SMSF Strategies

[Prospector]

Paying your wife or partner would to me, be a red flag to the ATO. SMSF's cannot run a business; paying someone a salary is like running a business. I spend a lot of time managing our SMSF but you just have to lump it. No way would I even think of paying myself a salary, nor anyone else.

As for your shares, you can buy them personally and then transfer them across.

The above is not financial advice, just what I have been told, so seek advice from your accountant/financial advisor before doing anything!

 

[Muschu]

Hi

My wife and I have a SMSF [largely direct shares]which is presently being administered by a FP. We are in the process of moving the entire fund away from him and his firm. The shares and MFs will go to a Comsec HIN a/c. The taxation, compliance etc will go to a chartered accountant. This guy has been our personal accountant for some years and looks after quite a number of SMSFs for clients. I've only one brief meeting with him about SMSFs and, naturally, there are still gaps in my knowledge.

I largely retired in 2003 but continue to do independent [ie: self-employed] casual work as a consultant. [I have not had a SMSF all that time by the way].

If anyone has time to help with a few questions then I'd be grateful:

Just how do I salary sacrifice my earnings?

Can payments for my consultancy work be made out to the SMSF [the super fund] and its ABN and then deposited into our SF a/c? I’m pretty sure the answer is “No” and that the fund would be seen as running a business.

If my earnings are cheques made out to me [and my business ABN], can these cheques be deposited directly into our SF a/c and be viewed as a personal contribution? Here I think the answer is “Yes”. [These earnings would also form a part of my personal income and be a part of my personal (not SMSF) tax return]

Because I am over 60 and not an employee [but rather part-time self-employed] are lump sum withdrawals in the pre-pension phase tax free?

All help appreciated!!

With thanks

Rick

 

[Dezza]

Hi Rick,

As you're self-employed, you can make concessional contributions (c/c's) to your SMSF from your employment income/earnings. As you are also above 60 yrs, you can make up to $100,000 this Financial Year and until 2012 without incurring additional contributions tax (however, the standard 15% contributions tax to super is applicable).

Although you are over 60, you haven't met a condition of release yet and your funds will remain preserved and cannot be withdrawn in lump sum amounts until i) you deem yourself permanently retired, ii) hit 65 years iii) or in the ATO eyes, work less than 10 hours per week to be deemed retired. You are able to however, set up a pre-retirement income stream and draw down a maximum of 10% of your SMSF balance per annum. There is a dodgy loophole at the moment to 're-boot' your SMSF income stream, however it defies the purpose of the income stream and is looked down upon from the ATO, so I won't discuss it here.

Note that if you have unrestricted non-preserved amounts, you can withdraw these at anytime, however, if you convert to an income stream, the income will be drawn from this component first.

Hope this helps a little. But as for all posts, please seek financial advice from your licensed planner or tax adviser before proceeding as this is just my personal opinion.

 

[Muschu]

Hi Rick,

As you're self-employed, you can make concessional contributions (c/c's) to your SMSF from your employment income/earnings. As you are also above 60 yrs, you can make up to $100,000 this Financial Year and until 2012 without incurring additional contributions tax (however, the standard 15% contributions tax to super is applicable).

Although you are over 60, you haven't met a condition of release yet and your funds will remain preserved and cannot be withdrawn in lump sum amounts until i) you deem yourself permanently retired, ii) hit 65 years iii) or in the ATO eyes, work less than 10 hours per week to be deemed retired. You are able to however, set up a pre-retirement income stream and draw down a maximum of 10% of your SMSF balance per annum. There is a dodgy loophole at the moment to 're-boot' your SMSF income stream, however it defies the purpose of the income stream and is looked down upon from the ATO, so I won't discuss it here.

Note that if you have unrestricted non-preserved amounts, you can withdraw these at anytime, however, if you convert to an income stream, the income will be drawn from this component first.

Hope this helps a little. But as for all posts, please seek financial advice from your licensed planner or tax adviser before proceeding as this is just my personal opinion.

Thanks Dezza. I wish this was easier!
I just phoned the ATO.
They advised that I can make personal contributions [is this what you mean by "concessional"] as I wish.
They also said I could make lump sum deductions from the SMSF tax free - which I have been doing.
Perhaps these have been coming from my undeducted contributions?
Does this make sense?
Rick

 

[Dezza]

Hi Rick,

There are different types of contributions, each with their own limits. If you exceed these limits, you can pay up to 97% tax on the excess (eg. if you breach the concessional cap + the non-concessional cap in a financial year).

Personal contributions can be made as either concessional (e.g. pre-tax dollars) or non-concessional (after-tax dollars). C/c's attract 15% contributions tax whilst NC/c's are tax-free as it's coming from after-tax dollars. These have their own caps ($100K C/c's for over 50s and $150K/$450K NC/c's depending if you use the bring-forward rule).

If you haven't met a condition of release for super, you can only make lump sum withdrawals from your SMSF if you have unrestricted non-preserved components. Otherwise, the funds remain preserved until you meet one of those conditions. Even non-concessional (undeducted) contributions are preserved.

As always, your situation is personal so please seek advice from your Accountant to work out what components you have and how much you have left in your caps this Financial Year.

 

[TheRage]

Hi

My wife and I have a SMSF [largely direct shares]which is presently being administered by a FP.

Rick

I am interested in knowing why you have chosen to move the managing of your SMSF away from you FP. I am assuming that you feel that the value provided by your FP is not enough to justify the cost and you now feel like managing your own finances? What is you accountants compliance fees?

 

[Muschu]

Hi Rick,

There are different types of contributions, each with their own limits. If you exceed these limits, you can pay up to 97% tax on the excess (eg. if you breach the concessional cap + the non-concessional cap in a financial year).

Personal contributions can be made as either concessional (e.g. pre-tax dollars) or non-concessional (after-tax dollars). C/c's attract 15% contributions tax whilst NC/c's are tax-free as it's coming from after-tax dollars. These have their own caps ($100K C/c's for over 50s and $150K/$450K NC/c's depending if you use the bring-forward rule).

If you haven't met a condition of release for super, you can only make lump sum withdrawals from your SMSF if you have unrestricted non-preserved components. Otherwise, the funds remain preserved until you meet one of those conditions. Even non-concessional (undeducted) contributions are preserved.

As always, your situation is personal so please seek advice from your Accountant to work out what components you have and how much you have left in your caps this Financial Year.

Am I getting closer Dezza?
If I earn $$ from consultancy work [and I'm not talking huge amounts -- maybe $15-25k a year] and pay personal tax on those earnings [which is what I have been doing] then the $$ can go into my SMSF as non-concessional [undeducted] tax-free contributions?
[You must be an accountant!]
With your , [ii], [iii] in your first post (regarding release conditions) do ALL of these have to be met or any one of the three? Over a year I work less than the average of 10 hours / week you mention. {My wife refuses to pay me for the meals and cups of tea I make}.
Sorry this is taking a while to sink in. While I got distinctions for pure maths at Uni, I was a disaster at applied maths.... altho a lot of this really belongs in the world of foreign languages.
Thanks, again, for your help.
Rick

 

[Dezza]

Haha, no worries Rick. I'm still learning about things as well. Not an Accountant, but work in the Financial Planning industry.

You are spot on with the first part. Using your post-tax earnings to contribute to super is a non-concessional. However, as you are classified as self employed, you can also claim a deduction on these contributions, which in turn changes them to a concessional contribution. The purpose of this is to minimise your taxable income, especially if you have CGT implications for the financial year, works a treat. However, seeing as your income is around the 15% tax bracket anyway, there's no real benefit of this, so your non-concessional contributions are good enough.

As for the preservation rules, the ATO has a listing of when you can access them here: http://www.ato.gov.au/super/content.asp?doc=/content/48211.htm
You only need to qualify for one of them, not all of them, to qualify for access. From the sounds of it, you should be able to qualify.

However, again, just personal view based on the info provided. Don't take this as personal advice, and always check with your Accountant / Adviser before proceeding.

 

[Muschu]

Thanks Dezza - the picture is slowly coming together although sometimes the information is not consistent.-- Or maybe it is, but my understanding is inconsistent.
On a similar / related topic: Superannuation co-contributions.
The ATO told me I was eligle but my wife is not. We are both trustees of our SMSF and occasionally draw lump sums from there.
Difference is, according to the ATO, that I am self-employed [even if just casually]. My wife's earnings are from bank interest and share sale profits. [Shares outide the SMSF at this time]. She is not self-employed [other than as an investor perhaps]. Hence the ATO consider her a "passive" earner and ineligble for the super co-contribution.
Have others received this same advice please?
R

 

[TheRage]

Thanks Dezza - the picture is slowly coming together although sometimes the information is not consistent.-- Or maybe it is, but my understanding is inconsistent.
On a similar / related topic: Superannuation co-contributions.
The ATO told me I was eligle but my wife is not. We are both trustees of our SMSF and occasionally draw lump sums from there.
Difference is, according to the ATO, that I am self-employed [even if just casually]. My wife's earnings are from bank interest and share sale profits. [Shares outide the SMSF at this time]. She is not self-employed [other than as an investor perhaps]. Hence the ATO consider her a "passive" earner and ineligble for the super co-contribution.
Have others received this same advice please?
R

That's because 10% of your assessable income needs to come from eligible employment. Eligible employment can include income from self employment or carrying on a business hence your wife's passive income does not qualify.

 

[Julia]

What a terrific resource ASF is, huh, Rick?

Dezza and The Rage - many thanks for such helpful contributions.

 

[Muschu]

What a terrific resource ASF is, huh, Rick?

Dezza and The Rage - many thanks for such helpful contributions.

Spot-on Julia. I'm glad I found ASF. And I add my thanks to Dezza and Rage.

 

[Dezza]

No probs. Studies and work actually became useful for once.

 

[sandgroper3]

I've just launched into the world of SMSF using MySF software to set up and learn my own way on the accounting and management side and Esuperfund to make sure the job gets done correctly. This site has been a wealth of information, Thanks everyone.

Now to the problem at hand:

In order to rollover super into a self managed super fund, it is necessary to classify that super with respect to both accessibility and taxation.

Rollover statements classify the monies being rolled over with respect to accessibility: i.e. preserved and non-preserved and the two categories of non-preserved: Restricted and Unrestricted.

The same rollover statement classifies the same monies being rolled over with respect to taxation liability: i.e. Tax Free and Taxable Components and the two elements of Taxable components: taxed in fund and untaxed in fund.

Is there anywhere on the statement by which one can tell if, for example, all or some portion of an Unrestricted non-preserved rollover amount is non-taxable or taxable?

 

[Prospector]

At the 'annual accountants meeting" a few days ago; he said that I should be wary about how often I buy/sell shares in the SMSF structure, because the SMSF is not allowed to be in the "business of being a business" and that if I trade too regularly the ATO could re classify the SMSF as a business with huge penalties and loss of tax benefits. The ATO could say I derived "pleasure" from trading and that defeats the sole purpose test! My sole purpose is to make money for retirement, but apparently that isn't a business. What kind of 'business' is it though, where you do research and work for hours each week but are not allowed to draw a salary? A flawed model methinks, but apparently the ATO don't see it that way.

He thought a maximim of 100 trades a year would be about the benchmark. I am well under this, but the amount of $$$ such shares I did trade was quite high. For reasons of the obvious fall of the markets, but also to lighten profit. A bit contrarian. The Investment strategy does not allow me to have more than a certain % of 'spec' shares in the portfolio; for me some of those spec shares (mining, mining, mining) paid off so I was forced to lighten them because of their profit ; others, well, 1 of them (MFS) totally tanked.

I did a recalculation last night of how the SMSF was faring this financial year and I was back in the black! Today, given the 200 point fall in the DJIA, who knows. At least I am out of the financial sector these days. Thank god for iron ore and copper.

 

[elbee]

Prospector,

A SMSF can lose its concessional status if it fails to meet the sole purpose test. The sole purpose test being that the fund is run purely to provide retirement benefits to its members.

Now whilst the ATO has said its view is that if a superannuation fund is conducting a business, then it is not being administered for the sole purpose of providing benefits for the members, it is a bit of a stretch to say this implies a numerical limit on the number of trades a SMSF can make.

You clearly have, as the SMSF regulations require, a documented investment strategy that addresses the matters specified in the regulations, and are taking trading actions to comply with that plan. The ATO can have no argument with this regardless of the number of individual trades made.

Where the ATO may become concerned is if your trades are outside the mandate of the investment strategy or the strategy does not meet the Prudent Person Investment Act for your state, or if you are indeed conducting a business, trade or profession as distinct from investing in a business.

 

[Julia]

I have a question about the audit of the SMSF and hope someone might be able to help.

Despite having had all the information available to her since the end of the last financial year, my accountant has only this afternoon completed the financial statements for the tax return, lodgement date for which is this Thursday 15th. Given that there are some 30 odd pages of what to me is complex information, and further given that my careful checking of the return last year elicited two large and very expensive errors, I will not be signing off on it so she can lodge it electronically by 15th.

(I've contacted the ATO, explained, and as per their instructions, written requesting an extension. They were quite OK about that.)

Now I have always had the understanding - and this is what I'd appreciate someone confirming or correcting - that the accountant completes the tax return and the return is then sent out to the auditors for checking.
(When I first went to this accountant, she made a point of confirming that the audit was not done 'in house', but that rather she was very careful about sending the return out to a separate firm for auditing.)
Is this right? If so, then my accountant has not allowed time for this.

When I put this question to her, and further asked "what would happen if there is a mistake subsequently picked up by the auditor?", the following was her reply:

With regard to your question concerning the audit of the Fund; I work extremely closely with the auditor throughout the entire financial statement preparation process and any issues are communicated during this process. They are prepared to sign the documents after they have been lodged to facilitate smooth lodgements and as they too are subjected to the same ATO lodgement program as we are, and they are also stretched for time

Now this sounds like pretty shonky practice to me and rather as though there is a cosy little arrangement happening here.

I'd very much appreciate any comment on this.

With thanks.
Julia

 

[Whiskers]

Now this sounds like pretty shonky practice to me and rather as though there is a cosy little arrangement happening here.

I'd very much appreciate any comment on this.

With thanks.
Julia

Hi Julia

I don't think it's uncommon for an accountant to work closely with another that acts as an auditor... especially if it involves a query about how to treat a certain transaction/event. Better to query and come to a common understanding about how something should be done in advance.

I'd assume the auditor at least had seen the electronic version before lodgement. But strictly speaking the auditor should also check against the source documentation or data file if you keep electronic records.

I'd be more concerned that there was errors in the (previous) return.

Were they simple math errors or wrong accounting treatment of certain transactions/events?

 

[Julia]

Hi Whiskers,

The errors were:
(1) including a company I had never owned
(2) omitting a company I still owned

 

[CAFA1234]

At the 'annual accountants meeting" a few days ago; he said that I should be wary about how often I buy/sell shares in the SMSF structure, because the SMSF is not allowed to be in the "business of being a business" and that if I trade too regularly the ATO could re classify the SMSF as a business with huge penalties and loss of tax benefits.

He thought a maximim of 100 trades a year would be about the benchmark. I am well under this, but the amount of $$$ such shares I did trade was quite high.

I think your accountants warning is reasonable he is doing his job. I would think that the number of trades per year would depend on how many companies you own. E.g. if you own one company and trade 100 times, or twice a week you ARE trading. If you traded each company once or twice a year you are not trading. If you are buying and selling within days on a regular basis then you are probably trading. If Day Trading then you are absolutely trading and your SMSF will get stuffed sooner or later.

The value of the shares traded has no impact on whether you are classified as Trading, it's the frequency especially within one or more companies. (my view)

I assume you understand why trading is banned from a SMSF? If you are able to make a living from trading (as opposed to holding stock for the long term) then why can't I operate a consulting business from within the SMSF??? Now where would the taxation base be if this was allowed (again, my view of the world)