Making contributions in the year you or your partner turn 65

 

 

Making contributions in the year you or your partner turn 65 is a common topic as it seems to cause confusion about how much can be contributed as a concessional (tax-deductible) or non-concessional (non-deductible) amount.

There are some simple steps that can be followed to provide an easy route to understanding what is required.

Can I contribute during my 65th year?

If you are under 65 at the time the contribution is made there is no requirement to satisfy a work test. However, once you reach 65 you must meet a work test at any time during that financial year of at least 40 hours in 30 consecutive days.

Example:

1) Santo reaches 65 on 25 December 2014 and has not worked since he was 63. If he wishes to contribute to super he must do it before his 65th birthday as he will not meet the work test this financial year and won’t be able to contribute once he reaches 65.

Alternatively, he could get a job of at least 40 hours in 30 consecutive days and could contribute to the fund at any time during the financial year.

How much can I contribute in my 65th year?

That depends on whether you are claiming a tax deduction for the contributions. Under the rules there is no limit to the amount of concessional or non-concessional contributions you are making to superannuation.

However, if you contribute more than your contribution caps you may have to pay a penalty tax on any excess that you make to the fund.

Contributions that are not tax-deductible are called non-concessional contributions. Providing you are under 65 at the beginning of the financial year you may be able to make non-concessional contributions of up to $540,000 in total to the super fund without paying penalty tax on the excess.

To qualify for the maximum non-concessional contributions of $540,000 in the financial year you turn 65, there are a few rules that apply.

The maximum is called the non-concessional contributions cap and applies if you make non-concessional contributions of more than the standard non-concessional contributions of $180,000 (prior to 1 July 2014 it was $150,000) in any year.

By triggering the higher cap you are able to bring forward the non-concessional contribution for the next two years. This means you are able to make up to $540,000 in contributions at any time during the three-year fixed period.

If you have triggered the higher cap in the previous two financial years (the 2012-13 or 2013-14 financial years) when the higher cap was $450,000, you may be limited to the amount of non-concessional contributions you can make in the financial year you turn 65.

If any non-concessional contribution exceeds your non-concessional contributions cap the fund is required to refund any excess to you and no penalty will apply to that excess.

Examples:

2) Merry is 65 on 31 December 2014 and wishes to contribute the maximum non-concessional contribution to her super fund. During the past two financial years, she contributed $100,000 in July 2013 and $145,000 in July 2014.

As Merry did not exceed her non-concessional contributions cap in the 2012-13 or 2013-14 financial year, she can trigger the bring-forward rule and make non-concessional contributions of up to $540,000 up until her 65th birthday.

If she meets the work test at any time during the financial year, contributions can be accepted by the fund at any time.

3) Claude will reach 65 in February 2015 and worked for 40 hours in July 2014 just before he retired. He contributed $200,000 in August 2014, $160,000 in November 2014 and will make a non-concessional contribution of $180,000 in March 2015.

As the total of Claude’s non-concessional contributions will not exceed the higher concessional contributions cap, they will not be subject to penalty tax.

4) Rudolph, who is 65 on 31 January 2015, made a non-concessional contribution to super on 1 October 2014 of $600,000 in one amount.

As the non-concessional contribution made by Rudolph exceeds his non-concessional contributions cap, the super rules require any excess to be refunded to him within 30 days. Therefore, the fund will need to refund $60,000 to Rudolph by 31 October.

5) Donna, who is 65 in March 2015, made two contributions to her super fund. One contribution was for $400,000 and the other was for $300,000.

Unlike Rudolph’s situation where one non-concessional contribution was made that exceeded the cap, in Donna’s case, as two contributions each less than the cap were made, there is no requirement under the super rules for an automatic refund.

In Donna’s case, the amount in excess of her non-concessional contributions cap will be subject to a penalty tax.

Once you are 65 or older at the beginning of the financial year you can make non-concessional contributions of up to $180,000 in total without penalty, providing you meet the work test.

Non-concessional contributions can be made to super up until you are 75, providing you meet the work test at some time during the financial year when the contributions have been made.

Example:

6) Roger is aged 67 and worked 40 hours during September 2014. He is able to make a non-concessional contribution to superannuation of up to $180,000 without penalty as he has met the work test for the financial year.

You may be able to claim a tax deduction for the contributions in your 65th year. If less than 10 per cent of your adjusted income is earned from employment sources, you may be able to claim up to $35,000 without penalty.

However, once you reach 65 you must meet the work test at any time during the year in which you make the contribution. Just like non-concessional contributions you are unable to make concessional contributions once you have reached 75.

Examples:

7) Daniel is 65 in March 2015 and earns about $70,000 each year from investments held in his own name. As Daniel does not earn anything from employment-related activities he may be eligible to claim a tax deduction for any contributions he makes to super.

He could contribute up to $35,000 and claim a tax deduction, providing he makes an election that tells the trustee how much he is going to claim.

As Daniel does not meet the work test for the financial year in which he is age 65, he would need to make the contribution prior to reaching age 65 in March 2015.

8) Vicki, who will be 65 in June 2015, earns about $40,000 each year, which includes $10,000 salary and wages from a job as a tourist guide during the Christmas holidays.

As the income she has earned from employment sources is at least 10 per cent of her total income, she will not be able to claim a tax deduction for any contributions she makes to superannuation.

Quote your tax file number

Quoting your tax file number (TFN) is very important if you wish to make personal contributions to super.

If you don’t quote your TFN the fund will not be able to accept any personal contributions to help you build your retirement benefit.

Making it all work

If you turn 65 in a financial year the question of whether you are able to make a contribution to superannuation depends on:

• the amount you wish to contribute;

• whether you wish to claim a tax deduction for all or some of the contribution;

• whether you need to meet a work test during the year; and

• quoting your tax file number.

Should a portfolio change in retirement?

 

 

Joint research from industry association the Financial Services Council (FSC) and investment bank UB has shown that demand has strengthened for annuity and allocated pension products in recent years.

Around two in five respondents (43 per cent) said they are likely to buy a product that provides an income stream from their self-managed superannuation fund (SMSF), while almost one third (30 per cent) were unsure.

The FSC/UBS survey also looked at broader trends in financial services, including in the SMSF sector.

Sixty per cent of SMSFs already have plans or have started planning for retirement.

Increasing demand for products like annuities highlights that trustees are concerned about their investments as they move into retirement, and rightly so. The current swathe of retirees has the memory of the GFC at the forefront of their minds.

By handing over capital to an annuity provider, annuities can offer a simple solution for providing certainty of income.

Annuities can lock the kids out, which is the best way to stop leakage in the form of income. Investors could look at annuities as part of the “post-retirement investment equation”.

If you have a guaranteed income stream, you can take a greater risk with the rest of your portfolio.

Does an investment portfolio before retirement have to be fundamentally different in retirement?

The short answer is that it really depends on what the investment objectives are.

Everyone faces the same market risks throughout their lifetime. Everyone spends money whether they are young or old. What changes is mortality.

The risk when you are young is dying. The risk when you are old is living.

Given this sobering assessment, capital preservation becomes a key investment objective.

While weak markets may be good for young people as it provides them with the opportunity to buy cheap assets, for retirees the best way to create wealth is to not lose it (the wealth, that is!)

We reiterate some caution in making sweeping changes to an investment strategy however.

Investors could look at moving towards a more conservative strategy, but one that has liquidity as well as a sufficient income stream.

It’s also about having that long-term philosophy in place, particularly when taking into content market events like the GFC.

The GFC was a great example of a market slap but how long did it last? Investors may have had capital losses but the dividends and income stream didn’t stop.

Yet many people exited the market in 2009, moving major portions of their portfolios into annuities and missing the market rebound.

Trustees need to think about being prudent and using common sense. The question to ask is “Where do I want to be in five or 10 years and what am I going to do to support myself in retirement?”

ATO confirms restrictions for insurance in SMSFs

 

 

The ATO recently confirmed that there are new prohibitions on cross-insurance which could have significant implications for those with limited recourse borrowing arrangements.

In a statement issued last week, the ATO confirmed cross-insurance for any new insurance products is not permitted in light of regulations that came into effect on July 1 this year.

These types of arrangement are prohibited because the insured benefit will not be consistent with a condition of release in respect of the member receiving the benefit, the ATO said.

This could increase the risk of limited recourse borrowing arrangements, given that cross-insurance is used as a risk mitigation strategy.

It’s called cross-insurance because when one member dies or becomes TPD, for example, then the proceeds instead of being added to their account go to the other member.

If the proceeds are just added to the deceased member’s account then it doesn’t provide any liquidity benefits for the fund.

If the proceeds are added to the other member’s account, the surviving member, then the fund can use that money to retire debt. So these type of strategies are commonly used where there’s a limited recourse borrowing arrangement in place.

In light of the statement from the ATO, SMSF practitioners should think about other ways in which their clients’ funds could service a debt in the event that one of the contributors to the fund dies, given that this option no longer seems to be available.

What to expect in 2015

 
 
 
Geoff Saffer, Head of Equities at Australian Stock Report, recently sat down with Steen Jakobsen to discuss the global market and what to expect in 2015.

Steen Jakobsen is the Chief Economist, Saxo Bank A/S. Steen has more than 20 years of experience within the fields of proprietary trading and alternative investment.

Every year, Saxo Bank puts together a number of potential scenarios that may seem “outrageous” today but could come true in the following year.

Late last year Steen predicted oil would fall rapidly to US$80 a barrel, the Aussie dollar would soften significantly, Germany’s economy would struggle and certain US tech companies would plummet.

Be amongst the first to hear what Steen thinks is in store for next year, including;

  • Why the RBA could cut rates to as low as 1.5%
  • What will drive the AUD/USD in 2015
  • Why most investors are too bullish on the US market
  • Why investors will be best served piling into fixed interest in early 2015
  • The prospect of the market facing a major turning point mid-year
  • How to position your portfolio to take advantage of these developments

SMSF Trustees: What’s in a DRP?

 

 

Using Dividend Reinvestment Plans (DRPs) can be an effective method of growing your super or speeding up wealth accumulation outside super.

When DRPs were originally introduced, some companies offered discounts of 5% or even 10%. These days, generous discounts are rare. Expect to see a discount of around 2.5% or less with many companies offering no discount at all.

Calculating capital gains on DRPs can cause headaches when you go to sell the shares. You need to weigh up whether the administration effort or accounting bills is worth the benefit you would get.

Of course if you or your SMSF owned shares in a company but didn’t want to invest more money in that stock, it would be silly to sign up to that company’s DRP.


 

How do DRPs work?

Some companies offer their shareholders the opportunity to participate in a DRP. Under these plans, shareholders can choose to use their dividend entitlement to acquire additional shares in the company instead of receiving a cash payment.

Let’s say you (or your SMSF) own 20,000 shares of XTY Limited, which last traded at $1. XYZ now declares a three-cent dividend.

For your 20,000 shares, you are entitled to receive $600 in dividends.

If XYZ offered a DRP and you had selected this as your preferred method of payment, the company would effectively use the $600 to buy more shares for you – giving another 600 shares @ $1 each (DRP purchases also attract no brokerage).

Note, of the 400 or so companies paying dividends, just over half (225 at last count) offered a form of DRP and almost a third of these are ETFs or listed investment companies (LICs).

Have we reached the end of the road’ for leverage in super?

 

 

The Financial System Inquiry’s (FSI) interim report suggests that the days are coming to a close for the use of leverage inside super.

Recent comments by former Prime Minister Paul Keating has fuelled speculation that borrowing in super may be prohibited.

Mr Keating noted a “dramatic acceleration” in investor financing linked to the ability of SMSFs to borrow.  He associated this activity with the surge in Australia’s housing prices, particularly in the capital city markets.

“If I was treasurer today, I would be looking very hard at the whole entitlement or availability of debt to SMSFs. They have gearing available to them and, of course, many of them are taking the option of buying residential property.” Mr Keating said.

Since the FSI first sought feedback on restoring the prohibition on direct leverage of borrowing in super, speculation has mounted that the panel will recommend that borrowing in SMSFs be banned.

The new accountant’s “limited AFSL”, how it works, and what will change from 2016

 

 

This is the final part of a 4 part series in which we explore the thin (sometimes, very thin) line that accountants can inadvertently cross when giving advice to their clients. The “line” is of course the need to hold an Australian Financial Services License (AFSL) to cover the provision of that advice.

 

For the purposes of this series, we’re assuming that the client is a retail client under the Corporations Act 2001 (Cth) (Corporations Act).

 

In Part 1, we discussed the “accountant’s exemption”, which has the effect of permitting a “recognised accountant” to recommend that someone establishes their own SMSF or dispose of their existing superannuation interest (perhaps to transfer the benefits to an SMSF), where that advice is given in the course of providing advice on the “establishment, operation, structuring or valuation” of the SMSF.

 

We also flagged, however, the forthcoming removal of the “accountant’s exemption”, and the new licensing regime that will apply for accountants from 1 July 2016.

 

This Part 4 will discuss the new licensing regime from 1 July 2016, and the “transitional” arrangements which apply for the period 1 July 2013 to 30 June 2016.

 

Why remove the “accountant’s exemption”?

 

The removal of the “accountant’s exemption” is essentially a product of the “Future of Financial Advice” (FOFA) reforms, which largely took effect from 1 July 2013. In a nutshell, FOFA prescribes a statutory “best interests” duty on AFS licensees and their representatives, and bans a number of payment arrangements involving licensees and their representatives.

 

As we discussed in earlier articles in this series, accountants are able to provide advice on SMSFs under the “accountant’s exemption”, courtesy of Regulation 7.1.29A of the Corporations Regulations.

 

By way of background, let’s recall how the “accountant’s exemption” operates:

 

Section 766A(2)(b) of the Corporations Act provides that the Corporations Regulations may set out the circumstances in which a person is taken not to provide a financial service. This takes us to Reg 7.1.29 of the Corporations Regulations, which states that a person who provides an eligible service in the context of conducting an exempt service is taken not to provide a financial service.

 

“Eligible service” is defined by reference to the definition of financial service in s766A(1) of the Corporations Act. It therefore includes (as is relevant for accountants) providing financial product advice in relation to SMSFs.

 

“Exempt service” includes (as relevant to accountants giving advice in relation to SMSFs) the following (Reg 7.1.29(5)(a) and (b) of the Corporations Regulations):

 

“…advice in relation to the establishment, operation, structuring or valuation of a superannuation fund…[where] the person advised is, or is likely to become…a trustee…or director of a trustee…or a person who controls the management…of the superannuation fund.”

 

However, Reg 7.1.29(5)(c)(ii) of the Corporations Regulations requires that the advice does not include a recommendation that a person acquire or dispose of a superannuation product.

 

So, if we were to stop there, we’d see that a person cannot – without an AFSL – recommend that someone establishes their own SMSF or dispose of their existing superannuation interest (perhaps to transfer the benefits to an SMSF), even if that advice is given in the course of providing advice on the “establishment, operation, structuring or valuation” of the SMSF. The establishment of an SMSF would be considered the acquisition of a financial product.

 

However, Reg 7.1.29A of the Corporations Regulations provides that Reg 7.1.29(5)(c)(ii) (which is the regulation which provides that advice cannot include a recommendation that a person acquire or dispose of a superannuation product), does not apply if the advice/recommendation is given by a recognised accountant in relation to an SMSF. This is the “accountant’s exemption”.

 

Once this Regulation is removed on and from 1 July 2016, however, accountants will generally be unable to advise a person to acquire or dispose of an interest in an SMSF without being licensed in their own right, or an authorised representative of a licensee.

 

What is the “limited AFSL”?

 

The “limited” AFSL is essentially a transitional measure, which permits accountants to apply for an AFSL, but with reduced application and compliance requirements. It therefore affords the opportunity to obtain an AFSL but under a less stringent application process and with reduced license conditions which would otherwise apply to “full” licensees. From 1 July 2016, accountants who propose to give advice in relation to the establishment or disposal of an SMSF will need to hold either a “full” or “limited” AFSL, or be the representative of a licensee.

 

It should be noted, however, that the “limited” AFSL, whilst having less stringent application and compliance requirements, does also limit the types of “financial services” which are able to be provided under the license. Specifically, financial services under a “limited” AFSL are limited to the following:

 

  • providing advice on SMSFs;

 

  • providing advice on superannuation products in relation to a client’s existing holding in a super product but only to the extent required for making a recommendation that the person establish an SMSF or advice on contributions or pensions under a super product;

 

  • providing ‘class of product’ advice on a range of financial products; and

 

  • arranging for a person to deal in an interest in an SMSF.

 

There are other significant differences between a “full” and “limited” AFSL as well.

 

Here’s a table outlining some key differences between the “limited AFSL” and the “full” AFSL.

 

Issue Full AFSL  Limited AFSL
Does the “organisational competence” requirement apply? The applicant must have responsible managers who hold the qualifications and have the experience set by ASIC in RG 105.There are five options which the nominated responsible managers can meet.

Commonly, responsible managers meet the option which requires the responsible manager to have an undergraduate degree in a relevant discipline and a short industry course to meet the knowledge requirements, and three years out of the last five years’ experience as a representative of an AFS licensee

If the responsible managers nominated are ‘recognised accountants’, then they do not need to meet ASIC’s experience requirements. They will, however, need to meet the knowledge requirements.If an entity obtains a limited AFSL and nominate ‘recognised accountants’ as the responsible managers, then the entity is subject to a condition that three years after receiving its licence, ASIC can call on the entity to prove its responsible managers have the appropriate knowledge and skills.

 

Audit requirements A registered company auditor must be appointed to undertake an annual audit of the licensee. A licensee must lodge its profit and loss statement and balance sheet annually. If client money is not handled, then the limited AFS licensee can lodge a compliance certificate rather than an audit.However, the licensee will still need to lodge its profit and loss statement and balance sheet annually.
Application process Lodgement of prescriptive Form FS01, core proofs and additional proofs. No difference, other than the omission of the requirement that responsible managers lodge two business references with ASIC where those responsible managers are ‘recognised accountants’ and the application is made during the transition period (i.e. 2013 to 2016).

 

Conclusion

 

With the forthcoming removal of the “accountant’s exemption”, an opportunity exists for accountants to consider the transitional measures currently available, and obtain a “limited” AFSL. It should be noted, of course, that whilst the “limited” AFSL has less stringent application and compliance requirements, it does limit the types of “financial services” which are able to be provided under the license.

 The new accountants limited AFSL, how it works, and what will change from 2016

Cristean Yazbeck

Head of Financial Services

+61 02 8263 6663

E cyazbeck@ro.com.au

© Copyright in this content and the concepts it represents is strictly reserved by Rockwell Olivier, Pty Ltd

Should your SMSF own your business premises? The pros and cons

More SME owners will focus much more closely in coming months on the pros and cons of buying and gearing their businesses premises through their self-managed super funds.

Specialists in superannuation, investment and business advice expect SME owners to consider accelerating any existing plans to gear their business premises through their self-managed super funds. This follows renewed debate about whether to bar future gearing.

The interim report of the Australian government’s inquiry into the financial system calls for views about whether superannuation gearing should be prospectively prohibited because it “may create vulnerabilities for the superannuation and financial systems”.

Here are 10 critical points to consider when deciding whether your SMSF should acquire business premises, typically through gearing, to rent to your family business:

PROS

1. FAMILY BUSINESSES MAY MAKE EXCELLENT TENANTS

Sue Prestney, a partner at PwC Private Clients, says that in her experience, family businesses tend to make “excellent” tenants for their SMSF-owned business premises.

Again speaking in regard to her own clients, Prestney says their family businesses typically pay their rent on time to their SMSF. “They look after the premises like it was their own.”

Martin Murden, a director of SMSF consulting and auditing with the Partners Wealth Group, says family businesses make “great” tenants provided the business is successful.

And Murden says dealings between a family SMSF as landlord and a family business as tenant can be smoother – regarding such things as rent reviews – than with an arm’s-length tenant.

2. EXCEPTION FOR BUSINESS PROPERTY

Business real estate is one of the limited types of assets that SMSFs are allowed to acquire from related parties including members.

And business real estate is one of the few types of assets that SMSFs can lease to related parties, including the members’ businesses, without a limit on its value under the in-house asset rules in superannuation law.

3. CONCESSIONAL TAX TREATMENT

During an SMSF’s accumulation or saving phase, rents are taxed at 15% within the fund while capital gains are taxed at an effective 10% if the property is held for more than 12 months.

And once the business premises are backing the payment of a superannuation pension, fund income and capital gains are tax-free. This means that the SMSF may eventually be able to sell a property in the pension phase without paying CGT on any profits

SMSFs in the accumulation phase can claim the same types of tax deductions as individual investors who buy properties in their own names including negative-gearing deductions for the shortfall between the deductible expenses, including interest payments, and rental income.

4. BUSINESS SUCCESSION AND ESTATE PLANNING

SMSF trustees aim to keep the premises of their family businesses in their super fund through generations, with the aim of gaining greater security of tenure for the business as well as business succession and estate-planning benefits.

Under this strategy, an SMSF will need sufficient other assets to pay member superannuation benefits when necessary for older members such as a business’s founders.

5. ASSET PROTECTION

Business premises held in an SMSF are generally out of the reach of creditors if individual fund members are declared bankrupt – subject to claw-back provisions in the Bankruptcy Act.

CONS

1. POTENTIAL CONFLICTS IF FAMILY BUSINESS STRUGGLES TO PAY RENT

While the principals of a troubled family business may need the premises to keep trading, the family SMSF’s trustees – who are often the same people – must maintain the fund for the core or sole purpose of paying member benefits.

Additionally, funds are prohibited from providing financial assistance to members, says Murden. This includes giving rent relief to family businesses in financial difficulties.

2. HIGH-COST BUSINESS PREMISES CAN DOMINATE AN SMSF’S PORTFOLIO

This can make it to diversify a fund’s portfolio to spread investment risks and opportunities.

When preparing their mandatory investment strategies, SMSF trustees must consider such factors as investment risk, portfolio diversification, liquidity of investments, ability to pay member benefits and the members’ circumstances.

Peter Crump, superannuation strategist for ipac South Australia, says that super funds are not legally required to diversify their investments but emphasises that trustees must consider diversification when preparing their investment strategies.

Indeed, some fund trustees specifically decide to have SMSF portfolios dominated by a single property asset, such as the premises of their businesses, perhaps after considering the diversification of their other super and non-super investments.

3. IT MAY BE MORE TAX-EFFECTIVE TO GEAR BUSINESS PREMISES OUTSIDE SUPER

Much will depend on the circumstances.

First, the superannuation tax rate is much lower than most personal marginal tax rates, thus providing potentially lower tax deductions for negative gearing. Second, lenders usually require a much higher deposit for SMSF gearing, which means a property is likely to remain negatively-geared for a relatively short period – if at all.

As well, SMSF trustees should be cautious about relying too much on the possibility that the business premises will eventually be sold when the asset is backing the payment of a pension and thus becomes exempt from CGT.

Crump suggests that trustees recognise that the fund may well sell the property before it becomes exempt from CGT.

4. POTENTIAL COSTLY TRAPS IN CONDITIONS FOR SUPER GEARING

SMSFs should gain quality professional advice to ensure compliance with the strict conditions allowing funds to borrow. Mistakes can be costly.

SMSF Trustees must enter a limited recourse borrowing arrangement and a geared asset must be held in a separate trust until the load is repaid. Lenders cannot make a claim against any other assets of the super fund in the event of a default on the loan.

5. SMSF COULD FACE SEVERE FINANCIAL SETBACK FOLLOWING LOAN DEFAULT

Despite the requirement for a limited recourse loan, an SMSF that defaults on a loan to buy business premises could lose its sizeable deposit plus capital repayments and payments of interests and costs.

Upon a property’s forced sale, a defaulting fund would be paid whatever is left after the lender recovers any outstanding amounts including the cost of a forced sale and the discharge of the mortgage.

SELF-managed superannuation funds attacked from all sides

 

 

SELF-managed superannuation funds have been attacked from all sides in recent times, coming under fire for supposedly being used as tax avoidance schemes for the rich and powerful.

As a result, the Australian Taxation Office has taken the unprecedented step of coming out in support of the nation’s fastest growing super group.

This event all but ensures that the self-managed fund movement will become by far the dominant force in Australian superannuation. The anti-SMSF aggressors must now back off and halt their attacks.

In his keynote address at the Chartered Accountants Australia and New Zealand National SMSF Conference, the Australian Tax Office’s deputy assistant commissioner of superannuation, Stuart Forsyth, said that Australia’s 534,000 SMSFs and their one million members contribute significantly to the overall success of the superannuation sector and should be “celebrated”.

Forsyth declared that overall the compliance of self-managed funds was high and was improving.

And he went further: “Self-managed super funds are here to stay. We can see one million SMSFs, down the track”.

Unlike the large super funds, which are regulated by the Australian Prudential Regulation Authority, SMSFs are regulated by the tax office, which ensures they comply with both tax and superannuation regulations.

In supporting SMSFs and their overall compliance with the rules, the ATO has put paid to the negative sentiment of the anti-SMSF brigade, who like nothing more than to sprout its criticism of the fast-growing sector. The organisers of the press campaign against SMSFs remain a secret but it is believed Treasury plus the retail and industry funds engineered it.

The anti-SMSF campaign often portrays SMSFs as a tax avoidance strategy for the wealthy, but the simple fact is that the tax rules for self-managed funds are the same as for all super funds.

While most SMSFs are compliant, there will naturally always be a few bad apples. That’s no different to anywhere else.

If Forsyth is right about SMSFs, then the movement could be set to grow significantly.

When the sums were last calculated, self-managed super funds had one third of the $1.5 trillion superannuation pie (total $495bn). They were well ahead of retail and industry funds, and growing fast. Forsyth revealed that SMSFs now control $557bn worth of assets, a rise of $62bn, or 12.5 per cent in a year.

The self-managed super fund market share will continue to increase because they have well over half the superannuation pool being used to pay retirement pensions.

There have also been inaccurate suggestions that self-managed funds are moving rapidly into residential property. While there is no doubt self-managed funds are a force in the residential market, the investment represents a tiny part of the $557bn in SMSFs overall. Some $8.7bn is held by SMSFs under Limited Recourse Borrowing Arrangements. The LRBA growth rate is much less than the overall SMSF growth, again showing that the anti-SMSF brigade has its facts wrong.

The campaign against SMSFs is a devious attempt by bigger players to try to get money flowing back into the big retail and industry funds. It won’t work. SMSFs are the future of superannuation and growth in the self-managed sector will continue at a rapid pace.

A “walk through” of a typical accountant’s SMSF advice, including tips & traps for the unwary.

 

 

This is the third in a 4 part series, in which our Head of Financial Services, Cristean Yazbeck, explores the thin (sometimes, very thin) line that accountants can inadvertently cross when giving advice to their clients. The “line” is of course the need to hold an Australian Financial Services License (AFSL) to cover the provision of that advice.

 

For the purposes of this series, we’re assuming that the client is a retail client under the Corporations Act 2001 (Cth) (Corporations Act).

 

Typically, an accountant providing any form of assistance to a client in relation to an SMSF is likely to be asked to give at least some of the following (and probably, all) in relation to their clients’ SMSF:

  • Strategic advice
  • Tax & structural advice
  • Asset allocation advice
  • Investment advice
  • Execution advice/services.

Each of the above services has potential AFSL implications. In part 1, we discussed the “accountant’s exemption” and the scope under which an accountant could provide SMSF advice without an AFSL. In part 2, we canvassed the fine line between “financial product advice” and “factual information”. In this article, we’ll walk through the “typical” SMSF-related services that an accountant may be asked to provide, and the licensing implications (if any) of each of those services. We’ll look at some tips and common traps that accountants may fall into, and consider some potential opportunities to restructure existing advice templates to ensure no potential adverse AFSL implications arise.

 

Let’s examine each of the above “typical” SMSF-related services.

 

Strategic Advice

 

Invariably, an accountant will wish to discuss their clients’ strategic objectives, including on matters such as wealth creation, wealth preservation, income needs, risk appetite, and estate planning. These discussions will likely take place at the start of the engagement and as part of the initial client dialogue, and to assist the accountant in determining the scope of his or her engagement.

 

To what extent do these discussions constitute the provision of “financial product advice” which require an AFSL, or to which an exemption applies?

 

To the extent that the initial client dialogue merely serves to scope, understand and restate the clients’ objectives and is documented accordingly, and that dialogue in itself contains no recommendations, then there is unlikely to be any financial product advice given which would necessitate an AFSL. Refer to part 2 for further information on the distinction between a “recommendation” and “factual information”.

 

Tax & Structural Advice

 

No accountant-client interaction will be complete if “tax” wasn’t discussed. Indeed, tax is likely to be a key motivating factor for investing through an SMSF.

 

Typical “tax” advice in relation to an SMSF will include at least the following:

 

  • Tax rates that apply
  • Contributions caps and excess contributions tax
  • Restructuring of assets or creation of entities to minimise tax.

 

Surely such advice is financial product advice?

 

Fear not! Accountants should consider the following:

 

  1. Tax Agents’ exemption under the Corporations Act 2001 (Cth) (Corporations Act)
  2. “Exempt” services under the Corporations Act as they apply to tax advice.

 

We talked about each of the above in part 1, but we’ll consider them again here.

 

Tax Agents’ Exemption

 

Section 766B(5)(c) of the Corporations Act 2001 (Cth) (Corporations Act) provides that advice given by a registered tax agent, which is given “in the ordinary course of activities as such an agent and that is reasonably regarded as a necessary part of those activities“, is not financial product advice.

 

“Exempt” services under the Corporations Act as they apply to tax advice

 

In part 1, we identified s766A(2)(b) of the Corporations Act, which provides that the Corporations Regulations 2001 (Cth) (Corporations Regulations) may set out the circumstances in which a person is taken not to provide a financial service (and thus not require an AFSL covering the provision of that service). This takes us to Reg 7.1.29 of the Corporations Regulations, which provides that a person who provides an eligible service in the context of conducting an exempt service is taken not to provide a financial service.

 

“Eligible service” is defined by reference to the definition of financial service in s766A(1) of the Corporations Act. It includes (as is relevant for accountants) providing financial product advice in relation to SMSFs.

 

“Exempt service” includes (as relevant to accountants giving advice in relation to SMSFs) the following (Reg 7.1.29(5)(a) and (b) of the Corporations Regulations):

 

  “…advice in relation to the establishment, operation, structuring or valuation of a superannuation fund…[where] the person advised is, or is likely to become…a trustee…or director of a trustee…or a person who controls the management…of the superannuation fund.”

 

However, Reg 7.1.29(5)(c)(ii) of the Corporations Regulations also requires that the advice does not include a recommendation that a person acquire or dispose of a superannuation product. The “accountant’s exemption, though, kicks in (Reg 7.1.29A of the Corporations Regulations) to enable a recognised accountant to provide such advice.

 

In addition, Regulation 7.1.29(4)(a) of the Corporations Regulations provides that “advice to another person on taxation issues including advice in relation to the taxation implications of financial products“, is also an exempt service. However, to be able to rely on this exemption, further conditions need to be met:

 

  1. The accountant must not receive a benefit such as a fee or commission (other than from the client) as a result of the client establishing the SMSF.

 

  1. The advice must be accompanied by a written statement that the accountant is not licensed under the Corporations Act to provide financial product advice, and that tax is only one of the matters that must be considered when making a decision, and that the client should consider taking advice from someone who holds an AFSL before making a decision on the SMSF.

 

Asset Allocation Advice

 

Once an SMSF is established and funds are either contributed or transferred/rolled over to the SMSF, decision making will of course turn to investing those funds. Accountants will invariably be asked for advice on how funds could or might be allocated: should the client purchase property using a limited recourse borrowing arrangement? What about shares? Managed funds? Should the client hold insurance within their SMSF? And so on…

 

It’s not uncommon for accountants to recommend that their clients speak with a licensed financial adviser to deal with such questions. Accountants should bear in mind, however, that there is some scope to advise on such matters without it constituting financial product advice.

 

Regulation 7.1.33A of the Corporations Regulations provides that a circumstance in which a person is taken not to provide a financial service under the Corporations Act is “the provision of a service that consists only of a recommendation or statement of opinion provided to a person about the allocation of the person’s funds that are available for investment among 1 or more of the following“:

 

  • shares
  • debentures;
  • debentures, stocks or bonds issued, or proposed to be issued, by a government;
  • deposit products;
  • managed investment products;
  • investment life insurance products;
  • superannuation products;
  • other types of asset.

 

The Regulation covers “superannuation products”, which would include SMSFs.

 

The note to Regulation 7.1.33A also provides, though, that the exemption “does not apply to a recommendation or statement of opinion that relates to specific financial products or classes of financial products.

 

In essence, this regulation exempts what is often referred to as “broad asset allocation advice” from being a “financial service”. So long as it deals with the asset type as a whole, and does not refer to specific financial products or classes of financial products, then the exemption can apply.

 

Investment Advice

 

Investment advice in relation to a specific financial product or class of financial product will invariably require an AFSL authorisation.

 

Execution Services

 

As we know, persons generally need to hold an AFSL to cover the provision of a “financial service”. We’ve discussed “financial product advice” so far, which is one type of “financial service”. Another “financial service” under the Corporations Act is what is referred to as “dealing” in a financial product.

“Dealing” is defined in s766C of the Corporations Act to include (among other things):

  • applying for or acquiring a financial product;
  • issuing a financial product;
  • disposing of a financial product.

Where a person arranges for a person to engage in any of the above, that will also constitute “dealing”.

Accordingly, execution-type services provided by an accountant in relation to their clients’ SMSFs will need to be examined to determine whether they constitute a “dealing” which requires an AFSL.

Here are some specific examples of common advice/recommendation scenarios involving SMSFs which may fall within some of the exemptions discussed above, and how they might cross the line and require AFSL authorisation.

 

Category Common Question Exempt From AFSL  AFSL Authorisation Required
Strategic Advice Can you review my existing investments and determine whether an SMSF is appropriate for me? If the review serves to scope, understand and restate the clients’ objectives and is documented accordingly, and that dialogue in itself contains no recommendations, then there is unlikely to be any financial product advice given which would necessitate an AFSL. If, in the course of the review, recommendations are made, for example, that other investments may be more appropriate, an AFSL may be required (unless an exemption applies)
Tax & Structural Advice Should I contribute additional funds to my SMSF to tax advantage of concessional contributions caps? If the advice is given by a Tax Agent in their ordinary course of business, and/or the advice is limited to the tax implications of contributing to super, the advice will likely be exempt. 

Note the disclosure obligations which apply.

 

If the advice goes beyond merely considering the tax implications of contributing to super, it may fall outside the statutory exemptions are require an AFSL authorisation.
Asset Allocation Advice How can I structure my holdings within my SMSF? Broad asset allocation advice, which does not identify specific financial products or classes of financial products, will not be a “financial service” (eg if it refers to “shares” or “superannuation” generally).  AFSL authorisation required if the advice is in relation to a financial product or class of financial products (eg XYZ managed fund). 
Investment Advice Where should I invest my SMSF assets? No AFSL authorisation required unless the advice is in relation to a financial product or class of financial products. AFSL authorisation required if the advice is in relation to a financial product or class of financial products (eg shares, managed funds). 
Execution Services Can you set up my SMSF for me? Advising a client to establish an SMSF, or on how to establish an SMSF, should be exempt from being a “financial service”.  Setting up an SMSF on the client’s behalf will likely constitute “dealing” in a financial product.

 

Conclusion

 

To the extent that advice-related services are to be provided in relation to a client’s SMSF, accountants should be aware of the specific AFSL implications of each of those services, and the available exemptions. In addition, advice documentation should be drafted in such a way which is reflective of the exemption on which the accountant is relying.

 

For example, if relying on the “Tax Agents’ Exemption” on the basis that the advice is given by the agent in the ordinary course of activities as such an agent and that is reasonably regarded as a necessary part of those activities, the factual bases to support such reliance should be clear from the advice. This would entail, for instance, making it clear that the advice is in relation to liabilities, obligations or entitlements which may arise under tax law. Such matters would objectively be seen as being within the ambit of the ordinary course of business of a tax agent.

 A walk through of a typical accountants SMSF advice, including tips & traps for the unwary.

Cristean Yazbeck

Head of Financial Services

+61 02 8263 6663

E cyazbeck@ro.com.au

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