What Is The Right Structure For My SMSF?

Making the decision to set up your own self-managed superannuation fund (SMSF) is just the first of many other important decisions you will be called upon to make, and these decisions will impact on the performance of your fund. Getting it wrong with this first decision would not be an ideal start, so the recommendation from people in the industry is to talk to a professional advisor before going ahead.

What is this decision that is so vital that you should be seeking advice at the onset? There is plenty of advice available regarding the different types of investments available; the Australian Securities and Investments Commission (ASIC) has some general information available on their web page, but it is the Australian Taxation Office (ATO) web page that sets out the two types of structures you can have for your fund.

Getting the structure right at the beginning is a much easier option than trying to change it after everything has been set up. You can choose between setting up a corporate trustee and using an individual trustee. There are benefits and limitations to both, and the chances are that only one will be appropriate for your individual needs.

There are several areas where the structures differ from each other. The first is in the member and trustee requirements. A fund with an individual trustee must have two to four members only; each member of the fund must be a trustee and each trustee must be a member. Also, a member cannot be an employee of another member unless there is a family relationship.

An SMSF with a corporate trustee has one to four members; each member must be a director of the corporate trustee and each director of the corporate trustee must be a member. The employee/relative requirement is the same as the individual trustee.

A further complication occurs when the fund has a single member. In an individual trustee structure, there must be two trustees, one of whom is the fund member. If the fund member is an employee of the other trustee, they must be related to each other. With the corporate trustee structure, the corporate trustee company can have one or two directors but no more. The fund member must be the sole director, or one of the two directors, and again, the employee/relative requirement is similar.

Now to the cost. The individual trustee structure does not attract any ASIC fees, so establishment and ongoing administration fees are lower. ASIC charges a fee to register a corporate trustee initially and there are annual review fees with additional conditions. In both cases, trustees or directors cannot be paid for their services in relation to the fund.

These are just the first two issues to understand and deliberate. The ownership of fund assets, the separation of assets, the penalties for breach of superannuation law and succession issues are the others. There are companies such as SMSF Assure that can assist you to set up your fund to suit your requirements. Why go it alone when there is professional assistance readily available?

Getting The Right Investment Strategy For Your SMSF

Being a trustee of a self-managed superannuation fund (SMSF) is a major responsibility and the decisions made by you as trustee will affect the retirement incomes of all members of the fund, yourself included. Since this end result may not take place for many years, getting the right investment strategy, at not only the start but right throughout the entire journey until retirement, is critical to the lifestyle you will enjoy at that juncture.

As the superannuation environment becomes more and more complex, having sound, reliable, consistent advice from a trusted financial advisor is essential, especially if you are concerned that your knowledge of the investment world is limited. You must have a written investment plan and the best way to start one is to establish financial objectives, then tailor your plan to achieve them.

If you are a trustee, it falls to you to decide what would better suit your stated objectives. Putting all of this in writing allows you and your financial advisor to examine, research, discuss and formulate a response to the investment products available at the time.

Currently, there is a disparity between the types of investments favoured by APRA-regulated funds and SMSFs, with SMSFs showing a clear preference for Australian shares, property and cash. From the information provided by the Australian Taxation Office, it seems that Australian shares are the first preference; cash comes second and property is third.

Within those three areas are variations such as listed property trusts, options, futures and others in the Australian shares strategy, bonds, debentures, fixed term and term deposits and others in the cash strategy and residential and commercial property in the property strategy.

However, identifying the preferred strategies for your fund is not the whole story. When you compile your Investment Strategy document, you must also consider the risk, cost of holding and likely return of these investments when considered against the SMSF objectives and future cash flow requirements. You must also look at all the investments as a whole and assess the likelihood of the entity being exposed to excessive risks and the benefits of diversification to prevent this.

You must also consider the liquidity of the investments to allow for the payment of tax, lump sum payments if a member leaves the SMSF and regular pension payments. The SMSF must also be able to discharge its existing and prospective liabilities.

This is a lot to manage and be responsible for and having a licensed financial advisor to assist the trustee with the many decisions that will be needed over the life of the fund will make the task much less onerous.

The administration of the fund is another area that can quickly become a burden if returns are not made on time or any of the other mandatory requirements are not met. Companies such as SMSF Assure are readily available to assist with this part of the management of your SMSF, leaving you and your financial advisor to work together to implement the investment strategy.

Keeping Your SMSF Investment Funds As Safe As Possible

The performance of any superannuation fund will eventually affect the quality of retirement that members will enjoy, so it is important that members monitor their returns. It is also worth considering the possibility that some of the products that funds have included in their portfolios are unsafe, exposing the members to reduced returns and eventually a diminished retirement lifestyle.

Just how safe those funds are, is a question worth asking. Provided you are checking that your employer is paying the required contribution to your chosen fund, and that fund has competent managers who have diversified the investments in high-quality products, there should be little to worry about. Throughout the GFC, superannuation funds experienced reduced returns but were never in real danger of collapsing.

This does not mean that such a thing could never happen, but in our highly regulated superannuation market, warning signs would be expected and acted on by fund managers. However, if you are the trustee of a self-managed superannuation fund, and you were either unaware of typical financial indicators or chose to ignore them, your funds and those of your members could be at risk.

Bear in mind that many of the protections available to other superannuation funds by the APRA (Australian Prudential Regulation Authority) are not applicable to SMSFs. For example, they are unable to claim compensation if their fund is affected by fraud or theft. SMSF members also do not have access to the Superannuation Complaints Tribunal if they are not happy with where their funds are being invested.

This is one of the reasons why an SMSF must have an investment strategy. It must be in writing and subject to regular reviews to ensure that it is meeting the needs of the members. This is particularly important when the financial and investment markets are in a state of flux. Without a proper strategy, trustees may be tempted to make quick, unwise decisions to recover losses rather than wait for market corrections.

The best way to keep SMSF investments safe is to develop an investment strategy with the assistance of a licensed financial advisor. The advisor should also be involved in the regular review, so that the fund trustee/s has the benefit of professional expertise. Licensed financial advisors must keep up to date with industry and market changes, and they share this information with their clients.

The other major issue SMSF trustees have is the administration and compliance involved. If you are a trustee struggling with the responsibility of running your fund, getting your investment strategy under control will be a load off your mind. Companies such as SMSF Assure are in the business of assisting clients with SMSF administration and compliance so with both of these areas covered, you are in the best position to keep your fund investments safe.

DO YOU KNOW THE NEW PENALTIES SMSF TRUSTEES AND DIRECTORS FACE?

Industry and retail superannuation funds have been in the spotlight now for many months as the federal government tries to get their proposed legislative changes through parliament. These changes include the possibility of jail terms of up to five years for super fund directors who contravene the rules governing the fund.

Currently, this behaviour is not an offence and does not attract a criminal or civil penalty. The proposed changes would see the fund possibly subject to a civil penalty, which could then result in both civil and criminal consequences. For serious breaches of a director’s duty, a criminal offence and jail time is proposed.

These proposed changes affect directors of industry and retail funds, but are there any changes taking place that affect self-managed superannuation fund (SMSF) trustees and directors? Yes, there are, and they are already impacting on the SMSF industry.

For example, harsher fines have been in place since the beginning of the 2017/2018 financial year, with the value of a penalty unit increasing to $210 since 1 July 2017. What are penalty units? This is the amount of money under Australian law that is used to calculate penalties for breaches of statute law. It is easier to change the number of penalty units each year than it is to amend legislation to increase penalties.

SMSF trustees need to understand how penalty units work, as they must operate their fund according to superannuation rules. If they break those rules, financial penalties may be the result. A breach of certain rules means an automatic administrative penalty ranging from $1,050 up to $12,600, depending on the type of breach.

Three types of new penalties have been imposed. One is a requirement to improve a trustee’s knowledge through education by taking a course by a certain time. Failure to do this will incur a financial penalty. The second is to correct any breaches of the rules within a specific time frame. In both cases, evidence must be provided to the ATO to prove that corrective action has been taken.

The third is the administrative penalty already mentioned and it is the most significant. Fines will be applied to each trustee separately, so if there are two trustees, the fine must be paid by each individual trustee, for the same amount, effectively doubling the amount of money to be paid. If the SMSF has a corporate trustee, the directors are jointly and severally liable to pay just one penalty amount.

These fines must be paid by the trustees or directors themselves and cannot be reimbursed back to them out of the SMSF funds. The consequences of overlooking an administrative responsibility are now significant, so using a specialist such as SMSF Assure to handle all administrative and compliance matters makes more sense than ever.

DIVERSE INVESTMENT OPTIONS AVAILABLE TO SMSF TRUSTEES

As the trustee of a self managed superannuation fund (SMSF), you are responsible for the investment decisions the fund makes on behalf of its members. This is a big responsibility, as errors of judgement will have a big impact on the lifestyle of the fund members upon retirement. For this reason, investments cannot be ad-hoc, but must be part of an investment strategy.

This strategy should be in place before you actually make any investments. It should also be in writing and have clear objectives. Without it, you are following the vagaries of the market instead of treading a path that will eventually see those objectives reached or exceeded. Like any strategy, it must be reviewed regularly, and any adjustments and decisions should be recorded. You may need to explain them at some time in the future.

In terms of how to invest through your SMSF, there are some restrictions imposed by the Australian Taxation Office (ATO), but generally, you are able to invest in shares, property and collectibles. However, it appears that fund trustees have different priorities in their investment packages than Australian Prudential Regulation Authority (APRA)-regulated funds.

Statistics released by the ATO show the comparison between SMSFs and APRA-regulated funds as at 31 December 2017. This reveals that APRA-regulated funds have much more diversity in their investments than SMSFs, which concentrate more on cash, property and alternative assets.

For example, SMSFs hold 23% of their investments in cash, 1% in international shares and shares in unlisted companies, 15% in property and 28% in “Other”, which includes trusts, managed investments and collectibles. For APRA-regulated funds, cash makes up just 11% of their portfolios, 24% in international shares and shares in unlisted companies, 8% in property and just 4% in “Other”, which for them includes hedge funds.

Speculation is that SMSF trustees like property because they are familiar with the Australian property market, which has generally performed well for some time. They are also comfortable with holding cash in the safety of our banking system, even though returns have been somewhat low since 2008. Their lack of knowledge about international shares makes them wary of investing there.

Many SMSF fund trustees have handed the administration of their funds over to companies such as SMSF Assure so that they can concentrate on building their investment portfolio. However, there are also many licensed financial advisors who could help them rework their investment strategy to take advantage of opportunities they may be missing. These decisions now may affect the members’ quality of lifestyle in retirement, so getting professional advice should at least be considered.