Super co-contributions

Individuals may be eligible for a Government super co-contribution.

A Government co-contribution means the Government adds to your super. You may be eligible for the super co-contribution, low-income super contribution (LISC) from the 2012-13 to 2016-17 financial years, or low-income super tax offset (LISTO) from 1 July 2017.

Super co-contribution
The Government will make a co-contribution of up to $500 if you are a low or middle-income earner and make personal (after-tax) contributions to your fund.

The eligibility conditions for a co-contribution from the 2017-18 financial year include:
a total superannuation balance less than the general transfer balance cap for that year
the contribution you made to your super fund must not exceed your non-concessional contributions cap for that year.

Low-income super contribution
The low-income super contribution (LISC) is a Government super payment of up to $500 to help low-income earners save for retirement.

If you earn $37,000 or less a year, you may be eligible to receive a LISC payment directly into your super fund.

The LISC is 15 per cent of before-tax super contributions made you or your employer from the 2012-13 to 2016-17 financial years.

If you have reached your ‘preservation age’ and are retired you can apply to have your LISC paid directly to you.

Low-income super tax offset
The low-income tax offset (LISTO) was introduced from 1 July 2017. If you earn income up to $37,000, you may be eligible to receive a refund into your super account. This is on the tax paid on your concessional super contributions up to a cap of $500.

This means most low-income earners will pay no tax on their super contributions.

Splitting super

When partners in an SMSF separate, there are specific legal and tax implications that should be considered.

It is possible to split super benefits, i.e., transfer assets, such as property, from one super fund into another and roll money over to another fund; however, trustees need to keep the following in mind:

• Separating couples need to work out how they will split their super. They can choose to enter into a formal written agreement, seek Consent Orders, or if the separating couple cannot reach an agreement, they can seek a court order.

• It is important to have necessary documentation in the event of an ATO audit including financial and non-financial records. Due to the tax outcomes of splitting super in an SMSF, it is essential to have documentation, such as the notice for splitting the super, to show a genuine separation.

• There is the potential for SMSFs with property as a major form of investment to create a liquidity problem; however, this can be addressed with future contributions. Individuals will also need to be aware of the market valuation rules for real estate in SMSFs.

• If one member establishes a new single-member fund it is advisable to incorporate a special purpose company as the trustee. This avoids having a second person as a trustee.

• Trustees can now acquire assets from a related party of the fund (in-house assets) as a result of marriage breakdown. Legislation was recently amended to broaden the scope to the breakdown of opposite-sex and same-sex de facto relationships. Where in-house assets are acquired as the result of a relationship breakdown, transitional exemption provisions apply.

Transfer balance account report now available

The new transfer balance account report (TBAR) is available on the ATO’s website.

Self-managed super funds can use the TBAR report to report events that affect an individual member’s transfer balance account. The option to report is available from 1 October 2017, however, SMSFs are not required to report anything until 1 July 2018.

Events that affect a member’s transfer balance account will need to be reported to minimise the tax consequences of exceeding the transfer balance cap.

Funds with straightforward affairs are likely to have only a few events per member to report over the life of the fund. Common events that will require reporting include:

• the values of any retirement phase income streams to which an SMSF member is entitled, including reversionary income streams
• the value of any commutation of a retirement phase income stream by an SMSF member
• structured settlement payments an SMSF member receives and contributes to their fund
• certain limited recourse borrowing repayments that give rise to a transfer balance credit as a result of recently enacted legislation.

Keeping your SMSF compliant while overseas

Travelling overseas for an extended period of time is an exciting adventure. What isn’t so exciting is the prospect of breaking compliance laws in relation to your SMSF while enjoying your trip.

There are specific conditions that must be met to deem the self-managed super fund ATO compliant. They are as follows:

Fund recognised as an Australian fund
The SMSF will be recognised as an Australian super fund provided that the setup of and initial contributions are likely to have been made and accepted by the trustee(s) in Australia or at least one of its assets is located in Australia.

Management and control of the fund carried out in Australia
The central management and control of the fund must ordinarily be in Australia. This means the SMSF’s strategic decisions are regularly made, and high-level duties and activities are performed in Australia. Some examples include formulating the investment strategy, reviewing the performance of the fund’s investments and determining how assets are to be used for member benefits.

Generally, fund’s will meet this condition even if its central management and control is temporarily outside Australia for up to two years. If central management and control of the fund is permanently outside Australia for any period, it will not meet this requirement.

Active member test
An “active member” is a contributor to the fund or contributions to the fund have been made on their behalf.

To satisfy the “active member test” trustees should ensure the fund has no active members, or it has active members who are Australian residents and who hold at least 50 per cent of the total market value of the fund’s assets attributable super interests, or the sum of the amounts that would be payable to active members if they decided to leave the fund.

If a member of the fund becomes a non-resident but still wishes to make or receive contributions, they should do this outside of their SMSF, i.e., through a retail or industry super fund. When they return as an Australian resident, they can then rollover the contributions to their SMSF.

How does the super guarantee charge work?

Employers who do not pay the minimum amount of super guarantee for their employee(s) by the due date may have to pay the super guarantee charge (SGC).

The charge is made up of super guarantee shortfall amounts including any choice liability calculated on your employee’s salary or wages, interest on those amounts (currently 10 per cent) and an administration fee ($20 per employee, per quarter).

Employers must report and rectify the missing payment by lodging an SGC statement by the due date and paying the SGC to the ATO. Employers may be able to use a late payment to reduce the amount of SGC, however, they must still lodge an SGC statement and pay the balance of the SGC to the ATO.

The ATO prioritises the collection of unpaid SGC debts. If an employee reports an employer for unpaid super, the ATO will investigate on their behalf.

Employers must lodge their SGC statement and pay the charge by the due date.

If a due date falls on a weekend or public holiday, the payment can be made the next working day.

Once the statement has been lodged and the SGC is paid, the ATO will transfer the super guarantee shortfall amount and any interest to the employee’s chosen super fund.

New measures to crack down on super non-compliance

The Australian Taxation Office (ATO) will receive additional funding for a Superannuation Guarantee Taskforce to crack down on non-compliance by employers.

The Government has announced a package of reforms to close a legal loophole used by dishonest employers that short-change employees who make salary-sacrifice contributions to super.

Funding for the Taskforce coincides with new data released by the ATO reporting a significant estimated Super Guarantee gap. This gap is the difference between the theoretical amount payable by employers to be fully compliant and actual contributions received by funds.

The ATO estimates the net SG gap as 5.2 per cent or $2.85 billion of the total estimated $54.78 billion in SG payments that employers were required to pay in 2014-15.

The gap exists because some employers are not meeting their super guarantee obligations either by not paying enough or not paying at all.

Employers who deliberately are not paying their workers’ super entitlements are robbing their workers of their wages. The new package aims to take action on this so employers cannot hide from their legal obligation.

Some of the measures included in the package involve:

• A requirement for superannuation funds to report contributions received more frequently (at least monthly) to the ATO. This is aimed to better identify patterns of non-payment and allow for immediate action;
• The rollout of Single Touch Payroll to further improve visibility on reporting, simplify tax and super for employers while allowing the Tax Office to better detect patterns of non-compliance;
• Improvements to the effectiveness of the ATO’s recovery powers, including strengthening director penalty notices and the use of security bonds for high-risk employers, to ensure unpaid super is better collected by the ATO and paid to employees’ super accounts; and
• Allowing the ATO to seek court-ordered penalties in the most shocking cases of non-payment, including employers who are repeat offenders.

The crackdown serves as a strong reminder for businesses to do the right thing. The ATO deals with roughly 20,000 complaints annually regarding unpaid super from both former and current employees.

Superannuation is a legal entitlement for employees; failure to pay employee super guarantee is illegal and can result in harsh penalties.

Strategies to bulk up your super before retirement

To retire comfortably, you should be doing everything you can while still in the workforce to make sure your superannuation is as fruitful as possible.

Consider the following:

Consolidate super into one account
Super account fees can eat away at your super balance, especially if you have numerous accounts. If you find yourself in this position, take the time to organise your super contributions into the one account to reduce unnecessary and excessive fees.

Outstanding super payments
Check you have been paid all the super you are entitled to, as well as interest, as this can uncover large amounts of unpaid super. Employers have a legal obligation to pay all employees who have earned more than $450 in the space of a month, and these payments are required to be paid at least quarterly. If you have not been paid what you are owed, you are also missing out on accumulated interest. It is now compulsory for employers to report the super contributions they make, but this was not always the case, meaning you may need to contact previous employers or the ATO to access unpaid super you are entitled to.

Salary sacrifice
This is an efficient way to grow your superannuation while also incurring worthwhile tax benefits. To practice salary sacrificing, you will have to come to an agreement with your employer. You can contribute money from your pre-tax salary into your superannuation account, on top of the 9.5 per cent SG contribution that your employer must make. You will only be taxed 15 per cent on this additional contribution amount, but it does mean taking home a smaller figure each paycheck.

Spousal contributions
If your spouse is a low-income earner who is receiving less than $13,800 annually, you can contribute up to $3,000 into their super each year while getting an 18 per cent tax offset. This can save you up to $540 in tax.

Carrying on a business in an SMSF

Self-managed super funds can carry on a business providing the business is allowed under the trust deed and operated for the sole purpose of providing retirement benefits for fund members.

Carrying on a business through an SMSF does have restrictions that other businesses do not have, such as entering into credit arrangements or having overdrafts.

SMSF trustees that carry on a business through their fund must adhere to the sole purpose test. The ATO looks for cases where:

• the trustee employs a family member
• the ‘business’ is an activity commonly carried out as a hobby or pastime
• the business carried on by the fund has links to associated trading entities
• there are indications the fund’s business assets are available for the private use and benefit of the trustee or related parties

The same regulatory provisions still apply to funds that carry on a business, i.e, SMSF investments must be made on a commercial ‘arm’s length’ basis, business activities must be conducted in accordance with the SMSF’s investment strategy, collectables and personal use assets cannot be displayed at the business premises and so on.

The SMSF cannot be involved in the following business activities:

• selling an SMSF asset for less than its market value to a member or relative of a member
• purchasing an asset for greater than its market value from a member or relative of a member
• acquiring services in excess of what the SMSF requires from a member or relative of a member
• paying an inflated price for services acquired from a member or relative of a member.

Identifying undervalued assets

Recent research has found that an alarming 31 per cent of SMSF trustees consider choosing investments as one of the hardest aspects of running an SMSF. Value investing is one such strategy that SMSF investors can utilise to boost their portfolios.

Value investing involves identifying undervalued assets that have the potential to increase in value over time. These assets are generally priced well below their intrinsic value due to missed expectations, market crashes, cyclical fluctuations and so forth.

To identify undervalued assets or asset classes you need thorough analysis and good judgment. Look for asset classes that are inexpensive and backed by news. It is much better to invest in industries where you understand the business dynamics, i.e., how they make their money, underlying conditions and so on.

Furthermore, looking for businesses in industries with a sustainable competitive advantage where external factors do not affect them too much is ideal.

When evaluating stocks look at companies with a low debt load, are paying steady dividends and have a quality rating that is average or better. Other metrics to consider include:

Price-to-earnings ratio: This is a stock’s current share price divided by its annual earnings. A lower ratio indicates it is cheaper. Stocks with a ratio of 9 or less are typically undervalued.

Price-to-earnings growth: A stock’s price-to-earnings ratio divided by its projected earnings growth rate over a certain time frame. Ideally, companies with no deficits and where earnings increase over that time period are better.

Price-to-book value: This is calculated by dividing the current price by the book value per share. Investing in stocks which are selling below their book value is key.

As with any other investment strategy, it is best to seek professional advice if you are unsure whether value investing is appropriate for you.

Increased access to Superannuation Clearing House

The ATO has changed the conditions of registration for businesses to access the Small Business Superannuation Clearing House.

The Small Business Superannuation Clearing House is a free online service available for small businesses to make super contributions for their employees. The Tax Office is now allowing businesses with 19 or less employees or businesses with an annual aggregated turnover of $10 million or less to use the service.

These employers can now make super guarantee contributions as a single electronic payment to the Clearing House and it will then distribute the payments to employees’ funds.

The super guarantee contributions count as paid on the date the Clearing House accepts them. Employers have 21 days to pass an employee’s choice of fund to the Clearing House.

The Clearing House reduces red tape and compliance costs for small business.

In early 2018, the Clearing House will be integrated with other ATO online services in the Business Portal to better serve the growing number of users.