News

Here’s an end-of-year guide for SMSF trustees

May 2020

Opinion piece written by John Maroney, CEO, SMSF Association

Published in the Financial Review (Licensed by Copyright Agency) on 21 May 2020

COVID-19 will make the end of the financial year more complicated than usual for some self-managed superannuation fund trustees.

Here are some tips.

For self-managed superannuation fund (SMSF) trustees, the end of any financial year is a busy time. For this financial year, the impact of COVID-19 on investment markets generally and the economy more broadly means trustees need to be even more thorough in their analysis and evaluation of their SMSF and retirement plans.

They also need to remember that there are several important decisions to make before the year end in order to take advantage of the federal government’s relief packages designed to assist individuals in these difficult financial times. Discussing options with an SMSF specialist will be time well spent in the planning process before June 30.

Drawdowns

For members of an SMSF who have been adversely affected by COVID-19 and can’t access their superannuation, the opportunity to withdraw as much as $10,000 under the adjusted financial hardship rules may be available for the year ending June 30 and financial 2021.

SMSF members must submit their application through myGov between now and June 30 to secure this opportunity this financial year. A second application for an additional $10,000 can be made from July 1 to September 24 for financial 2021.

It will be important that SMSF trustees ensure their trust deed allows the new temporary release condition and that they properly document the release and which eligibility criteria the member has satisfied.

It is also important trustees have the required liquidity and do not pay any superannuation benefits before receiving the ATO determination.

Pensions

Retired SMSF members who are receiving a pension from their fund can choose to receive less than their standard minimum pension this financial year.

The federal government has provided that, for financial years 2020 and 2021, the minimum pension requirements will be halved.

This is to allow members adversely affected by market volatility to withdraw less pension from their account for these two years, minimising the need to sell assets at reduced prices to meet these payments that must be paid in cash.

Regardless of the decision as to the level of drawdown by pension members, trustees must still ensure those members with an ongoing pension paid from their fund, or who started one during the year, must have drawn out at least the adjusted minimum legally required payment for the financial year.

These pension payments must be paid by the fund and received by the pension member before year end to qualify as a pension payment. Failure by SMSF trustees to make at least the minimum pension payments in a financial year will mean the pension will not exist for that year, forfeiting the tax benefits of paying a pension.

For pension members to change their required drawdown and choose to nominate a lesser pension drawdown in line with the temporary relief measures, there should be a record of their request plus a trustee minute acknowledging the reduction.

Pension members will not be able to return pension payments already received exceeding the new minimums to their accounts unless they otherwise meet contribution eligibility.

Any contributions made by way of returning excess pension payments will be subject to the preservation rules and need to be held in an accumulation account. New contributions cannot be added to the capital of an existing pension.

Valuations

Preparing the financial 2020 accounts will be challenging for some SMSFs. Addressing important issues before year end will help this process and improve the overall position of the fund moving into the next financial year.

Don’t forget that for tax purposes, fund expenses that are tax deductible this financial year must be paid before year end. Valuation of assets will also be particularly important this year.

In particular, lumpy assets such as property should be revalued regularly, and close to June 30 is the best time to do it. Equally, difficult to value assets such as shares in private companies or units in unlisted unit trusts need to be looked at to validate current valuations or to be adjusted accordingly.

Trustees should not forget to check the actual investments they have made are accurately reflected in their SMSF’s investment strategy.

Often large movements in markets, such as those because of COVID-19, can cause the total value of particular assets to be outside the limitations set for those asset classes in the investment strategy.

Trustees need to address this issue actively. Temporarily being outside documented parameters in these circumstances is acceptable to the ATO. Ignoring the issue, however, is not.

Strategy

Given the recent and possible future impact of COVID-19 on all markets, the investment objectives of the SMSF, and the investment strategy implemented to achieve those objectives, may need to be re-evaluated by trustees.

Are the long-term investment objectives for members’ retirement goals still realistic? Are the investments made to achieve those objectives likely to deliver? To do this, trustees need to ask themselves how has the mix of asset types in their SMSF changed over the year?

Adjusting the asset mix to suit members’ new risk appetite is an ongoing responsibility of SMSF trustees. Trustees should also remember that while the sale and purchase of assets may best be undertaken before the year’s end, there may be tax outcomes for the fund.

Realising capital losses in order to offset realised capital gains while restructuring an SMSF’s portfolio alignment may be an important part of the process.

The year’s end is a great opportunity to maximise members’ retirement savings by fine tuning the SMSF and addressing all administrative issues. Although COVID-19 has made the job more challenging, it has never been more important.