Top five SMSF strategies for 2011-12

The 2011-12 financial year will see significant reforms impacting the entire financial services industry. This will put strategic advice at the forefront of all those wishing to advise in the area of self-managed superannuation funds (SMSFs). Strategy has been recognised by the Government as the most important piece of the SMSF jigsaw and increased competencies will be required for anyone wanting to provide advice to the sector.

Here are the top five SMSF strategies for the 2011-12 financial year.

Contribution splitting is back in vogue

The May 2011 Federal Budget saw the Government reaffirm its commitment to extend the contribution caps (additional $25,000 above the current $25,000 concessional contribution cap) for individuals over 50 with less than $500,000 in super. Although there has been an opposed unified voice from the Association of Superannuation Funds of Australia, Financial Services Council and SMSF Professionals' Association of Australia about this proposed legislation, we believe it is important to start thinking about the benefit that splitting contributions with non-working spouses may have.

In particular, it will allow the primary breadwinner to potentially continue making maximum contributions into super each year. This will require appropriate forward planning to manage the member’s account balance.

Contributions reserve to avoid excess contributions tax (ECT)

Excess contributions tax continues to haunt many clients and advisers. Whilst changes have been announced in the Federal Budget to provide a ‘one-off’ return of excess contributions up to $10,000, it is unlikely to appease those whose excess contributions problems have arisen over the past few years.

A strategy to alleviate some pain may be to implement a contributions reserve strategy whereby any contributions made into the fund in June can effectively be ‘parked’ and allocated to the member’s account within 28 days of the end of the month in which the contribution was made (ie, before 28 July). This strategy allows for the member to potentially eliminate or reduce their exposure to any excess contributions by allocating the contributions to a future financial year.

Borrowing to develop property

This strategy appeared to gain momentum over the course of the last financial year as a result of changes introduced by section 67A and 67B of the Superannuation Industry Supervision (SIS) Act, which came into effect from 7 July, 2010. A current lack of clarity around the definition of a ‘single acquirable asset’ (section 67A) and what constitutes a ‘replacement asset’ (section 67B) means SMSFs using borrowings in accordance within section 67A will invest in a SIS Regulations 13.22C unit trust. The capital contributed into the unit trust will then be used to make any purchase, improvements or developments.

The key limitation to this strategy is that it is unlikely that a bank will provide a limited recourse loan because they cannot take a charge on the property itself, only on units in the un-geared unit trust. As a result, this strategy appears limited to related party borrowing arrangements.

Anti-detriment is back by popular demand

Whilst we would all like to think we will live forever, this is simply not the case.

There are two very important strategies to be aware of relating to benefit payments on the disablement or death of a member. Anti-detriment payments or the ‘tax-saving amount’ provides an additional payment for dependent beneficiary or beneficiaries, and creates a sizeable tax deduction within the fund that can benefit future members or simply minimise (or eliminate) capital gains tax. Importantly, the application of section 295-485 of the Income Tax Assessment Act (ITAA) 1997 applies differently to the old rules contained within section 279D of the ITAA 1936, whereby the whole benefit was required to be paid out to claim the additional amount.

Under section 295-485 of ITAA1997, the tax-saving amount is calculated only on the amount paid out as a lump sum. This view was recently confirmed in the March 2011 meeting of the NTLG Superannuation Technical Sub-Committee. With potential issues around allocations from reserves being caught as concessional contributions, this interpretation means many advisers should consider how to integrate the strategy into their client’s estate planning and intergenerational wealth transfer plans.

Deductions for future liability to pay benefits

The future liability deduction contained within section 295-470 of the ITAA 1997 can also provide a sizeable tax benefit within the fund in the event of death or disability as a consequence of the termination of a member’s employment (section 295-470, ITAA 1997). Importantly, to be entitled to this tax deduction the fund cannot claim a tax deduction for any insurance premiums that would ordinarily have been deductible for the financial year and future years. The deduction is determined based on the future service period of the member (to age 65) over their total service period.

This strategy can be combined with the above anti-detriment tax deduction to provide a significant tax deduction that could be beneficial for the disposal of fund assets with significant capital gains tax, or simply to benefit future generations of the member’s family.

Aaron Dunn is the managing director of The SMSF Academy and author of the SMSF blog thedunnthing!