Meg Heffron

Heffron’s Super Toolkit now includes BGL integration and multiple subscription levels. Drawing on our extensive technical knowledge and understanding of SMSFs, Heffron is creating tools for SMSF professionals which contain unique features to guide users through the process of creating fully compliant SMSF documentation.

As part of our latest release we have added a Professional subscription level to our Toolkit offer. Subscribers can now manage access for multiple users from within a firm to collaborate in a single account. They will still be able to share documents with interested parties outside their organisation, like trustees or financial advisers.

Another feature of the Professional subscription is integration with innovative and award winning SMSF software provider BGL 360. This technology will allow client details to be populated in the documentation as it is created, creating business efficiencies.

Heffron’s Managing Director Meg Heffron announced the newly developed features.

“We are excited about the next evolution of our Super Toolkit. Our intention is to provide tools that enable intermediaries and trustees to play the role they want to play with SMSFs. For some this might simply be providing a compliance document. For others, it will be guiding them through the key decision points for a range of different SMSF events or activities (we’re calling this “guided decision making”).”

“The BGL integration is something we are extremely proud of. This will save our clients time by allowing fund and member data to be automatically pre-populated from BGL 360.”

“We will continue to develop useful tools to help our clients with many aspects of their SMSF work,” said Heffron.

The post New features added to Heffron’s Super Toolkit appeared first on AdviserVoice.

Meg Heffron

A key ATO ruling (LCR 2021/2) was released yesterday to update the original draft from 2019. It deals with the vexed issue of when transactions between a superannuation fund and another party potentially create non arm’s length expenses (NALE).

NALE exists when expenses incurred by a SMSF are too low – they are less than the amount that would be been incurred if the parties had been dealing with each other on an arm’s length basis.

Meg Heffron, Managing Director of Heffron and leading SMSF expert explains that NALE is bad because where it exists, the fund also has NALI (non arm’s length income).

“In other words, if a fund’s costs are artificially low, some or all of its income is taxed at the top marginal tax rate of 45% rather than the normal superannuation rates of 15% or nil%” said Heffron.

“The ATO has consulted widely and has ended up in a place that won’t please a lot of us on every front.” Like the original draft, the final ruling divides potential NALE into two buckets:

• Costs that relate specifically to an individual asset – in which case all future income in relation to that asset is tainted forever and will be NALI (including capital gains), and
• Costs which don’t relate to an individual asset (let’s call them general expenses) and are therefore deemed to relate to all income of the fund – in which case NALE means ALL fund income is NALI.

For SMSFs in particular, when it comes to trustees doing work for their own fund, the final ruling also draws a distinction between:

• Work done in the person’s individual capacity – which might create a NALE problem if the fund isn’t charged arm’s length rates, vs
• Work done in their trustee capacity – where it’s generally OK not to charge for the work, since being a trustee naturally involves (unpaid) work and sometimes that work will leverage particular skills the trustee happens to have. In fact, the super law prohibits trustees being remunerated for the work they do as trustee.

Heffron explains that the final ruling includes a sensible compromise that where a general cost is recurring, having a NALE problem in one year won’t taint the relevant income forever. General costs will only give rise to NALI in the years in which they are charged on a non arm’s length basis.

“In practical terms, this means that undercharging accounting fees in one year (a general expense that causes all fund income to be NALI) will only impact that year” says Heffron.

Note that the ruling explicitly distinguishes between this type of “once off NALE” and a similar problem where the expense relates to the purchase of an asset. Unfortunately, there is a permanent problem for NALE under these circumstances. The ruling even provides an explicit example where an LRBA is entered into on non arm’s length terms. Even refinancing and moving to arm’s length terms doesn’t help – all income and capital gains, now and forever, will be NALI.

“That’s rough. It means there is actually no solution for LRBAs that aren’t set up on a solid market basis” says Heffron.

A second piece of good news is that the very tough stance originally taken on (most commonly) accountants doing work for their own SMSFs using company equipment has been softened to include some important new language: “However, minor, infrequent or irregular use of equipment or assets will not, of itself, indicate the individual is acting in their individual capacity. For example, in the absence of any other factor indicating otherwise, minor, infrequent or irregular use of a business computer at the office by an individual would not, of itself, indicate the individual is acting in their individual capacity” LCR 2021/2.

Heffron says there are still plenty of questions to answer in regard to this subject.

“The importance of relying on a licence or insurance – it would seem that (for example) it’s fine for a qualified accountant to do their SMSF’s bookwork on their work computer and using their expertise gained via their work. But if they also lodged their tax return under their firm’s corporate tax agency, that is likely to create a problem,” says Heffron.

“A similar issue would appear to arise for financial advisers. An example provided in the ruling (Example 7, Levi) makes it clear that it’s fine for Levi to place investments for his SMSF (even using his work computer). But we’re unclear as to how far that stretches. If Levi’s SMSF is invested via the same platform as all Levi’s other clients, can he manage it under the same dealer code?”

“And finally, the ruling does acknowledge the commercial reality of things like staff discounts. It provides examples about situations where (say) accounting fees for work on SMSFs of the staff who work at the firm can be discounted without automatically creating NALE. A key feature of the examples provided, however, is that the trustee / member is not in a position to influence the discount. How far does this go? Could we be in the bizarre situation where I can offer all Heffron staff a discount on their SMSF work but can’t receive one myself because I can influence the decision? It’s not clear.”

Meg Heffron explains that there is still much to decipher and consider from this ruling.

“It’s a good start but as always, we need more examples that are closer to real life. We have specific time devoted to this important topic in our forthcoming Super Intensive Day as we predict there are many nuances that will need to be nutted out before SMSF practitioners and advisers feel they have this under control. “

The post SMSF NALE ruling finalised – ATO gives some good news, some not so good appeared first on AdviserVoice.

Meg Heffron

Accountants and advisers now have access to a unique industry tool dedicated to delivering pension documentation, with the launch of Heffron’s new Pension Pack.

Working as part of Heffron’s Super Toolkit, the Pension Pack tool is designed to help accountants and advisers deliver pension documentation for their SMSF clients that is both fully compliant and also reflects how pensions happen in real life within an SMSF.

Heffron Managing Director, Meg Heffron, says SMSF pension documents are often prepared well after the pension has started, but written as if they were signed in real time. She says it’s one area where industry professionals fall down unnecessarily.

“Sometimes the precise amount used to start a pension is known well in advance and documented upfront. More likely, the member knows they will commence a pension with their full account balance but won’t know exactly what that will be until the financial statements are prepared.”

“The documentation needs to reflect the fact that it is either confirming a decision made some time ago to start a particular pension or flag that the pension is being documented before it starts but some information will be added later.” says Heffron.

Heffron’s new pension tool accommodates and documents all these scenarios.

“And of course, the tool incorporates all the checks and reminders we would use in our own practice before setting up a pension. This is one of the areas where we think we can really help advisers and accountants – using our knowledge of the rules and actual industry practice to get their documentation right.” says Heffron.

The Pension Pack is in addition to Heffron’s existing Super Toolkit’s components; Investment Strategy, COVID-19 Rent Relief and Investment Strategy Review. New features, including integration with SMSF software, multiple user accounts and guided documentation will continue to be added to the Super Toolkit when the next subscription level (designed specifically for SMSF professionals) is introduced.

For a limited time only, users will be able to access the new pension tools as part of their existing monthly Toolkit subscription of just $20 + GST with no lock in contract.

The post Heffron takes a unique approach to SMSF pension documentation appeared first on AdviserVoice.

Meg Heffron

Accountants and advisers can now calculate their client’s new personal transfer balance cap, with the launch of Heffron’s new calculator, free in their online portal.

The calculator has been developed to tackle the upcoming transfer balance cap increase on 1 July 2021, which is the first increase since the cap was introduced on 1 July, 2017.

Heffron Managing Director, Meg Heffron, says while the headline increase is from $1.6- million to $1.7-million, it’s important to remember not everyone is entitled to the full $100,000 adjustment.

“People will have their own personal transfer balance caps, which could be $1.6-million, $1.7-million or somewhere in between.”

While personal transfer balance caps will be calculated over time by the Australian Taxation Office, it will be reliant on the correct and timely reporting of actual transactions like starting or commuting pensions. This is not useful for advisers, accountants and clients who are planning ahead.

Unique to the market, the Heffron Transfer Balance Cap calculator addresses this issue by allowing transactions that have already happened (or are going to happen) up until 30 June 2021, to be entered. The tool will prompt users with helpful hints to make sure the right data is entered for less common situations (for example, inheriting a pension from a spouse). It will then calculate the client’s personal transfer balance cap on 30 June 2021, allowing for their individual indexation entitlement.

Meg Heffron says it’s a tool where you input the data and we calculate the amount based on your particular situation.

“It’s quick, easy to use and absolutely accurate. For accountants and advisers, it provides certainty around how this complicated legislation works and makes it easy to get a key piece of information that is vital for advising clients now.” Heffron continued.

The post Heffron launches free online wizard to help calculate personal transfer balance cap appeared first on AdviserVoice.

What to do with an SMSF when divorcing?

The coronavirus pandemic has taken its toll on Australian couples. As well as marriage rates continuing their 20-year decline, divorce is reportedly on the rise. Google searches for the term ‘divorce’ surged to their highest point in 12 months at the end of June, even higher than the traditional Christmas divorce season.^[1] Family law firms also reported an increase in new business to initiate divorce proceedings during lockdown.

In most Australian states, superannuation, including super held in SMSFs, is generally considered property that can be divided just like other assets when a marriage or de facto relationship breaks down.

For those SMSF members heading towards a divorce there are far reaching consequences and the process of dividing super can be complex, with conflicts that must be carefully managed.

This is also a time when good advice makes a huge difference. Lawyers and the courts are well versed in dividing up assets but often it’s understanding the nuances of superannuation and tax law that is key to getting the best possible outcome when an SMSF is involved.

Divorce or relationship breakdown is one of the few times when it’s possible for one person’s superannuation to be moved (or split) to someone else. But remember, this is only the case if the super is formally split via a superannuation agreement or court orders. A couple can’t just decide this between themselves.

The split can be done immediately (i.e an existing balance is divided up) or in the future when payments are made from it (i.e, there’s an agreement to divide up future payments such as pensions and these are split between the (ex) couple each time a payment is drawn).

When it comes to SMSFs, usually it’s the former – the balance is divided up and the person receiving some of their ex-partner’s super (called the “non member spouse”, even if they are actually also a member of the SMSF) has some choices to make about what they do with the amount they receive. Subject to any specific requirements of the superannuation agreement or court orders, they can move it to another fund, leave it in the existing SMSF or (if they are at the age where they are already allowed to access their superannuation) they can take it out of super.

For SMSFs and their advisers there are four tips that will help this process run smoothly. These should be discussed and decided while the superannuation agreement or court orders are still being prepared so they can achieve what the clients actually want.

Tip 1: Decide in advance who will go and who will stay in the SMSF

The first consideration is whether both parties remain in the SMSF or if one party is to leave. Commonly, someone will leave the fund which inevitably raises the next challenge – deciding how assets within the SMSF will be distributed or sold to create liquidity for a payout.

SMSFs with major assets that are not easily divided (eg a property) can present difficulties here and prevent the couple from effectively separating their financial affairs.

It might make more sense, for example, to leave one party with more of the couple’s superannuation (and adjust the treatment of other assets to reflect this) if it allows that member to keep a particular asset entirely. The key when it comes to SMSFs is to look beyond simply the value of the member’s balance and consider how the assets themselves should be divided. It is crucial to think about this at the time the relevant agreements or orders are being settled rather than later.

Tip 2: Update members’ account balances and understand the CGT position

It is essential to update member balances to market once it is agreed which member is staying or going and whether any assets will be sold for cash or transferred to another fund.

It is also vital to understand and allow for capital gains tax that will be paid either immediately (because the assets have been sold) or in the future (because they have been transferred to a new fund and the leaving member is entitled to special relief on CGT that applies under these circumstances). Many couples value the special relief as it means they don’t need to pay tax on the gains built up so far until the asset is actually sold for cash. But remember, these assets will be sold eventually. At that point, whichever fund owns them at the time will have to pay CGT on both the gains achieved in the new fund and the gains built up before the transfer.

Beware of one extra trap that is easy to fall into. Many funds with pensions in place before a major rule change in 2017 have some special CGT amounts linked to gains built up before 30 June 2017. Normally, tax is paid on these amounts when the asset is sold. Unfortunately, this particular tax also has to be paid if the assets are transferred to another fund even as part of a divorce, it can’t be just rolled over to the new fund like other capital gains. This will be paid by the original fund and should be factored into the relevant calculations.

Tip 3: Think about tax and preservation components, not just the amount of the split

The splitting rules require that the amount received by the non-member spouse is divided between tax and preservation components in the same proportions as the original interest.

There are some important factors to consider here.

If the two members have very different tax or preservation components, it might actually make more sense to have two splits – one each way – to allow them to end up in identical positions.

Secondly, think carefully about how to handle cases where the member spouse has multiple superannuation interests. If the tax or preservation components of the different interests vary considerably, it may be worthwhile specifying the interest from which the split is to be paid as well as the amount or proportion.

Tip 4: Get your documentation right

Documentation is critically important. Unfortunately, this doesn’t end with the court orders or superannuation agreement – there is vital documentation to be prepared by the SMSF itself. As usual with superannuation, there is specific information that must be included and deadlines. There’s no substitute for expert advice around SMSFs with so many factors to be considered. All parties must be fully aware of the law and their responsibilities. It is a difficult time, but good advice is key to success.

——–

[1] https://www.theaustralian.com.au/breaking-news/covid-impact-to-send-divorce-rate-soaring-as-googlesearches-reach-peak/news-story/2db1e28f24421c5b2cd1709c5cb43ab3

The post SMSF members urged to seek good advice as COVID divorces spike appeared first on AdviserVoice.

Lyn Formica

The word unprecedented seems overused – and yet not overused – at the moment.

On 22 March 2020 the Government announced the second of their stimulus packages to support Australia through the economic consequences of the Coronavirus.

Notably, the Prime Minister and the Treasurer were at pains to describe their economic announcements today as a “safety net” package rather than a “stimulus” package. In other words, the tone is all about surviving rather than prospering.

Not surprisingly the key measures were support for businesses and individuals currently bearing the brunt of the economic fallout from Covid-19.

However, there were also some important superannuation announcements that will be highly relevant for SMSF members and clients with their superannuation in a public offer fund.

Firstly, the Government has announced that the minimum pension requirements for 2019/20 and 2020/21 will be re-set to half the normal rates and there will be changes to the deeming rates used to calculate an individual’s income for a range of important government benefits (including the age pension).  We have explained these changes in as much detail as is available at the moment here.

Secondly, special access to existing superannuation balances will be available to those who have experienced significant (at least 20%) reductions in their income or are unemployed or who have been retrenched.  The rules announced today are explained here.

Supporting retirees

Temporary reduction in Minimum Drawdown Requirements

Similar to the approach taken in the 2008/09 Global Financial Crisis, the minimum drawdown requirements for account based pensions and similar products will be temporarily reduced by 50% for the 2019/20 and 2020/21 years.

The revised rates for the 2019/20 and 2020/21 years will be as follows:

At first glance this appears counterintuitive – all other measures in the announcement were about putting more money in people’s hands.  The policy rationale is that one very obvious consequence of the current situation is that investment markets have fallen considerably and continue to do so.  Many superannuation pension recipients will have been concerned about selling assets to make pension payments when their fund (or pension account in a large fund) did not have enough cash to make the payments. This measure will mean that those who don’t need additional income will not be required to take it out of their fund – potentially relieving some pressure to sell assets.

Whilst we are yet to see the amending legislation, we expect this change will work as follows:

What type of pensions will qualify for the reduced drawdown rates?

The Government’s Fact Sheet says that the reduction will apply to account-based pensions and similar products.  We expect the Government means:

• account-based pensions (including transition to retirement income streams),
• allocated pensions (including transition to retirement pensions), and
• market linked pensions (also commonly called term allocated pensions).

We do not expect the relief to apply to lifetime or life expectancy pensions.

Will all superannuation funds (including SMSFs) offer the reduced drawdown rates?

We expect all superannuation funds, including SMSFs, will be able to take advantage of the reduced drawdown rates.  However, there may be some SMSFs with very prescriptive minimum pension rules in their governing rules/trust deed.  Funds in this position would need to amend their trust deed to take advantage of the 50% reduction.

How will the 50% reduction affect pensioners who have already drawn an amount equivalent to their reduced amount before the announcement?

These pensioners will not be required to draw any further pension payments before 30 June 2020.

If a pensioner has already drawn more than their reduced minimum, can they return the surplus pension payments to the fund?

No, there will not be a mechanism to return surplus pension payments.  It may, however, be possible for some clients to recontribute the surplus (if they are eligible to contribute and the amount will be within their contribution caps).

What if a pensioner had say elected to treat all payments from their SMSF as pension payments up to their minimum and then lump sums from their accumulation account?  How would payments taken before today be treated?

In our view, payments should be processed accordingly to the rules which applied at the time of the payment.

For example, before 1 July 2019, Craig instructed his fund to treat any payment he took from the superannuation fund as follows:

• firstly, a pension payment (up to the minimum payment amount) and then
• a lump sum from his accumulation account once the minimum had been met.

Craig’s minimum for the 2019/20 was originally $40,000 (ie $1m x 4%).  He took a payment of $45,000 on 1 March 2020.  His reduced minimum is now $20,000.  How should the $45,000 be treated?

On the basis of the election he made for the 2019/20 year, the first $40,000 will be a pension payment and the remaining $5,000 will be a lump sum from his accumulation account.

What about pensions that start after the announcement?

We expect the temporary reductions will apply to all pensions, not just those in place before the announcement was made.

Is any action required now?

Pensioners who want to minimise the amount they withdraw from superannuation in the current financial year should turn off/adjust any automatic periodic payment arrangements.

We will cover the broader impacts of this change in our upcoming online masterclass – SMSF Strategies.

Changes to Social Security Deeming Rates

The Government will also reduce the pensioner deeming rates for financial investments from 1 May 2020 by 0.75% as follows:

While deeming rates are not explicitly linked to the RBA cash rate, this latest change is largely triggered by the RBA’s decision to announce further interest rate cuts last week.  The policy logic is that pensioners may well see their incomes decline and hence lower income levels from investments should be factored in when calculating their age pension and other social security benefits.

Supporting those suffering reduced incomes

Temporary Early Access to Superannuation

As a general rule, preserved superannuation benefits may only be accessed in lump sum form once members turn 65 or reach their preservation age and retire (or satisfy some other condition of release such as permanent incapacity, terminal illness etc). However, in times of financial distress, there are some circumstances under which members may be able to bypass these rules and access their super earlier.

Unfortunately the current rules which allow access to those suffering from “severe financial hardship” or qualify on “compassionate grounds” are very narrow and release has only been available under very limited circumstances.

The Government has announced a quite significant, but temporary, extension to these rules.  A copy of their Fact Sheet can be found here

Who is eligible for the new rules?

A new opportunity for early release will be available to individuals who:

• are unemployed, or
• are eligible to receive a Job Seeker Payment (previously known as Newstart Allowance), youth allowance for job seekers, parenting payment, special benefit or Farm Household Allowance, or
• on or after 1 January 2020:
  • were made redundant, or
  • had their working hours reduced by 20% or more, or
  • for sole traders, their business was suspended or there was a reduction in their turnover of 20% or more.

Further information is needed in relation to how this 20% reduction is to be determined, but it appears it will be by comparing current hours/turnover with the average for the period 1 July 2019 to 31 December 2019.

Importantly, there is no requirement that the individual is already receiving Commonwealth income support payments and there is no waiting period.  The payment can be requested immediately once the new rules come into effect (see below).

There are no income or assets tests.  Even someone with a very high salary who remains employed and has other assets could access this payment as long as their salary has been reduced by 20% after 1 January 2020.  While they might choose not to, many could well do so if their superannuation is more easily accessed in cash than other assets and if their reduced income is not sufficient to meet living costs that cannot be adjusted quickly to reflect their new situation (eg large mortgage payments, rent etc).

How much will be available?

Eligible individuals will be able to access up to $10,000 before 1 July 2020.  A further amount of up to $10,000 will be available from 1 July 2020 but only for approximately three months after that time (exact timing to depend on the passage of legislation).

Only one payment will be permitted in each financial year.

How do individuals apply for the new payment?

To access benefits held in funds other than SMSFs, the process will be as follows:

1. Individuals will be able to apply directly to the ATO via their myGov account.
2. Once the ATO has processed the application and confirmed the individual’s eligibility, they will provide both the individual and their superannuation fund with a determination.
3. On the basis of that determination, the fund will then make payment to the individual.

The Fact Sheet describes this measure as targeting those who have suffered a loss of income due to Covid-19 but there is no indication whether one of the questions that will be asked by the ATO in the relevant application will be whether the reduction in income relates to this specific event.

Individuals do not need to apply directly to their superannuation fund.  However, it would be wise to double check that the fund has the right bank account details and proof of identity documents to ensure that the money can be paid quickly.

While we understand the eligibility rules for SMSF members will be the same as for members of non-SMSFs, separate arrangements are being made and there may be a different process to follow when moneys are to be released from an SMSF.  Further guidance on the application process for SMSF members is to be made available on the ATO website in due course.

Given the wide ranging impact of this event, it is entirely likely that some SMSF members will need to take advantage of the measure.

When will amounts be available?

Applications will be able to be made from mid-April 2020.  However it is not yet clear how long it will take for the ATO to process an application and for the fund to make payment to the individual.

Note that anyone who simply withdraws money from their SMSF now, or even after mid April but does not follow the right process, will be subject to the usual rules.  This could be substantial tax and other penalties – it is vital to wait until the new rules are in place.

How will these payments be taxed?

Amounts released under this new ground for early release will be paid tax free and will not affect Centrelink or Veterans’ Affairs payment eligibility.

This is unusual – currently amounts released on compassionate grounds or on the basis of severe financial hardship are taxed which can mean up to 20% + medicare for many people.

Will there be rules on how the amount released must be spent?

At this stage, individuals will be free to spend the monies released in any way they choose.

What if the individual is already receiving income from their superannuation fund from a transition to retirement income stream?

Many people in this position will not need to access the new payment – they will simply increase their transition to retirement income stream payments if they need more income to supplement a reduced salary.  However, transition to retirement income streams have an upper limit on pension payments (10% of the pension balance at the previous 1 July).  Someone needing more than this amount who meets the criteria above could apply for one of these payments.

How can Heffron help?

Heffron SMSF Solutions is supporting individuals in a number of ways including:

• for members of SMSFs administered by us, we will prepare the fund documentation to evidence the withdrawal of monies under this new condition of release at no cost, and
• for accountants and advisers needing to document the withdrawal of these monies from SMSFs they administer, we will provide template fund documentation for their use at no cost.

We will be able to do this as soon as the process for SMSFs is finalised between the Government and ATO.

By Lyn Formica, Head of SMSF & Technical Services

The post Economic response to the Coronavirus – Impact on superannuation benefits appeared first on AdviserVoice.

Heffron director and superannuation expert Martin Heffron says the restriction of the terms of reference to establishing facts rather than making recommendations offers an unusual opportunity to avoid political pressure.

Mr Heffron says the independent panel can more freely investigate the impact of retirement income policies such as the generous treatment of the family home on inter-generational equity, fiscal sustainability and efficiency.

“The generous treatment of the Australian family home for tax and benefit purposes is one of the most fiscally unsustainable policies in Australia. It has many negative consequences and contributes to the sharp increase in homelessness we see in our city streets every day,” said Mr Heffron.

“Thankfully, there is nothing to stop the panel from reporting on the factual impact of  this treatment on the sustainability of our current retirement income policy framework. I wish them well in their important work.”

Mr Heffron also urged the review to clarify what they believe is meant by potentially contentious terms such as “retirement income adequacy”, as the diversity of opinion on what level of retirement income is adequate for individuals could open the upcoming review to criticism and confusion.

The post Retirement income review well placed to scrutinise fiscally unsustainable policies appeared first on AdviserVoice.