Does Your SMSF Investment Strategy Include Insurance?

As we go through life in our modern world, many of us choose insurance to protect us from a range of common loss scenarios. Vehicle insurance protects us against claims for damage in the event of an accident, home and contents insurance assists us to replace stolen or damaged items, and income protection insurance assists if we are unable to work for extended periods of time.

These insurances provide us with the security that, if we have an unfortunate accident or occurrence, our insurer will hopefully recompense us for some or all of our losses. We also need to consider what will happen to us if we are sick or injured and incur both hospital and medical expenses.

In Australia we have access to both universal health insurance and private health insurance. Most of us have one or the other, and many of us have both. Since 1984, Medicare has been the foundation of our health care system and is available to Australian and New Zealand citizens, permanent residents, and people from countries with reciprocal agreements.

The three major parts to Medicare are medical services, hospitals and medicines. It covers the cost of public hospital services should you need them, and some or all the costs of other services such as visits to GPs and other medical specialists. It also covers prescription medicines, which are available to Medicare recipients at much reduced prices under the Pharmaceutical Benefits Scheme.

Medicare is partly funded by a 2% levy on taxpayers (with exceptions for low-income earners) and further funding by the federal government from general revenue. People can also choose to take out additional private health insurance, which gives them access to private hospital services and a range of ancillary services not covered by Medicare.

As a result, Australians enjoy some of the best medical services in the world. The introduction of this scheme gave many Australians access to services they previously could not afford, and as a result, we now recognise the importance of health insurance as part of a modern and fair society.

Insurance is also an important consideration for trustees of SMSFs (self-managed superannuation funds. Once the SMSF has been established with the ATO (Australian Taxation Office), the trustees must by law finalise an investment strategy with a financial advisor. This includes consideration of the insurance needs of the members. Finalising an investment strategy is not the same process as engaging a company such as SMSF Assure to undertake all the administration and reporting requirements of the SMSF.

The ATO advises that an SMSF can provide insurance for members for an event that is consistent with several conditions of release of the member’s superannuation. These are death, a terminal medical condition, permanent incapacity and temporary incapacity. SMSFs generally cannot provide trauma insurance for their members. These events are not the same as universal or private health insurance but may be equally as important to the SMSF fund members.

WANT TO BE A SUCCESSFUL BUSINESS OWNER? THINGS TO THINK ABOUT

The trend for some years for many business owners was to rely on the eventual sale of their business to fund their retirement. It seems that in the effort of establishing and running a successful business, owners set aside any thought of retirement planning in the hope that economic conditions will be favourable when they decide to sell.

This retirement strategy had served the taxi industry well until the arrival of Uber. Almost overnight, taxi licenses that cost hundreds of thousands of dollars to purchase plunged in value, leaving many taxi owners with huge debts and businesses that would be unlikely to attract buyers when they were ready to retire.

With all this history in mind, it is worth reviewing some essential practices that successful people know and use, not only to develop and maintain wealth at work, but also to actively plan for a well-funded and comfortable retirement.

The Importance of Cash Flow

Understanding the importance of cash flow is no secret to the accounting industry but seems to baffle first-time business owners. Cash flow is not to be confused with profit which, put simply, is revenue less expenses. Cash flow refers to the inflow and outflow of cash through the business. The business needs it to operate, so cash flow management is one of the most important secrets to a successful business.

Know the Competition

The second practice is to thoroughly research the competition. Only through knowing your competitors and how your product differs from theirs, can a business owner set competitive prices and respond to rival marketing strategies. Keeping an eye on the competition should be an ongoing activity so that your business offering can stand out against theirs.

Know Your Customer

It may seem obvious, but the third practice is to absolutely know your customer. Don’t assume that because you think your new product is sensational that your customers will too. Find out what they need and give them that. Talk to them face-to-face, survey them and use your social media presence to get their feedback; do whatever it takes to get the right product and price point to place your business where you want it to be.

Be Passionate

Number four practice or secret, if you like, is all about you. Be passionate about what your business does and how it reflects your values. You can always employ professionals to help you with your accounts, IT and similar tasks, but exhibiting values such as honesty and integrity through your actions and rhetoric will flow through you to your staff and hence to your customers. Create a business culture that transcends a business plan and draws exceptional people to you.

Take a Long-Term View

Once your business is established, you should now be ready to look to the future to see where your industry is going. Try to envision a sustainable future where your business, in its present and future forms, can develop and thrive. You will have to ask hard questions but as we now know, if the taxi industry had done this when Uber was just appearing, perhaps their outcome may have been different.

You should now be considering a retirement plan, and there is no better place to start than with your own self-managed superannuation fund. SMSFs have become so successful that they currently hold 30% of all superannuation assets in Australia. Be warned, however, that setting up and running an SMSF is completely different from a business. The good news is that there are now reputable companies such as SMSF Assure that exist solely to assist with the management of SMSFs, so you can have the best of both worlds – control over your own superannuation investments and assistance with the fund administration.

GET PROFESSIONAL ADVICE BEFORE DECIDING ON A BUSINESS STRUCTURE

When someone decides to go into business for themselves, their first decision is whether to buy an existing business, or to start from scratch. Both approaches have different priorities. An existing business should have some type of structure because it is already trading, but the start-up usually is a one or two-person operation without structure but with competing demands. The most critical demand gets the attention first, and in these early stages, the business structure is often left to be sorted out later.

This is a common mistake that would-be entrepreneurs should be addressing early in the life of their fledgling business. They can choose from four different structures here in Australia, and each one has implications for taxation, personal liability, degree of control and the ongoing costs and amount of administration required.

Sole Trader Structure

The sole trader option is simple to set up and operate and gives the owner full control over all operations of the business. It also makes the owner fully responsible for everything related to the business including any debts and losses. It is a low-cost structure with minimal reporting requirements but puts all personal assets at risk if anything goes wrong.

Partnership

A partnership has two or more people involved who distribute income and losses between themselves. There are three different types of partnerships with key differences, but again, they are relatively easy and inexpensive to set up. The partners require separate tax file numbers (TFNs) and each partner pays tax on their share of the net partnership income each one receives.

Company Structure

A company business structure is more difficult to set up than the others and business operations are controlled by directors and owned by shareholders. A company is a separate legal entity with obligations under the Corporations Act 2001. Company members have limited liability and directors must understand and comply with all legal obligations.

Trust

A business can be operated as a trust, but this structure can be expensive to set up and operate. A trust must operate under a trust deed that formally sets out how it is to be run, and the trustee is required to undertake formal yearly administrative tasks.

This is just a brief summary of the four most common types of business structures. There are many more issues to be understood and addressed before deciding on the best structure for the business. The best way to make the right decision is to discuss the options with an accountant.

Once the business is up and running the time may come when the owner decides to plan for retirement and set up a SMSF (self-managed superannuation fund). After running a successful business, the owner would be familiar with the business structure, the accounting methods, the formal reporting process and the tax requirements. This may lead them to think that, because they have business experience, getting a SMSF started will be easy.

However, the structure and operating processes surrounding a SMSF are completely different to a business. The administration is complex, and the reporting required by the ATO (Australian Taxation Office) is specific and time critical, with penalties for non-compliance. Business owners wanting to take control of building their own wealth for retirement engage companies like SMSF Assure to handle the administration and reporting of their SMSF while they get on with managing their business.

WHAT NOT TO DO WITH YOUR SMALL BUSINESS ACCOUNTING?

Running a small business has always been a challenge. Our current economic environment, even with interest rates at never-before seen lows, is stubbornly stuck in low growth mode and consumer confidence is flat. However, there are still many large and medium-sized businesses that are operating profitably in this environment.

To do this requires a robust and responsive accounting system, which allows them to respond quickly to the needs of the market. Owners running small businesses with good accounting systems can also do the same, provided they avoid the common mistakes often made by people lacking accounting experience.

If you are a small business owner, most likely you are wearing many different hats. Some of them will be familiar, and some will be new hats involving a steep learning curve. Unless you have prior experience in bookkeeping, small business accounting is usually one of those hats, and the most important thing you need to learn is what not to do.

Garbage in, Garbage Out

Keeping it simple to start with, the first mistake is inaccuracy. Small business owners who do their own data entry often don’t take enough care. They transpose numbers, put entries into the wrong accounts or hit the wrong keys, then they wonder why the reports they produce don’t make sense. If you put garbage into your software, you will get garbage out, so make sure you check your data entries.

Keep Records up to Date

Many owners neglect their record keeping, leaving it to the end of the month. According to the Institute of Public Accountants, not keeping records up to date is a major time waster for small businesses. Spending just 15 minutes each day entering the new transactions will mean a huge time saver when it comes time to checking your cash flow or running a profit and loss statement.

Separate Personal from Business

Always keep a separate account for the business where all business transactions go. All personal transactions should be kept separate in personal accounts. This is essential for not only getting accurate reports about the business, but also for doing tax returns at the end of the financial year.

What Else Can Your Software Do?

There is now accounting software available for every budget, but many small business owners just use it for the basics. Most software comes with a free training module so users can get the most out of the package. Time spent understanding what the software can do will save you hours further down the track.

Keep in Touch with Your Accountant

One of the worst mistakes new small business owners make is not communicating regularly with their accountant. They then expect to get their business tax return done using inaccurate data, shambolic filing systems and poorly prepared reports. They also make important business decisions without first checking the tax or other implications with their accountant.

Many small business owners are also trying to run their own SMSFs (self-managed superannuation funds), while working actively in their businesses. Record keeping for a business and record keeping for an SMSF are totally different and they require two different recording systems.

Fortunately, many accounting firms now offer additional services to help small business clients in this situation. Being the trustee of an SMSF is a big responsibility and another huge learning curve for the inexperienced. The process is heavily regulated and requires timely reporting and extensive administration.

Companies such as SMSF Assure are now available to help small business owners with this administration while their accounting associates work separately with the clients to keep their business accounting practices accurate and up to date.

WANT TO START YOUR OWN SMSF? EMBRACE THE CHALLENGE AND SEEK ASSISTANCE

Many Australians are hearing about the success of others who started their own SMSFs (self-managed superannuation funds) some time ago and are thinking about doing the same. They dwell on the benefits of taking control of their own retirement nest egg, but some of them gloss over the challenges involved, not only in getting the fund started but also the expertise required to grow the investments.

If you are one of those who are thinking that you could get a better return on your superannuation if you do it yourself, it would be wise to first consider seriously the considerable challenges ahead of you. You must first understand that the management of an SMSF is highly regulated by the ATO (Australian Taxation Office) and as the trustee, it is your responsibility to comply with complex superannuation and taxation laws.

Your first challenge is to set the fund up correctly so that it can receive contributions, be eligible for tax concessions and be correctly structured. Getting it wrong at this point will cost a lot of time and money to rectify, and in the interim, investment opportunities will be missed. Just as one example, there are many administrative tasks required, first in the set-up phase, then in day-to-day operations, as well as strict reporting requirements and deadlines to meet.

You will need to choose and appoint trustees, create the trust deed, register the fund correctly as an Australian super fund, set up a bank account, get an electronic service address and prepare an exit strategy; and this all before you have even thought about where you will be investing the funds.

To do this, you will need a documented investment strategy. There are still issues of how to pay benefits to members, choosing SMSF auditors who must meet specific requirements and be registered with ASIC (Australian Securities and Investments Commission), and the already mentioned administration and reporting.

While none of these challenges are insurmountable, if you still believe that having your own SMSF is the best option for your retirement planning, the good news is that you can have your cake and eat it too. At every step of the way, there are professionals in the relevant fields who can assist you to achieve your SMSF goals.

Accountants can help with establishing financial systems, a legal professional can prepare your trust deed and a financial advisor can help you with your investment strategy. Regarding the administration and reporting, companies such as SMSF Assure are assisting many SMSF trustees with the initial set up and the ongoing running of their funds.

Be prudent, be aware that there will be challenges, but if you take advantage of the professional help that is available, you can run your own SMSF successfully and take charge of your retirement planning.