Presented by:Aaron Dunn                 ©The SMSF Academy 2012
Thank You to our supporting sponsorshttp://www.mlc.com.au/accountant-solutions/            www.bglcorp.com.au           ww...
General Advice DisclaimerThis presentation provides general advice only. No direct or implicitrecommendations are given in...
Strategy 1:GET OUT OF JAIL FREECARDS WITH EXCESSCONTRIBUTIONS TAX
Excess contribution tax – a growing problem?                                                               Will we see    ...
‘One-off’ refund of excess concessional contributionsATO must pay refund within 60 days of receiving                      ...
One-off ECT refund example• Neil (53) earns $100,000 p.a. and salary  sacrifices up to his CC cap of $50,000• Reduced to $...
One-off ECT refund example• Where Neil accepts the NoO,   – Excess contributions become assessable to him     personally (...
One-off ECT refund example•   $10,000 excess contributions tax refund limit will not be indexed•   If an individual lodges...
Returning contributions• Fund-capped contributions prevent a person  from contributing more than the NCC cap• Super funds ...
Returning contributions• Trust deed may outline how certain  contributions could be aggregated   – E.g. off-market share t...
De-minimus rule• ATO to apply a de-minimus threshold for  certain excess non-concessional contributions   – Superannuation...
De-minimus example• Geoff (55) is self employed and made $50k self  employed super contribution to his SMSF, along  with $...
Strategy 2: CONTRIBUTIONS …TO HAVE AND TO HOLD
Contributions Holding Accounts• ATOID 2012/16: Allocation of contributions• Interpretative decision confirms ability to  “...
Contributions Holding Account Example Allocated to   member                $25,000     Unallocated CC       Allocated to  ...
Don’t trip up…• NCC amounts must not be ‘fund-capped’,  otherwise must be returned      – Under 65, >$450,000; over 65, >$...
Strategy 3:SMSF “THE BLOCK”    & LRBAs
POLL: Is this allowable using an LRBA?                BEFORE                AFTER
Allowable using an LRBA?• Commissioner’s views within SMSFR 2012/1  suggest such a transformation would not have  created ...
LRBA considerations• Borrow to acquire, repair and maintain but not  to improve• Can improve, but only to extent that acqu...
Different (replacement) asset examples        Single acquirable asset   Whether it is a different asset(s)        Vacant b...
Different (replacement) asset examples        Single acquirable   Whether it is a different asset(s)        asset        R...
Funding improvementsHow you can fund any improvements using a LRBAInsurance Proceeds                                  YesT...
Strategy 4:BORROWING FORSMSF PROPERTY DEVELOPMENT
Funding improvements• Section 67A & 67B changes from 7 July 2010  have imposed restrictions using LRBAs• ATO SMSFR 2012/1 ...
How it works – LRBA with SISR 13.22C trust                                 #top10smsf
SISR 13.22C LRBA example• Craig & Alana Jones intend to buy a property  with sizeable land to build 3 townhouses• Existing...
SISR 13.22C LRBA example   5. SMSF has obligation to make        loan repayments (use                                     ...
SISR 13.22C LRBA example• Not impossible but unlikely to find a bank that  will lend   – Only security allowed by lender a...
Strategy 5:  WHY YOU SHOULDALWAYS RUN MULTIPLE  SMSF PENSIONS
Maximising benefit payments• Maximise benefit of locking in the tax-free and  taxable components• Why is this important?  ...
Impact on UNP with Transition to Retirement   • Proportioning rule states that tax-free &     taxable components must be t...
Impact on UNP with Transition to Retirement   • Case Study      – Greg (55) has $700,000 account balance within        SMS...
Impact on UNP with Transition to Retirement  $300,000                                                            $800,000 ...
Benefit of multi-pension strategy• Case Study  – Ted (60) has recently retired  – $1,000,000 balance in SMSF ($200,000    ...
Benefit of multi-pension strategyOne pension                            Multi-pensionsOriginal components include 20% TFC ...
Benefit of multi-pension strategy                     $700,000                     $600,000                     $500,000Ta...
How net earning & pension levels influence the strategy        Multi-pension strategy benefit after 10 years              ...
How net earning & pension levels influence the strategy        Multi-pension strategy benefit after 20 years              ...
Strategy 6:   SIX REASONS FORRUNNING REVERSIONARY       PENSIONS
Six reasons for reversionary pensions1. Continuation of the Fund’s tax exemption2. Potential for pension benefits to becom...
Why reversionary?• Commissioner states within TR 2011/D3 that a  pension will cease unless:   – Reversionary beneficiary i...
Strategy 7: HOW $1 ACCUMULATIONACCOUNT ALLOWS YOU TOCARRY FORWARD A $100K     CAPITAL LOSS
Exempt current pension income• As part of fund investment strategy, trustees may  wish to:   – Segregate assets; or   – Po...
Asset segregation example• Fred & Wilma are both retired and drawing  Account Based Pensions from their SMSF• During 2011-...
Why is this important?• Carried forward capital losses can be very  important in light of the Commissioner’s  views expres...
Strategy 8:  MEETING MINIMUMPENSION AS LUMP SUM
Partial Commutationexample   Partial commutation example• Amanda (59) has recently retired and has  $1,000,000 in accumula...
Partial Commutationexample    Partial commutation example• Ability to use low-rate threshold – $175,000  (2012-13)• Accumu...
Meeting the minimumpension  Meeting the minimum pension• Yes she can• TR 2011/D3 confirms that where Amanda  elects to tak...
Strategy 9:OPTIMISING PENSIONS WITHIN A VOLATILEINVESTMENT MARKET
Benefiting from a poor investment market   Downward investment market example    • Arthur drawing an Account Based Pension...
Benefiting from a poor investment market  Benefiting from a poor investment market    • Full commutation at 30 June 2011 =...
Benefiting from a poor investment market  Benefiting from a poor investment market    • Opportunity Cost = 2/12ths tax exe...
Strategy 10:  ANTI-DETRIMENT,RECONTRIBUTION OR       BOTH?
Anti-detriment or recontribution? Anti-detriment recontribution?• TR 2011/D3 has highlighted taxation issues  with super d...
Example                   Example• John (62) is retired and sole remaining  member of SMSF• $450,000 balance made up entir...
Example (cont.)                                                  Anti-detriment                        RecontributionAccou...
Example (cont.)• Anti-detriment payment  creates a $424,287 tax  deduction for SMSF   – Unrealised capital gain of     $20...
Example (cont.)                                Anti-detriment    Recontribution          BothAccount Balance on death     ...
My Top10 SMSF strategies for 2012-131. Use the ‘get out of jail free’ cards for ECT2. Contribution holding accounts to man...
eBook and Webinar recording A copy of the webinar recording and        eBook are available at    www.thesmsfacademy.com.au
Thank Youwww.thesmsfacademy.com.au     twitter.com/thesmsfacademy     facebook.com/thesmsfacademy     youtube.com/thesmsfa...
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Top10 SMSF strategies for 2012-13

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Webinar presentation of the Top10 SMSF strategies for 2012-13 conducted by Aaron Dunn of The SMSF Academy on 23 August 2012.

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Top10 SMSF strategies for 2012-13

  1. 1. Presented by:Aaron Dunn ©The SMSF Academy 2012
  2. 2. Thank You to our supporting sponsorshttp://www.mlc.com.au/accountant-solutions/ www.bglcorp.com.au www.banklink.com.au www.justsuper.com.au www.glenister.com.au #top10smsf
  3. 3. General Advice DisclaimerThis presentation provides general advice only. No direct or implicitrecommendations are given in this document. This means that the generaladvice provided has not been prepared taking into account an individual’sfinancial circumstances (i.e. investment objectives, financial situation andparticular investment needs). You should assess whether the advice isappropriate to your individual financial circumstances before making aninvestment decision. You can either assess the advice yourself or seek the helpof an authorised representative through an Australian Financial Services License(AFSL) holder.The SMSF Academy Pty Ltd believes that the information in this presentation iscorrect at the time of compilation but does not warrant the accuracy of thatinformation. Save for statutory liability which cannot be excluded, The SMSFAcademy disclaims all responsibility for any loss or damage which any personmay suffer from reliance on this information or any opinion, conclusion orrecommendation in this presentation whether the loss or damage is caused byany fault or negligence on the part of presenter or otherwise. #top10smsf
  4. 4. Strategy 1:GET OUT OF JAIL FREECARDS WITH EXCESSCONTRIBUTIONS TAX
  5. 5. Excess contribution tax – a growing problem? Will we see • 296% increase in ECT assessments from the same in 296% increase in ECTassessments for concessional contributions in 2009-10 financial year (halving of concessional 2010 2012-13? contribution cap) • Will we see a similar story for 2012/13? • “Get out of jail free” cards: – Once-off refund of ECT for concessional contributions – Returning contributions (NCC) – De-minimus test “Get out of jail free” cards: – Contributions Reserving • Once-off refund of ECT for concessional contributions • Returning contributions (NCC) • De-minimus test • Contributions Reserving
  6. 6. ‘One-off’ refund of excess concessional contributionsATO must pay refund within 60 days of receiving Individual Income Tax return the amount from the fund. ATO allows 15% tax must be lodged within 12offset. Refund can be reduced by outstanding tax months of income year debts and debts owed to other government agencies (e.g. child support agency, Centrelink) Member lodges tax return Excess concessional contributions are $10,000 or ATO credits 100% of excess less; Individual does not ATO determines to member’s excess have previous excess income tax concessional contributions contributions account and amends return on or after 1 July 2011 Must accept offer within SMSF pays 85% ATO notifies 28 days, but ATO can of excess member to contribution to accept allowed longer ATO Must pay within 30 days unless ATO offers release authority defined benefit interest, pension to fund interest or if excess amount exceeds the value of the Interest #top10smsf
  7. 7. One-off ECT refund example• Neil (53) earns $100,000 p.a. and salary sacrifices up to his CC cap of $50,000• Reduced to $25,000 for FY2012-13• SMSF reports $27,083 at end of income year• SMSF reports to ATO – excess of $2,083• As the contributions: – Have been made post 1 July 2011; and – Are $10,000 or less; and – Are the first time Toby has breached the cap (since law introduced); and – Tax Return lodged within prescribed period• Commissioner will issue “Notice of Offer” – 28 days to accept / reject the offer #top10smsf
  8. 8. One-off ECT refund example• Where Neil accepts the NoO, – Excess contributions become assessable to him personally (amendment to 2012 Individual ITR) – SMSF will be provided with a compulsory ‘release authority’ of 85% of the contribution ($1,770) • Must be paid within 30 days of receiving the release authority along with a release authority statement – Commissioner will amend Toby’s ITR based on excess contributions as assessable income – Income tax, Medicare levy to be deducted from release amount issued to ATO by SMSF • Amounts reduced by 15% tax offset representing tax paid by SMSF – Tax Refund provided back to Neil with amended notice of assessment, unless other Commonwealth debts outstanding #top10smsf
  9. 9. One-off ECT refund example• $10,000 excess contributions tax refund limit will not be indexed• If an individual lodges their personal income tax return late (beyond one year after the ITR was due), they forfeit their right to have an offer to release excess concessional contributions – Unless otherwise allowed by the Commissioner;• Where an individual breaches the concessional contribution cap by more than $10,000, there is no refund option available, plus they also lose their ‘once-off’ eligibility as a result of the ECT amount• If member has breached in more than one year before ECT assessment raised, will only be eligible for first year• It is a ‘all or nothing’ approach – there is no ability to request a partial refund of the excess concessional contributions• Where there is insufficient capital in the Fund to pay the compulsory release amount, the amount will be personally assessed to the individual and a tax liability raised #top10smsf
  10. 10. Returning contributions• Fund-capped contributions prevent a person from contributing more than the NCC cap• Super funds are required to return single fund- capped contributions that exceed - SISR 7.04(3): – $150,000 if member is age 65 or over on 1 July in a financial year; or – $450,000 if member is less than 65 on 1 July in a financial year• Does not apply across multiple contribution amounts made during a financial year where aggregated are excessive – E.g. John (59) makes NCC of $200,000 + $200,000 + $100,000 in FY #top10smsf
  11. 11. Returning contributions• Trust deed may outline how certain contributions could be aggregated – E.g. off-market share transfers made into SMSF on same day• Ineligible contributions – SISR 7.04(4) – 65 and over: work-test has not been met• Both require the contribution to be returned within 30 days of becoming aware of the breach – ATO ID 2009/29: must return even after 30 day time limit – ATO ID 2008/90: only excess amount needs to be returned #top10smsf
  12. 12. De-minimus rule• ATO to apply a de-minimus threshold for certain excess non-concessional contributions – Superannuation Consultative Committee – March 2012• “de minimis non curat lex” - the law does not care about very small matters• ATO likely to no longer raise an ECT liability where NCC cap breached as a result of inadvertent trigger of bring forward rule – i.e. contribution of small value triggered bring forward rule• Individuals can apply to the Commissioner for discretion on case-by-case basis #top10smsf
  13. 13. De-minimus example• Geoff (55) is self employed and made $50k self employed super contribution to his SMSF, along with $150k NCC contribution for 2011/12.• In 2012/13, Geoff makes a $450k NCC.• When completing 2012 tax return, Geoff can only claim $49,900 as self employed deduction, meaning $100 is NCC• This triggers the bring forward for 2011/12 ($150,100)• Excess contributions tax payable of $69,797 – ($150,100 + $450,000 - $450,000) x 46.5% = $69,797• ATO reviewing prior assessments from 1 July 2007• ATO to allow amounts to be re-contributed into the fund without incurring ECT #top10smsf
  14. 14. Strategy 2: CONTRIBUTIONS …TO HAVE AND TO HOLD
  15. 15. Contributions Holding Accounts• ATOID 2012/16: Allocation of contributions• Interpretative decision confirms ability to “park” contributions for up to 28 days after the end of month in which contribution made – June contributions can be held-over until following financial year (allocated before 28 July)• Deduction for taxpayer when paid• Tax assessed in year of payment• However, counts towards contribution cap in year amount is allocated to the member – When allocated – gross up by 1.176• Reserve or suspense account? – SIS & Tax law requirements #top10smsf
  16. 16. Contributions Holding Account Example Allocated to member $25,000 Unallocated CC Allocated to member prior to 28 July $50,0001 June 2012 30 June 2012 28 July 2012• John (54) has anticipated net capital gain of $100,000 for 2011-12• Self-employed with no concessional contributions made YTD• Wants to reduce CGT bill as far as possible• John makes $75,000 member deductible contribution into fund• Claims tax deduction for $75,000 | SMSF pays contributions tax of $11,250• $50,000 allocated 2011-12 | $25,000 allocated 2012-13 #top10smsf
  17. 17. Don’t trip up…• NCC amounts must not be ‘fund-capped’, otherwise must be returned – Under 65, >$450,000; over 65, >$150,000ExampleMember A makes $600,000 in-specie BRP contribution in June 2012. Trusteesresolve to allocate $150,000 before 30 June and balance to be allocated fromholding account/reserve before 28 July. ATO view that real property scenario isfund-capped, regardless of intention to allocate over 2 years• No ability to split a single contribution – SISR 7.08(2) requires trustee to allocate “the” contributionExampleSame facts as above, buy BRP is $400,000, with $150,000 before 30 June and$250,000 to be allocated before 28 July. ATO takes strict interpretation ofwording in SISR 7.08(2) where trustee is required to allocate “the” contribution,and therefore above circumstances not permitted #top10smsf
  18. 18. Strategy 3:SMSF “THE BLOCK” & LRBAs
  19. 19. POLL: Is this allowable using an LRBA? BEFORE AFTER
  20. 20. Allowable using an LRBA?• Commissioner’s views within SMSFR 2012/1 suggest such a transformation would not have created a different asset – Not using borrowings, but fund’s own resources• Acquired asset was residential property; remains residential property, regardless of the significant improvements made – Not rezoned, subdivided, etc. #top10smsf
  21. 21. LRBA considerations• Borrow to acquire, repair and maintain but not to improve• Can improve, but only to extent that acquired asset does not become a different asset• Need to determine if the character of the asset as a whole has fundamentally changed – Alterations or additions made to the physical object or the proprietary rights that comprise an asset under an LRBA #top10smsf
  22. 22. Different (replacement) asset examples Single acquirable asset Whether it is a different asset(s) Vacant block of land on A vacant block of land is subsequently subdivided single title resulting in multiple titles. One asset has been replaced by several different assets as a result of the subdivision. Vacant block of land on A residential house is built on vacant land which is single title on a single title. The character of the asset has fundamentally changed from vacant land to residential premises. This is a different asset. Residential house & A house is demolished following a fire and is land replaced by three (3) strata titled units. The character of the asset has changed along with the underlying proprietary rights. This has created three different assets. #top10smsf
  23. 23. Different (replacement) asset examples Single acquirable Whether it is a different asset(s) asset Residential house A fire destroys a four bedroom house and a new superior residential and land house is constructed on that land using both insurance proceeds and additional SMSF funds. Rebuilding another residential house (regardless of size) does not fundamentally change the character of the asset held under the LRBA. The addition of a garage, for example would also not change the character of the asset. Residential house While each of the following changes would be improvements each and land (or all) of the changes would not result in a different asset: • An extension to add two bedrooms • Addition of a swimming pool • Extension consisting of an outdoor entertaining area • Addition of a garage and driveway • Addition of garden shed Residential house A ‘granny flat’ is to be constructed in the backyard of a property and land which already has a four bedroom residence established on it. The granny flat will have two bedrooms, a family room, a kitchen and bathroom and will be connected to utilities. The character of the asset would remain residential premises and thus the construction of the granny flat would not result in there being a different asset #top10smsf
  24. 24. Funding improvementsHow you can fund any improvements using a LRBAInsurance Proceeds YesThe fund’s cash reserves* YesNon-related tenant YesRelated party tenant YesFunds from any other external source Yes• Related party improvements may be classified as a contribution (TR 2010/1)• Beware related party acquisitions of goods and materials not insignificant in value & function• Trustees can not be remunerated unless suitably qualified, licensed and operating a business of building/renovating #top10smsf
  25. 25. Strategy 4:BORROWING FORSMSF PROPERTY DEVELOPMENT
  26. 26. Funding improvements• Section 67A & 67B changes from 7 July 2010 have imposed restrictions using LRBAs• ATO SMSFR 2012/1 has provided clarity on: – single acquirable asset, – Repairs, maintaining and improving an asset; and – Where an asset becomes a different asset• ATO ruling confirms that the SMSF can not undertake (breach of s67B): – Capital improvements where it becomes a different asset, including subdivision, rezoning, – Property held over 2 or more titles (e.g. farmland)• What strategies (if any) can be used to address the above? #top10smsf
  27. 27. How it works – LRBA with SISR 13.22C trust #top10smsf
  28. 28. SISR 13.22C LRBA example• Craig & Alana Jones intend to buy a property with sizeable land to build 3 townhouses• Existing Property & Land purchase is $450,000• Development cost estimated at $550,000• Total project = $1,000,000• They would like undertake the development using their SMSF• How can this be achieved? #top10smsf
  29. 29. SISR 13.22C LRBA example 5. SMSF has obligation to make loan repayments (use Issue? contributions?) Jones Property Trust Jones Family Bare (unit trust) Super Fund (Holding) Trust Dist’ns (SMSF) Trust 3. Apply for #1,000,000 @ $1 units Units in Unit Trust Units in in Unit Trust 2. Limited 4. Unit Trust acquires property for Loan $450k; undertakes development Recourse Repayments with additional capital of $550kLoan to SMSF 6. Bank Repayments 1. Redraw $550k Craig & Alana #top10smsf
  30. 30. SISR 13.22C LRBA example• Not impossible but unlikely to find a bank that will lend – Only security allowed by lender are the units in the unit trust• ATOID 2010/162 – more favourable terms for the SMSF loan? – What level of interest rate can be charged?• Money should go in ‘upfront’ otherwise may require further bare trust for additional borrowings• Must not breach requirements of SISR 13.22D• What about going over budget? #top10smsf
  31. 31. Strategy 5: WHY YOU SHOULDALWAYS RUN MULTIPLE SMSF PENSIONS
  32. 32. Maximising benefit payments• Maximise benefit of locking in the tax-free and taxable components• Why is this important? 1. Greater tax efficiency for pensions under 60 years of age 2. Estate planning benefits• POLL: Do you run multiple pensions?• Create multi-pensions where undertaking recontributions – Ability to elect which interest to draw benefits from• Various strategies including: – Unrestricted Non-preserved monies with TRIS – Market volatility – Asset segregation #top10smsf
  33. 33. Impact on UNP with Transition to Retirement • Proportioning rule states that tax-free & taxable components must be taken in proportion to each other – Accumulation: Based on component before lump sum benefit paid – Pension: Proportion determined at commencement of income stream • SIS or Tax Law does not impose any proportioning to preservation components – Can separate unrestricted non-preserved benefits from preserved and restricted benefits • Why? – Priority of cashing benefits – Allocation of fund earnings #top10smsf
  34. 34. Impact on UNP with Transition to Retirement • Case Study – Greg (55) has $700,000 account balance within SMSF – Components include preserved $500,000, unrestricted $200,000 – Target pension income of $60,000 p.a. (CPI, 3%) – Access to capital is important to Greg • How do we best structure the pension(s) for Greg? – Do we commence one or more pensions? – Two pensions will allow for Account Based Pension to be commenced with unrestricted non-preserved benefits #top10smsf
  35. 35. Impact on UNP with Transition to Retirement $300,000 $800,000 $700,000 $250,000 $600,000 $200,000 $500,000 $150,000 $400,000 $100,000 $300,000 $50,000 $200,000 $- $100,000 55 56 57 58 59 60 Single TRIS TRIS & ABP Balance • Within 4 years, single pension has totally eroded unrestricted benefits • Additional $243,331 of unrestricted benefits available after five (5) years by running separate income stream (ABP)
  36. 36. Benefit of multi-pension strategy• Case Study – Ted (60) has recently retired – $1,000,000 balance in SMSF ($200,000 TFC) – Requires $60,000 pension p.a. (CPI – 3%) – Fund earnings at 6% p.a. – Undertakes recontribution strategy of $450,000 • TC = $360,000 + TFC = $90,000• Should Ted commence one or more pensions? #top10smsf
  37. 37. Benefit of multi-pension strategyOne pension Multi-pensionsOriginal components include 20% TFC Original components include 20% TFCPost recontribution includes 56% TFC Recontribution creates a new super(44% TC) interest (ABP#2) with 100% TFC ABP#1 commences with recontribution (20% TFC)All earnings and benefits taken must All earnings and benefits to bebe applied in proportion to when the applied proportionatelyincome stream commenced (i.e. 56% Choice of above minimum pensionTFC / 44% TC) amountsTaxable component balance: Taxable component balance:• After 10 years - $460,223 • After 10 years - $414,930• After 20 years - $383,733 • After 20 years - $254,318
  38. 38. Benefit of multi-pension strategy $700,000 $600,000 $500,000Tax-free component $400,000 Multi-pension strategy benefit: $300,000 • $45,293 after 10 years $200,000 • $83,751 after 15 years • $129,403 after 20 years $100,000 • $195,411 after 25 years $0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Years Single Pension Multiple Pension #top10smsf
  39. 39. How net earning & pension levels influence the strategy Multi-pension strategy benefit after 10 years 10% 9% Estate Planning benefit of 8% $205,804 Net Earnings 7% 6% 5% 4% $50,000 $60,000 $70,000 $80,000 $90,000 $100,000 Pension level $0 -$100,000 $100,000 -$200,000 $200,000 -$300,000 $300,000 -$400,000
  40. 40. How net earning & pension levels influence the strategy Multi-pension strategy benefit after 20 years 10% 9% Estate Planning 8% benefit $0 7% 6% 5% 4% $50,000 $60,000 $70,000 $80,000 $90,000 $100,000 $0 -$100,000 $100,000 -$200,000 $200,000 -$300,000 $300,000 -$400,000 $400,000 -$500,000
  41. 41. Strategy 6: SIX REASONS FORRUNNING REVERSIONARY PENSIONS
  42. 42. Six reasons for reversionary pensions1. Continuation of the Fund’s tax exemption2. Potential for pension benefits to become ‘contaminated’ with taxable component3. No minimum pro-rata pension required prior to death4. Can still take a lump sum death benefit payment5. No change to minimum pension for current financial year6. Less paperwork #top10smsf
  43. 43. Why reversionary?• Commissioner states within TR 2011/D3 that a pension will cease unless: – Reversionary beneficiary included within the original pension terms & conditions; or – A valid binding death benefit nomination existed• ATO view that reversionary must be established at commencement of pension• Any change to add a reversionary is likely to require a full commutation and repurchase• Reliance on a valid BDBN would require very strict requirements in substance and form of nomination #top10smsf
  44. 44. Strategy 7: HOW $1 ACCUMULATIONACCOUNT ALLOWS YOU TOCARRY FORWARD A $100K CAPITAL LOSS
  45. 45. Exempt current pension income• As part of fund investment strategy, trustees may wish to: – Segregate assets; or – Pool assets (unsegregated)• Segregation can take various forms: Segregated by ‘pool’ of members Asset Asset Member Member A B A B (Pension) (Pension) Member Member Asset Asset Member Member A B C D C D (Accum.) (Accum.) Segregated by Asset All members are in pension phase
  46. 46. Asset segregation example• Fred & Wilma are both retired and drawing Account Based Pensions from their SMSF• During 2011-12 financial year have realised several investments which have resulted in capital losses totalling $100,000• As fund is ‘segregated’ – capital losses are to be disregarded – Section 118-320, ITAA 1997• If a member decided to roll back part of their income stream to accumulation phase, an actuary certificate would be required using unsegregated method – Section 102-5, ITAA 1997• Change in method would allow for the capital losses to be carried forward
  47. 47. Why is this important?• Carried forward capital losses can be very important in light of the Commissioner’s views expressed within TR 2011/D3: – Failure to complying with pension standards • Loss of fund tax exemption – Death of a member • Pension ceases at death unless automatic reversionary beneficiary #top10smsf
  48. 48. Strategy 8: MEETING MINIMUMPENSION AS LUMP SUM
  49. 49. Partial Commutationexample Partial commutation example• Amanda (59) has recently retired and has $1,000,000 in accumulation within SMSF• Wishes to commence an Account Based Pension and withdraw $70,000 for the income year Tax Rate Tax Payable Pension payment of $70,000 32.5% $3,797 37.0% $15,400* 45.0% $21,000* The tax amounts shown above do not include any Medicare levy or Medicare levy surcharge, but do include the 15% tax offset available for the pension. * Assumes pension amount is entirely assessable within the respective tax bracket (i.e. pension added to other income taking individual into the marginal tax bracket) #top10smsf
  50. 50. Partial Commutationexample Partial commutation example• Ability to use low-rate threshold – $175,000 (2012-13)• Accumulation phase (15%) Fund Tax Tax Payable on $50,000 of Rate fund income$70,000 taken as lump sum 15% $7,500$70,000 as an income stream 0% $0• Better to take income stream up to $83,000 of taxable income (incl. Medicare levy)• But, could Amanda have the best of both worlds? #top10smsf
  51. 51. Meeting the minimumpension Meeting the minimum pension• Yes she can• TR 2011/D3 confirms that where Amanda elects to take a lump sum via a partial commutation, the: – Income stream benefit still exists (no cessation) – The payment is a super lump sum for income tax purposes and lump sum for SIS purposes – All payments from Account Based Pension count towards minimum pension requirements as a result of commutation (unless to rollover)• Amount can be in cash or in-specie Strategy can also apply for 60 and over members E.g. Moving into higher pension % brackets not requiring income; can make in-specie benefit payments to meet minimum pension
  52. 52. Strategy 9:OPTIMISING PENSIONS WITHIN A VOLATILEINVESTMENT MARKET
  53. 53. Benefiting from a poor investment market Downward investment market example • Arthur drawing an Account Based Pension with an account balance of $1,000,000 at 30 June 2011 – Includes 50% Tax-Free proportion • Poor share market performance shows portfolio decreased to $800,000 – dropped 20% in 2 months • Do nothing = benefits reduce proportionately from commencement of income stream – $400k TFC / $400k TC • Is there an alternative solution for Arthur? #top10smsf
  54. 54. Benefiting from a poor investment market Benefiting from a poor investment market • Full commutation at 30 June 2011 = $500,000 TFC / $300k TC – NB. Not 1 July otherwise, pro-rata minimum (1/365th) pension required to be withdrawn • Commence new income stream from 1 September 2011 – 62.5% tax-free proportion Accumulation Pension Phase Tax-free component $500,000 $400,000 Taxable component $300,000 $400,000 Account Balance $800,000 $800,000 • Result = 12.5% improvement in tax-free component – Under age 60: reduced Arthur’s taxable income – 60 years & over: improved tax on lump sum death benefit when paid to non-dependant #top10smsf
  55. 55. Benefiting from a poor investment market Benefiting from a poor investment market • Opportunity Cost = 2/12ths tax exemption for financial year – @ 4% Fund income = $6,667 share of income x 15% = $1,000 tax INCOME TAX (less than 60 years) No change Commutation & Pension Reset Taxable proportion Pension $25,000 $18,750 Tax Payable (ex. Medicare levy) $0 $0 After tax pension $50,000 $50,000 Super Fund Tax (15%) $0 $1,000 Total Tax $0 $1,000 ESTATE PLANNING No change Commutation & Pension Reset Account Balance $628,380 $628,380 Taxable Component $314,190 (50%) $235,643 (37.5%) Non-dependant death benefit (16.5%) $51,841 $38,881
  56. 56. Strategy 10: ANTI-DETRIMENT,RECONTRIBUTION OR BOTH?
  57. 57. Anti-detriment or recontribution? Anti-detriment recontribution?• TR 2011/D3 has highlighted taxation issues with super death benefits from: – Lump Sum death benefit to non-tax dependants; and – Capital Gains Tax (CGT) within the SMSF• Recontribution ‘window’ typically 60 - 64 years of age – Can extend beyond 65 if ‘work test’ is met #top10smsf
  58. 58. Example Example• John (62) is retired and sole remaining member of SMSF• $450,000 balance made up entirely of taxable component• 2 x Adult children (independent)• Death benefit nomination indicates to be paid equally• Should John consider undertaking a recontribution strategy or look to fund an anti-detriment payment? – $74,250 lump sum tax saving with recontribution (i.e. $450,000 x 16.5%) – What about CGT within the fund? $200,000 of unrealised capital gains? #top10smsf
  59. 59. Example (cont.) Anti-detriment RecontributionAccount Balance on death $450,000 $450,000Tax-free component $0 $450,000Taxable component $450,000 $0Anti-detriment payment* $63,643 $0Total death benefit $513,643 $450,000Tax-Free Component $0 $450,000Taxable Component $513,643 $0Tax on death benefit ($84,751) $0Capital Gains Tax $0** ($20,000)Excess Contributions Tax*** $0 $0Net benefit $428,892 $430,000 John’s ESP is 1 July 1971, with date of death benefit payment 31 March 2012 * Calculated in accordance with ATOID 2007/219 ** Provides a carried forward tax loss, subject to other fund income ($224,287) *** ECT ignored but could apply due to reserve transfer and concessional contribution cap limitation
  60. 60. Example (cont.)• Anti-detriment payment creates a $424,287 tax deduction for SMSF – Unrealised capital gain of $200,000• Becomes a future tax benefit for adult children, but will they use it?• Is there an optimal outcome? #top10smsf
  61. 61. Example (cont.) Anti-detriment Recontribution BothAccount Balance on death $450,000 $450,000 $450,000Tax-free component $0 $450,000 $237,880Taxable component $450,000 $0 $212,120Anti-detriment payment* $63,643 $0 $30,000Total death benefit $513,643 $450,000 $480,000Tax-Free Component $0 $450,000 $237,880Taxable Component $513,643 $0 $242,120Tax on death benefit ($84,751) $0 ($39,950)Capital Gains Tax $0 $20,000 $0Excess Contributions Tax** $0 $0 $0Net benefit $428,892 $430,000 $440,050 • 2.21% effective tax rate on fund income and death benefit
  62. 62. My Top10 SMSF strategies for 2012-131. Use the ‘get out of jail free’ cards for ECT2. Contribution holding accounts to manage ECT and ‘double dip’3. Property improvements using LRBAs4. Property development with LRBAs & SISR 13.22C trusts5. Almost always run multi-pensions6. Six reasons to have reversionary pensions7. How a $1 account balance can allow carry forward capital losses of $100,0008. Taking minimum pension as lump sum9. How to take advantage of strategies in a volatile investment market10. Anti-detriment or recontribution or both? #top10smsf
  63. 63. eBook and Webinar recording A copy of the webinar recording and eBook are available at www.thesmsfacademy.com.au
  64. 64. Thank Youwww.thesmsfacademy.com.au twitter.com/thesmsfacademy facebook.com/thesmsfacademy youtube.com/thesmsfacademy

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