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The transfer balance cap is a limit on how much super can be transferred into pension accounts earning tax-free income. On 1 July, this cap will be increased. What might this mean for your retirement income stream?

 

       

A major change to the superannuation system came into effect in mid-2017 with the introduction of a lifetime limit on how much super can be transferred into pension accounts earning tax-free income.

The limit on what's known as the transfer balance cap, covering most pensions and annuities, was initially set at $1.6 million. But the legislation always allowed for that limit to be lifted gradually over time based on increases in inflation.

On 1 July the transfer balance cap will be lifted for the first time since it came into effect to $1.7 million following the release of Consumer Price Index (inflation) readings from the December quarter.

However, while the $100,000 increase in the limit may sound straightforward, how it will actually apply to the financial affairs of many retirees is quite complicated.

Because, rather than having a single, standardised super balance cap that applies to everyone, many retirees will end up having their own personal balance cap limit that will range somewhere between $1.6 million and $1.7 million.

It all comes down to when you have started drawing a pension income stream.

If you only start drawing a retirement phase income stream on or after 1 July 2021, your personal transfer balance cap will be automatically set at $1.7 million.

However, if you've already been drawing a retirement income stream your balance cap could be up to $100,000 lower than this.

Your transfer balance cap will remain at $1.6 million if, at any time between 1 July 2017 and 30 June 2021, the balance of your account was $1.6 million or more.

On the other hand, if you've never used the full amount of the $1.6 million transfer balance cap, your personal transfer balance cap will be higher.

It will be proportionally indexed based on the highest ever balance you've had in your transfer balance account and will fall somewhere between $1.6 and $1.7 million.

Doing the calculations

If you've already been drawing a retirement income stream and want to work out your current transfer balance cap, you can do so by logging on to the Australian Tax Office's online portal after 1 July.

The portal will show what your highest account balance has been, which is important to know if you've never reached the initial maximum transfer balance cap level of $1.6 million.

To calculate your unused percentage of the $1.6 million balance cap you'll need to divide the highest ever balance you've had in your transfer balance account by your transfer balance cap limit on the first day you had that balance (prior to 1 July 2021 this will be $1.6 million for everyone).

Then you'll need to express that as a percentage, rounded down to the nearest whole number.

Miscalculating your balance cap could result in you being liable for excess transfers into your account. If you're a trustee operating a self-managed superannuation fund account and doing your own balance cap calculations, you should be extra careful.

The ATO's website provides more detailed information on the proportional indexation of transfer balance caps.

The regulator also details how the new limits will apply to capped defined benefit income streams, non-concessional contributions, co-contributions, and to child death benefit income streams.

ATO case studies

There are a number of case studies on the ATO's website page that are helpful to help calculate indexation of the general transfer balance cap.

There's also a detailed table showing individual transfer balance cap ranges based on previous highest transfer balances, although to work out your own specific balance cap you'll need to use the calculation method outlined above.

For some context, here are two of the case studies on the ATO website.

The first example is “Leanne”, who started an $800,000 retirement phase income stream on 1 October 2017.

On 13 May 2019, she commuted $200,000 from her pension. Leanne's transfer balance account was debited by $200,000.

Although the balance of her transfer balance account when indexation occurs is $600,000, the highest ever balance of her transfer balance account is $800,000. Leanne's unused cap percentage is therefore 50 per cent of $1.6 million.

Leanne's personal transfer balance cap will be indexed by 50 per cent of the $100,000 rise in the transfer balance cap. Her personal transfer balance cap after indexation on 1 July 2021 will be $1.65 million.

Another example used is “Matthew”, who started a pension in his SMSF valued at $1.6 million on 1 July 2017. Since then, he has been taking all payments from his pension in excess of the minimum pension payments as lump sum commutations.

Just before indexation the balance of his transfer balance account is $1.2 million.

In this situation, Matthew won't be entitled to proportional indexation of his personal transfer balance cap. He'll have cap space available to start a new retirement phase income stream to the value of $400,000.

Consult a financial adviser

The transfer balance cap indexation change won't be an issue for those starting a retirement stream after 1 July, because all new retirees from that date will have a starting balance of $1.7 million. In effect, it will be a level playing field.

But the change to transfer balance cap will potentially make things more complex for many people already drawing a retirement income stream.

That's because just about everyone will end up with a totally different, personalised balance cap.

While this may not be an issue for people who are never likely to reach the maximum cap level, the varied cap limits may be problematic for others.

Given the complexities around the new cap limits and calculations, consulting a financial adviser may be a very prudent step.

 

 

By Tony Kaye
Senior Personal Finance Writer, Vanguard Australia

16 Mar, 2021

 

 

What exactly are non-fungible tokens and why are they taking the internet by storm? Here’s a closer look at NFTs and how they work. 

 

       

What are NFTs

Just when you thought the hype around bitcoin was starting to level off, a new player appears to have entered the cryptocurrency arena and is now being dubbed the new frontier of the crypto gold rush.

It all started with a piece of art that sold for more than $88 million via the renowned Christie’s auction house. However, the winning bidder did not purchase a print or a painting, but a digital art piece that only exists in the ether – they will receive a unique digital token known as an NFT. 

Non-fungible tokens, or NFTs, are the latest crypto phenomenon that has gone mainstream overnight. NTFs are digital assets built on the same blockchain technology as bitcoin and ethereum. But unlike cryptocurrencies, they cannot be traded or exchanged at equivalency. The tokens are unique asset identifiers that are considered to be non-fungible because they cannot be forged, replicated or divided.

The internet’s newest, and arguably most confusing, asset is leaving investors (as well as people in the internet) scratching their heads. What exactly is an NFT and how does it work?  

What is a non-fungible token (NFT)?

Let’s break down the basics on this new digital asset. 

As we’ve mentioned, NFT stands for non-fungible token. In economics, a fungible asset means that it’s exchangeable, like money. For example, you can trade a $20 note for four $5 notes and it will be of equal value.

This, however, doesn’t apply to a non-fungible asset, which has unique properties, meaning it cannot be interchanged with something else. This is because NFTs are unique and each one is one of a kind. For example, traditional works of art such as Da Vinci’s Mona Lisa or Van Gogh’s The Starry Night are considered as non-fungible. While you can make copies of them by taking a picture or buying a print, there will always be only one original and authentic painting. 

While art paintings are one of a kind, digital forms of art (including audio, videos and drawings) can be easily and endlessly duplicated. They can be seen, screencapped and downloaded by anyone online. 

This is where NFTs come in. They function as a non-duplicable digital certificate of ownership for any assigned digital asset. It is basically a contract that is assembled using bits of open source code and used to secure a digital item. Once the code is created, it is then minted and then published into a token on a blockchain.

How do NFTs work? 

NFTs are unique collectible tokens that are permanently tied to a specific digital asset. It is a form of digital asset whose ownership is recorded on a blockchain. 

What’s a blockchain? 

If you’re an intermediate crypto trader, you may be highly familiar with this. But those that are new to it may think of it as a digital ledger that keeps a publicly accessible record of who owns what asset, similar to the kinds of networks that are behind bitcoin. Most NFTs are part of the ethereum blockchain, where the ownership and transaction history of each unique NFT are stored.

So, NFT tokens can be considered as digital passports. Each token has a unique and non-transferable identity to differentiate it from other tokens. Because of this, it can’t be replicated. Similar to bitcoin, NFTs contain ownership details for identification and easy transfer between token holders. Like cryptocurrencies, they also have no tangible form of their own. 

Once it is purchased, the owner of the NFT has the digital rights to resell, distribute or license the digital asset at their own discretion. The only limitation is that the creator can program, in the conditions in the NTF’s code, how it gets used. For example, they can bar it from being displayed on a certain platform, such as a streaming network or a TV network. NFT creators can also earn royalties from future reselling transactions. 

What can I turn into an NFT? 

Digital artworks are particularly marketable as a unique collectible when published as an NFT. The sudden rise in popularity of NFTs came from a string of artists, influencers and musicians that have recently started striking gold by selling NFT versions of their digital art, as investors and collectors line up to get their hands (virtually) on them.

But are NFTs only for artworks? No. Almost any digital collectible can be converted into an NFT. You can turn real estate, online trading cards, GIFs, memes and even video game costumes into an NFT. In fact, the possibilities are endless – Twitter co-founder and CEO Jack Dorsey’s first tweet was turned into an NFT and was sold at an auction for $3.8 million. 

World-renowned brands such as Nike, Louis Vuitton and the NBA have already started generating NFT-based consumer goods and services. The most popular NFT platform, NBA Topshot, has sold almost $349 million worth of unique NBA video highlights. In Australia, start-up Zora is attempting to cash in on this new digital economy by embarking on a journey to create a sustainable marketplace for creators by using NFTs. 

To purchase an NFT, buyers must figure out what cryptocurrency is needed for the transaction, then purchase the cryptocurrency then create a digital wallet for the transaction. While ethereum is one of the most popular currencies for NFT transactions, each platform chooses its digital wallet service. Make sure to do your research before purchasing your digital currencies. 

Once you’ve covered this step, you can start looking for NFTs to purchase in digital marketplaces such as OpenSea, Rarible and Mintable. 

Be careful about buying cryptocurrencies and make sure that you are buying from a reputable crypto exchange. 

Is NFT a good investment? 

With all this said, should you invest in NFTs? NFTs gain value from the same deflationary principles as bitcoin – there is a limited number of tokens and the item is unique and cannot be duplicated.  

Additionally, an NFT’s value is based on how well-received the item is by people who want to purchase it. If an item is highly desirable, its value will understandably go up. 

People purchase NFTs for different reasons. It can be a financial investment, a sentimental purchase or a way for a buyer to support an NFT creator, like an artist or a musician. Think of it as people collecting sports trading cards or vintage toys.   

But because NFTs are a relatively new asset, there is still a lot to learn about them. Additionally, it can be difficult to put a price on a digital art, making it an incredibly risky investment. After all, there are no guidelines on how much a meme or GIF is worth, so there’s a lot of guesstimating involved on how much you’ll be able to profit from it, or whether you will be able to sell it at all. 

But if you want to be part of the so-called NFT gold rush, it’s advised to set a spending limit and only spend what you can afford to lose. NFTs are highly speculative, so don’t dive into it with the expectation of getting millions of dollars in one transaction. It may be better to keep the majority of your money in safer investments, such as index funds or ETFs. This will put you in a better position to take on risky investments.

While NFTs are an interesting new type of investment, it doesn’t mean they’re right for everyone. If you’re determined to be part of the hype, it may not hurt to explore this asset and buy one or two that catch your interest. Otherwise, it’s a good idea to watch this crypto phenomenon unfold from the sidelines where your money will be safe. 

 

 

Zarah Mae Torrazo
March 30 2021
nestegg.com.au

 

 

The ATO has updated its guidance on navigating COVID-19 LRBA relief complexities in consideration of Division 7A rules and the processes in the application of NALI.

 

       

The ATO has released new guidance on the COVID-19 limited recourse borrowing arrangements (LRBA) repayment relief and its interactions with Division 7A which is now available online.

The Tax Office recommended the guidance if an SMSF has an LRBA from a related private company where Division 7A applies and there has been negotiated repayment relief with the lender on commercial terms as a result of the financial impacts of COVID-19.

“The new guidance is here to help SMSF trustees determine how to avoid the application of non-arm’s length income (NALI) rules, especially if unpaid interest has not been capitalised on the loan during the payment deferral period,” the ATO said.

In a previous blog with SMSF Adviser, DBA Lawyers director Daniel Butler said when dealing with limited recourse borrowing arrangements (LRBAs), it is important to understand the consequences that may arise where the LRBA is not implemented and maintained on a proper basis.

“This is especially so in the case of a self-managed superannuation fund (SMSF) undertaking a related-party LRBA,” Mr Butler said.

“The terms and conditions of such an LRBA should either comply with the ATO’s safe harbour criteria in PCG 2016/5 or be benchmarked with arm’s length evidence.

“Having an LRBA that is not properly implemented and maintained can result in non-arm’s length income (NALI) and other potential contraventions of the Superannuation Industry (Supervision) Act 1993 (Cth).”

In the new guidance, the ATO reminded that the super law does not specify the type of trust that must be used as a holding trust in an LRBA. 

The law specifies only that the SMSF trustee must have a beneficial interest in the asset being held in the holding trust and the right to acquire legal ownership of that asset after making one or more payments, the ATO noted. In addition, for the special in-house asset rule to apply, the asset must be the only property of the holding trust.

“More complex trusts are unlikely to satisfy the requirement that the SMSF trustee has the necessary interest in a particular asset of the holding trust. For example, a discretionary trust could not be used, nor could the SMSF trustee be one of a number of unit holders in a unit trust,” the ATO said.

“We understand that temporary repayment relief may be offered in relation to an existing LRBA between an SMSF and a lender (which can be a related or unrelated party) due to the financial effects of COVID-19.

“This repayment relief may involve the lender accepting that loan repayments are deferred for a certain period.

“It might also require interest to be capitalised on the loan during the deferral period and allow for the loan to be extended to reflect the repayment relief. The variation in loan terms might also mean that the SMSF is no longer able to meet the safe harbour loan terms that we accept are consistent with an arm’s length dealing.”

The guidance also outlines the processes on requesting to extend the time to make minimum yearly repayments for COVID-19-affected borrowers under section 109RD.

“When there is a complying loan agreement between a private company (and certain interposed entities) and a borrower under section 109N, the borrower must make the minimum yearly repayment (MYR) by the end of the private company’s income year,” the ATO said.

“This avoids the borrower being considered to have received an unfranked dividend, generally equal to the amount of any MYR shortfall (referred to as the shortfall).”

 

 

Tony Zhang
29 March 2021
smsfadviser.com

 

 

Despite some reports, the vast majority of Australians exhaust their superannuation in retirement according to data that flies in the face of the Retirement Income Review (RIR).

 

         

The vast majority of Australians exhaust their superannuation in retirement according to data that flies in the face of the Retirement Income Review (RIR).

Data from ASFA found that the proportion of the population drops sharply with increasing age, and that 80 per cent of people aged over 60 who died between 2014 and 2018 had no super in a period of up to four years before their death.

“We don’t have a systemic problem with retirees underspending or bequeathing their super – quite the opposite. The majority of Australian retirees run out of super well before the end of their lives,” said ASFA chief executive Dr Martin Fahy.

“Sadly this new data indicates that 90 per cent of Australian retirees aged over 80 had no superannuation in their final years. The situation is much worse for women. Eighty-five per cent of women who passed away, aged 60 and above, didn’t have any super left at all.”

According to ASFA, that strengthens the case for increasing the superannuation guarantee to 12 per cent – but also highlights the need for high-net-worth superannuants to withdraw any super they have in excess of $5 million. 

“The main challenge for the Australian superannuation system is to deliver higher superannuation balances at retirement. The solution for ensuring adequacy of retirement incomes is moving the Superannuation Guarantee to 12 per cent,” Mr Fahy said. 

ASFA said that the idea that retirees have more super and financial assets when they die has become a “trope” in narratives about retirement income and disagreed with the suggestion of the RIR that retirees “tend to consume only the income derived from assets and not the assets themselves”.

“Despite such claims being widely quoted, there is little or no evidence that the typical Australian dies with around the same amount of financial wealth as when they retired, other than cases where there was not much financial wealth in the first place,” ASFA said. 

“Sadly, the main group having the same amount of superannuation when they died as when they retired are those who retired with no superannuation.”

 

 

Lachlan Maddock
31 March 2021
investordaily.com.au

 

 

Sophisticated fraudsters are targeting Australian investors with investment 'phishing' scams. Find out what to watch out for so you can avoid being caught up in one.

 

           

We recently drew attention to a new type of scam where sophisticated fraudsters, pretending to work for real companies, are targeting Australian investors with fake investment products.

Our Smart Investing article followed a warning in late January from the Australian Securities and Investments Commission (ASIC) about the rise of “imposter bond” investment offers that claim to deliver secure, high-yield returns.

The fraudsters have designed professional looking fake websites using real company logos, to capture personal information such as phone, email and bank details.

They then make contact directly and offer to email a fake investment prospectus document in order to trick people into investing their money.

Vanguard branded phishing scam

Phishing is the term used to describe fraudulent attempts to illegally obtain sensitive information or data, usually via fake websites or emails.

Vanguard has now become aware of a phishing campaign being operated through a fraudulent comparison website that's targeting people online. The website includes a fake investment offer from Vanguard.

People providing personal contact information are then being phoned, with the caller offering to email a pretend Vanguard prospectus.

We're alerting people to this scam via our websites and investor portal, through our phone support, and advising anyone impacted on steps to take if you've shared any personal information.

Vanguard's IT security systems have not been compromised in any way by this issue and our priority is to warn investors of the scam and assist those who have been impacted.

If you suspect you've transferred any money to a third party in relation to this scam you should immediately contact police, and contact your bank to stop direct debit transactions if you've shared any banking details.

It's also important to alert major credit bureaus such as Equifax and Experian to place a block on your credit profile to stop others from opening accounts using your personal information.

Our teams are working closely with authorities and industry partners to identify and remove the bogus website and to provide information from official sources, such as the Australian Competition & Consumer Commission's ScamWatch, on how to stay safe online.

What to watch out for

Some of the common tactics being used by the “imposter bond” scammers include:

  • Using the contact details gathered online through fake investment comparison websites to call people and pressure them to invest or risk missing out.
  • Sending professional looking fake prospectuses with unrealistically high returns.
  • Falsely stating the bonds are issued by prominent financial services firms when this is not true and there is no underlying investment.
  • Falsely claiming investor funds will be pooled to invest in government bonds or the bonds of companies with AAA credit ratings.
  • Falsely claiming the purchase price of the bonds is protected under the Commonwealth Government's Financial Claims Scheme.

How to avoid investment scams

As noted in our previous article, just taking a few basic precautions will go a long way to ensuring you don't get caught up in a scam.

Ignore all unsolicited approaches to invest in a financial product, even if they come via people pretending to be from a well-known company or a government authority.

Keep in mind that Vanguard never sends email or text messages with clickable links asking you to verify or provide personal information such as your account or login details.

There are many ways to greatly reduce your chances of ever being tempted into a scam.

  • Ensure any promotional investment emails you receive, even from companies you already invest with, are legitimate.
  • If in any doubt over a company's bona fides, check that its website is displaying a genuine Australian Business Number and an Australian Financial Services Licence (AFSL) number. These details can be checked directly using ASIC's online search registers.
  • Don't ever click on links or open attachments in emails unless you are completely certain of the authenticity of the sender.
  • You can easily verify website addresses by searching a company (without clicking on an email link), and by checking contact details through legitimate online information sources.
  • Never respond to messages, calls or emails that ask for any personal information or financial details. ASIC advises people to just hang up on callers attempting to interest you in investments, and to delete any suspicious emails.
  • Types of approaches can be investment cold calls from bogus portfolio managers or real estate agents pretending to promote share investments or property schemes, or to offer financial advice.
  • Don't fall for approaches to investment seminars designed to promote “exclusive” opportunities offering high returns. These can be straight scams, or involve very high-risk investment products or schemes.
  • Be on the alert for superannuation scams offering to give you early access to your super funds. Accessing superannuation is subject to strict conditions governed by federal legislation.
  • Lastly, if an investment offer sounds too good to be true, it probably isn't legitimate.

The ScamWatch website should be your first port of call to check out everything to do with investment scams, including news and alerts of current activities.

Also check ASIC's extensive Moneysmart list of companies you should not deal with.

 

 

By Tony Kaye, Senior Personal Finance Writer, Vanguard Australia
16 Mar, 2021
vanguard.com.au

 

 

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