Considered Wealth

Issue 12 - SMSF Wealth Newsletter - May 2018

Labor's Dividend Imputation Proposed Policy-Impact on SMSFs

There has been much interest in the Labor party's dividend imputation policy and its potential impact on Self Managed Super Funds (SMSFs).

Currently, dividend imputation (otherwise known as franking credits) provides a tax offset to reduce the tax liability for the owners of Australian shares. If the amount of franking credits is higher than the initial tax liability of the shareholders, then the excess franking credits are refunded as cash to the superannuation fund.

Labor's proposed policy is to remove the concession of refunding excess franking credits as cash to taxpayers, but still allow franking credits to reduce a taxpayer's liability to nil.

Labor has said that the Parliamentary Budget Office analysis shows that 92% of taxpayers in Australia did not receive any cash refunds for excess franking credits in their 2014-15 tax return.

Under the new policy, SMSFs with significant investments in shares and managed funds that produce franked income will be more adversely affected than SMSFs with more investments that generate non-franked Income, such as rental properties, fixed deposits, property trusts etc.

Moreover, SMSFs which are predominantly in pension phase and producing tax-free income could be more adversely affected than SMSFs in accumulation phase. Franking credits would be "wasted" as there is usually very low (or nil) tax liabilities to offset. 

Another impact on SMSFs may be reconsidering the tax advantages of being in pension phase if franking credits can already reduce their tax liability to nil. There may be an advantage for some in commuting pension balances back to accumulation so there are no minimum pension payments required.

The proposed policy also involves exemptions to the new rules for those receiving full or part aged pensions or other government allowances. SMSFs with at least one pensioner or other allowance recipient as a member before 28 March 2018 will also be exempted.

If the changes are implemented, it may lead SMSF Trustees to revise their investment portfolios due to the reduced attractiveness of Australian shares and managed funds compared to other alternative investments such as international shares, property and other asset classes.

If Labor wins the next federal election in 2019, the policy is proposed to begin from 1 July 2019 and will only affect future earnings and franked dividends paid from the 2019-20 financial year onwards.

This subject is obviously generating a lot of media and other commentary. Suffice to say a lot of lobbying is underway as it is a substantial and fundamental change proposal. 

Contribution Caps For 2017-2018

The maximum amount of superannuation that can be claimed as a tax deduction for the 2018 financial year is $25,000. The work test will need to be met for members between the ages of 65 to 74 to make a concessional contribution and claim a tax deduction. Superannuation funds can only accept mandated (Superannuation Guarantee) employer contributions for members over 74. The maximum amount of non-deducted contributions is lower than previous years at $100,000, provided that the member's Total Super Balance is under $1.6 million. The "bring forward" rule allows some members to contribute up to $300,000 utilising 3 years of the cap. Contributions are deemed to be made when the funds reach the superannuation fund's bank account. So plan ahead to ensure payments are received before 30 June.

Retirement-Meeting A Condition Of Release

Generally, a member must satisfy one of the conditions of release to cash preserved benefits from their superannuation fund. Turning 65 years of age is one condition of release. Another is retirement for members over their preservation age, but under 65 years of age.

For those over their preservation age but under age 60 to gain access to their superannuation, the member must cease an arrangement of gainful employment and intend to never be gainfully employed for more than 10 or more hours a week.

For members older than 60 but under 65, the member must cease an arrangement of gainful employment, but there is no requirement to never intend to return to the workforce.

For company directors to rely on this condition, they need to ensure that a sufficient retirement declaration has been made when ending a directorship. It is also important to confirm that they were both an employee and gainfully employed, and there has been a legitimate termination of employee status.

Employee Status

The meaning of an employee for superannuation purposes includes company directors who are entitled to payment for the performance of their duties.

Directors are generally not entitled to be paid for their services unless its specifically permitted under the company's constitution or it has been approved in a shareholder resolution. It is     important to review a company's constitution or records to confirm whether the directors are entitled to any payment to confirm whether they qualify as employees.

It is not enough to confirm that the constitution entitles the director to remuneration. Members will need to show remuneration has been paid, or they have received some other form of gain or reward for the performance of their duties.

Termination of Employment

There is added difficulty where a person is both a director and an employee of a company. If a person resigned their directorship but remained an employee, they need to ensure they ceased to have any involvement in managing the company's business activities, otherwise the ATO could conclude that no termination occurred.

Significant consequences can occur for cashing benefits from your SMSF prior to meeting a  condition of release. Penalties for breaches to the SIS (Superannuation Industry Supervision) Act, including breaching the sole purpose test or preservation standards may apply. Anti-avoidance provisions may also apply where a member has obtained a tax benefit by entering the tax-free pension phase prior to meeting a condition of release.

Please contact our office if you believe you have met any conditions of release as soon as possible.

Disclaimer:The information provided in this newsletter does not constitute advice. The information is of a general nature only and does not take into account your individual objectives, financial situation or needs. It should not be used, relied upon, or treated as a substitute for specific professional advice. We recommend that you contact Brentnalls SA before making any decision to discuss your particular requirements or circumstances. Brentnalls is not a partnership or a joint venture. Instead, the business of Brentnalls SA is independently owned and operated and it is an independent member of the Brentnalls Affiliation of Accounting Firms. Individual member firms do not accept responsibility or liability for the actions or inactions of any other individual member firm.