Author: Alan Preston Archives

Can I make contributions to my SMSF as if I am 65 during the financial year 2014-15?

You can start contributing to your super after you turn 65 as long as you worked 40 hours within a 30-day period during the financial year wherein you want to make a contribution. Assuming that you did not retire in December 2014, it’s safe to assume that you met the above work test within the first half of the financial year and you are entitled to contribute to your super fund until June 30 within the same year. But in the financial year 2015-16, you will need to meet the work test before you make any contributions.

But note that if you’re retired, you can make a personal/deductible contribution or in SMSF jargon a concessional contribution before June 30. This is useful if, by the time you retire, you have a number of accrued leave that could boost your annual taxable income. Take note that you can only make a total of $35,000 in concessional distribution for the financial year of 2014-15. This total includes all employer contributions and any salary-sacrificed contribution made earlier during the year.

Because you just turned 65, you are limited to the standard $180,000 cap for non-concessional contributions and you cannot use the three year roll-up.

Has the tax offset of $500 for a mature age worker (someone over the age of 50) has been abolished or amended in the last budget?

The bill that abolished the mature age worker tax offset for the financial year 2014-15 and in the later financial years, dubbed as the Tax and Superannuation Laws Amendment (2014 Measures No.5) Bill 2014, passed the Parliament and both houses on March 3, and as of March 2015, the bill is awaiting Royal assent.

Can I withdraw the money in my retirement accounts 401(k) and 403(b) and transfer it to my UniSuper accumulation superannuation account without worrying about tax implications and the 10 per cent penalty? Are there tax implications for the transfer and does the USA and Australia have tax treaties that can make this possible?

A 401(k) account is an SMSF where an employer can make pre-tax contributions and a 403(b) plan is another form of SMSF that’s available for certain public-school employees or employees of tax-exempt organizations. The latter can be in the form of tax-deferred annuity and can be held by a retirement account custodian and invested in mutual funds. The latter can also be a retirement income account that’s invested in annuities or mutual funds.

For both, there are rules about when money can be withdrawn and penalties when you withdraw prior to retirement age. A US resident pays standard income tax on withdrawal after the age of 59.5 (59 years and 6 months).

Assuming that you gave up US residency, you will be subject to a withholding tax on withdrawal as a lump sum, which is around 15 per cent under the US-Australia tax treaty but you may want to get in touch with the Internal Revenue Service and complete form W-8BEN.

You can get an exemption from this tax under the dual tax treaty if you withdraw a pension from your funds, but I suggest you get a ruling from the IRS first before making any decisions as to whether you withdraw it as a lump-sum or have it paid as pension. You will also find state charges because a pension is likely to be taxed in Australia. But you can apply the $18,200 tax-free general concession, assuming that your other income comes from untaxed super benefits.

SMSF is a status symbol for generation Y

A self-managed superannuation fund is seen as a status symbol and an increasing number of generation Ys – people who were born from the early 1980s to early 200s – are now looking into getting their SMSF as early as now.

But is it a good idea to manage their retirement fund, or simply the idea of locking their own money for a few decades?

Ray Jaramis, a Gen Y financial adviser with Treysta Wealth Management, states that a young person is looking to start his or her own fund to invest in assets like an investment property. But Jaramis provides a smarter alternative to young investors who’re looking to manage their own funds yet don’t have the means to warrant starting their own fund: join someone else’s fund. Jaramis says “We have many clients who allow their children to become members of their SMSF so the children have the benefit of economies of scale as the costs are paid mostly by the members with the higher balances – that is, mum and dad.”

Jason McLaren, an adviser with Axiom Super Solutions, admit that until now, SMSFs have been the domain of people with significant super balance who are close to retirement, but he says that that too is changing. He notes that there is a significant increase in the Gen Ys who are establishing their own SMSF.

People are now more engaged with SMSFs, according to McLaren, simply because of the drop in set-up and ongoing costs. The drop has also allowed SMSFs to become a more commoditised product.

McLaren advises investors that SMSFs comes with responsibility. He says “You need to make investment decisions and arrange for annual financial reports and tax returns to be prepared and audited each year. You are also responsible for your SMSF complying with the law at all times.”

Gen Ys should invest in SMSFs, but shouldn’t be advised or recommended outright, according to Joshua Stega. He believes that if an investor has a sizable super balance, an SMSF can become a suitable investment vehicle for Gen Ys. As a director for JAS Wealth, he doesn’t recommend SMSFs to young investors outright but if they’re a suitable candidate, he is more than willing to provide relevant advise.

For Stega, the moment a young investor uses SMSF, he or she will immediately become more engaged and taking more responsibility in managing their retirement assets.

But is it sensible for someone so young to tie up their wealth in something they can’t touch for years? Stega believes that young investors should make think of superannuation as long term. “If clients want to take risks like starting a business they should do this outside super and leave superannuation as the retirement nest egg,” Stega says. “We would rarely recommend a younger client increase their contributions to superannuation as a forced savings mechanism unless they lacked discipline around their personal cash flow.”

their personal cash flow.”

Tax effectiveness

Are there options for investors who want access to the tax benefits that SMSFs deliver but don’t want to get their money tied up? Stega explains that a super is the most tax-effective investment and even outside super, investors should consider the tax effectiveness of their own investments and use structures like trusts and companies.

Kane Munro from Accountancy Online believes that someone’s ability to control or manage their finances shouldn’t be based on their birthdate. A young investor’s capability to run his or her SMSF comes down to that individual’s financial literacy.

In July 2016, a new set of collectibles rules will become a part of the SMSF management structure. It is rather unfortunate, but quite in tune with the trend, that many SMSF trustees are grossly unaware of them.

SMSF rules are such that a minimum of two individuals are required to make the cut. On the other side of the spectrum, four is the maximum number a single fund can have. In more general cases, two fund members (read trustees) of an SMSF are spouses.