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July 2017

Hello and welcome to our July 2017 newsletter.  In this quarter’s issue, we have provided articles on the following topics:

 

Staff Updates

Veritas Wealth Solutions would like to extend our congratulations to team member, Tracey Whittaker, who married her long-term fiancé in a surprise ceremony during a recent trip to the USA.  Going forward, she will now be known as Tracey O’Brien.  Please note that her email address has not changed.

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Simpler BAS Reporting

 From 1 July 2017 the ATO is simplifying GST reporting for small businesses with a GST turnover of less than $10 million.

Simpler BAS Reporting aims to make BAS preparation easier and quicker as small businesses will only need to report:

  • G1 – Total sales
  • 1A – GST on sales
  • 1B – GST on purchases

Simpler BAS will not change how other taxes are reported (PAYG tax withheld or PAYG income tax instalments), reporting frequency or record keeping requirements.

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Demystifying shares – for new investors (and a refresher for seasoned ones)

We regularly have clients investing in shares directly or via a self-managed superannuation fund for the first time so we have outlined below what to expect when you purchase you shares.

CHESS Registration & Holder Identification numbers (HIN)

If you purchase shares via a broker whether it be an online or full service traditional broker, generally you will be CHESS registered.  CHESS (Clearing House Electronic Subregister System) automatically manages the transfer of funds and legal ownership between buyers and sellers.

If you hold a CHESS account you will receive a Holder Identification Number (HIN) which will start with an “X”.

Any personal contact changes, for example address changes, will need to be updated via your broker and you will receive letters from CHESS confirming any changes made to your CHESS account.  These details cannot be changed via the share registry when you are CHESS broker sponsored.

Issuer Sponsored & Security Reference Numbers (SRN)

Shares that have been purchased without using a CHESS account (known as broker sponsored) are known as an “Issuer sponsored” trade, often occurring via an “initial public offering” (IPO) or some other off market change of ownership.  An issuer sponsored transaction will receive a Security Reference Number (SRN) which will start with an “I” and all details are managed by the company’s nominated subregister.

CHESS (HIN’s) vs Issuer (SRN’s)

A broker sponsored account will consolidate all your shareholdings under one number making it much easier to keep track off. Issuer sponsored shareholdings receive a different number for each company that you invest in.

What is a Contract Note?

When you buy or sell shares you will receive a contract note confirming the trade. This document should be kept for your records.  Do not throw it away!  It will be needed 20 years later when you decide to sell and need to calculate your capital gains tax liability. These documents are even more important when your Estate is being administered as the Executor will need all the information possible to make an informed decision on how best to wind up your assets and implement your wishes.

What is a share registry?

The share registry manages the list of all the owners of shares in that company. It will handle most of the dealings you will have with the company you have invested in.

The share registry requires certain information from all shareholders:

  • Tax file number relating to the shareholder (personal or entity)
  • Bank account details to deposit your dividends (Note: Broker sponsored holdings will typically automatically send the TFN & Bank Details on their records to the share registry. You usually receive confirmation of this a few days after the welcome documents when you make your first investment with a particular company)
  • Communication preferences so they know how to send you information

You can manage your share registry details online with all the major share registries, such as Computershare, Link Market Services, Boardroom and Advance.

What paperwork will I receive?

When you make your first investment with a company you generally will receive a Welcome Letter and forms to complete asking for TFN, Bank account & communication options or website login information to update this electronically.  Going forwards, you will receive:

  • Dividend/Distribution Statements when they are declared by the company
  • Tax Statements (if applicable)
  • Company Reports including Annual Reports
  • Company announcements including information regarding the AGM or corporate actions
  • Holding statements recording your trading activity whenever a transaction is made.

You can update the communications options with all share registries to receive correspondence by email.  However certain changes and notices will always be sent via post.  For example changes verifying updates made to personal contact details via the broker or issuer are sent via mail to the registered address.

Records Management

Important paperwork to keep:

  • Contract Notes for all transactions
  • Corporate Action purchase/sell papers if you have taken the offer
  • Holding Statements
  • Tax Statements
  • Dividend Statements if you are utilising a Dividend Reinvestment Plan

These can be in electronic format, preferably PDF, if you wish to save filing space at home.  This information should be kept for at least 5 years after your tax return is lodged once the asset has been sold.  For example if you sold some shares in 2016/17 financial year, then the contract notes verifying the buy and sell transactions should be kept until July 2022.

Keep your details up to date

Key information you need to keep up to date includes your Settlement Bank Account linked to your Broker account and your personal contact information eg Address, Email and Phone numbers

Further Reading

If you’d like to do some more in-depth reading on the topic, the ASX website has further details here: ASX First-Time Investor Education

Need some help?

Veritas Wealth Solutions can assist and guide you through the whole share trading process.  We are seasoned administrators for all types of investments and well versed on the paperwork and systems needed to manage your portfolio efficiently.

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It’s time to think about your investment strategy

You’ve made it through the financial year and navigated the new superannuation laws that took effect on 1 July 2017 but there is one thing you should always think about and that’s your investment strategy. There is no better time than right after a financial year ends to review your self-managed super fund’s (SMSF) investment strategy and its performance.

As a trustee you are required to review your investment strategy regularly to ensure it continues to reflect the purpose and circumstances of your fund and its members. An SMSF investment strategy must take into account the following:

  • The risks involved in making, holding and realising the SMSFs investments, their expected return and cash flow requirements of your SMSF.
  • The diversification and composition of your SMSF investments.
  • The liquidity of your SMSF investments, with regard to expected cash flow requirements.
  • The SMSF’s ability to pay current and future benefits to the members.
  • Whether to hold insurance cover for each member of your SMSF.

 

An important requirement for you as trustee of your SMSF is to have an investment objective and a strategy to achieve that objective before you start to make decisions about how you want to invest your SMSF’s money.

Whatever assets you choose for your SMSF to invest in, there must be a clear and obvious retirement purpose in the choices you make. Of equal importance is that the investment objective and strategy is not set in stone. Trustees can choose to change the investment objectives they have set for their SMSF at any time.

At the same time looking at current broader economic risks should form part of your decision making. Looking ahead to the 2018 financial year these include whether United States President Donald Trump can succeed on his economic promises, the looming threat of North Korea and the United Kingdom’s pending ‘Brexit’.  Domestically, slow wages growth, rising housing costs and a potential interest rate rise from the Reserve Bank of Australia could all weigh in on the economy.

So as an SMSF trustee, your best defence against this uncertainty is to have a clearly defined, well-rounded and long term investment strategy. Not only is your SMSF legally required to have an investment strategy, it is key to guiding you and your fund through uncertain times.

A crucial aspect of an investment strategy is to consider the diversification of your SMSF’s assets.  Diversification of your retirement savings across different assets and regions is fundamental to protecting your fund from volatility in financial markets over the long-term.

While it is important to keep track of events that affect financial markets and your superannuation savings, keep in mind that superannuation is for the long-term and that sometimes, short-term decisions can do more harm than good.  A good investment strategy that keeps members disciplined and focused on the long-term is essential.

With any decisions you make as a trustee in relation to your fund’s investments strategy and asset allocation, the important things to keep in mind are:

  • Try to avoid taking undue risks with your underlying investments, which increases the likelihood of short-term losses. For example, think twice before moving from relatively stable shares to speculative shares even if you think a short-term win will come to your SMSF.
  • If the fund is considering payment of an income stream, ensure the cash flow from the asset allocation is sufficient to pay the required amount.
  • If there is a relatively long timeframe before benefits become payable from the fund, the potential capital growth of the investment should be considered.
  • Consider the effects of inflation and protect against the reduction in the real value of the fund’s investments.
  • All trustees and members of SMSFs have a range of attitudes towards risk and how they see their funds’ investments performing over time. When it comes to the fund’s investment strategy and asset allocation it is important to carefully consider its overall risk profile or tolerance, including the impact of asset allocations on the overall investment portfolio.

Your investment strategy does need to be reviewed at least once a year and this will be evidenced by your approved auditor. It is also important to review your strategy whenever the circumstances of any of the members change or as often as you feel it is necessary. The following practical tips will help you keep on top of your obligations:

  • Put your investment objective and strategy in writing.
  • Set an investment objective that you can achieve with the underlying investments you are comfortable to invest in.
  • There is no template for an investment objective and strategy, but make sure they reflect how you intend to invest your SMSF’s money.
  • The investments you actually make must be contemplated by the investment strategy you have set.
  • Additionally, document your actions and decisions, as well as your reasons, and keep them as a record in order to demonstrate that you have indeed satisfied your obligations as a trustee in this important area.

 How can we help?

The financial advisors at Veritas Wealth Solutions can help you formulate, execute and review your investment strategy and needs from inception to retirement as well as answering any questions or concerns you may have. Please feel free to call our office to arrange a meeting to discuss your particular requirements in more detail.

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April 2015

Hello and welcome to our April 2015 newsletter. In this quarter’s issue, we have provided articles on the following:

 

SMSF Minimum Pension Withdrawal Reminder

A quick reminder for our SMSF trustees about the importance of withdrawing the minimum pension amount from your superannuation fund before Tuesday 30th June 2015.  You can find each member’s minimum pension withdrawal amounts for 2015 in the covering letter we included with your 2014 financial statements.  If you have any questions to do with your minimum pension requirements please call our office to discuss with one of our accountants.

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Income Protection Insurance and Workers Compensation – the differences explained

Many people believe that being covered at work through workers compensation insurance is enough and feel there is no need to extend their coverage beyond this.  However workers compensation insurance coverage is limited to the workplace and not all injuries that occur in the workplace are automatically eligible for compensation.  There are certain factors that influence as to whether a claim will be paid and if so the amount that will be paid out.  These include: proving the negligence of the employer; the injury has to be a direct result of some kind of negligence on the employer’s part.  If this cannot be proved then usually the claim is denied.  Also the injury sustained must be while the employee is at their workplace.

If the injury incurred does qualify for workers compensation then the amount paid will vary.  Compensation will depend on the type of injury caused, its severity and the time the employee is likely to not be able to return to work.  Therefor the actual compensation amount is very difficult to determine if an employee gets seriously injured at work.  Currently there is no uniformity in regards to benefit periods and amounts paid across all states and territories.  So overall there is a risk of workers compensation not being received or when it is does qualify, not being adequate enough to cover the injury sustained.

Income Protection insurance has a much broader application than workers compensation and as there is a reasonable risk of accidents or injuries occurring outside work from home and recreational activities, it should be considered by most working people.

Income Protection insurance can give you cover until you are fully recovered to return to work or in some cases to the age of 65.  Under Income Protection cover you have a choice as to the type of cover you want and how you will be paid, it will depend on the amount of cover and terms you are willing to pay for.  Each insurance provider will have different coverage and terms as to when a claim can be made.  When comparing policies, it is essential to read the product disclosure statements to understand the different terms and options available that can be taken.  Consider getting professional financial advice to help you pick the correct policy and terms for your circumstances.

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Taxing of Minimum Pension Drawdowns Age 55-59

There are some quirky aspects of the application of the minimum drawdown and related tax rules for account-based pensions which have caused uncertainty, particularly for those aged from 55 to 59 inclusive. However, recent Australian Taxation Office (ATO) statements appear to remove all but a few of the remaining mysteries. This article examines some interesting tax implications that can arise for account-based pensioners under the age of 60 depending on the manner in which they make their drawdowns.

Importance of meeting the minimum drawdown requirement

As a starting point, it is worth emphasising the importance of holders of an account-based pension (ABP) receiving total annual payments necessary to meet the Superannuation Industry (Supervision) Act 1993 (SIS) minimum drawdown requirement. As the ATO has made clear in Tax Ruling TR 2013/5, if this requirement has not been met then it considers that an ABP will have ceased at the start of the relevant income year (or not started at all, if it was to have been the first year). The tax consequences for that year are typically unfavourable and include no fund earnings tax exemption and potentially higher tax on benefits paid. The ATO can only exercise discretion to overlook failure to meet the minimum drawdown in very limited cases. How the minimum drawdown requirement is met for an ABP holder varies depending on the preservation status of their super benefits; that is, typically, the extent to which their benefits are classified as unrestricted non-preserved, restricted non-preserved or preserved. For people aged 55 to 59 this often turns on whether or not they have retired for the purposes of SIS.

Retired ABP owner

Assume David is 58 years old, retired for the purposes of SIS and started an ABP in his SMSF in 2014/15 with unrestricted non-preserved benefits, all taxable component. His minimum drawdown requirement for this year is $30,000 and he has already drawn $10,000 by way of regular income payments. He is contemplating making a partial commutation and cashing a further $20,000 in one lump. Note that, prior to any partial commutation, the cashings during the income year must have been at least equal to a pro rata amount of the minimum, based on the number of days the ABP was payable in the financial year up to the commutation date. Alternatively, after a partial commutation the remaining ABP balance must be enough to pay any outstanding minimum requirement. Assume David meets these requirements.

Can a partial commutation count towards meeting the minimum?

While SIS makes a distinction between partial commutations and other payments for various purposes, cashings arising from partial commutations count towards the minimum drawdown requirements in the same way that regular income payments do. The ATO has acknowledged this in its Self-Managed Superannuation Fund Determination SMSFD 2013/2.

Can the partial commutation be taxed as a lump sum benefit?

If taken as a lump sum benefit, the taxable component is taxed on David’s personal income tax return at 0% up to the low rate cap.  Once the low rate cap has been exceeded, it will be taxed at 15% plus the Medicare levy.  If taken as an income stream, the taxable component is taxed at his marginal tax rate plus the Medicare levy but he is also entitled to a 15% tax offset.

David’s regular pension payments will be taxed as superannuation income stream benefits by default. While he will be entitled to a tax offset of 15%, assume his marginal tax rate is higher than that so the payments will give rise to a tax liability. However, if he makes a written election in advance of the payment, the $20,000 partial commutation can be treated as a superannuation lump sum benefit for tax purposes. The low rate cap referred to in the table above is an indexed lifetime limit ($185,000 in 2014/15) that is reduced by the taxable component of any lump sums David has already received in a previous financial year on or after reaching preservation age (age 55 for someone born before 1 July 1960, such as David). Assuming David has not previously cashed a lump sum benefit, if he makes an election for the payment to be a lump sum benefit the $20,000 partial commutation will fall within his low rate cap and no tax will apply to that payment. Note that David’s fund was liable to make a series of periodic income stream benefit payments which it made prior to his decision to take the lump sum benefit. Had that not been the case it is possible that the ATO may have taken the view that there was no pension under SIS nor was the fund entitled to a tax exemption (refer to Tax Ruling TR 2013/5 and Division 295 of the Income Tax Assessment Act 1997).

The transitioning ABP owner

Assume Ann’s circumstances are similar to David’s except that she has not retired and her ABP is a “transition to retirement” (TTR) pension. She started the pension this income year and it comprised of preserved benefits except for around $30,000 of unrestricted non-preserved benefits (URNP) (which were sourced from a benefit rolled over from an employer-sponsored fund upon resignation many years ago). The ATO’s view is that SIS requires payments from a TTR pension to be paid first from URNP benefits, then from restricted non-preserved benefits (but there are none here) and then from the preserved benefits. Ann has received $10,000 in regular pension payments and is contemplating making a partial commutation of the remaining $20,000 of URNP benefits. For TTR pensions, SIS allows URNP benefits to be commuted (but not restricted non-preserved or preserved benefits).

Can a partial commutation count towards meeting the minimum?

The ATO has recently issued SMSF Determination SMSFD 2014/1 which confirms that, on the one hand, the partial commutation cashing does not count toward the maximum drawdown constraint for a TTR pension but, on the other hand, it does count towards the minimum. So, while SMSFD 2013/2 indicates otherwise, SMSFD 2014/1 clearly indicates that the ATO would now accept that Ann will have met the minimum once the $20,000 partial commutation is cashed.

Can the partial commutation be taxed as a lump sum benefit? 

It should follow that Ann can make a written election in advance of payment that the $20,000 partial commutation is to be taxed as a superannuation lump sum benefit and to take advantage of the fact that the amount falls within her $185,000 low tax cap.

What if a TTR pension is fully preserved? 

Assume instead that Ann’s TTR account comprises only preserved benefits. In this case SIS generally does not permit a partial commutation cashing. However, under the governing rules of Ann’s fund, the terms of her TTR pension permit irregular pension payments so Ann arguably would be able to cash a $20,000 payment from the fund without it being classified as a partial commutation for the purposes of SIS.

Would she be able to elect for such a payment to be treated as a superannuation lump sum benefit for tax purposes? 

There does not appear to be anything which expressly prevents her from doing this under the relevant provisions of the Income Tax Assessment Act 1997, but perhaps the fact that the payment could not be recognised as a partial commutation under SIS prevents this in some way. We await the ATO’s view on this remaining mystery.

People about to start a TTR pension: 

For SMSF members about to commence a TTR pension with part of their super savings, the ATO website currently suggests that they can choose which classes of benefits they allocate to their TTR pension account for preservation purposes. For those who have URNP benefits, some thought needs to be given to whether or not the URNP benefits should be transferred to the pension account. On the one hand, if they intend only to draw the minimum required each year, there may be some appeal in transferring URNP benefits into the pension account, as it may provide clear scope for some of the cashings to attract lump sum tax treatment. On the other hand, the fact that any URNP benefits in a pension account must be drawn from that account before any other benefit may limit the scope to take them as lump sum benefits. In particular, members who are likely to need to draw more than the minimum and who are keeping some of their super in accumulation phase may gain extra flexibility by keeping the URNP benefits out of a pension account since these will not be forced out of the fund but are available for cashing at any time. Of course, some members will transfer all their super savings into the TTR pension for tax and other reasons, in which case any URNP benefits will be allocated to the TTR account and be paid out first.

In many cases people with ABPs aged 55 to 59 who are cashing only the minimum necessary to satisfy the SIS rules will have the scope for part of the cashings to be treated as a lump sum benefit for tax purposes. Recent ATO statements indicate that this may extend to TTR pensioners, although it is unclear whether that treatment is limited only to their URNP benefits.  If you would like further information please contact our office.

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 Tax Planning for 2015

With the end of the financial year fast approaching it’s a good time to start thinking about tax planning ideas to minimise your tax liability. Some strategies, including setting up more tax effective business structures such as a company or trust, negative gearing property or salary sacrificing, are more complex but well worth discussing with your accountant, particularly for higher income earners.

A tax strategy you can use straight away is to bring forward any tax deductions you may have prior to 30 June.  By maximising your tax deductions this financial year you can reduce your taxable income which will reduce the amount of tax you need to pay.

The following are some examples:

  • Paying rental property expenses including repairs and maintenance
  • Giving gifts and donations to registered charitable organisations
  • Paying subscriptions to professional journals
  • Paying memberships to professional associations
  • Prepaying for business travel, seminars and conferences
  • Prepaying insurance premiums or rent on business premises
  • Purchasing office supplies and stationery
  • Business owners can pay employee’s super contributions into a complying fund by 30 June
  • If you intend to claim work related Motor Vehicle expenses remember to prepare a log book to document your private and business kilometres travelled for a continuous 12 week period as well as your motor vehicle expenses
  • Higher income earners could get private health insurance to avoid the Medicare levy surcharge.

These ideas require spending money sooner rather than later in order to save money.  If your cash flow prevents this or does not relate to your circumstances at the very least it’s a good idea to plan just by making sure you have all your necessary tax documents together sooner rather than later.  Not only will you then not miss claiming items you should have but it will mean you can have your tax prepared in a timely fashion so you don’t get hit with late lodgement fees and if you do have a tax liability you can then budget for it.

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Rules for Collectible and Personal Use Assets in SMSFs

From 1st July 2016, the transitional rules for collectibles and personal use assets held in SMSFs will have expired.  Collectibles and personal use assets include items such as:

  • Artwork – including paintings, sculptures, drawings, engravings & photographs
  • Coins, medallions or bank notes – where their value exceeds their face value
  • Antiques
  • Postage stamps or first-day covers
  • Memorabilia
  • Wine or spirits
  • Memberships of sporting or social clubs
  • Bullion coins are collectables if their value exceeds their face value & they are traded at a price above the spot price of their metal content
  • Jewellery
  • Artefacts
  • Rare folios, manuscripts or books
  • Motor vehicles & motorcycles
  • Recreational boats

The new rules took effect for purchases made from 1st July 2011 and from 1st July 2016 they apply to all collectable and personal use assets.  The rules prevent these types of assets:

  • being leased to, or part of, a lease arrangement with a related party
  • being used by a related party
  • being stored or displayed in the private residence of a related party.

This excludes agreements where art is displayed at the business premises of a related party where it is visible to employees and clients.  However you are allowed to store collectibles and personal use assets in purpose-built storage facilities that are owned by a related party provided the premises are not a part of their private residence and the assets are not on display.

Artwork can be leased to an art gallery provided the lease is an arm’s length arrangement and the gallery is not owned by a related party.  The SMSF must have an insurance policy in its name over the artwork, regardless of the insurance policies held by the gallery.

Investments in classic motor vehicles, as well as restrictions on display and storage, also prevent related parties from driving them, even for restoration or maintenance reasons.

As well as storage and use restrictions:

  • the investment must comply with all other investment restrictions, including the sole purpose test
  • documentation, such as meeting minutes, must be kept for 10 years on storage decisions
  • insurance must be in place within 7 days of acquisition and the policy must be held by the SMSF
  • if the item is sold to a related party, it must be sold at market value as determined by an independent valuer.

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