The 2010 year left behind an indelible mark for the self-managed super fund industry; much of it due to the key recommendations of the Super System Review (Cooper Review).
The year ahead will see the beginnings of a new framework in which trustees and SMSF service providers will begin to operate.
However, as has (and will) always be the case, the application of strategic advice plays the most important role for members of SMSFs. Strategy has been recognised by government as the most integral piece to the SMSF jigsaw, with recommendations to increase the competency requirements for those wishing to advise on SMSFs.
The 2011 year has seen some changes to last year’s (2010) inaugural top 10 list on thedunnthing blog. Last year’s strategies focused on the themes of borrowing and the global recovery. Borrowing inside super has certainly taken off, but most of us are still waiting the markets to recover!! I think these two themes will continue in 2011, along with an emerging theme of SMSF investment succession, as many members start to think about intergenerational issues and longevity risk for their funds.
So, I have outlined below for you my Top 10 list of self-managed super fund strategies for 2011:
- Contribution Splitting is back in vogue!! – The last Federal Budget saw the government announce changes to allow for individuals over 50 with less than $500,000 in super to continue to be able to make concessional contributions at $50,000 p.a. Whilst this is not yet law, it is important to start thinking about the impact of splitting contributions with non-working spouses to allow for the primary breadwinner to continue to make maximum contributions into super each year. See my previous blog, “has the budget may contribution splitting a powerful strategy again?”
- Borrowing to develop property – this strategy appeared to gain momentum over the course of 2010, in particular post 7 July when the rules for limited recourse borrowing changed. Click here to read my previous blog for details about this strategy. This strategy currently has its limitations with banks unlikely to offer borrowings, as they can only take a charge over the units of the ungeared unit trust. Therefore, related party lending (BYO lending) appears the most likely way to facilitate this. Some financial institutions may be prepared to look at it, however don’t bank on it!!
- Member lending beyond contribution caps – whilst the contribution caps might have stymied the inflow of contributions into super, limited recourse borrowing actually allows for significant monies to still enter the superannuation environment. With limited recourse borrowing arrangements for property acquisition being the ‘flavour of the month’, I think we will also see people look to lend ‘surplus’ money to their SMSF on an ‘arm-length’ basis to simply invest (where they have already reached their contribution caps). Why? simple, two key reasons… (i) no CGT on assets if sold in pension phase; and (ii) the rate of interest can arguably be quite nominal. ATO ID 2010/162 last year stated the views of the ATO – that is, the terms of the loan can be more favourable to the SMSF (i.e. interest rate can be lower than commercially available). On the basis that the fund’s rate of return can exceed the cost of borrowing, this strategy definitely stacks up!! I expect this strategy to gain momentum in 2011.
- The year for building reserves – reserves are still very much an unknown beast within SMSFs. They can however provide significant advantages to members today and for the future. You can read my previous article on “10 things your need to know about fund reserves”. Contributions reserves (as discussed above), pension reserves, reserving for anti-detriment and self-insurance are just some of the key benefits available within a SMSF.
- Understanding the tax benefits of anti-detriment and the future liability deductions – Whilst we would all like to think we would live forever, this is simply not the case… There are however two very important strategies to be aware of relating to the payment of death benefits (as a lump sum) from a SMSF. Anti-detriment payments or the ‘tax saving amount’ provides an additional payment for dependent beneficiary(ies), and creates a sizeable tax deduction within the fund which can benefit future members or simply minimise (or eliminate) CGT. You can refer to item 6 in “10 things your need to know about fund reserves” for more information on anti-detriment payments. The future liability deduction can also provide a sizeable tax benefit within the fund in the event of death or terminal illness where the deceased member was working (see section 295-470 of ITAA1997). I’ll be providing more information on these topics early in 2011…
- Closing the door on in-specie share transfers – one of the recommendations by the Cooper Review Panel to Government was to remove the exception of being able to in-specie transfer (off-market) listed shares. The government supported this recommendation, which is likely to take effect from 1 July 2012. There are some great strategies around off market share transfers into SMSFs, in particular focusing on the management of the capital gains tax impost, such as making deductible super contributions using the 10% rule. Click here to read further information on this Cooper Review recommendation and government support for the change (refer to recommendation 8.13). Click here to read more about transferring assets into an SMSF.
- “Double dip” on contributions in June 2011 – this strategy again makes the list as it provides a fantastic opportunity for a person to get double the tax deduction in the year of the contribution, but to amortise the contributions over two financial years. Click here to refer to further details on this strategy in last year’s Top 10 strategies. (NB. with excess contribution tax assessments expected to increase substantially for the 2010 financial year, this strategy is very effective to use to house June contributions to allocate in July. It might not solve the whole problem, but it’s certainly better than paying 46.5% or 93% tax!!)
- Meeting minimum pension limits by lump sums (including in-specie payments). The impost of tax can play an important part of a member’s retirement planning. The ability to take benefits from a SMSF under age 60 as a pension but be taxed as a lump sum, can provide significant tax savings when it is available to be used. With the first $160,000 of taxable component taxed at 0%, this strategy can literally save thousands of dollars where structure appropriately. Does it still have application post-60? you bet!! Whilst pension payments must be taken in cash, this strategy can allow you to transfer assets as a lump sum from super and meet the minimum pension requirements. Click here to read my previous blog on this issue.
- Locking in tax-free proportion income streams – this to me is the most powerful piece of legislation introduced with the Simpler Super reforms. The large majority of pension recipients from SMSFs should be running multi-pensions to either provide tax efficiency under age 60 or for estate planning post 60. Income streams with 100% tax-free component, such as after a re-contribution or large non-concessional contribution can save tens of thousands of dollars at an estate planning level.
- Segregating to capitalise on a market recovery – whilst we wait for market’s to recover, I think it is important to keep this strategy in the back of your mind. Where there is a pension and accumulation member or account within the fund, the trustees have the ability to segregate assets into the pension account or pension pool (for the benefit of all pension members). Why? By simply applying segregation, the assets with significant capital gains can be exempted from tax, rather than a proportion of the amount being exempt in accordance with an actuary tax certificate. The important thing to do here is to appropriately document the decisions of the trustees to segregate assets to a particular member or pool of members. It also doesn’t have to be all members, it can simply be one asset to the pension member and the rest of the income shared across all members. The strategy allows absolute creativity!! Click here to read my previous blog on segregation.
What do you think about my Top 10 strategies list? Let me know if there are any strategies that you think should be included?
I am currently in the process of preparing an e-book detailing the benefits of these top 10 strategies. I hope to have ready later this month, along with a webinar going through these key strategies for the year ahead. Keep your eye out for this must see event!! Register your interest on The SMSF Academy website to be sent a copy of this e-book.
Here’s to an exciting year ahead of us for SMSFs…