The bushfires we’ve experienced this summer have been very severe with numerous properties lost and some lives as well. Only after the worst of it is over can we take stock and figure out what it really means and what some of the flow-on effects might be. And believe it or not, this is where SMSF trustees need to be vigilant.
The most direct effect of a bushfire on an SMSF will have to do with the value of property. Obviously if a real estate asset held within a fund has been damaged by a bushfire, there will be an immediate impact of having to revalue and reassess the ongoing viability of that asset. An insurance claim might also be involved, as well as finding a replacement asset for the SMSF.
But even if none of the properties held inside an SMSF have been fire ravaged, trustees still need to be cognisant of the flow-on effect of the associated market forces. Naturally all properties in the regions where the fire took hold will have to be revalued, but as the market moves they may not be the only prices affected.
These revaluations lead to the bigger picture of which SMSF trustees must be mindful. After all, it goes without saying any time assets are revalued in a super fund, a revision of strategies must also take place.
Two simple scenarios spring to mind here. Firstly, if there are any members of the SMSF already in pension phase, and a fire-affected property is supporting that pension, then a recalculation is necessary to determine the effect on the minimum drawdowns. These will potentially have to be adjusted to ensure the SMSF remains compliant, as well as to manage longevity risk (where a person’s savings will not cover their lifetime, which can happen if drawdowns are too high).
A revaluation of properties stemming from the bushfires will also have a direct effect on an individual’s total super balance (TSB). Remember, this element of an SMSF determines the viability and legality of several simple actions.
For example, if the property inside an SMSF is devalued as a result of the bushfires, this will mean a member’s TSB will drop. If that member’s TSB was over $1.6 million, preventing them from making any additional non-concessional contributions, a decrease in the property’s value may take the person’s TSB underneath this threshold, opening up the possibility of making this type of contribution to the fund once more.
Similarly, a fall in the price of an SMSF-held property due to the fires could mean a member’s TSB will dip below $500,000, making them eligible to take advantage of the rules allowing individuals to carry forward their unused concessional contributions cap.
The aforementioned strategy scenarios are examples of how an event trustees may think will not affect them in any way, shape or form can have significant flow-on consequences on an SMSF. It emphasises the need for trustees to be forever mindful of all elements with the potential to impact on their fund, even if not immediately obvious.