It’s been a big year for everyone and a tough year for many, so it’s great we can start to turn our attention to having an awesome 2021. If your financial situation changed as a result of COVID or other market factors this year, you might need to revisit your superannuation strategy and we encourage you to consider the benefits of a Self-Managed Super Fund (SMSF) and the relevant rules and updates you need to be aware of.
Having an SMSF can provide additional control and flexibility around how you build up your retirement nest egg. But if you don’t keep in check with the rules, you might miss out on important deadlines and opportunities from changes to the rules.
Here is a list of 20 SMSF tips and advice we recommend you consider for the 2021 financial year so you can make the most of your SMSF.
1. Meet your contribution deadlines – It’s all about timing!
Whether you’re self employed or an employee, your super contributions must hit your SMSF’s bank account by close of business on 30 June. There are some exceptions where the fund has received a cheque by 30 June but not banked it in time; however, we always say to be on the safe side and plan ahead.
2. Consider your minimum pension withdrawal limits – It’s all about timing again!
Pension payments must leave your SMSF account by close of business on 30 June unless paid by cheque, in which case the cheques must be presented within a few days of the EOFY and there must have been evidence of sufficient funds in the bank account to support the payment of the cheques on 30 June. We recommend you take all your minimum pension payments by 20 June so there is no opportunity for error.
If you didn’t meet your minimum pension requirements, you may be eligible for the once-off exception known as the 1/12 rule, so long as the shortfall is no more then 1/12th of the annual minimum pension requirement and you have caught up the balance in the next financial year.
3. Understand the impacts of COVID-19 on pension payments
For those who have pensions, the Australian Government has brought in a 50% temporary reduction in the minimum pension requirements. The table below shows the new pension minimums for the 2020/21 financial year. Make sure that you only take the new minimum amounts if you don’t need any more.
Tips and traps for minimum pensions
If you have already taken the original minimum percentage, you can’t, unfortunately, refund the pension payments back to the SMSF. You can, however, allocate the amount above the reduced minimum percentage as a lump sum withdrawal from your pension or accumulation account if you have one.
It is important that you discuss this with your accountant as some funds will have to report this quarterly and others on an annual basis.
If you have an accumulation balance, it may make more sense to withdraw the excess pension payments as lump sums from this account. This may benefit you from keeping more of your super in the pension phase.
The reversionary pension option
A reversionary pension is an income stream you set up with your superannuation that automatically continues to someone else (generally your spouse) when you die. A reversionary pension to your spouse will provide them with up to 12 months to get their financial affairs in order before having to make a final decision on how to manage your death benefit.
You should review your pension documentation and check if you have nominated a reversionary pension. If not, consider your family situation and options to have a reversionary pension. This is especially important with blended families and children from previous marriages that may contest your current spouse’s rights to your assets. Also consider reversionary pensions for dependent children with a disability.
The reversionary pension has become more important with the application of the $1.6m Transfer Balance Cap limit to the pension phase.
We highly recommend you speak with a financial advisor or estate planner about this topic, to ensure your intentions are set in place with the correct documentation.
4. Get up to date on the work test age
The government has recently changed the superannuation contributions rules and from 1 July 2020, the work test age has been increased from 65 to 67 years of age. This opens up contribution eligibility for those that couldn’t previously satisfy the work test.
5. Utilise the carry-forward concessional contributions cap
If your super balance on 30 June 2020 was under $500,000, you may want to consider using the carry-forward concessional contributions cap. Essentially, the carry-forward rule allows individuals to make additional contributions in a financial year by utilising unused contributions cap amounts from up to five previous financial years, providing their total superannuation balance just before the start of that financial year was less than $500K.
This measure applies from 2018–19 so, effectively, this means an individual can make up to $75,000 of superannuation contributions in a single financial year by utilising unapplied unused contributions caps since 1 July 2018 and going forward from up to five previous financial years.
Prior to these amendments, if an individual did not fully utilise their annual contributions cap in a financial year, they could not carry forward the unused cap to a later year.
This strategy could also be used to offset an increase in personal tax expected from say a capital gain made from selling a lumpy asset. Speak with your accountant and financial advisor to determine the merits of this SMSF strategy.
6. Reduce personal tax by doubling up your personal concessional contributions
For those who may have a large taxable income this year (from, say, a large bonus or property sale or share sales) and are expecting a lower taxable income next year, you should consider a contribution allocation strategy to maximise deductions for the current financial year.
This strategy is also known as a “Contributions Reserving” and it involves bringing forward the personal concessional contribution from the future year into the current year. This allows you to get a larger deduction against your taxable income.
You should speak to an advisor to determine if this strategy is ideal for you.
7. Check your eligibility for non-concessional contributions
From 1 July 2020, the new age limit of 67 will also apply to non-concessional contributions not needing to meet the work test, so SMSF members have the option of making $100,000 in non-concessional contributions per year up to age 67.
The Australian Government is also considering extending the three-year bring forward rule up to age 67. This is still in draft and not yet law, so we recommend you work closely with your financial advisor who can keep you up to date.
8. Check your eligibility for co-contributions
Co-contributions are government contributions (up to a maximum amount of $500) to your superannuation account that match your own superannuation contributions. There can be great benefits to co-contributions when it comes to your retirement planning, so make sure to check your eligibility and, if you are eligible, take advantage of this free money from the government.
The amount of government co-contribution you receive depends on your income and how much you contribute.
9. Make spouse contributions
Did you know you can make contributions to a superannuation fund on behalf of your spouse (married or de facto) who is earning a low income or not working?
If your spouse has assessable income plus reportable fringe benefits that total less than $37,000 (full $540 tax offset) and up to $40,000 (partial tax offset), then consider making a spouse contribution.
The tax offset is calculated as 18% of the lesser of:
- $3,000, reduced by $1 for every $1 that the sum of your spouse's assessable income, total reportable fringe benefits amounts and reportable employer superannuation contributions for the year was more than $37,000
- the total of your contributions for your spouse for the year.
10. Pay expenses relating to the SMSF from the SMSF bank account
It’s important you keep your SMSF and personal affairs separate and to pay all expenses relating to your SMSF directly from your fund’s bank account.
Make sure to check for amounts that may form a superannuation contribution, such as expenses paid for on behalf of the fund, debt forgiveness or in-specie contributions, and insurance premiums for cover via superannuation paid from outside the fund.
11. Make a notice of intent to claim a deduction
If you’re planning on claiming a tax deduction for personal concessional contributions, you must have a valid notice of intent to claim or vary a deduction form completed. It is also important that, if you intend to start a pension, this form must be completed before your pension is commenced.
12. Consider contribution splitting to your spouse
Spouse contributions splitting is a strategy whereby a member will split up to 85% of their concessional contributions to their spouse.
This strategy could be used if:
- your family has one main income earner with a substantially higher balance
- there is an age gap where you can get funds into the pension phase earlier via another member, or
- you can improve your eligibility for a concession card or age pension by retaining funds in superannuation in the younger spouse’s name.
13. Sell shares from your own name to your SMSF via an off-market share transfer
Did you know that you’re able to sell listed shares that are held in your own name to your SMSF? This can be done as a cash sale or even as a contribution. Before proceeding with this, you should speak with your financial advisor and accountant to determine if this strategy is appropriate for your needs.
14. Review the capital gains tax position of each investment to lower tax bill
So, you have sold an investment that you have made money on and there will be capital gains tax to be paid on these at the end of the financial year?
If you have carried forward capital losses – great, you can offset some or all your gains. If not, you should review your investments to determine if there are any investments with unrealised losses that you could sell to offset the capital gains.
15. Review your investment strategy
We recommend you regularly review your investment strategy and ensure all investments have been made in accordance with your strategy. Also, and importantly, ensure your strategy includes consideration for whether or not you require life and TPD insurance.
16. Make sure your SMSF trust deed is up to date
The SMSF trust deed is a very important document – if your deed is not up to date, have it updated to the latest superannuation rules. BlueRock’s SMSF deed update costs $398 and includes 2 years’ worth of free updates.
17. Consider your in-house assets
If your fund has an investment that is classified as an in-house asset, you must always make sure that the market value of these investments is less than 5% of the value of your SMSF.
There is an exception to this rule that the Australian Government has put in place to provide COVID-19 relief. The ATO has responded to current market conditions, and has announced it will not take compliance action against SMSFs where:
- at 30 June 2020, the market value of an SMSF’s in-house assets is over 5% because of the downturn in the share market
- the trustee of the SMSF prepares a rectification plan
- by 30 June 2021, the rectification plan either:
- cannot be effectively implemented because of market conditions, or
- does not need to be implemented because the market recovers and the 5% test is again satisfied at 30 June 2021.
18. Keep documentation on COVID-19 rent relief
If you provided rent relief to a tenant as a result of the financial impacts of COVID-19, it’s important that the arrangement was documented. The documentation should include how the SMSF considered, managed and documented the request, the reasoning behind your decision and the details of the relief provided.
19. Review your insurance
Have you recently reviewed your insurance needs? By insurance, we mean for you as well as investments held by your SMSF. Consider whether you’re adequately insured should anything happen to you (e.g. TPD, Life and Income Protection policies) and whether your SMSF investment property is insured at market value (property insurance)?
20. Get on top of your estate planning
Did you know that superannuation does not automatically form part of your estate assets?
Make sure to review your Binding Death Benefit Nominations (BDBN) to ensure they are valid and still as per your wishes. You should also ensure you have appropriate Enduring Power of Attorneys (EPOA) in place to allow someone to step into your place as SMSF trustee in the event of illness, mental incapacity or death.
Find out more on our website or make an enquiry with our estate planning team for advice on these matters.
Would you like some more advice on your SMSF?
As we said earlier, SMSFs bring a huge range of financial benefits that can give you great control and flexibility over your retirement planning.
But an SMSF strategy can be complex, and the rules and regulations do change over time, so we recommend you speak with our SMSF specialists to help you keep your SMSF on track to tick off your retirement goals. It’s more important than ever.