Masterclass SMSF – New reporting on Annual Returns where LRBA made after 1 July 2018

SMSF – new reporting on Annual Returns where LRBA made after 1 July 2018

Recently the ATO announced that a legislative change relating to certain limited recourse borrowing arrangements (LRBAs) counting towards a member’s total superannuation balance (TSB) had been enacted with a retrospective start date of 1 July 2018.

From the ATO website –

This new legislation impacts how some self-managed super funds (SMSFs) report LRBAs from the 2018–19 financial year onwards and affected some SMSFs that had already lodged their 2018–19 SMSF annual return (SAR).

LRBA amounts now included in TSB calculation

The calculation of an individual’s total superannuation balance (TSB) will include, in certain circumstances, the outstanding Limited recourse borrowing arrangement (LRBA) amount attributable to each member’s interest where the self-managed super fund (SMSF) has an LRBA that was made under a contract entered into on or after 1 July 2018.

This will apply if:

• the LRBA is with an associate of the SMSF – in this case all members of the fund whose interest is supported by the asset purchased with the LRBA must include their portion of the outstanding balance of the LRBA amount in their TSB calculation
• a member of the fund met a condition of release with a nil cashing restriction – in this case, the member must include the outstanding LRBA amount attributable to their super interest in their TSB calculation.

This change doesn’t include the refinancing of an LRBA that was made under a contract entered into before 1 July 2018, where both the following apply:

• The new borrowing is secured by the same asset or assets as the old borrowing;
• The refinanced amount is the same or less than the existing LRBA.

Things to consider

We’ve updated our SMSF annual return instructions 2019 to let you know how to report NALI and LRBA amounts for 2018–19. If you’ve already lodged your 2019 SMSF annual return, and are affected by these new measures, you may need to amend your return. We will contact you to determine this.

If you’re a member of an SMSF that has an LRBA affected by this new law, your TSB on ATO online services may be inaccurate. We’re updating our systems and your TSB will be accurate at the earliest by March 2020. If you’re affected you’ll need to recalculate your own TSB by adding your share of the outstanding LRBA amount to the TSB amount displayed on ATO online.

What are your Thoughts? Comment below!

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NEWS – Increased scrutiny of the regulator – ATO – good for the SMSF sector

NEWS – Increased scrutiny of the regulator – ATO – good for the SMSF sector

The increased scrutiny of SMSFs by the ATO has been positive for the sector and will add to its long-term success, according to SMSF technical specialist Heffron, which also praised the regulator for its work to date.

Heffron managing director, Meg Heffron, said the ongoing success of the sector relied on having SMSFs and advisers being seen to comply with the rules.

“That necessarily means punishing and eliminating those who wish to do damage. The industry as a whole therefore welcomes active regulation,” Heffron said.

“It is gratifying to see the ATO flex their muscles with recalcitrant funds. The tax regulator has definitely become more assertive and active. They’ve been ramping up penalties on SMSF trustees who break the rules and taking a much tougher stance on late lodgement of returns.”

She praised the ATO for its regulatory stance over the past 20 years, which saw a period of rapid growth in the size of the SMSF sector and said it was important the regulator retained its focus on high-priority targets while also supporting trustees that complied with the rules.

Looking back over the year, she noted the sector had also been under examination during the federal election campaign as part of the debate around the retention of franking credits and negative gearing, which played a part in the election outcome.

She pointed out the ALP positions on these issues were regarded as an attack on the retirement incomes of many older Australians and proved unpopular at the ballot box.

“Whatever you think of negative gearing or the refunding of excess franking credits, the electorate certainly decided that changing the rules suddenly and without notice was fundamentally unfair on the retirement incomes of older Australians,” she said.

While these issues ranked highly during 2019, Heffron director and policy expert Martin Heffron pointed to the government’s Retirement Income Review as being likely to dominate the agenda in 2020.

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What are your thoughts? Start or continue the conversation here!

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MASTERCLASS Investment – What is the Quick Ratio and how to calculate Quick Ratio

Investment – What is the Quick Ratio and how to calculate Quick Ratio

One helpful ratio for business financial health check, is the Quick Ratio formula – it is an indicator of a company’s short-term liquidity position and measures a company’s ability to meet its short-term obligations with its most liquid assets. (Usually within 3 months or less).

By indicating the company’s ability to instantly use its near-cash assets (that is, assets that can be converted quickly to cash) to pay down its current liabilities, it is also called the acid test (a quick test result, an old expression from using acid to test metals).

Quick Ratio (QR) = Current Assets less Inventory / Current Liabilities

Example

A store has –

• Cash $2,000
• Accounts Receivable (Lay-by) $3,000
• Inventory $12,000 (not used)
• Current Liabilities $3,500
• QR – (2,000 + 3,000) / $3,500 = 1.43 (quick assets are 1.43 times current liabilities)

The QR formula uses current assets that can be converted to cash within 90 days or in the short-term. Cash, cash equivalents, short-term investments or marketable securities, and current accounts receivable are considered quick assets.

Short-term investments or marketable securities include trading securities and available for sale securities that can easily be converted into cash within the next 90 days.

The Quick Ratio shows us how well a company can cover it current liabilities.  If a firm has enough quick assets to cover its total current liabilities, the firm will be able to pay off its obligations without having to sell off any long-term or capital assets.

Since most businesses use their long-term assets to generate revenues, selling off these capital assets will not only hurt the company it will also show investors that current operations aren’t making enough profits to pay off current liabilities.

A company with a quick ratio of 1 indicates that quick assets equal current assets. This also shows that the company could pay off its current liabilities without selling any long-term assets. An acid ratio of 2 shows that the company has twice as many quick assets than current liabilities.

Higher quick ratios are more favourable for companies because it shows there are more quick assets than current liabilities.

A similar ratio is the Current Ratio which includes the inventory, so it is similar to the Quick Ratio.

Want to learn the core issues of share investing?

See our slides SMSF & Shares Overview to get a quick session where you can learn to easily understand Company Financial Statements, how to find healthy companies, what Tools and Ratios to use, work on examples, and also includes how to get better investment outcomes.

If you have questions, call 0407 361 596

Basics about Super – How does Salary Sacrifice work?

Basics about Super – How does Salary Sacrifice work?

How does salary sacrifice work?

Salary sacrifice super (ss) (one type of salary packaging) is an arrangement between you and your employer where you pay for some items or services straight from your pre-tax salary. You can salary package super, computers, cars, and childcare, for example. This can reduce your taxable income and put more money in your pocket.

Your employer pays fringe benefits tax (FBT) on the benefits provided to you. Some of these benefits will be listed on your end-of-year payment summary and are used to assess your Medicare levy surcharge, tax offsets, child support payments and other government benefits.

You must enter into a salary sacrificing arrangement before you earn the income. It can never be retrospective.

For more on Salary Sacrifice in general see Money smart.

Employer Contribution or Fringe Benefit?

Salary sacrificed super contributions under an effective salary sacrifice arrangement are considered to be employer contributions. These are not fringe benefits when paid for an employee to a complying super fund.

However, super contributions made for the benefit of an associate, such as your spouse, are a fringe benefit. Similarly, contributions paid to a non-complying super fund will be a fringe benefit.

Implications of entering into an arrangement

As an employee, you need to be aware of how entering into a salary sacrifice arrangement with your employer will affect you. For instance:

• You pay income tax on the reduced salary or wages.
• Your employer may be liable to pay FBT on the non-cash benefits provided.
• Your employer may be required to report certain benefits on your income statement or payment summary.
• Your salary sacrificed super contributions are taxed in the super fund and are classified as employer super contributions, rather than employee contributions.
• Your salary sacrificed super contributions cannot be used to reduce the minimum amount of SG your employer needs to pay for you (from 1 January 2020).

See also:

• Accessing your payment summary or income statement
• To check your award or agreement, contact Fair Work Commission.

Super guarantee

Your salary sacrifice contribution is counted towards your employer contributions.

Therefore, salary sacrificed super contributions are generally taxed concessionally at 15% in the super fund.

From 1 January 2020, salary sacrificed super contributions will not:

• Reduce the ordinary time earnings that your employer is required to calculate your super entitlement on;
• Count towards the amount of super guarantee contributions that your employer is required to make for them to avoid the super guarantee charge.

Prior to 1 January 2020, your employer could use salary sacrificed super contributions to reduce both the earnings amount your super guarantee entitlement is calculated on as well as satisfying all or part of their compulsory super guarantee contributions for you.

It is advisable that you and your employer clearly state and agree on all the terms of any salary sacrifice arrangement.

For more see the ATO website Salary Sacrifice.

SuperBenefit works with SMSF trustees to CONNECT them with the advisors they need.

If you have any questions, why not give us a call – it’s FREE!

No obligation. 0407 361 596, Paul

Masterclass SMSF – Fractional Property investment in SMSF

SMSF – Fractional Property investment in SMSF

A trustee can consider fractional property investment in their SMSF, which is similar to purchasing units in a managed property trust. Fractional investment offers an alternative to forking out big dollars to get into the housing market.

How it works –

Fractional investing, much like its name suggests, means investing in a smaller piece of a whole asset. The property is divided up into small shares and sold off to investors at a price that is affordable compared to the whole property.

These investors will then receive income via rent from the property and can also benefit from capital gains once it sells or they sell their shares. It is important to note though that all gains and returns will be proportional to the size of the share in the investment.

Benefits –

Fractional property investment is gaining traction across Australia and for good reason – it enables you to buy a portion of a property, so you get all of the benefits of owning a property (or part of it at least) without the upfront expense and the ongoing hassle of covering expenses. Think of it as property crowd-funding.

One of the biggest advantages of fractional investment is the low barrier to entry when compared to traditional property investment. Investors don’t need to save 10-20% of a property’s value as a deposit – they can own a share of a property for a very small initial outlay.

There are a number of options available for buying an investment property through factional ownership but it’s a good idea to do your research before jumping in. Some do offer relatively low risk options though because the amount you invest is low. Typically they generate a low level of ongoing income – they are primarily positioned for long-term capital growth.

Tax Office view –

The ATO has approved fractional investing for SMSF – but always with the Sole Purpose Test in mind (that super monies are used for the FUTURE benefit of members, not current benefit such as renting to themselves or relations). The ATO gave guidance following the 2018 Federal Court decision in Aussiegolfa Pty Ltd (Trustee) v Commissioner of Taxation [2018] FCAFC 122External Link.

Specifically, the ATO is considering the sole purpose test implications of fractional property investments especially in relation to one particular company, and how it is dealt with.

The ATO has indicated it is open to fractional property investments being used within an SMSF, but product providers would need to seek approval from the regulator before going to market.

The SMSF regulator (ATO) made the comments as part of a statement titled “Guidance for SMSFs on fractional property investment”, in which it invited fractional investment product providers that were considering the sole purpose test implications of their products to speak with the ATO.

The other way AN SMSF can invest in property is place a deposit and borrow, (Limited Recourse Borrowing Arrangement – LRBA) but in 2019 the availability of lenders for this is limited, and much more restricted. 

Want to learn about LRBA borrowing and how property works in SMSF? See our FREE slides SMSF & Property Overview

Call for FREE education, or to speak to an advisor about your specific situation.

SuperBenefit works with SMSF trustees to CONNECT them with the advisors they need. A call is FREE.

If you have any questions, why not give us a call – it’s FREE! No obligation. 0407 361 596, Paul

CASE STUDY – Daniella, Troy and Michael – Helping a Property Advisor towards Property in their Super

Daniella, Troy and Michael – Helping a Property Advisor towards Property in their Super

Danielle and Troy had property investment experience, with several properties in their personal portfolio already. Daniella was also an expert senior property investment advisor and Troy had an accounting background and they wondered if they could do better with their super, and their nephew was also keen to know too.

(There are 5 easy steps to planning anything – start where you are at, decide what lifestyle you want to have, what that lifestyle state or position will cost in money (to maintain the living costs) what you need invested to meet that cost of having what you want, and what action we need to take now to get there. Here is how it works with one of our clients.. )

(Get the FREE Resource: 5 Easy Steps to Plan your Retirement).

1. WHERE they were at – Daniella and her husband were keen to understand and be able to invest in property using their super. Their existing experience with property investment matched Daniella’s career as a property investment advisor, and Troy had sold his business in the last couple of years and was looking at opportunities. Their nephew was close to them, and they realised they needed to be pro-active about retirement and that if they combined their super monies they could build up a deposit to invest in property.
2. WANT to have – The goal was to self-fund retirement, with enough to be comfortable, but keep administration minimal and simplify the process.
3. COST of that lifestyle – Estimated in today’s values, the annual income to retire they desired would be at least $100,000. That would be well over the ASFA definition of “Comfortable”, where “comfortable” enables “…an older, healthy retiree to be involved in a broad range of leisure and recreational activities and to have a good standard of living through the purchase of such things as: household goods, private health insurance, a reasonable car, good clothes, a range of electronic equipment, and domestic and occasionally international holiday travel.”
4. NEED – how much you need invested to cover the income required – To be safe, if a conservative investment return of 5% is used, (one 20^th of 100%) this means at least 20 times the income goal – which rounds to approx. $2,000,000 of income-producing assets other than the family home. They also needed administration assistance as it did not appeal to them!
5. NOW what to do – After researching and talking to several services, they met with Paul, the Administration Manager at SuperBenefit, who supplied a detailed list of what would be included in the service. Once the structure of the bank and investments was clearly mapped out to ensure all components involved were covered, it was a simple matter to start organising the collection of documents required and have the accounts processed.

What was liked best of all – that the SuperBenefit Programme made it easy – SuperBenefit manages compliance from the  annual documents, storage of records electronically and additionally, has a CONNECT-ASSIST service which provides co-ordination as well as help – with who to talk to for advice and any other help besides the financial advisor.

There was other value in our property investment specialists and private-client share broker, if required.

There is also peace of mind because any queries or compliance issues, could simply be given to the SuperBenefit administrator, who would CONNECT them to the right advisors as required (Connect/Assist Service).

The advisors had put these components in place –

• Strategy – to take control of the retirement plan, and build their super.
• Structure – use an SMSF and the SuperBenefit Programme administration.
• Support – with resources and all compliance taken care of by SuperBenefit, as well as a team of specialist professionals that the SMSF Connect/Assist service provides, working with the client advisors in unison.

Note – This is a simplified summary of one client – it is not to be taken as advice, as your specific circumstances are not considered – we recommend asking for a consultation and/or seeking further professional advice with our recommended advisors or your own advisor.

Get the FREE Resource: 5 Easy Steps to Plan your Retirement 

If you have any questions, why not give us a call – it’s FREE!

No obligation. 0407 361 596, Paul

MASTERCLASS Investment – Interest Coverage Ratio – How it helps to analyse a company for investing

Investment – Interest Coverage Ratio – How it helps to analyse a company for investing

The interest coverage ratio, (also known as interest cover or times interest earned) tells us how many times the profit/earnings  of a  company covers its total interest-payment expense bill.

The formula is calculated by dividing EBIT (earnings before interest and taxes) by the total Interest Expense. Note – some consider that using profit after tax is taken, instead of using BEFORE, is a better indication. See a detailed working calculation example.

Interest coverage is the equivalent of a person taking the total of their interest costs on mortgage, credit cards, car loans etc and dividing that into their annual after-tax salary/income.

Because the interest cover ratio uses current earnings and current expenses, it indicates a company’s short-term ability to meet interest obligations. Comparing the result between companies is ONE indication of management, the company’s short-term financial health/strength and another view on the company debt situation.

The lower the interest coverage result, the higher the company’s debt burden and the greater the possibility of bankruptcy or default especially if it not managed and remains low over time.

Generally, 1 or below is NOT desired, 1.5 is OK, but over 2 is seen as COMFORTABLE, and desired.

For legendary investor Benjamin Graham, the interest cover was an indication of the margin of safety available in the investment – he related it to investing in bonds. He borrowed the term from engineering, for example when a bridge was constructed, it may say it is built for 10,000 pounds, while the actual maximum weight limit might be 30,000 pounds, representing a 20,000 pound margin of safety to allow for any unexpected situations.

Interest Cover is also important when interest rates are rising – especially if re-financing is required soon. A higher interest bill will reduce the interest ratio into warning values – and can be an important indicator if changing over time.

Some industries tend to have higher interest cover ratios than others, and cyclical companies in particular can experience significant swings in their interest cover ratios (especially during recessions).

Therefore, a comparison of interest cover ratios is generally most meaningful comparing companies within the same industry, and the definition of a “high” or “low” ratio should be made in this context.

Want to learn the core issues of share investing?

See our slides SMSF & Shares Overview to get a quick session where you can learn to easily understand Company Financial Statements, how to find healthy companies, what Tools and Ratios to use, work on examples, and also includes how to get better investment outcomes.

If you have questions, call 0407 361 596