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Why investors need to be wary in 2019

Why investors need to be wary in 2019

By Ben McCaw, MLC,  SMSFAdviser 22 February 2019 

The rise in share market volatility is a reminder of vulnerabilities that have accumulated in the financial system.

The fragilities underlying the prolonged strong returns of the past few years became more apparent in the final quarter of 2018. 

Returns have been generated on the foundation of ultra-low interest rates and central bank asset purchases since the global financial crisis.

The key fundamental change has been tightening liquidity. During the March quarter of 2018, we saw the first challenge to the perception that the strong return environment will persist.

The stronger US wages data resulted in a sharp interruption to the US share market’s relentless rise.

The surge in equity volatility was a reminder of these fragilities that have accumulated in the financial system.

Investor behaviour has, to some extent, shifted towards “selling the rally”. This is in contrast to what has been a perennial “buy the dip” mentality over the past decade.

However, a sustained shift in investor expectations requires repeated confirmations that the future is not as rosy as previously presumed.

In the final December quarter of 2018, monetary policy, global trade and related concerns about global and Chinese economic growth, as well as the US budget impasse, all combined to more clearly shift investor expectations.

This resulted in the worst year since 2008 for share markets.

Bond villains

However, in contrast to 2008, when government bond yields fell and their returns surged, bonds have mostly not been effective diversifiers of risk during 2018.

During 2018, both bonds and shares declined in value at the same time. This means that the only reliable way to limit downside risk has been to accept lower returns.

Our understanding of this reality is the reason why our real-return portfolios have been positioned so defensively.

What does the future hold?

While it can take a long time, the fundamentals will ultimately drive investment outcomes. Asset prices that are high suggest low future return potential.

While there are some exceptions such as emerging market shares, our assessment is that asset prices are mostly not cheap and, in some cases, as with US shares and nominal bonds, are still high.

However, the path of returns will depend on how investor expectations change. A trade deal between the US and China that is favourable for economic growth is still possible. The argument over the Mexico border wall can be resolved.

We also know that the US Federal Reserve (Fed) is “data dependent” and that US economic growth is still robust.

So, a positive mindset could resume across global financial markets, and we have seen some of that during January in response to soothing words from the Fed and hopes for a US-China trade deal.

A new direction for the Fed

However, liquidity is tightening and has turned into a headwind. The rise in share market volatility is a reminder of vulnerabilities that have accumulated in the financial system.

We also know that the Fed understands the imperative to build policy options for the next economic downturn.

Indeed, the Fed, under the leadership of Jerome Powell, has partly removed the “lower for longer” bias that distorted the outlook for US interest rates. This is a very important change for all risk asset markets.

The presumption of interest rates remaining “lower for longer” has been a core driver of stretched valuations across asset classes

Even small movements in long- term discount (interest) rates can have a profound effect on the periods when inflation is volatile valuation of all assets. Share prices, for example, can move significantly if the market revises its cost of capital assumption.

Further interest rate rises by central banks would likely drive the market’s perception of the “natural” interest rate higher again. 

Yet, even if the real economy remains strong enough for interest rates to normalise, a strong economy by itself will not drive a strong share market.

Taking risk may not reward investors during periods when inflation is volatile or stubbornly low.

In this vein

In this vein, perhaps the most threatening aspect for shares of a strong US economy is that higher inflation could lead to the erosion of the high corporate profit margins across most industry sectors.

Tight labour markets continue to threaten wage growth, while higher borrowing costs will eventually dampen net profit margins.

Thus, while corporate sales revenue growth may persist given a strong US economy, there is no guarantee that profit growth will keep up with expectations.

This leaves investors potentially facing the double penalty of a rising cost of capital and declining profit growth.

Taking risk may well reward investors over the coming year, but this may prove unwise if one chooses to ignore elevated share valuations and global political risks.

We believe that focusing tightly on risk control while taking opportunities when they present themselves will be beneficial. This is a challenging period that will test all investors.

Dr Ben McCaw, portfolio manager, capital markets research, MLC

By |February 27th, 2019|investors, retirement, Self Managed Super Fund News, Uncategorized|Comments Off on Why investors need to be wary in 2019

Auditors will require more information on non-standard investments in future

Auditors require more information on investments as concerns about non-arm’s length income intensify following recent litigation cases.

Audit cases prompt fears with new NALI (non-arms’s length income) measures, SMSFAdviser by Miranda Brownlee 12th November 2018

Concerns about the new provisions for non-arm’s length income have intensified following the outcome of recent litigation cases, particularly in the SMSF auditor community, says an industry lawyer.

Speaking to SMSF Adviser, Argyle Lawyers managing principal Peter Bobbin said it is still unclear how the new non-arm’s length expense provisions will operate and recent litigation cases involving SMSF auditors have added further concern, because they have shown that where auditors don’t identify the problems, they will be found liable.

The Cam & Bear Pty Ltd v McGoldrick case was a decision by the NSW Court of Appeal, which ruled that the auditor was negligent in failing to make proper enquiries as to the recoverability of certain investments held in the fund and report back to the trustee.

There has also been a second case more recently, Ryan Wealth Holdings Pty Ltd v Baumgartner, which similarly found that the auditor’s failure to detect irregularities in the fund over a number of years and this meant that the SMSF trustee was unable to redeem money lost on a series of unsecured loans.

“What the Cam & Bear decision tells us is that it’s an issue for every style of investment. Any private investment is a problem, whether it’s a private loan, private mortgage, private company shares, they’re all problems for auditors,” said Mr Bobbin.

“Whereas before, the problem was limited to does the investment exist and does the carrying value appear reasonable, but now they’ve got to make deeper enquiries with personal professional risk as a threat.”

What is unclear with the new provisions for non-arm’s length expenses, he explained, is what expense will convert the whole investment into a non-arm’s length problem.

“The explanatory memorandum says that if an accountant does the books of the super fund for free that’s okay, but what if the accountant does the books for the unit trust for free? Is that okay, or is that a problem? What about the super fund member who mows the rental property lawn? Is that a problem? Does the business owner, with an LRBA trust have a problem?” he said.

“Again, where do the auditor’s responsibilities start and stop?”

Auditors have expressed a fair bit of concern about the Cam & Bear case, he said, and determining what will sufficiently reduce risk for the auditor is difficult because each case is dependent on specific facts.

“What it might do is kill the cheap audit. Auditors will need to extend their investigations and that’s time consuming. That is a big issue and a lot of people are talking about that,” he said.

“It is quite worrying for auditors and I think audits for the 2018 year are going to be quite problematic.”

SMSF Alliance practice principal David Busoli also agrees that these two recent court decisions may “herald a rise in SMSF audit fees”. In both cases, Mr Busoli said the trustees willingly entered into investments in private arrangements that they did not understand.

“The auditors were presented with accounts that did not adequately describe them. Because the auditors did not make sufficient enquiries as to the nature of these investments, and so did not qualify the accounts, they were held to be primarily liable for the losses incurred,” he said.

“No doubt auditors will require more information on non-standard investments in future and their professional indemnity insurers will be considering these developments with interest. We can also expect to see a significant increase in qualified audits.”

By |February 7th, 2019|Auditor, Self Managed Super Fund News|Comments Off on Auditors will require more information on non-standard investments in future

Quality controls flagged for auditors as regulator clamps down

Quality controls flagged for auditors as regulator clamps down

SMSF auditors should consider new quality controls in 2019, given the regulator’s ongoing focus and recent court battles holding auditors liable for investment losses. – Accountantsdaily, SMSF Miranda Brownlee 17 January 2019

Speaking in a webinar, DBA Lawyers special counsel Bryce Figot said that recent court cases, such as Cam & Bear Pty Ltd v McGoldrick and Ryan Wealth Holdings Pty Ltd v Baumgartner, have prompted SMSF audit firms to consider how to bolster their internal quality controls and protect their business from litigation risk.

Asking the right questions

One of the key questions that SMSF auditors should be asking when they take on clients is whether there are any loans in the SMSF, and whether there are any investments in entities associated with the accountant or financial adviser who looks after the member, Mr Figot said.

The presence of loans or these types of assets can be an indicator that there are higher risks for that particular SMSF.

If there are indicators that point to high investments, then the SMSF auditor may want to contact the trustee or directors of the SMSF and alert them to the risks of the investment and flag that it may not be fully recoverable, Mr Figot explained.

The auditor should keep following up with the trustees or directors of the SMSF, he said, until they receive confirmation from all the trustees if there are individual trustees, or at least two directors where it is a corporate trustee.

The engagement letter

Best practice is to ensure that the client for whom the audit is being conducted signs the audit engagement letter, Mr Figot said.

“It doesn’t always happen that way, however. In the Ryan Wealth Holdings v Baumgartner case, the engagement letter hadn’t been signed by the trustee,” he noted.

“The letter of engagement had a formal closing of ‘Yours Faithfully, Baumgartner Partners’ and provided a space for signature above the typed words ‘David Baumgartner’ and the letter was signed by Christopher Moylan, a financial adviser and accountant to the plaintiff.”

Still an agreement
It was still considered to be an agreement that was entered into, though, with the auditor retained to perform duties under the audit contract, he explained.

In order to address situations where the letter is unsigned, he recommended that audit firms address this by having a clause in the letter that states ‘you may accept this offer by continuing to give us instructions in this matter’.

“I would say you are the client, attached is the terms governing our engagement, if you want to bill someone else, get them to sign it and return it, but until they do it, you are client,” Mr Figot explained.

“Best practice is, of course, to get it signed, but this gives you a leg to stand on. So, I think you should have that line in your engagement letter.”

Mr Figot acknowledged that while there is a lot of case law that suggests a clause like this would be adequate in the context of a lawyer providing services, there isn’t really any case law which sheds light on whether it would stand up in court for auditors.

Scope
SMSF auditors should also be aware that accountants in their engagement letter will often make it clear that the scope of their retainer is merely to act as a supplier of information.

This means that the auditor may be found liable for the accuracy of financial statements.

“This is essentially how the accountant in Cam & Bear got off scot-free, whereas the auditor was found to be 90 per cent liable,” he cautioned.

Contact Trustees
The auditor should also make it clear that they may contact the trustees and directors directly and any additional fees or hourly rates that may apply if they do contact the trustees or directors and the correspondence exceeds a certain time limit.

One of the other items that should be explained, he said, is that if the auditor decides to engage another professional such as a lawyer or an actuary, whether they will provide that advice to the client or keep that advice confidential.

“You may want to have that eventuality covered off in your engagement letter,” he said.

Auditors may also want to make it clear that if the client decides to terminate their engagement, that the auditor may still feel obligated to lodge an audit contravention report and charge for their time.

By |January 29th, 2019|Auditor, retirement, Self Managed Super Fund News|Comments Off on Quality controls flagged for auditors as regulator clamps down

Franking changes tipped to ‘strangle’ SMSFs

Franking changes tipped to ‘strangle’ SMSFs

The federal opposition’s proposal to end refunds of excess imputation credits will potentially “strangle” existing SMSFs and drive them into retail and industry funds, says the Tax Institute. SMSF  Jotham Lian  04 December 2018 from www.accountantsdaily.com.au

Speaking to Accountants Daily, the Tax Institute’s senior tax counsel, Professor Robert Deutsch said retail and industry funds would be in a much stronger position to withstand Labor’s proposal due to their capacity to utilise excess franking credits against other income internally within a fund across a broad combination of members who are in pension and accumulation mode.

“Retail and industry funds invariably have a combination of members – one group being in pension mode the income from which is tax-free and another group being in accumulation mode the income from which is taxed at 15 per cent. To the extent that one can marry the excess imputation credits derived by the pension mode members against the extra tax which needs to be paid by the accumulation mode members, Labor’s policy will have no impact,” said Professor Deutsch.

“SMSFs by comparison, have a much smaller capacity for utilising this principle since they are often two-member SMSFs where both members are in pension mode, or SMSFs with younger members who are all in accumulation mode. Situations where SMSFs have a combination of both pension mode members and accumulation mode members will be fairly limited.

“I don't think the Labor party did this because they set out to make life as difficult as possible for the SMSF industry but it is going to be one of the victims of the change if and when it happens.”

Professor Deutsch believes the proposal will see a less than ideal outcome with SMSF members ultimately driven to retail and industry funds.

“The SMSF industry is an important sector and should be nurtured. People should be encouraged to have their own funds and take responsibility for the performance of those funds rather than leaving it to third-parties who having regards to everything we've seen in the royal commission, one might argue that you're better taking responsibility for your own financial future rather than leaving it to a third party,” said Professor Deutsch.

“People often say we are returning to where we were from 1987 to 2001 where we had this very system with no excess imputation refunds.  The difference is that the SMSF industry back then was in its infancy and wasn't widespread.

“In the course of the last 18 years, we have encouraged the SMSF industry, partly I have to say through excess imputation credits but not entirely, and as a result, there's been an explosion in the number of these funds and it's not right to say we're going back to where we were. Economically, it's a very different environment and we're going to strangle the existing SMSFs because they have built a reliance on excess imputation credits being returned to them and that will cease,” he added.

“We're not enamoured at the idea of carve outs, we're not enamoured of the idea of caps, we believe the system as it stands works well and is consistent with at least one theory of imputation and we think the status quo should remain but we're realistic enough to know that if Labor are likely to win the election, they certainly would have a mandate to do what they are proposing.”

CPA Australia had earlier spoken out against the reforms, calling for other options to be considered to ameliorate the impact on investors, including introducing an annual cap on refundable credits, as well as holistic tax reform.

“One of our key suggestions was that if they were going to go down this path, in the absence of holistic tax reform and looking at other options such as an income tax discount on income from rents, interest and dividends, which is not on the table, then they should be considering whether perhaps there should be franking credit caps introduced for taxpayers so if you’re an SMSF or an individual, you might have a cap where you can only get a refund of say $20,000 per annum instead of just no refund,” said CPA head of policy, Paul Drum.

jotham.lian@momentummedia.com.au 

By |December 4th, 2018|Uncategorized|Comments Off on Franking changes tipped to ‘strangle’ SMSFs

Compliance Hotspots for SMSF 2018-19

Compliance Hotspots for SMSF 2018-19 from Shirley Schaefer, Partner BDO published in SMSF Adviser Magazine Nov/Dec 2018

What the ATO has on their Radar this year

Late or Non-Lodgement of Tax returns. “The ATO has clearly done some work around this and SMSF trustees are realising that they need to get everything into line … Interestingly, for some … it goes back a significant number of years; the ATO seems to be happy so long as the trustees actually engage an accountant or an administrator to take them under their wing and get it done. That’s their main focus, to make sure people get it started if nothing else.”

“We may see them (ATO) focusing on related party limited recourse borrowing arrangements. Now that most of 2016-17 tax returns have been lodged, they’ll be able to identify those funds that have got a related party borrowing arrangement in place, and of course if they’re not at arm’s length terms, then the income from that arrangement could potentially be taxed as non-arm’s length income. Taxed at the highest rate.”

The other thing, which is always on their radar, is early access to super and loans to members. They’ve always got their eye out for those types of things.”

Compliance Hot Spots

Issues with returns for the 2016-17 financial year – “The biggest area of concern, although it wasn’t so much a problem, was just having to deal with the resetting of pension balances down to the $1.6million and then correctly calculating the reset of any asset cost bases and the capital gains tax for the relief.”

2017-18 financial returns, traps that will arise with those – “Nothing that’s really come in so far, but I do expect to see some problems or some issues and errors with contributions made to super in the 2017-18 financial year, with changes in the limits. Concessional contributions caps went down to $25,000 and non-concessional limits were reduced to $100,000. Also, the additional thresholds around non-concessional contributions, the fact that you can’t really make non-concessional contributions if you’ve got more that $1.6 million in super, and just the further complication of those rules. Despite everyone’s best intentions, I think trustees will make mistakes.”

Transfer Balance Cap Reporting – “I still think there’s a lot of accountants out there who don’t know that they were supposed to report by 30 June 2018, the 30 June 2017 pension balances, and they still don’t realise that they need to do regular reporting to the Tax Office of different events … a lot of the smaller accounting firms are not across a lot of that stuff yet”

To read more on this go to www.smsfadviser.com

By |November 8th, 2018|Self Managed Super Fund News, Uncategorized|Comments Off on Compliance Hotspots for SMSF 2018-19

Three-year SMSF audits: how auditors will be affected

Three-year SMSF audits: how auditors will be affected – By Alexandra Cain, – 26 Jun 2018, INTHEBLACK magazine – 26 Jun 2018 https://www.intheblack.com/articles/2018/06/26/three-year-smsf-audits

Trustees will still have every year audited, but this would be completed once every three years.

Experts says cutting audits of self-managed super funds (SMSFs) to once every three years instead of annually is unlikely to cut either costs or red tape and could have serious consequences for the SMSF audit sector.

The 2018 Federal Budget proposed allowing SMSFs to be audited every three years, rather than annually as currently required. It is not a one-year-in-every-three proposal, rather trustees would still have every year audited, but this would be completed once every three years.

“Trustees still have to verify the opening balance and reconcile and verify audit evidence over the three-year period, which may end up costing more. Any auditor will tell you it can be difficult getting clients to submit their material annually. This will be even tougher if they only have to do it every three years,” says Paul Drum, head of policy at CPA Australia.

Drum says that if trustees have made mistakes or inadvertently contravened regulations, the problem will only compound over three years. It is likely it will take more time and money to fix than if the issue had been picked up after a year.

Costs to rise for fewer SMSF audits?

There will be savings for some funds, but for many there won’t be any cost reduction at all, and for some an increase in costs is likely, says Richard Smith, managing director, ASF Audits. Smith says three-year audits may work for very simple funds, for instance those that only hold cash or managed funds.

“But even with simple funds, trustees can easily make errors with contributions and pensions,” he says.

Tenuous benefits aside, Drum argues moving to a three-year audit could threaten the integrity of the SMSF ecosystem.

“There will be an element who will take the opportunity to game the system. If you don’t regularly police it, you run the risk people will find loopholes. Trustees are also less likely to implement risky strategies in the existing annual audit system, in the knowledge the fund is regularly monitored.

“The extra checks auditors perform, especially around record-keeping for property investments and limited recourse borrowing arrangements, help support the regulator’s role,” he says.

Audit as checks for good administration

Drum says that rather than view the audit as an impost, a better approach is to see it as a useful tool to help ensure the smooth running of the fund.

“The audit gives trustees an invaluable check they are administering the fund appropriately. SMSFs are complex, so instead of looking at the annual audit as a burden they should be looking at it as a tool that supports their role.”

There are many details to be worked out should three-year audits be introduced, such as which SMSFs would be allowed to have their audits completed once every three years.

The Federal Government’s initial indication is that only funds with a good compliance and lodgement track record would be eligible, but no detail has been released about what constitutes a fund with a good record.

Serious consequences for SMSF auditors

If the proposal goes ahead it is likely to have serious consequences for the SMSF audit sector.

Smith says managing fluctuating workflows will be a concern, particularly if a large number of funds will be eligible to be audited in the same year, while a much smaller number will be audited in the other two years.

“That is going to create serious resourcing issues, which may increase costs for us and for our SMSF clients. One reason is because we may have to employ more casual staff, which comes at a higher cost compared to full-time staff.”

ASF has never outsourced any of its services, “but I am sure many firms are starting to think outsourcing is suddenly an option,” Smith says.

Who will decide audit timing?

A potential problem may be keeping auditors’ skills up-to-date and relevant in a three-year environment. Another issue is which party will drive the timing of the audit – the trustee, the auditor or the Australian Taxation Office?

CPA Australia is in discussions with Treasury about how three-year audits would work in practice.

“If the government can demonstrate this measure will meet its objectives, and it is able to be implemented, we would support it. But at the moment we have a lot of questions about how to make this work,” Drum says.

A Treasury spokesman confirms the Federal Government has started consultations with stakeholders on the proposal.

“Consultation to date has been constructive. The government will continue to progress consultation with industry and ensure stakeholder views are taken on board in the design of the measure,” he said.

Meanwhile, the SMSF audit industry is awaiting details of the proposal that has many businesses in the sector seriously concerned about how this will play out.

Says Smith, “When more details are released we will be able to make a better assessment of any potential savings or costs. Until then, we can’t work out what the real impact will be.”

 

By |August 21st, 2018|aged care, budget, retirement, Self Managed Super Fund News|Comments Off on Three-year SMSF audits: how auditors will be affected

Pension Loan Scheme

The pension loans scheme, From Tax & Super Australia Newsroom – https://taxandsupernewsroom.com.au/pension-loans-scheme/

To help pensioners who are asset rich but income poor, the government launched its own version of a financial product that has been commercially available for some time, the reverse mortgage.

A reverse mortgage is a type of home loan that allows you to borrow money using the equity in your home as security. The loan can be taken as a lump sum, a regular income stream, a line of credit or a combination of these options.

Interest is charged like any other loan, except you don't have to make repayments while you live in your home – the interest compounds over time and is added to your loan balance. You remain the owner of your house and can stay in it for as long as you want.

You must repay the loan in full (including interest and fees) when you sell your home or die or, in most cases, if you move into aged care.

While no income is required to qualify, credit providers are required by law to lend you money responsibly, so not everyone will be able to obtain this type of loan.

The government’s answer is its pension loans scheme (PLS), whereby a pensioner can apply for a non-taxable loan using some form of real property as security. The PLS does not provide a lump sum, but a regular fortnightly payment.

The scheme is administered by the Department of Human Services (DHS).

At present the scheme is only open to those on a full pension, but the 2018 Federal Budget announced the government intends to open the PLS to all pension-age retirees (not just those who qualify for the Age Pension). A date has not been set for this yet.

Also (from 1 July 2019) the maximum allowable income stream (combined Age Pension and PLS) will increase to be 50% higher than the full pension, including supplements.

A full age pensioner may be able to apply if:

  • they or their partner are of Age Pension age
  • they own real estate in Australia that can be used as security for the loan (home or investment)
  • they or their partner receive a rate of payment that is less than the maximum pension amount or nothing (due to either the income or assets test, but not both)
  • they meet Age Pension residence rules.

There are costs associated with the scheme, which DHS will determine and send to the person seeking the loan. The current rate of interest is 5.25%, which DHS adds to the outstanding loan balance each fortnight until the loan is repaid.

The loan recipient can repay the PLS loan in part or in full at any time. If the loan recipient wants to sell a property they need to inform DHS, and they can either transfer the loan to another property including a new home or they can repay the loan on the date of settlement.

If there is an outstanding amount upon the loan recipient’s death, the estate or in some cases the surviving partner’s estate can make repayments.

The total loan available depends on the:

  • equity in the property offered as security
  • equity kept in the property, and
  • the age of the recipient or their partner, whoever is younger.

Applicants can get a loan up to the maximum rate of income support payment they qualify for. Loan recipients may also use real estate owned by a private company or trust as security for the loan, if they are a controller of that company or trust. If there is more than one property, they can choose which to use as security for the loan.

DHS will register a charge with the Land Titles Office on the title deed of the property used as security, with recipients paying any costs associated with this charge. A licensed valuer will value the property; however this is done at no cost to the loan recipient.

Any person seeking a PLS should contact the DHS first to ensure they are eligible and to confirm the amount they can seek.

By |August 20th, 2018|aged care, budget, retirement, Self Managed Super Fund News|Comments Off on Pension Loan Scheme

Insurance under SMSF

Important tax time decision flagged for SMSF insurance

Reported in SMSFAdviser News by Miranda Brownlee 16 July 2018 https://www.smsfadviser.com/news/16751-bt-flags-important-tax-time-decision-for-smsf-insurance.

Instead of claiming tax deductions for life insurance premiums, SMSFs may want to claim a deduction for the future liability to pay death or disability benefits instead, according to a technical expert.

BT senior manager, product technical Crissy Demanuele said by claiming the future liability tax deduction, rather than deductions for the premiums paid for life insurance premiums, in some cases SMSFs can be "significantly better off". 

Ms Demanuele reminded SMSF practitioners that an SMSF will only be able to claim this deduction if the fund has paid an insurance premium in the year in which a death or disability benefit is paid, the fund had also been claiming tax deductions for the insurance premiums previously, and the member ceased work as a result of the disability or death.

“The future liability deduction may be available to funds when they pay a benefit to a member as a result of death, terminal illness, total and permanent disability or temporary disability,” she said.

“Once this election is made however, the fund cannot claim future tax deductions for the cost of insurance, so the SMSF trustees need to carefully consider which tax deduction may be more beneficial for their fund.”

Ms Demanuele used the example of David and Julia who are both aged 55 and have an SMSF. Each member is insured for $1.4 million of term life and TPD insurance cover. On 1 March 2018, David suddenly passed away. At the time of his death, he had been a member of the SMSF for 10 years, she explained.

“The SMSF received a death benefit insurance payout of $1.4 million which was added to his accumulation balance of $500,000. The SMSF paid the insurance premium of $2,000 on 1 February 2018,” she continued.

“After David’s death, Julia’s son Michael joined the fund and also became a trustee of the fund. As trustees, Julia and Michael seek tax advice and are informed that they could choose to claim the premium paid of $2,000 as a tax deduction or claim a future liability deduction instead for the 2017/18 financial year.”

If the SMSF claims a deduction for the premium paid, Ms Demanuele explained it will receive a tax deduction of $2,000.

“If instead Julia and Michael choose not to claim a deduction for insurance premiums paid by the fund in 2017/18, the fund can instead claim a tax deduction under provisions for the future liability to pay benefits,” she said.

The deduction, she explained, will be calculated as follows:

Benefit amount x Future Service Period/Total Service Period

= $1.9 million x 10 years/20 years

= $950,000

“By claiming the future liability tax deduction, an SMSF could be significantly better off,” she said.

By |July 18th, 2018|Self Managed Super Fund News|Comments Off on Insurance under SMSF

SMSFs to be required to have Retirement Income Strategy

SMSFs to be required to have Retirement Income Strategy from www.solepurposetest.com/news MAY 21, 2018 BY LUKE SMITH

SMSFs would be required to develop a Retirement Income Strategy under changes to superannuation being developed by the Government.

The Government has released a position paper on the Retirement Income Covenant, which would require super funds – including SMSFs – to develop a Retirement Income Strategy for members.

“For too long superannuation has been focused only on accumulating savings. A retirement income framework is a pivotal part of the Government’s reform agenda for superannuation – an agenda squarely focused on protecting and improving outcomes for superannuation members,” said Minister for Revenue and Financial Services Kelly O’Dwyer.

“To fulfil the overarching purpose of superannuation, it is essential that trustees develop a retirement income strategy and consider the retirement income needs of their members.” 

This follows from an announcement in the 2018 Budget that the Government intends to amend the SIS Act to “introduce a retirement covenant that will require superannuation trustees to formulate a retirement income strategy for superannuation fund members”.

The Retirement Income Covenant is part of the Comprehensive Income Product for Retirement (CIPR), which was a recommendation of the Financial System Inquiry (FSI) to require super funds to pre-select a retirement income option for members. The Government has been slowly progressing CIPR since it was recommended by the FSI in 2014.

According to the position paper the only part of the Retirement Income Covenant that would apply to SMSFs is the requirement for a Retirement Income Strategy.

In terms of the broader Retirement Income Framework, the Government plans to prioritise progress of the Retirement Income Covenant, followed by simplified and standardised disclosures for retirement products, then retirement income projections and finally the regulatory framework.

The superannuation industry has criticised CIPR as “neither necessary nor sufficient”, as currently designed, to meet its goals.

 

By |May 22nd, 2018|budget, retirement, Self Managed Super Fund News, Uncategorized|Comments Off on SMSFs to be required to have Retirement Income Strategy

2018 Budget measure proposes annual audit change to once every three years

SMSF Association Media Release – 8 May 2018 – Audits.

The 2018 Budget measure that proposes a reduction in the annual audit requirement to once every three years for self-managed super funds (SMSFs) with a good compliance history has been welcomed by the SMSF Association.

SMSF Association CEO John Maroney says this proposal, which will cut red tape for the SMSF sector, is a fitting reward for trustees who strictly adhere to the regulatory regime.

However, Maroney adds that it’s a strongly held Association position that an independent audit is essential to the integrity of the sector, and as such “we keenly await the implementation details of the proposal”.

This proposed change in auditing procedure for SMSFs, when coupled with the expansion of SMSFs from four to six members and the digital rollover measure announced by the Minister for Revenue and Financial Services, Kelly O’Dwyer, at last month’s inaugural SMSF Expo, help to cut red tape and improve flexibility for SMSFs.

Maroney says these positive measures, in line with a 2018-19 Budget that largely left superannuation alone, will come as an “enormous relief” to SMSFs and their advisers.

“This continued regulatory stability for SMSFs is welcomed by the Association and is sorely needed as trustees still come to grips with the superannuation tax changes that took effect on 1 July 2017.

“We look forward to a much-needed period of stability for superannuation and working through the implementation of the superannuation changes with the Government and regulators.”

He says the Association is pleased that the Government has acted to ensure the efficiency and integrity of the broader superannuation system.

“Capping fees on low balance superannuation accounts and introducing opt-in requirements for insurance in superannuation for certain fund members are positive measures that will ensure younger superannuation fund members do not have their account balances eroded unnecessarily.”

Older Australians were also beneficiaries of the Budget via an expanded Pension Work Bonus program, the enlarging of the Pension Loans Scheme to include people on the full-age pension and self-funded retirees, and granting a one-year superannuation work test exemption for recent retirees with balances under $300,000.

“These measures are welcomed by the SMSF Association for providing more flexibility for older Australians to manage their retirement.”

By |May 12th, 2018|budget, Self Managed Super Fund News, Uncategorized|Comments Off on 2018 Budget measure proposes annual audit change to once every three years

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