With the festive season just around the corner, the summer break is an ideal time to review your self-managed superannuation fund (SMSF) and consider what you need to focus on in 2019. Taking some time to review and plan can help ensure your SMSF is on track to achieve your retirement savings goals.
The key issue that will be on the mind of most SMSF trustees is the 2019 federal election, expected in May, and the potential change to a Labor government. We already know that an elected Labor government will have key policies that will affect SMSFs.
The most significant policy change is ending the refunding of franking credits. SMSFs that receive franking credits for the tax paid by Australian companies will often receive a refund of the tax paid at the corporate level.
This is most important for SMSFs in the retirement phase, with franking credit refunds playing a key role in providing retirement income. It has been estimated that Labor’s policy would likely result in an average 10 per cent reduction in retirement income for SMSF members in the retirement phase.
Under Labor’s proposed policy, SMSFs with a member receiving the age pension on March 28, 2018, will still be able to get a refund for franking credits received by the fund under Labor’s “pensioner guarantee”. Those who begin to receive the age pension after this date will not be eligible.
First, consider diversifying asset holdings away from Australian shares that have attracted fully-franked dividends to other income-yielding assets. These include international shares, property trusts and fixed interest investments.
It should be remembered, however, that franking credit refunds are only part of the overall return of Australian shares. Another point to remember is that Australian shares tend to have higher dividend yields than international shares, still making them attractive from an income perspective.
SMSF trustees could also consider adding adult children to their funds to increase the fund’s taxable income to offset franking credits. However, this comes with the added complexity of having members with vastly different investment horizons and goals in the same SMSF, calling for careful management.
SMSF trustees could also consider moving their Australian shares out of their SMSF to a large superannuation fund’s “member direct” option.
Most large funds would still be able to pass on the full value of franking credits as they have enough taxable income against which to use the credits. Many commentators have noted the unfairness of this aspect of Labor’s proposal, so there may be further changes before implementation.
In addition to changes to franking credits, Labor has also proposed changes to superannuation contributions and limited recourse borrowing arrangements (LRBAs).
If elected, Labor has signalled it will cut the after-tax annual contribution limit to superannuation from $100,000 to $75,000; repeal the ability to carry forward unused concessional contribution cap space and make “catch-up” contributions; and reverse changes that allow all taxpayers to contribute to superannuation and claim a tax deduction for doing so (personal deductible contributions). It will also lower the income threshold for the extra 15 per cent tax high-income earners pay on concessional contributions from $250,000 to $200,000.
Accordingly, SMSF members may want to consider their financial circumstances to make the most of the current contribution rules that could allow for more flexibility and scope to contribute to their SMSF before the election.
Further, with Labor proposing to ban new LRBAs if elected, SMSF trustees who believe that a geared investment strategy is right for their fund should consider pursuing this before the next election. This should always be done with specialist SMSF advice and with a long-term investment strategy.
On that note, a break over Christmas makes for a sensible point in time to review your investment strategy and whether your asset holdings are in line with your long-term goals. Recent SMSF Association research has shown that around 65 per cent of SMSFs have not adjusted their asset allocation significantly over the past 12 months, meaning that many may be coasting when they should be actively reviewing and rebalancing investment allocations.
Although recent market gyrations naturally lend a shorter-term focus to your investment thinking, it is important to remember that investing for retirement is a long-term proposition. Estate planning and SMSF exit strategies should be looked at too.
Finally, a review of compliance obligations is a useful exercise for SMSFs at this time of the year. An SMSF that is paying a pension to its members should check whether it is on track to make its annual minimum pension payments by the end of the 2018-19 financial year and whether it is meeting its pension reporting obligations.