The ultimate EOFY checklist for SMSFs: 2021
Take advantage of opportunities and avoid a knock on the door. Here are 25 items to check.
A version of this article first appeared on Firstlinks.com.au, a Morningstar company.
Here we are with a few weeks left to the end of the financial year to put our SMSF or other super funds in order and ensure we are making the most of the strategies available to us.
Here is a checklist of the most important issues that you should address with your advisers before the year-end.
Warning before we begin
In the rush to take advantage of new strategies, don't forget how good you may have it already. Be careful not to allow your accountant, administrator or financial planner to reset any pension that has been grandfathered under the pension deeming rules that came in on 1 January 2015 without updated advice on the future consequences of losing the grandfathering. Point them to this document.
1. It's all about timing
If you are making a contribution, the funds must hit the super fund's bank account by the close of business on 30 June. Some clearing houses hold on to money before presenting them to the super fund.
In addition, pension payments must leave the account by the close of business unless paid by cheque in which case the cheques must be presented within a few days of the EOFY. There must have been sufficient funds in the bank account to support the payment of the cheques on 30 June.
Get your payments in by Friday 25 June or earlier to be sure (yes I’m Irish).
2. Review your Concessional Contributions (CC) options and new rules
The government changed the contribution rules from 1 July 2020 to extend the ability to make contributions from age 65 up to age 67. Read more here. Maximise contributions up to CC cap of $25,000 but do not exceed your limit. Note that the CC cap will increase to $27,500 from 1 July 2021.
The sting has been taken out of excess contributions tax but you don’t need additional paperwork to sort out the problem. Check employer contributions on normal pay and bonuses, salary sacrifice and premiums for insurance in super as they may all be included in the limit.
3. Consider using the ‘carry forward’ CC cap
Broadly, the carry forward rule allows individuals to make additional CC in a financial year by utilising unused CC cap amounts from up to five previous financial years. Eligibility requires a total superannuation balance just before the start of that financial year of less than $500,000 (across all your super accounts).
This measure applies from 2018-19 so effectively, this means an individual can make up to $75,000 of CC in a single financial year by utilising unapplied unused CC caps since 1 July 2018.
4. Review plans for Non-Concessional Contributions (NCC) options
From 1 July 2020, the new age limit of 67 applies to NCCs (that is, from after-tax money) without meeting the work test (increasing to age 74 from 1 July 2022). You have the option of making $100,000 NCCs per year up to 67 (or 74 from 1 July 2022). Check out ATO superannuation contribution guidance.
Unfortunately, Parliament is yet to pass the long-delayed legislation allowing use of the 'three-year bring forward rule' up to age 67.
- Current option if turned 65 in 2020-21: NCC of $100,000 or $300,000.
- Proposed option: NCC $100,000 2020-21, NCC $100,000 2021-22, NCC $300,000 2022-23.
NCCs are an opportunity to move investments into super and out of a personal, company or trust names.
Even up spouse balances and maximise super in pension phase up to age 74. Couples where one spouse has exhausted their transfer balance cap and has excess amounts in accumulation are able to withdraw and recontribute to the other spouse who has transfer balance cap space available to commence a retirement phase income stream. This can increase the tax efficiency of the couple’s retirement assets as more of their savings are in the tax-free pension phase environment.
Make your tax components more tax free by using recontribution strategies. SMSF members can cash out their existing super and re-contribute (subject to their contribution caps) them back in to the fund to help reduce tax payable from any super death benefits left to non-tax dependants. They can now do this until they turn age 75 and 28 days.
5. Downsizer contributions
If you have sold your home in the last year and you are over 65, consider eligibility for downsizer contributions of up to $300,000 for each member.
From 1 July 2022, the eligibility age to make downsizer contributions into superannuation will be reduced from 65 to 60 years of age. All other eligibility criteria remain unchanged, allowing individuals to make a one-off, post-tax contribution to their superannuation of up to $300,000 per person from the proceeds of selling their home. These contributions will continue not to count towards non-concessional contribution caps.
The $300,000 downsizer limit (or $600,000 for a couple) and the $330,000 bring forward NCC cap allow up to $630,000 in one year contributions for a single person and $1,260,000 for a couple subject to their contributions caps.
6. Calculate co-contributions
Check your eligibility for the co-contribution, it's a good way to boost your super. The amounts differ based on your income and personal super contributions, so use the super co-contribution calculator.
7. Examine spouse contributions
If your spouse has assessable income plus reportable fringe benefits totalling less than $37,000 for the full $540 tax offset or up to $40,000 for a partial offset, then consider making a spouse contribution. Check out the ATO guidance here.
From 1 July 2022 you may also be able to implement this strategy up to age 75 as a Spouse Contribution is treated as a NCC in their account (and therefore counted towards your spouse's NCC cap).
8. Give notice of intent to claim a deduction for contributions
If you are planning to claim a tax deduction for personal concessional contributions, you must have a valid ‘notice of intent to claim or vary a deduction’ (NAT 71121).
A notice must be made before you commence the pension. Many people like to start pension in June and avoid having to take a minimum pension in that financial year but make sure you have claimed your tax deduction first. The same notice requirement applies if you plan to take a lump sum withdrawal from your fund.
9. Consider contributions splitting to your spouse
Consider splitting contributions with your spouse, especially if:
- your family has one main income earner with a substantially higher balance or
- if there is an age difference where you can get funds into pension phase earlier or
- if you can improve your eligibility for concession cards or age pension by retaining funds in superannuation in the younger spouse’s name.
This is a simple no-cost strategy I recommend for everyone here. Remember, any spouse contribution is counted towards your spouse’s NCC cap.
10. Act early on off-market share transfers
If you want to move any personal shareholdings into super (as a contribution) you should act early. The contract is only valid once the broker receives a fully-valid transfer form so timing in June is critical. There are likely to be brokerage costs involved.
11. Review options on pension payments
The government has extended the Temporary Reduction in Minimum Pensions as part of the COVID-19 response. Ensure you take the new minimum pension of at least 50% of your age-based rate below. If a pension member has already taken pension payments of equal to or greater than the 50% reduced minimum amount, they are not required to take any further pension payments before 30 June 2021. For transition to retirement pensions, ensure you have not taken more than 10% of your opening account balance this financial year.
Minimum annual payments for pensions for 2020/21 and 2021/22 financial years
If a pension member has already taken a minimum pension for the year, they cannot change the payment but they can get organised for 2021/22. So, no, you can’t sneak a payment back into the SMSF bank account!
If you still need pension payments for living expenses but have already taken the 50% minimum then it may be a good strategy for amounts above the 50% reduced minimum to be treated as either:
- a partial lump commutation sum rather than as a pension payment. This would create a debit against the pension members transfer balance account (TBA). Please discuss this with your accountant and adviser asap as some funds will have to report this quarterly and others on an annual basis.
- for those with both pension and accumulation accounts, take the excess as a lump sum from the accumulation account to preserve as much in tax exempt pension phase as possible.
12. Check your documents on reversionary pensions
A reversionary pension to your spouse will provide them with up to 12 months to get their financial affairs organised before making 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 in the context of your family situation. 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 disabled children.
The reversionary pension has become more important with the application of the $1.6 million Transfer Balance Cap (TBC) limit to pension phase.
Tip: If you have opted for a nomination instead then check the existing Binding Death Benefit Nominations (many expire after 3 years) and look to upgrade to a Non-Lapsing Binding Death Benefit Nomination. Check your Deed allows for this first.
13. Review Capital Gains Tax on each investment
Review any capital gains made during the year and over the term you have held the asset and consider disposing of investments with unrealised losses to offset the gains made. If in pension phase, then consider triggering some capital gains regularly to avoid building up an unrealised gain that may be at risk to legislation changes.
14. Collate records of all asset movements and decisions
Ensure all the fund's activities have been appropriately documented with minutes, and that all copies of all statements and schedules are on file for your accountant, administrator and auditor.
The ATO has now beefed up its requirements for what needs to be detailed in the SMSF Investment Strategy so review your investment strategy and ensure all investments have been made in accordance with it and the SMSF Trust Deed, including insurances for members. See my article on this subject here.
15. Arrange market valuations
Regulations now require assets to be valued at market value each year, including property and collectibles. For more information refer to ATO’s publication Valuation guidelines for SMSFs.
On collectibles, play by the new rules that came into place on 1 July 2016 or remove collectibles from your SMSF.
16. Understand COVID relief on in-house assets
If your fund has any investments in 'in-house assets' you must make sure that at all times the market value of these investments is less than 5% of the value of the fund. Do not take this rule lightly as the current SMSF penalty powers make it easier for the ATO to apply administrative penalties (fines) for smaller misdemeanours ranging from $820 to $10,200 per breach per trustee.
Due to COVID, the ATO will not take action against SMSFs where:
at 30 June 2021 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 2022, 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 2022.
17. Document COVID-19 rent relief
If you have provided rent relief to a tenant, related or not, ensure it is documented before 30 June including the reasoning behind the trustee decision and the details of the relief provided.
The ATO has provided a non-binding practical approach of not applying resources to this issue for FY2021. However, this announcement while positive, should not be relied on given the considerable downside risks. Auditors will want full documentation.
18. Check the ownership of all investments
Make sure the assets of the fund are held in the name of the trustees (including a corporate trustee) on behalf of the fund. Check carefully any online accounts and ensure all SMSF assets are separate from your other assets.
We recommend a corporate trustee to all clients. This might be a good time to change, as explained in this article on Why SMSFs should have a corporate trustee.
19. Assess estate planning and loss of mental capacity strategies
Review any Binding Death Benefit Nominations (BDBN) to ensure they are valid, and check the wording matches that required by the Trust Deed. Ensure it still accords with your wishes.
Also ensure you have appropriate Enduring Powers of Attorney (EPOA) in place to allow someone to step into your place as trustee in the event of illness, mental incapacity or death.
Check your Trust Deed and the details of the rules. For example, did you know you cannot leave money to stepchildren via a BDBN if their birth-parent has pre-deceased you?
20. Review any SMSF loan arrangements
Have you provided special terms (low or no interest rates, capitalisation of interest etc) on a related party loan? Review your loan agreement and see if you need to amend your loan.
Have you made all the payments on your internal or third-party loans, have you looked at options on prepaying interest or fixing the rates while low? Have you made sure all payments in regards to Limited Recourse Borrowing Arrangements (LRBA) for the year were made through the SMSF trustee? If you bought a property using borrowing, has the Holding Trust been stamped by your state’s Office of State Revenue.
21. Ensure SuperStream obligations are met
For super funds that receive employer contributions, the ATO is gradually introducing SuperStream, a system whereby super contributions data is made electronically.
All funds should be able to receive contributions electronically and you should obtain an Electronic Service Address (ESA) to receive contribution information.
If you change jobs your new employers may ask SMSF members for their ESA, ABN and bank account details.
22. ASIC fee increases from 1 July 2021
ASIC is increasing fees by $1 for the annual review of a special purpose SMSF trustee company $55 > $56. The Government is moving gradually to a “user pays” model so expect increases to accelerate in future years. For $387 you can pre-pay the company fees for 10 years and lock in current prices with a decent discount. There is a remittance form linked here.
23. Relaxing residency requirements for SMSFs from 1 July 2022
SMSFs and small APRA funds will have relaxed residency requirements through the extension of the central management and control test safe harbour from two to five years. The active member test will also be removed, allowing members who are temporarily absent to continue to contribute to their SMSF. The Government expects this measure will have effect from 1 July 2022.
Tip: Probably useful post-COVID for those working or travelling to stay with family or get away from them for extended periods overseas.
24. Legacy retirement product conversions (probably from 1 July 2022)
Individuals will be able to exit a specified range of legacy retirement products, together with any associated reserves over a two-year period. The specified range of legacy retirement products includes market-linked, life expectancy and lifetime products, but not flexi-pension products or a lifetime product in a large APRA-regulated or public sector defined benefit scheme.
Currently, these products can only be converted into another like product and limits apply to the allocation of any associated reserves without counting towards an individual’s contribution cap.
There is considerable additional detail in this feature so consult an adviser if you are affected, especially to ensure you do not lose other entitlements such as the age pension.
25. Improving the Pension Loan Scheme – Social security benefits for you or your mum and/or dad
Current: The Pension Loan Scheme (PLS) allows a fortnightly loan of up to 150% of the maximum rate of Age Pension to help boost a person’s retirement income by unlocking capital in their real estate assets. It can be available for self-funded retirees who are Age Pension age but do not receive a social security pension. Interest is compounded fortnightly at 4.50% pa, and any debt under the scheme is paid back when the property is sold or the person dies.
Proposed: From 1 July 2022, the Government will introduce a No Negative Equity Guarantee for PLS loans and allow people access to a capped advance lump sum payment.
- No negative equity guarantee - Borrowers under the PLS, or their estate, will not owe more than the market value of their property, in the rare circumstances where their accrued PLS debt exceeds their property value. This brings the PLS in line with private sector reverse mortgages.
- Immediate access to lump sums under the PLS - Eligible people will be able to access up to two lump sum advances in any 12-month period, up to a total value of 50% of the maximum annual rate of Age Pension (currently $12,385 for singles and $18,670 for couples).
Don’t leave it until after 30 June. Review your SMSF now and seek advice if in doubt.
Liam Shorte is a specialist SMSF adviser and Director of Verante Financial Planning. He is also a Director of the SMSF Association and he writes under the social media identity of 'The SMSF Coach'.