Author: Emma Partenza, Manager, TAG Financial Services
With the end of financial year in sight, it is a great time for trustees to start planning and attending to matters requiring attention prior to 30 June. This is to ensure sufficient time to obtain the required information for a smooth 2021 administration and audit process to be completed; as well as ensuring pensions are paid, and contributions taken advantage of, for the financial year before it is too late.
Pensions
One of the requirements of trustee’s in paying a pension to members of the fund is that a minimum pension must be paid annually. Adherence to the payment standards ensures that the pension does not cease, and earnings in respect to retirement phase pensions are exempt from tax (in the form of exempt current pension income deduction).
It is critical all pensions are paid well before 30 June 2021 to ensure earnings can remain exempt from tax.
As part of temporary COVID relief measures, the Government announced a 50% reduction in the annual pension payment to members this financial year.
Payments of transition to retirement income streams have a 10% maximum capped amount on amounts that can be paid. These pensions do not enjoy tax exempt earnings until they enter the retirement phase.
In instances where member’s may have withdrawn amounts greater than their minimum pension requirement for the financial year (and have maximised their personal transfer balance cap), payments could be tax effectively classified as lump sum from accumulation or partial commutation from pensions – where members have instructions in place with the trustee on how to allocate payments taken in excess. Where there is no such direction in place, it is advised to put one in place for FY2022 for these payments to be automatically allocated in accordance with instructions. Alternatively, a member is required to request a lump sum from the trustee prior to each payment.
Action required:
- Review pensions paid to financial year to date for members. Ensure any remainder is paid to make sure the reduced minimum is met. This must be paid ASAP.
- Should the member put in place direction for the trustees in respect to treatment of excess pension payments? Please contact us to discuss further.
Conditions of release
Has a member of the fund met a full condition of release during the financial year, such as retirement or reaching age 65, that allows them to access their benefits? There is no requirement for members to commence retirement phase income streams in these instances. Members do have access to their benefits should they require cashflow, in the form of a lump sum.
As the general transfer balance cap is being indexed from 1 July 2021, consideration could be given to delaying pension commencements for the benefit of obtaining a higher personal transfer balance cap to have a greater amount of benefits in the retirement phase where the earnings are tax exempt.
Action required:
- Has a member of the fund met a full condition of release during the financial year? Consider what action needs to take place and please contact us if you have any questions or need assistance.
Investment Valuations
Valuing investments at their market value is a requirement under SIS Regulation 8.02(b).
Investments held by a superannuation fund must be valued at market value each financial year. Where a fund’s investments comprise of property, a valuation is required to be obtained every 3 years, unless a significant event has occurred that impacts its value in the interim. A real estate property valuation is sufficient for audit purposes. Its timely to contact real estate agents to ensure an up-to-date valuation is obtained for 30 June 2021.
Valuing investments will impact member’s total superannuation balances, which in turn may affect their entitlement to make contributions, amongst other things.
Commercial property owned by a fund that is leased to a related party (i.e. your business), you must also obtain a rental appraisal (market value of rent in respect to the property). The auditor needs to ensure rent is being paid to the fund based on market value, arm’s length basis. Lease agreements should also reflect same.
Action required:
- Obtain property valuations for 30 June 2021 from real estate agents.
- Obtain rental appraisals for 30 June 2021 from real estate agents (commercial properties).
Contributions
Many members may wish to maximise their contributions into super prior to the end of the financial year. Don’t leave payments to the last minute – all contributions must be received into the super fund’s bank account no later than 30 June 2021 to be attributed to the current years cap. Should amounts be received by the fund on 1 or 2 July 2021, they are a contribution in respect to the 2022 financial year.
Concessional Contributions
Each member’s cap is $25,000 and work test must be satisfied for members aged 67 or older.
Where a member will make a personal concessional contribution (that is, claim a tax deduction in their personal income tax return), ensure the member has sufficient taxable income to claim the tax deduction. Where this is not the case, the contribution will become non-concessional, potentially causing implications for the member where the are ineligible or their non-concessional cap is nil.
Catchup contributions could be utilised this financial year where the member had a total super balance on 30 June 2020 of less than $500,000.
Be careful of contributions made in June 2020 that were reserved to be allocated in July 2020 as the member may already have utilised their annual concessional contribution cap.
Non-Concessional Contributions
Where a member’s total super balance on 30 June 2020 was less than $1,600,000, members are generally entitled to make a non-concessional contribution. The annual cap for FY2021 is $100,000 and the work test must first be met for member’s aged 67 or over. Members under age 65 may be entitled to the non-concessional cap bring forward rules (of up to $300,000 over 3 years) – however, proceed with caution here and ensure to evaluate their circumstances for eligibility (especially where they have already triggered this).
Action required:
- Ensure any last contributions up to the Concessional Contribution or Non Concessional Contribution cap limits for FY2021 are made ASAP to be included in current year contribution caps.
- Ensure the notice of intent to claim personal contributions is prepared and provided to the superannuation fund.
- Where reserving a contribution in June 2021 is involved, ensure a request to adjust concessional contributions form is lodged with the ATO to avoid an excess concessional contribution being issued.
With the pending indexation changes to contribution caps, careful planning is needed to avoid excesses either for FY2021 or future financial years.
Investment strategy
Trustees must formulate, regularly review, and give effect to an investment strategy that has regard to the whole of the circumstances of the fund – as per SIS Regulation 4.09.
Trustees must ensure the fund’s investments are in line with their strategy. Where this is not the case, the strategy must be updated. During the financial year, if the fund invested into other assets, such as property or entered into a limited recourse borrowing arrangement, that it had not in the past, it is now prudent to ensure this is reflected in the fund’s strategy. Additionally, the strategy needs to be reviewed where a member may have entered pension phase during the financial year.
For funds investing in a sole (or predominantly sole) asset class, the lack of diversification needs to be addressed in the investment strategy together with the trustee’s evaluation of risk levels in respect to doing so.
Action required:
- Trustees to review the fund’s current investment strategy to ensure it is line with current investment mix.
Estate planning
As part of any annual review, it is critical to ensure member’s have addressed their estate planning needs. Including: Wills, Enduring Powers of Attorney and Binding Death Benefit Nominations.
Death benefit nominations can now be made non-lapsing under SIS legislation, so they never expire unless revoked. Members who have had these in place for quite some time would be worth a review and potential update.
Action required:
- Have members addressed their estate planning needs? Please contact us if you need any assistance or would like to discuss further.
Trust Deed
There have been significant changes to superannuation since 2007, which may or may not be expressly provided for in the fund’s deed. It is generally recommended trustees update the fund’s trust deed every 5-7 years, so it remains up to date and relevant to its members.
In some cases a trust deed specifically details what is allowable (outside of SIS legislation), specifically in relation to binding death benefit nominations, for example. An up-to-date deed will provide greater flexibility for members and important strategic opportunities for the fund.
Action required:
- Review the fund’s current trust deed and consider updating it where it is greater than 5-7 years old.
If you have any questions, please contact us on 03 9886 0800 or via email.
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Disclaimer: The information contained is general in nature. Professional advice should be sought before acting on any aspect on this page. Financial planning services provided by TAG Financial Advisors Pty Ltd (ABN 77 154 205 017 AFSL 415632), a wholly owned subsidiary of TAG Financial Services Pty Ltd (ABN 67 075 374 686). Copyright 2021. Please do not reproduce without the expressed written consent of the author.