What Is the Most Important Factor in Deciding to Open an SMSF?

Has the investment performance of your retail or industry superannuation fund been a little lacklustre of late? Do you look at the investment mix and wish it were not quite so conservative? Do you think you could do better and that it may be time to start your own SMSF (self-managed superannuation fund)? While you are not alone in thinking that, you may be surprised to know that these are not the best reasons for setting up your own fund.

There are some other factors that may impact on your decision. For example, have you any plans to live overseas permanently in the future? To qualify for the 15% tax concession rate and remain compliant, the SMSF trustee must be an Australian resident, so this arrangement would not suit a non-resident or someone planning to relocate overseas permanently.

Also, the ATO (Australian Taxation Office) has some eligibility criteria around the person or persons who can operate as trustee of an SMSF. The most common exclusions are people who have been convicted of an offence involving dishonesty, have been subject to a civil penalty order under the super laws, are insolvent under administration or been disqualified by a court or a regulator.

If none of these factors applies to you, and you still think you have what it takes to manage your own fund, the best reason for proceeding has nothing to do with timing. Instead, it is to take advantage of investment choices and strategies that ordinary industry or retail funds cannot currently provide.

For example, you may have had your eye on an investment property so having your own SMSF will allow you to borrow in order to purchase it. If you own or operate a business, you can also purchase business real property and lease those premises for the purpose of conducting business.

The other important factor you must consider carefully is the question of cost. There is a great deal of administration, management and ongoing reporting to keep your fund compliant. For it to be worthwhile, you must be satisfied that the administration and investment management fees of your SMSF are less than would be incurred in an industry or retail super fund.

This is particularly important if you are thinking about using a professional organisation such as SMSF Assure to assist you. They handle every aspect of the paperwork involved in the set-up process, and continue the ongoing administration of your fund, ensuring that all reporting deadlines are met and compliance is maintained.

With the assistance of professionals such as these, and an investment strategy developed with a licensed financial advisor, this could be the perfect time for you to open your SMSF.

SMSF Terminology Can Be Confusing

The self-managed superannuation fund industry in Australia continues to expand as more people seek to take control of the process of building their retirement income. Before anyone takes the first steps to set up their own fund, however, they should realise that there is a lot to know and understand about not only the process of running the fund, but also of some of the terminology and what it means.

Most people understand the meaning of the word “asset” but in the world of the SMSF (self-managed superannuation fund) this is preceded by the word “pooled” and conversely, the word “segregated”. It is important that fund managers become familiar with these terms and understand the difference between pooled assets and segregated assets.

Pooled Assets

Let’s start first with pooled assets, which, as the name would suggest, describes the treatment of both the income and the assets within the fund. When the income and assets are pooled together, they are proportionally allocated between member pension accounts and accumulation accounts. The pension accounts receive favourable treatment under our taxation rules. The portion of the pooled assets allocated to the pension accounts can be claimed as exempt from the 15% fund income tax.

To claim this exemption however, the SMSF must obtain a Tax Certificate from an actuary stating the actual percentage of the fund’s assessable income being claimed. This percentage is then applied to the assessable income with a couple of exclusions. However, if one of the fund members retires and commences a pension part way through the year, the percentage that could be applied becomes more difficult to calculate. If during that time, for example, a fund asset with a large unrealised gain is sold, a lesser percentage of the capital gain is exempt from the 15% fund income tax than if the assets had been segregated.

Segregated Assets

When the fund segregates their holdings, they have assets that have been specifically allocated, or segregated, to fund pensions. By using this method, a certificate from an actuary is not required, but they do need to track the income from those assets. This is important when it comes time to claim that income as exempt from the 15% fund income tax. Also, the value of the assets that have been segregated to fund pensions cannot exceed the total value of those pensions.

From an administration perspective, the pooled asset method is easier for a fund trustee to manage, but it may not be in the best interests of the fund members, given the changes proposed by the federal government. The segregated method requires much more administration but it offers the opportunity to take better advantage of the existing tax exemptions.

Specialist SMSF Administrators Available to Assist

Accountants and specialist SMSF administrators such as SMSF Assure should be meeting with their SMSF trustees to discuss these two methods so that the trustees understand the differences and can make fully informed decisions about which method best suits their fund. With other changes likely to take place, it is important for trustees who have specialist SMSF administrators to keep in regular contact and discuss any issues with them before making major decisions.

What Retirement Standard Are You Expecting From Your Superannuation Fund?

If you are one of the many Australians who have their own self-managed superannuation fund (SMSF), you could be justified at feeling a little smug following the recent release of a report into what is considered a “comfortable retirement”. This report shows that couples over the age of 57 with a median balance in their fund can be reasonably confident that they will have enough funds to meet the comfortable retirement standard.

What is the comfortable retirement standard, and why is it important? This is a benchmark established by the Association of Superannuation Funds of Australia (ASFA), which estimates the annual budgets needed by Australians to fund either comfortable or modest standards of living in retirement.

These budgets are adjusted quarterly for inflation and it is assumed that the retirees own their own homes outright and are relatively healthy. They are important because they could be a window into your own future.

Figures for the quarter ended 31 December 2016 show that a single retiree aged 65 would need an annual income of approx. $44k, and a couple an annual income of approximately $59k to have a comfortable lifestyle in retirement. This lifestyle includes the expectation of involvement in a range of leisure activities, the ability to maintain a dwelling and purchase household goods, a reasonable car, nice clothes, private health insurance, electronic equipment and holiday travel.

A modest standard of living falls somewhat short of these criteria, still better than the Age Pension but with a budget that only allows for basic activities and requires tight controls on spending. SMSF trustees and members would certainly be hoping that by taking control of their investments via the fund, they could look forward to a comfortable retirement standard and not have to settle for a modest one.

As you can see, there is no room for complacency if you want the retirement lifestyle just described. Solid preparation now should deliver the future you want, but only if your fund is well-managed and has the benefit of sound financial advice delivered by licensed and qualified financial advisors.

One of the key benefits of starting your own SMSF is the ability to establish an investment strategy that is specific to your needs and future goals. Members of retail and industry superannuation funds have their contributions invested across a range of products, which may or may not deliver them the lifestyle they are expecting. Their future aspirations, and what would be needed to fund them, are grouped together with those of hundreds of thousands of other members.

When the administration of your SMSF is handled by a professional organisation such as SMSF Assure, your time can be better spent regularly monitoring your personal investment strategy. This is necessary to check if the current strategy is likely to deliver the funds needed to meet your future goals. It is this level of personal control that prompts many people to establish their own SMSF.

For a retirement lifestyle to look forward to, the comfortable retirement standard should really be the minimum goal amount. Many others looking to secure their futures agree, and the SMSF sector continues to expand as more of us take control of our retirement futures.

What You Should Think About Before Starting an SMSF

As the number of self-managed superannuation funds (SMSF) continues to increase, so too does the complexity of our superannuation regulations, which seem to change every few months. It is increasingly obvious that a lay person with only a minimal understanding of how to manage an SMSF will quickly run into trouble.
However, don’t let this deter you from setting up your own fund if you would like more control over saving for your retirement. Once the fund is established, complexities related to administration and reporting can be managed to ensure it continues to be compliant with Australian Taxation Office (ATO) requirements.
There are significant benefits to be had for those who can meet the criteria, so the best place to start is with the ATO website where there is up-to-date information. Bear in mind that an SMSF must be established with the sole purpose of providing retirement benefits for the members or their dependents. Here are just a few questions to get you thinking more deeply about the issues:

Is this genuinely your purpose?

  • If you are planning to incorporate some other investment strategies into your fund that are too short term to be considered as retirement investments, you will quickly come to the attention of the regulator. For example, buying art works could be thought of as a long-term strategy, but if they are hanging in your home, the purchase through an SMSF is illegal.

Do you know how to structure the fund at the outset to get the most benefit out of it?

  • There are two structures that meet the criteria for a compliance SMSF. The first has up to four individual trustees and the second is a corporate trustee, which is a company acting as a trustee for the fund. You must ensure you choose the structure that suits your fund, as there are differences in several key areas. Member and trustee requirements differ between the two as does cost, the ownership of fund assets, the separation of those assets, penalties and succession.

The initial setting up of the fund costs money but there are also recurring costs that must be met. Do you have the funds to take on this commitment long term?

  • It is difficult to give any estimate of the cost of setting up and running the fund over the many years it is likely to be in existence. Initial set up costs are just the start. There is the cost of an independent annual audit, a supervisory levy, regular asset valuations, possible legal fees and the cost of insuring the members.

Do you have the time and the skills needed to keep on top of the administration and compliance requirements?

  • There is a considerable number of administration and compliance tasks to be done, many of which are time sensitive. The SMSF annual return, for example, is your responsibility and must be lodged after the audit is finalised. There are fixed time frames for lodgement and failure to do so can result in penalties and the loss of the fund’s tax concessions. Doing the administration yourself will eat up large blocks of your time, and if you are already busy, you could easily overlook some key task or deadline.

Are you ready for the pressure of being responsible for the performance of the investments and what that will mean, long term, for the retirement plans of its members?

  • First, you will need an investment strategy. This must be in writing and needs to be reviewed regularly to check that it is still consistent with the purpose and circumstances of your fund. (This is one of the administration tasks already mentioned.). You will be deciding on issues such as investment diversity, the liquidity of the assets held in the fund, how the fund will meet the financial demands of retiring members as well as any on-going costs and other issues. This is just the start as you monitor these investments and worry about their performance.

These are just a few of the initial questions that you should be asking when considering setting up your own SMSF. There are many more, all dealing with some aspect of fund management and how they are viewed by the ATO. If you are already considering giving up however, remember the earlier mention of a way in which this can all be managed so you can still have your own fund.

The good news is that there are many professionals in the field similar to SMSF Assure who can assist you. They have a team of experienced people who can take the guesswork out of setting up your fund and put you in touch with a financial advisor who will assist with your investment strategy. Then they will look after the administration, year-end and regulatory work and provide on-going advice. Thousands of SMSFs are now being managed in this way. Why not yours?

Property Investment Through Smsf – A Quick Review

Prior to 2007, buying property through a self-managed superannuation fund (SMSF) was restricted by the requirement that such property purchases could not be funded by borrowing. Since that restriction was lifted, the number of SMSFs investing in residential and commercial property has increased substantially making them major influencers in the Australian property market.

There are significant tax benefits to buying property through an SMSF, but there are also a few issues that fund trustees must understand before they embark on that pathway. The first is that the trust deed must permit direct property purchasing and borrowing and the second that this type of investment must be part of the overall SMSF investment strategy. This is important not only from the perspective of the Australian Taxation Office (ATO) but will be viewed as an acceptable borrower by lending institutions.

It must also meet the sole purpose requirement. This is set by the ATO and applies to the fund itself, and all the investment vehicles held by it. Essentially, this means that the fund must be maintained for the sole purpose of providing for the retirement of its members or their dependents, should any fund members die before retirement.
Funds that contravene the sole purpose test can lose their tax concessions, which are considerable, and the trustees may be subject to civil or criminal proceedings. Trustees must not, either directly or indirectly, receive a financial benefit while making investments on behalf of the fund, other than increasing the fund balance.

The ATO audits SMSFs rigorously, placing a large administrative and compliance burden on trustees.
Many of the SMSFs have been established by small business operators who are already busy running their businesses and time taken out by them to attend to their SMSF is time they are not spending on their business operations. Many SMSF trustees have relieved themselves of this administrative and compliance burden by getting the assistance of professional administrators like SMSF Assure.

Having considered all this, trustees need also to be aware that there are still restrictions on how that property is used. For example, the fund trustee, or any family members, cannot live in any residential property purchased by the fund. Small business owners, however, can buy a commercial property to lease back through their business. Again, however, there are conditions.

The terms of the lease must be commercially competitive, that is, the owner cannot lease it back at less than market value to give them a competitive edge on their business rivals.

  • All rent payments must be made in full and on time. If the business goes through a downturn, the owner cannot forgo paying the rent to stay afloat until things improve.
  • Part of the compliance requirements for this type of arrangement is that the owners must arrange regular valuations of the commercial property. These will be scrutinised at audit and are an additional compliance burden.

When an SMSF seeks finance approval for a property loan, things get even more complicated, much more so than getting a normal housing loan. Most lenders will be reluctant to lend more than 80% of the property’s value, so the rest must be provided by the fund. Lenders will typically include the income expected from the property into the borrower’s ability to make the payments. They will also be assessing the frequency and value of members’ fund contributions as these will also be included in the repayment obligations.

These types of loans are complex, so along with all the other hoops that fund trustees must leap through to get their investments off the ground, it is little wonder that they are seeking professional assistance. With the right advice, property investment is a very attractive vehicle for creating wealth for retirement, but without this professional assistance, it is time-consuming and stressful.

The final caution for anyone thinking of using their SMSF to purchase property through borrowing, is to not be so focused on the property market that they ignore or neglect other classes of investments. Public superannuation funds spread their investments across a broad spectrum of asset classes so that when one class is not performing, it is supported by those that are. The old saying of not putting all your eggs in one basket is still valid today, and a timely warning to be prudent when planning for retirement.