As we approach the end of the 2019 financial year we would like to highlight some SMSF matters worth knowing:
1. The transfer balance account reporting obligations are now well entrenched. These obligations require trustees to provide certain information when a member of their fund commences drawing a pension, or commutes all or part of a previously reported pension.
2. The transfer balance cap regime, that came into effect on 1 July 2017, restricts the amount that a member of a super fund can transfer to the pension phase of superannuation. The current maximum is $1.6m. Once transferred to the pension phase, a pension account may grow in value to more than $1.6m in value with investment earnings without the need for the excess over $1.6m to be withdrawn.
3. The trustees of each SMSF are required to make, regularly review, and invest in accordance with their fund’s investment strategy. Investment strategies should be formally reviewed yearly and more often if the circumstances of the fund change.
4. As part of the investment strategy, trustees are required to consider insurance on the lives of members of the fund. A requirement to regularly review the insurance also applies. Decisions of the trustees should be recorded in writing.
5. Borrowing money for investment purposes has been a popular strategy used by an increasing number of SMSFs. Borrowings must comply with strict requirements imposed by legislation and the Regulator. Where money has been borrowed other than from a bank, the loan must be structured on commercial terms, as if the loan was provided by a bank. Many SMSFs borrow from a related party or a non-bank lender. Limited recourse borrowing arrangements should be reviewed to ensure they reflect the current requirements of the Australian Taxation Office. Failure to comply may result in the SMSF being taxed at a rate of 45%.
6. Trustees of SMSFs are required to ensure the assets of their fund are valued at current market value. While this does not necessarily require a formal valuation to be undertaken by an independent registered valuer, the valuations must at least be provided by someone with the necessary skills and experience. This is particularly important for SMSFs investing in property. Assets should be valued at least annually.
7. SMSFs that invest in, or make loans to related entities, are investing in in-house assets. The maximum amount that a fund can have in in-house assets is 5% of the market value of the fund’s total assets. It is advisable for SMSF trustees to review their investment in in-house assets, based on up-to-date valuations, before the end of the financial year so that corrective action can be taken if necessary.
8. SMSFs that have members in both the accumulation and pension phases of superannuation, have two options when it comes to determining the portion of the funds income that is tax exempt. Trustees may either use the segregated or the proportional (unsegregated) method. Where the proportional method is used, an actuarial certificate is required each year. From 1 July 2017, trustees of SMSFs may no longer use the segregated method where the fund has both accumulation and pension interests and has at least one member with a total superannuation balance (all their superannuation funds combined) of more than $1.6m.
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Disclaimer and Warning
The information above is of a general nature only. It should not be used as a source to make financial decisions. It's also important to note that the legislation and figures related to this topic tend to change regularly and therefore the information above may not reflect the current status. We recommend that if you are looking for advice on this matter, you should contact us.