New Regulations On Investing in Collectables

New Regulations

SPAA Specialist Advisor

2011 Budget Update

Contribution Caps

Pension Payments

The review into Australia’s superannuation system, headed by Mr Jeremy Cooper, (“the Cooper Review”) completed its final report on self managed superannuation funds (SMSFs) on 30 June 2010.

One of the recommendations of the Cooper Review was that the acquisition by SMSFs of collectables and personal use assets such as artworks, jewellery, antiques, wine collections, exotic cars and yachts be prohibited. SMSFs that already owned such assets would be given five years in which to dispose of them.

In response to this recommendation, on 30 June 2011, the Government made regulations applying from 1 July 2011 which allow SMSFs to continue to invest in collectables, but which also prohibit members from deriving any personal benefit from a fund’s ownership of collectables.

 

Briefly, the new regulations provide that:  The term “collectables” includes artwork, jewellery, antiques, artefacts, coins or medallions, postage stamps or first day covers, rare folios, manuscripts or books, memorabilia, wine, cars, recreational boats and membership of sporting or social clubs. For any new investment in collectables from 1 July 2011: The asset must not be leased to a related party; The asset must not be used by a related party; The asset must not be stored in the private residence of a related party; The asset must be insured in the name of the fund within 7 days of it being acquired (other than an investment in a membership of a sporting or social club); The transfer of a collectable asset to a related party must be at a market price determined by a qualified independent valuer; and A written record of any decision made by trustees with respect to the storage of a collectable asset must be made.

 


 


















If the above provisions are breached, funds could be made non-complying and/or the trustees fined up to $1,100 for each breach.
For existing investments in collectables as at 1 July 2011, the trustees will have until 1 July 2016 to comply with the above requirements, or dispose of the relevant asset.

 

Scott Maroske becomes SPAA Specialist Advisor

During the year, Scott Maroske, manager of Super Retirement Solutions successfully met the requirements of the Self Managed Super Fund Professionals’ Association of Australia (SPAA) to become a SPAA Specialist Member. 

This means that Scott has demonstrated the necessary expertise and experience in the self managed superannuation fund industry to be identified as a specialist in the area.  SPAA is the pre-eminent industry body in the self managed superannuation industry, and is well regarded by both the Government and other industry bodies.

2011 Budget Update

 

The 2011 Commonwealth Budget delivered on 10 May 2011 contained a small number of measures relevant to self managed superannuation funds.  In summary, the most relevant proposals were:

Increase in the SMSF levy

The SMSF levy has increased from $150 to $180 effective from the 2010/2011 financial year.  According to the Government, this is to help fund the cost of their “Stronger Super” reforms.


Changes to the minimum pension payments

In the last three years, in response to the Global Financial Crisis, the Government has provided pension drawdown relief by reducing the minimum amount required to be taken out as pension payments.  Over the next two years, the minimum payment amounts will return to normal, as set out in the table below

 

Member’s age Minimum % factors 2009 / 2010 2010 / 2011 Minimum % factors 2011 / 2012 Minimum % factors 2012 / 2013 Under 65 2% 3% 4% 65 – 74 2.5% 3.75% 5% 75 – 79 3% 4.5% 6% 80 – 84 3.5% 5.25% 7% 85 – 95 4.5% 6.75% 9% 90 – 94 5.5% 8.25% 11% 95+ 7% 10.5% 14%

Refund of excess concessional contributions

The Government will provide eligible individuals with the option to have excess concessional contributions taken out of their superannuation fund and assessed as income at their marginal rate of tax, rather than incurring excess contributions tax.

This measure will apply where:

• an individual has made excess concessional contributions of up to $10,000 (not indexed) in a particular year;
  
  but will only be available:
  • for breaches in respect of 2011-12 or later years; and
  • for the first year in which the breach occurs.

 

 

Contribution Caps

Also in the May Budget, the Government confirmed its intention to retain the $50,000 concessional contribution cap from the 2012/2013 financial year, but only for those aged 50 or more in the financial year with a total superannuation balance of less than $500,000.

The contribution caps in 2011/2012 are:

Name of cap Amount of cap Concessional contributions – under age 50   $25,000 Concessional contributions – age 50 or over   $50,000 Non-concessional contributions   $150,000 Non-concessional contributions– bring forward mode   $450,000 CGT cap   $1,205,000 (up from $1,155,000)

Recontribute your Pension Payments to Reduce Tax

For clients who are in receipt of an account based pension or a transition to retirement pension (TRIS), but are still eligible to contribute to their self managed superannuation fund, a recontribution strategy could be considered.

What this means is that clients withdraw more pension than they require from their SMSF, and recontribute the excess in the form of a non-concessional contribution.  The effect of the strategy is to increase the “tax free” component, and decrease the “taxable” component of a person’s total superannuation benefit.

This strategy is most effective when members are 60 or over and not paying tax on the pensions they are taking from their superannuation funds.  Increasing the tax free component means that, in the event of a person’s death, there would be less death benefit tax to pay if the benefit was ultimately being paid to a non tax dependant.

 The example below helps illustrate this point:

Gavin and Angela are both 60 and both commence Transition to Retirement Pensions on 1 July 2012.  Both their superannuation benefits have been accumulated entirely from the employer contributions and earnings on those contributions.  Both Gavin and Angela therefore have a “taxable component” of $500,000 and a “tax free component” of nil upon the commencement of their pensions.

Both require the minimum pension upon which to live.  However, Gavin withdraws the minimum pension, whilst Angela withdraws the maximum pension and recontributes the excess she does not require back into her fund as a non-concessional contribution.

The table below shows the difference between Gavin and Angela’s superannuation benefits over the next two years.

2011/2012 Gavin Angela Fund balance at 01/07/2011 $500,000 $500,000 Plus Earnings at 5% $25,000 $25,000 Less pension payment ($15,000) ($50,000) Plus re-contribution - $35,000 Total fund balance at 30/06/2012 $510,000 $510,000       Tax free component Nil $35,000 Taxable component $510,000 $475,000

2012/2013   Fund balance at 01/07/2012 $510,000 $510,000 Plus Earnings at 5% $25,500 $25,500 Less pension payment ($20,400) ($51,000) Plus re-contribution - $30,600 Total fund balance at 30/06/2013 $515,100 $515,100       Tax free component Nil $67,350 Taxable component $515,100 $447,750

Over two years, Gavin has paid no tax on his pension payments, but his taxable component is still 100%.  If Gavin was to pass away suddenly, and his benefits were paid directly to a “non tax dependant” (eg. his adult children), tax would be payable at 16.5% on the taxable component, which in Gavin’s case is his entire benefit.  This equates to $84,991.50.


Similarly, Angela has paid no tax on her pension payments.  However, if Angela was to pass away unexpectedly, and like Gavin her benefit was paid directly to her adult children, the 16.5% tax payable on her taxable component equates to $73,878.75.


In this example, there is a potential saving of $11,112.75 in tax payable by dependants, simply by utilising the recontribution strategy over two financial years.  The longer the strategy is in place, the greater the potential tax savings