SMSF Q&A: 15 April 2021

Hello and welcome to today’s SMSF Q&A, I’m Olivia Long. Remember that my answers today will be general advice, so they may not be appropriate or right for you.

We start off today with a question from Nick, he says – Hi Alan, noting many people have asked recently when you think the next market correction will occur and noting you cannot predict it of course, do you have a view on what percentage of a portfolio should be held as cash in the short to medium term to mitigate against a correction. Extending this thinking to superannuation, do you or Olivia see a movement to cash in the short to medium-term as a viable strategy.

Nick, unfortunately, I can’t give Alan’s opinion on this today, but I think as you mentioned, the real answer is, does anyone have a crystal ball? And if there’s anyone out there who does know that answer, please share it with us. I’ll defer this question to Alan next time.

Shami says – Hi Alan and Olivia, I found the Andrew Yee article very interesting. He mentioned the transfer balance cap will become $1.7 million after the next end of financial year, but people who already utilised their $1.6 million transfer balance cap are unable to top up their pension benefits by another $100,000 of superannuation benefit. Does this mean if you had $1.6 million in super pension stage in 2021, you cannot increase the pension mode, but if you had $1.59 million you can?

Shami, yes, that’s exactly what it means, you’re spot on there. Is it fair? Personally, no, I don’t think so. Moving along…

Cliff says – Hi Alan and Olivia, quick question to Olivia. A few weeks ago you mentioned that for fixed income for SMSF, investors could consider BetaShares. Is it possible you could explain a little more about how this investment works? Because since I have invested into this fund, which was over a year ago, I have received a monthly income but my capital invested has reduced considerably. I could be forgiven for thinking all BetaShares are doing is paying me my capital back on a monthly basis, what are your thoughts?

Cliff, this is a great question. For those who don’t know, a bond is essentially a corporate instrument issued by a corporation or a Government to raise cash and the promise to repay the investor their principal plus interest, which is known as the coupon, interest is the coupon. The interest or coupon is tied to interest rates and fluctuates based on this, whilst the underlying value of the bond is dependent on interest rates. Say a bond is 100, less the implied yield, let’s say 100 minus, say, a 2 per cent yield, the bond itself would be worth $98 dollars. But bond prices, not the interest payments, are correlated to interest rates and are actually the inverse, so when rates rise, bond prices fall.

If the yield goes to 3 per cent, then the value of the bond falls to $97 dollars. The reason that Cliff’s value has reduced considerably is because bond markets have been smashed this year. Bond yields have climbed considerably as investors have been selling down bonds, believing that this unprecedented level of fiscal stimulus and low monetary policy is likely to turbo-charge the global economy faster than central banks are lending on. As such, investors believe interest rates are going to rise. Given this approach, bond prices have fallen. To put this all in context, the yield on a 10-year Australian Government bond has risen from about 1 per cent at the beginning of January to about 1.7 per cent currently. I hope that answers your question, not an easy one, but there you go.

Tom says – Lots of questions regarding the fairness of super. I agree that it is being taken advantage of by the rich. Why not change the flatness of the tax system to mimic pay as you go. Perhaps, on the way out, say $5,000 per month is tax-free, then the amount above this is taxed; earnings and super maybe 15 per cent and if more than $50,000 it is 30 per cent, etcetera… Super guarantee, you get 9.5 per cent for the first $100K, then 5 per cent on the next $50K and 2 per cent thereafter. The progressive tax system is what makes pay as you go fair, why not do it in super?

Tom, I’m presenting my own opinion here today, not Alan’s, but I disagree that all of the rich are actually taking advantage because let’s remember, many people who have built up their super that may have higher balances than others, have also paid a significantly larger amount of tax over their career or working life than those on a lower annual salary. From what I see, most people are simply maximising their opportunities provided by the Government who return the favour by providing tax discounts at the end of their life when they retire, which I think is a fairly fair trade-off for a lifetime of paying tax.

Further, the last thing the Government should be doing is making more changes to the superannuation system. If Australians are going to have any faith in the system that they’re expected to support, we need stability in the underlying structure, especially for those who have made personal contributions to super to boost up their retirement savings based on the current tax rate. But again, that’s just my two cents’ worth.

Carl says – Is it true that Australian superannuation is the greatest legitimate medium to long-term tax shelter that money can buy? And I ask this in the context of all of the latest questionable financial dramas. Not casting any aspersions in any way of Greensill and subsequent securitised – and I use the term loosely – debt. Castle Rock Foreign Exchange, US films, Ponzi schemes, seem to present a much higher risk as opposed to the boring returns that super might generate.

Hi Carl, I have to say, no, it is not true that the Australian super system is the greatest legitimate tax shelter. The superannuation system is the most tax-effective vehicle in Australia, but I certainly wouldn’t call it a tax shelter. Going on…

David says – Olivia and Alan, I’m 62, retired with an SMSF that I take the minimum drawdown from each year. The SMSF was valued at around $1.2 million in 2017 when the $1.6 million dollar balance transfer cap was introduced. At the time, I was under the $1.6 million so no change was required. With the great opportunities we’ve had since the March 2020 lows, I find I now have close to $2 million in the fund. I believe this will not be a problem come close of the financial year as it is growth, not additional contributions that have taken me above the transfer balance cap which is now $1.7 million. Can you please confirm if I’m correct?

David, firstly, congrats on the growth, I love stories like that. The $1.7 million dollar cap takes effect from the 1^st of July of 2021. The amount that will be taken into account for assessing the transfer balance cap is the highest amount that has been reported to the ATO from a transfer balance cap purpose, so if the only amount reported to the ATO was the $1.2 million then this is the amount that is taken into account. You’re correct, if the value of the fund's portfolio has grown then this is not taken into account.

Hamish says – A question for Olivia. I have an SMSF in pension mode and prepare all my own financials, P&L, etcetera… Where do I find a tax agent that will check my results, balance to bank and send the audit and lodge with the ATO? I don’t want an adviser who prepares fancy bound end of financial year statements that are irrelevant to my needs.

Hi, Hamish. I’m going to make a very unashamed plug for my firm at this point and recommend that you look at Prime Financial’s SMSF service. For a pension fund, just to give you some background, it’s about a fee of $1,700 for the accounting tax and compliance and $550 for audits, so definitely feel free to give me a call.

Jason says – I’ve been researching the complex world of cryptocurrencies lately and think it makes sense to invest about 1 per cent of our super portfolio in them. Not much downside risk to the overall portfolio but potentially a large upside. Do you recommend a particular exchange for buying and selling crypto for SMSF’s in Australia? CoinSpot seems to be a logical option but there may be others that are better.

Hello, Jason, you’re quite right, cryptocurrencies are becoming more and more popular and in fact, I’ve seen more activity in SMSFs in the past 12 months in crypto than I’ve seen in 17 years in the industry. CoinSpot are one great option, yes, as are another firm, Caleb & Brown, who I trade with. I think the most important thing is, when you’re trading in your SMSF, you need to note that you need to establish the trading account in the name of the super fund and score the crypto on its own individual cold wallet. A common mistake I see people making is storing it with their personal cryptocurrency, which from an audit perspective creates issues.

Hamish says – Hi Alan, I’m a long-term SMSF, 20-years-plus in pension mode. I have a diverse investment portfolio and manage the investments myself…

Here’s another person, wow!

…I produce my own profit and loss statement, etcetera… Currently, I use a firm and their auditor that now charges $5,000 just because the accountant started using a new auditor and it took lots of time and money reinventing the wheel, whilst the accountants explain the investments to the auditor. These investments had been in place over 10 years and signed off by the previous auditor each and every year. To make it worse, the accountants are in Victoria and their new auditor is in country New South Wales. What I want to do is find an accounting service that just prepares my tax, a firm that’s local.

Again, Hamish, Prime’s based in Melbourne and the auditors are also based in Melbourne, so you can give me a call. But there are a number of SMSF specialists that are located close to you so perhaps shop around and find one that you’re comfortable with.

Brian says – Hello Alan, thanks for all your informative answers about such a wide range of issues. The question arose in a discussion the other day about how a person’s transfer balance account is affected by the receipt of a reversionary pension. Say you’ve got a wife who has their own income stream from a self-managed super fund and her transfer balance account is below the transfer balance account cap, if her spouse then dies and she becomes entitled to a reversionary pension, she may commute her own income stream and put the proceeds into an accumulation account, but if the reversionary pension she is to receive in its place is sufficiently large to put her transfer balance account over the cap, will she be able to receive that reversionary pension?

That’s the first part of the question and look, Brian, this question is quite complex, there’s actually a bit more to it which I won’t go into today. But, yes, she can commute her own balance back to accumulation and then she can take on the reversionary pension up to her cap, but any excess must be withdrawn out of the fund as a lump sum withdrawal. The second part of your question said…

If money is left in a will to a charity, either directly or via a testamentary trust, is that money for the charities going to be deductable from income attributable to, say, property on which capital gains will result when the property is sold by the estate?

So, a bit of an estate planning question here…

Is the tax return submitted by the deceased estate effectively a final personal return, so that things like capital gains discounts are still applicable?

Yes, quite simply, it is deductable against other income in the fund and yes, the capital gains discounts are still applicable. It’s a bit of a tax question there.

Steve says – I have a question on super, though it’s not for me but my self-employed partner. Currently, she earns a gross income ranging between $35K to $45K per annum and does not have a super account, hence we are destined to be dependent solely on mine. However, I would like to know whether she can open an account and make personal contributions, applying to have this tax deductable from her income? Additionally, is there a limit to the size of that contribution based on her low income level? Without wishing to seek tax advice, which I know you cannot offer, was your partner in the same low income self-employed situation and is opening a super account and making tax-deductable personal contributions something you would consider? Thanks in advance.

Good question, Steve. Given that superannuation is the most tax-effective vehicle to saving for retirement, I’d say that, yes, opening a super account for her and making personal contributions into it may be a prudent decision to make, but without knowing her personal circumstances, we can’t comment. If it was myself and it’s my partner, yes, I would definitely be making personal contributions up to the contribution limits where I could, if I was preparing for retirement.

Rod asks – I’m grappling with retirement transition over the next four years, I have an SMSF and currently contributing the maximum concessional contributions per annum. At what point does one start rebalancing to income or indeed investing in annuities?

Rod, I’d say it would be a good time to review your investments when you have a change in circumstances. It would be hard to say, again, without discussing your expected time to retirement or what income you need to live on post-retirement, what you should actually do. But obviously, making a change of your investment that’s so drastic definitely needs to be considered in line with what your retirement goals are and what you’re going to need at that point in time as well. A little bit difficult to answer on that one today.

Derrick says – I have an SMSF with three properties and limited debt and hope to be debt-free in three years. The fund will have positive free cash from the properties, plus concessional contributions for the next 20 years before retirement. I have a couple of questions – are there any limits to the value of the SMSF, remembering that these assets generated by the SMSF do not relate to the transfer balance cap?

So, in response to that first question, no, there are not any limits to the value of the SMSF.

Your second question is – what happens when the fund moves into retirement phase with regards to their income streams and the rent versus the asset values of the houses?

This is quite simply, when you move into retirement phase the income stream becomes entirely tax-free, but it doesn’t actually have any impact or it’s not related to the value of the houses. When you determine the rent that’s received by the properties, it needs to be benchmarked with market. As long as you’re receiving rent that’s at a commercial rate, then you’re fine there.

Your final question is – as the cash builds up, presumably the fund can purchase additional properties to keep building an income stream for retirement?

Absolutely, Derrick. Once you start to have extra cash or your cash builds up in your fund, you can definitely invest in other properties if that’s the investment of your choice.

That’s it for this week, all good questions, thanks for your company this afternoon. Alan will be back next week, so please send through your questions via the website and he’ll answer them then. Remember that my answers are general advice only so they may not be appropriate or right for you.