SMSF year-end considerations for 2023–24

A cash contribution, either by the member, their employer or spouse, will only be recognised when it is received by the fund, not when it is made. The timing of when a contribution is made and when it is recognised as received becomes crucial when this occurs close to 30 June.

For example, some APRA funds will have a cut-off day, around the middle of June, when they will accept contributions so that they will be allocated in that same financial year. There is no guarantee that contributions received after this date will be allocated before the end of the financial year.

In the SMSF space, there will always be clients that leave things to the last minute, no matter how hard we try to educate them not to do so. With 30 June being a Sunday (non-business day) this year, this has the potential to catch a few people out. It’s not like a lodgment day that falls on a weekend and you have to the next business day to lodge. A contribution received by the fund on 1 July 2024 is a contribution that will be treated as belonging to the 2024–25 financial year.

Electronic transfers between accounts with the same bank generally happen instantaneously and the trustees of the SMSF are likely to have access to those funds straight away, which may help those last-minute clients. However, a transfer between different banks will most likely result in a different outcome for the client, with the SMSF receiving the transfer after it was instigated by the contributor.

Another scenario to watch out for is where an employer is making contributions to an employee’s SMSF by using the ATO’s Small Business Superannuation Clearing House (SBSCH). The ATO recently provided an update concerning changes to the SBSCH process around obtaining bank account validations for SMSFs.

This is a timely reminder for clients using the SBSCH service to check the bank details of their SMSF are up to date and correctly recorded by the ATO, otherwise, payments may be rejected.

Speaking of clearing houses, it is also worth noting that payments by employers to a clearing house generally do not constitute the receipt of a contribution by a super fund. This is even though payments made to the ATO’s SBSCH will constitute a payment for SG purposes when received by the clearing house. A contribution cannot be recorded by the superannuation fund until it is received.

Last-minute 2023–24 superannuation payments by employers to top up an employee’s super may not reach the fund in time to be recorded as a contribution in 2023–24 and may end up being recorded in the 2024–25 financial year.

By now, most people will be aware of the contribution reserving strategy that clients may undertake in June. Given that the contribution will only count towards a member’s contribution cap in the year of allocation, it is worth remembering that the concessional cap for the 2024–25 financial year is currently set to increase from $27,500 to $30,000 from 1 July 2024.

It is also advisable that any contribution that is intended to be “reserved” and allocated at a later date be made separately from any other contributions that are not intended to be “reserved”.

In relation to the increase in the contribution caps from 1 July, it is also worth noting that this will change the non-concessional contribution cap thresholds in relation to the bring forward rule in the 2024–25 financial year. This is due to the fact the general transfer balance cap (GTBC) is not increasing and the thresholds are a product of both the GTBC and the annual non-concessional cap.

This may impact some members’ strategies as to when they intend to trigger the bring forward rule.

One last thing on contributions; this 2023–24 financial year is the last year that any unused concessional contributions carried forward from the 2018–19 financial year may potentially be utilised, subject to the member’s prior 30 June 2023 total super balance being less than $500,000.

Pensions

As with contributions, it’s important to deal with any requirements for the year, such as minimum pension payments, before the end of the year. Again, keep in mind that generally, for a pension payment to be recognised in the 2023–24 financial year it must leave the superannuation fund’s bank account no later than 30 June 2024.

Not meeting the payment standards may result in the SMSF not being able to claim exempt current pension income (ECPI) with respect to retirement phase pensions.

Exceeding maximum limits on pensions such as transition to retirements (TTR) and market-linked pensions will also be deemed a breach of the payment standards. In the case of a TTR, this may also result in the payments being treated as lump sum payments and illegal early access to super, if the member does not have any unrestricted components to draw upon.

Concerning pensions in the retirement phase, where a member may exceed their minimum requirements, they may consider whether to treat any additional payments as pension payments or a partial commutation. One main reason for considering this is the different treatment of the two types of payments in the member’s transfer balance account. A commutation of a pension will create a reportable event resulting in a debit transaction, whereas a pension payment is not reported at all.

However, one very important aspect of pension commutations is that any decision to take a commutation should be made by the member on a prospective basis. It should not be seen as a planning strategy opportunity that can be applied retrospectively.

On that note, a friendly reminder that all SMSFs required to report transfer balance account events from 1 July 2023 must do so on at least a quarterly basis. This includes any fund that may have previously been an annual transfer balance reporter.

For those members looking to commence a pension in June 2024, they will not have a minimum pension requirement for the 2023–24 year.

Now is also the time that you may start receiving calls from clients asking what they do if they do not have the liquidity to cover pension payments. One option may be to take advantage of the short-term borrowing rules that allow a fund to borrow, no more than 10 per cent of the value of the fund’s assets, for up to 90 days to cover payments to beneficiaries that are required by law or the governing rules of the fund.

I’m also of the view that such a discussion with clients should also include the trustee’s requirements to formulate, review and give effect to an investment strategy. That is, the trustees must consider, among other things, the liquidity of the fund’s investments concerning expected cash flow requirements and the ability to discharge its existing and prospective liabilities.

Remember that since 1 July 2017, in-specie transfers of investments can no longer be recorded as a pension payment and will always be a commutation of the pension, so that rules that option out to deal with the liquidity issue. That does not, however, preclude the potential for selling the asset to the member and using the cash sale proceeds to make the necessary pension payment, provided it’s all done by 30 June 2024.

One last thing on pensions: this is more of a 2024–25 financial year consideration than an end of 2023–24 financial year one, and it relates to the common action of members commencing a pension on 1 July. Where a member intends to claim a deduction for personal concessional contributions and/or do a contribution splitting with their spouse in relation to contributions made in the 2023–24 financial year, any associated paperwork and forms need to be attended to before the commencement of the pension.

That is, a member cannot commence a pension on say 1 July 2024 and then, at a later date, lodge their notice of intent to claim a deduction for contributions made in 2023–24 as it will be too late, the notice will be invalid.

Asset valuation

Assets of a fund are required to be recorded at their 30 June market value in each set of annual financial statements. Recent updates from the ATO have highlighted their concerns that not all trustees have been adhering to this requirement with reports showing some asset values have not changed over three consecutive financial years.

Of further concern to the ATO is the fact that in many of these instances, the fund’s auditors have not lodged contravention reports for potential breaches of the asset market value rules.

Depending on a fund’s assets, trustees may soon need to turn their attention to how they will determine the value of fund assets and substantiate such values, as they should expect closer scrutiny from SMSF auditors this year and potentially also from the ATO.

It is not uncommon for some clients to question the need for market values where a fund isn’t supporting retirement phase pension accounts. The notion is that the values will only impact payment standards and exempt current pension income.

However, as mentioned above, a member’s total super balance can also impact their ability to make non-concessional or catch-up concessional contributions. The recently retired contribution exemption and Government co-contributions are also linked to a member’s total super balance.

In addition to this, a fund’s in-house assets are also linked to the overall value of the fund’s investments. On that note, if a fund exceeds the 5 per cent limit on 30 June 2023, they only have until 30 June 2024 to collate and execute their written plan to rectify the matter, including disposing of the excess in-house asset amount. There is not much time left to act where there was an excess in-house asset amount on 30 June 2023, particularly if the 2023–23 annual financial statements and audit are yet to be completed and the SMSF trustees may not even be aware of the breach and actions required.

Where a fund may have been below the in-house asset limit on 30 June 2023 but expects they may exceed it on 30 June 2024, they may wish to consider if there is any action that can be taken beforehand to limit or remove the likelihood.

Audit concerns

A review of the auditor’s management letter and audit report for the previous 2022–23 financial year, is another worthwhile task to ensure that any identified contraventions, issues or concerns previously raised have been dealt with before the audit of the 2023–24 financial statements. It would be preferable to attend to any issues raised before the end of this 2023–24 financial year. Again, for those SMSFs who have not had their 2022–23 financial year audit finalised, the time to attend to any matter raised from the audit may be limited.

A previously identified contravention that has not been rectified can lead to a contravention report being lodged with the ATO. Rectification of contraventions, before reporting may be a mitigating factor when the ATO is deciding on any compliance action or imposition of penalties.

As mentioned above, the fund’s investment strategy is required to be reviewed regularly. Many trustees take the approach that reviewing the strategy leading up to, and in preparation for a new financial year, is one appropriate time for the review. This may also allow for any potential action to be taken that may be required to ward off any questions from the auditors as to why a fund’s investments may not be in accordance with the investment strategy on 30 June (being the day they have a snapshot of the fund’s investment to compare to the strategy).

When considering investments, where a fund has a lease agreement, particularly with a related party, has it been reviewed to ensure it is still valid and has not reached its expiry date? The lack of a legally enforceable current lease may result in business real property being classified as an in-house asset.

While there may be many other audit considerations that could be dealt with in the lead-up to the end of this 2023–24 financial year, the above are just a couple we are aware of that are likely to be closely scrutinised and trustees can take action to deal with them.

So, with 30 June 2024 fast approaching, SMSF trustees and members should take some time to ensure that all is for their fund and themselves for 2023–24 before we step into the 2024–25 financial year.