24 Posts

Increasing exempt current pension income percentage in your Self Managed Super Fund (SMSF)

Posted on October 26, 2018 by Helen Cooper

Exempt current pension income (ECPI) is the amount of income that is exempt from taxation inside an SMSF.  An SMSF has exempt income if the SMSF has a pension or pensions that comply with the minimum pension standards each year. A fund can be 100% tax free if all members are in pension phase and the minimum pension/s for each member were withdrawn for the financial year that ECPI applies.

The tax exemption applies to all income (including capital gains) that is generated from the fund assets held to support retirement phase income streams. ECPI does not apply to non-arm’s length income a fund may receive or any concessional contributions.

For example, the Happy Days Superannuation Fund has two members both in pension phase in the 2018 financial year, no member has any accumulation balances and each member withdrew at least their minimum pension amount prior to 30 June 2018.  The fund did not receive any non-arm’s length income so all income received on the fund’s assets throughout the year would be 100% tax free.

Importantly if at any time the pensions for which the ECPI has been granted do not comply with pension standards (by withdrawing the minimum pension amount required), the SMSF will lose its exempt current pension income which may apply to the full financial year.

It is important to remember that if an SMSF has an ECPI amount, that only the taxable percentage of expenses can be used to claim a tax deduction.  For example, a SMSF has an actuarial percentage of 90%, the taxable proportion of the SMSF’s income is 10% and therefore only 10% of expenses can be deducted from the SMSF’s remaining income.  If the SMSF is 100% tax free, no expenses can be claimed because there is no income for the expenses to be deducted from.  Expenses cannot be banked or saved like capital losses.   So in 100% pension phase expenses cannot reduce taxable income.

When an SMSF has both pension accounts and accumulation accounts running at the same time, an Actuarial Certificate is required to confirm the correct tax free percentage of the SMSF’s income.

The Actuarial Certificate will take into account the timing and amount of every contribution, pension payment and any member transfer.

A higher actuarial percentage will result in higher ECPI and less tax to pay.

The timing of contributions and pension payments throughout the year can have an effect on the level of exempt current pension income (ECPI) an SMSF can claim in a particular year.

For those that are eligible to make concessional or non-concessional contributions into super post retirement, the ECPI percentage is reduced the longer the period of time that contributions are held in a member’s accumulation account.

The actuary requires details on when members benefits are paid, whether they are pension payments or lump sums and whether these are paid from a member’s pension account or a member’s accumulation account.

For example: A SMSF with a sole member aged 63 years of age who has met a condition of release, has $1.6 million in pension phase and $400,000 in accumulation phase.  The member is seeking to draw an annual income stream of $80,000 while the net earnings of the funds was 6 per cent per year. Note that the minimum pension requirements for someone aged under 65 years of age with $1.6m in pension is $64,000 ($1.6m x 4%)

If the member drew down his / her $80,000 income stream monthly by exhausting the minimum pension payment requirement first and then sourcing the rest of the payments from his / her accumulation account as lump sums, an estimated ECPI of 74.65 per cent would apply.

If however monthly income payments above the required 4 per cent minimum pension payments were made by lump sums from the accumulation account first, with the remaining payments subsequently made from the pension account, the ECPI increases to approximately 80.32 per cent because more money is retained in the pension account for a longer period and the accumulation account is reduced sooner.

If you are seeking to draw out more than the minimum pension required for a financial year, you need to have met a condition of release and ensure the funds deed and ATO compliance documentation is in place. Please speak to our Superannuation Manager Helen Cooper for more information.

Any information provided in this article is general in nature and does not take into account your personal objectives, situation or needs. The information is objectively ascertainable and was not intended to imply any recommendation or opinion about a financial product. This does not constitute financial produce advice under the Corporations Act 2001.

DOWNSIZER CONTRIBUTIONS AND SELF MANAGED SUPERANNUATION FUNDS

Posted on August 14, 2018 by Piera-Lee Ramm

The downsizer contributions legislation, which allows homeowners aged 65 years or over to contribute up to $300,000 each into super as a tax free contribution came into effect on 1 July 2018.

How do downsizer contributions work?

There are three steps that need to be applied if a member would like to make downsizer contributions.  We have summarized these below including some important points.

Step 1 – Confirm Eligibility

The first step is to confirm that the contribution/s will be eligible. Broadly, an eligible downsizer contribution is where:

  • the contribution is made to a complying super fund by a member aged 65 years or older. There is no age limit or gainful employment test that needs to be satisfied;
  • the amount the member is contributing is equal to all or part of the capital proceeds received in respect of the sale of a dwelling in Australia that qualifies as a main residence under the downsizer provisions;
  • the dwelling must be a fixed structure to qualify (Proceeds from the sale of houseboats, caravans, and other forms of mobile homes do not qualify);
  • the member or the member’s spouse had an interest in the main residence before the disposal; (a new spouse can qualify if they have lived at the residence for two years);
  • the interest in the main residence was held by the member or their spouse for 10 years or more prior to the sale – the ownership period is generally calculated from the date of settlement of purchase to the date of settlement of sale;
  • the member has not previously made downsizer contributions in relation to an earlier disposal of a main residence (i.e. this is a once-off measure).

Step 2 – Making Contribution/s

Upon the sale of a main residence a member can make up to a maximum of $300,000 in downsizer contributions to their super fund.

The downsizer contribution:

  • is not a non-concessional contribution and will not be counted towards the relevant member’s contribution caps;
  • can still be made even if a member has a total super balance greater than $1.6 million;
  • will not affect a member’s total super balance until their total super balance is re-calculated to include all contributions, including the downsizer contributions, on 30 June at the end of the financial year;
  • will also count towards a members transfer balance cap, currently set at $1.6 million. This cap applies when you move your super savings into retirement phase;
  • option for in specie contribution to be made in lieu of cash proceeds;
  • the funds do not have to come from the proceeds of the family home e.g. The ‘downsizer’ new home may actually cost more than the family home that was sold but if other funds are available, the contribution can still be made;
  • there is no requirement to buy a new home after the family home is sold.

Once the member sells their main residence, they are required to make the downsizer contributions to their super fund within 90 days of receiving the proceeds of sale, which is usually at the date of settlement. Given this 90 day timeframe, a member cannot make downsizer contributions if settlement is on vendor terms that go beyond 90 days (unless an extension has been granted by the ATO under certain circumstances).

The “Downsizer Contribution Into Super” form should be completed and given to the superfund’s trustee either before or at the time of making the downsizer contribution.

While multiple downsizer contributions in respect of the sale of the same residence can be made, the total amount of downsizer contributions made by each member cannot exceed $300,000. This total amount includes the amount of all downsizer contributions a member makes in respect of all of their superannuation funds.

It is important to note that the $300,000 downsizer contribution cap is for only one member, therefore this would potentially allow for additional contributions of $600,000 for a couple (ie, 2 x $300,000).

Example 1 – Bob and Mary, sell their home for $800,000. Each spouse can make a contribution of up to $300,000.

Example 2 – Fred and Betty, sell their home for $400,000. The maximum contribution both can make cannot exceed $400,000 in total (being the sale proceeds). This means they can choose to contribute half ($200,000) each, or split it – for example, $300,000 for Betty and $100,000 for Bruce.

Step 3 – Reporting and Verification

The super fund must inform the ATO of receipt of the downsizer contribution form during the super fund’s annual reporting. The ATO will then run verification checks on the amount and may contact the member for further information.

If the ATO identify that the contribution does not qualify as a downsizer contribution they will notify the superannuation provider. Once notified, the fund will assess whether the contribution could have been made as a personal contribution under the contributions acceptance rules. If the contribution could be accepted, the amount will count towards the relevant contribution cap and may result in the member exceeding their cap. If the contribution can’t be accepted, the contribution amount will be returned to the member by the super fund.

False and misleading penalties may be applied if the ATO identify that a downsizer contribution was not eligible and had been incorrectly declared.

Other points to consider

  • The super fund trust deed must allow for the fund to accept the downsizer contributions. Please note if you have a SuperCentral Trust Deed and are participating in the annual renewal service, your SMSF can accept Downsizer Contributions as the SuperCentral Governing Rules were updated on 8 May 2018 to include provision for these contributions.
  • Members should note that disposing of their main residence and contributing downsizer contributions to their super fund may impact on their Centrelink entitlements. Generally a person’s family home is not taken into account for determining eligibility for the age pension, however superannuation savings are taken into account once a member reaches pension age. This means that if a member disposes of their main residence and makes a downsizer contribution, it will generally be taken into account for determining eligibility for the age pension.
  • Members should also be aware that downsizer contributions are not deductible.
  • There is no requirement to buy a new home after the family home is sold.

Please contact our Superannuation Manager Helen Cooper on 08 9316 7000 should you wish to discuss your specific circumstances in more detail.

Any information provided in this article is general in nature and does not take into account your personal objectives, situation or needs. The information is objectively ascertainable and was not intended to imply any recommendation or opinion about a financial product. This does not constitute financial produce advice under the Corporations Act 2001.

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