Government “discounted” the minimum pension payments which SMSF’s were required to pay members in pension phase. For the past 2 years the discount factor has been 25% (meaning members aged 65-74 only needed to pay 3.75% of the pension account balance rather than 5%).
There has been no announcement from the Government regarding continuation of this discount and trustees should therefore plan for higher minimum pension payments for the 2013/14 financial year. The resultant percentages will be the same as the 2007-08 percentages in the table below. For example, Members aged 65-74 will therefore need to draw 5% of the pension account balance in 2013/14 rather than the 3.75% drawn for the last 2 years
|Age||Percentage of account balance|
|95 or more||14%||7%||10.5%|
For additional information refer http://www.ato.gov.au/content/00120916.htm
Trustees need to consider how the fund will pay the increased minimum pension payments, particularly those funds with illiquid investments (eg real estate) or where funds are invested in long term deposits.
ATO Enhanced Penalty regime
The new SMSF penalty regime is due to commence on 1 July 2013. It will allow the Australian Taxation Office (ATO) to impose rectification directions, education directions or administrative penalties on SMSF trustees that breach the Superannuation legislation – in addition to the pre-existing ability to make the fund non-complying. This will result in much more “lower level” enforcement action being taken against SMSF trustees that breach the rules.
Increased SGC Rate
The superannuation guarantee contribution rate is due to increase in stages from 9 per cent to 12 per cent by 2019. The first 0.25 per cent increase will apply from 1 July 2013.
Increased concessional cap for members over 60
The concessional contribution cap for members aged over 60 increases from $25,000 in 2012/13 to $35,000 in 2013/14. For all other members the concessional cap for 2013/14 remains at $25,000
When you are ready to have your fund audited, please request the audit via our “Request an audit form” on our website. Click here to be taken direct to the form Request an SMSF audit form