WOMEN TAKING THE REINS OF FAMILY BUSINESS IN INCREASING NUMBERS

It may come as a surprise to know that the family business is one of the most common business models worldwide and even more surprising is the statistic that in Australia, family businesses account for 70% of all our businesses and employ half of our workforce. The sector is worth approximately $4.3 trillion and has its own peak body to provide support and information for its members.

It is also interesting to note that women make up just over one-third of all Australian business operators and the numbers of women who are running their family businesses are expected to equal males within the next few years. This acceleration away from male domination of family businesses is driven by the rapid take up of university education over the past few decades by females, and the support provided within the family business structure which is generally not available in private enterprise.

A typical example is the flexibility family businesses offer female leaders regarding child-rearing and personal family demands, which the corporate world is now recognising but is still slow to provide. Family businesses are also well ahead in their willingness and desire to trust and empower female leaders.

Reliable, authoritative studies have consistently found that women in management positions make fairer decisions, are more consultative, work to seek consensus before making decisions and are quick to adopt new governance practices. This applies equally across all business structures including family businesses.

There are unique dynamics involved in taking a leadership role in a family business. The two levels of relationship involved, being professional and family, become all the more complex when managers and team members are related to each other. Sometimes a female family member may become CEO unexpectedly following a sudden death in the family, but generally, the appointment comes as a result of sound business knowledge coupled with relevant experience.

Women in leadership positions would also be aware that generally speaking, women in the workplace are disadvantaged when it comes to accumulating sufficient superannuation to support them in retirement. The causes of this imbalance between male and female participants in the workforce are, as would be expected, are extended absences to bear and raise children, and later in life, further absences to provide care for elderly parents or relatives.

These accumulated absences can amount to many months if not years, interrupting careers with subsequent loss of income on which superannuation contributions are based. Women running family businesses are in an excellent position to establish self-managed superannuation funds (SMSFs) to ensure that all their employees, including family members and other women are members of funds that work towards ensuring comfortable financial circumstances in retirement.

These female leaders are also likely to recognise that to personally manage the day-to-day operations of their SMSFs would interfere with their ability to run their family businesses. To overcome this issue and provide assurance to the fund members that the fund is complying with all ATO reporting requirements, they are likely to engage companies such as SMSF Assure to handle all the administrative details on their behalf.

How to Check If All Your SMSF Admin Is Ready For The EOFY

If you are the trustee of a self-managed superannuation fund (SMSF), especially a newly established one, you may be approaching the new tax year with some trepidation. It starts, of course, on 1 July and it means that you should be preparing to lodge your annual return for the previous tax year.

Since one of the major benefits of operating an SMSF is the tax concessions available, it makes sense that trustees would ensure all administrative tasks, including the SMSF annual return, are completed on time. Trustees are liable to pay tax on the taxable income of the fund from the fund assets. This tax liability is advised to the Australian Taxation Office (ATO) through the annual return already mentioned. There is no separate SMSF tax return similar to others such as the tax return for individuals or the company tax return.

There are quite a few steps in the process of gathering the information needed to complete this annual return. It would be useful for the inexperienced fund trustee to make a checklist of the tasks required, starting with appointing an approved SMSF auditor not more than 45 days before the SMSF annual return due date. Add to the checklist the reminder that they may also require an actuarial certificate.

A well-managed fund should have its financial records up to date, which will make preparing the end of financial year accounts and statements a simple matter. The trustee should also have paid any minimum annual income stream payments required under superannuation laws. These tasks should be included on your checklist.

The trustee will also need to provide a market valuation of the assets of the fund as at 30 June, and also review the fund’s investment strategy and document the review. Again, these two items need to go onto the checklist.

Some fund trustees will be required to lodge transfer balance reports, so SMSF trustees need to check whether or not this applies to their fund situation and add this to the checklist if necessary.

The final two items may seem obvious, but it doesn’t hurt to be reminded by placing them on the checklist. Make sure the SMSF annual return is lodged by the due date and check that all fund records have been maintained as required under superannuation laws.

Successfully managing the entire end of financial year tasks is a big responsibility for fund trustees who have other financial responsibilities outside of their SMSF. Most trustees have now found that the end of the financial year is not to be feared when they partner with companies such as SMSF Assure to help them manage their administration responsibilities.

DO ANY OF THESE ATO CONCERNS APPLY TO YOUR SMSF?

Each year there are changes to the rules that govern superannuation and self-managed superannuation funds (SMSF), and for some fund trustees it can become difficult to remain compliant with ATO (Australian Taxation Office) laws.

Currently, there are three key issues that are causing the ATO some concern. If you are a trustee who has let some of the standard processes slip a little, a good place to start would be to understand these issues and check that your fund operations have not unwittingly become illegal.

The Sole-Purpose Test

The first issue is fundamental to SMSF and super regulation, and a key part of investment decision-making. It is the sole-purpose test, which means that to be eligible for tax concessions, an SMSF must be maintained for the sole purpose of providing retirement benefits to its members. While this seems simple enough, it is often misunderstood by fund trustees.

For example, recently the Federal Court dismissed an application by a fund trustee who was challenging the commissioner’s view that funds to provide accommodation for a member or relative was in breach of this rule. The Court agreed with the commissioner that leasing to a related party was contravening the sole-purpose test by using the fund assets for a purpose other than providing retirement benefits. This court decision has reinforced the sole-purpose test.

In-house Asset Rules

An in-house asset is a loan to, or investment in, a related party, an investment in a related trust, or an asset of the fund that is leased to a related party. A fund’s in-house assets cannot exceed 5% of its total assets, but unfortunately, a common regulatory breach being seen by the ATO regarding SMSFs is that funds are lending fund monies or assets to members or relatives of members of the fund.

Before going down this path, fund trustees are invited to contact the ATO for clarification or seek independent professional advice.

Unlawful Schemes and Arrangements

SMSFs have become prime targets for approaches by the unscrupulous to become involved in unlawful schemes and arrangements that may seem quite legitimate at the time.

ATO officers advise that these illegal arrangements are complex and cleverly hidden and can result in severe consequences for trustees and their funds. One such arrangement is to roll future retirement savings out of a superannuation fund and into an SMSF so that it can be withdrawn and used for a housing deposit.

This is illegal and the ATO is concerned that SMSF fund members are being targeted with these and similar arrangements that could result in fund members losing their life savings. The ATO is always available to assist trustees, and there are reputable professional advisors available to trustees who have been approached with a scheme and are confused about what to do.

There are also many reputable companies such as SMSF Assure working in the industry that are not licensed to provide financial product advice but are experts in fund administration. By having their assistance with the compliance and reporting part of your SMSF, fund trustees can then turn their full attention to the financial products and investment opportunities in the market, without falling prey to market predators.

SMSF RISKS YOU MAY NOT KNOW ABOUT

As trustee of your SMSF (self-managed superannuation fund), you would be aware of the responsibility you have to manage investments that will produce a comfortable income in retirement. You may have outsourced the fund administration to professionals such as SMSF Assure and engaged a licensed financial advisor to assist with investment decisions, but ultimately, the final responsibility for the fund performance is yours.

Apart from the usual market forces that affect any type of investment you make, there are some other, lesser known risks of which we should be aware. Three risks in particular are not directly linked to any investment category, which is most likely why they are often overlooked by SMSF trustees.

Risk No. 1 – Sequencing

The first is known as a sequencing risk and needs some explanation. You already know that investments perform better in some years than in others, but you may not have realised that the sequence in which these changes occur are just as important as the actual investment returns.

This particular risk came to prominence during the GFC (global financial crisis) when people close to retirement lost heavily as their share portfolios crashed. Those affected retired with less than they expected had the GFC not occurred, or in some cases, stayed in employment for much longer to recoup as much of their losses as possible.

Sequencing is all about timing. Losses made in the early stages of your working life can be recouped over time so that the fund balance is healthy at retirement. Those same losses later in life will likely have a profound negative impact on the balance available as members retire.

There is no single way to manage this sequencing risk. However, ensuring that the fund assets are diversified across several investment classes spreads that risk and lessens the overall long-term affect. Changing the asset mix over time to reduce volatility and having enough liquidity to avoid selling assets will maintain capital and keep the fund healthy.

Risk No. 2 – Liquidity

Liquidity then, or lack of it, is the next risk. A healthy SMSF needs cash on hand throughout its existence. Cash is required for administration, auditing, investment fees and other expenses. Fund members in the pension stage will need cash for pension payments or, in the case of bereavement cash to pay the family a benefit. Having cash in a high interest cash account is the best way to manage this risk.

Risk No. 3 – Underinsurance

Having the fund underinsured is the third major risk. Superannuation rules require fund trustees to consider insurance cover for its members, but some SMSFs choose not to do so. This places the fund at risk if assets must be sold, whatever the market conditions, in the event of the death or total and permanent disability of a fund member.

If members are insured against these or similar events, this insurance will most likely cover much of these expenses, leaving the fund assets intact and working to keep the fund balance healthy. These additional risks should be discussed with your financial advisor and plans put in place to manage them.

IS AN OVERSEAS PROPERTY INVESTMENT A POSSIBILITY FOR AN SMSF?

Trustees of SMSFs (self-managed superannuation funds) have, for some time, been able to purchase residential property in Australia on behalf of their fund. Although our property market may be “coming off the boil”, prices are still high, and many SMSFs are looking elsewhere to build retirement income.

Interest in overseas properties has been a hot topic in the media lately, especially in parts of Europe where the long-term effects of the global downturn are still being felt, and property prices are low. Some cashed-up Australians are taking advantage of this situation; however, does this mean that trustees of SMSFs can also invest fund money in overseas property?

The current advice is that there is nothing to stop an Australian SMSF from acquiring property abroad, but continued compliance with our tax laws still must be considered. Here, the key issue still, is whether an overseas property investment meets the sole purpose test, along with some other factors that need to be checked and addressed.

The sole purpose of superannuation is to provide retirement benefits to members and beneficiaries of the superannuation fund. Provided the trustees or members do not use the overseas property for their own benefit prior to retirement, such property should meet the sole purpose test.

Before going any further, it would be wise to check that the trust deed allows for overseas investments. Most deeds do, but a quick check will allow you to proceed with certainty. You should also ensure that the purchase of property abroad is also included in your written investment strategy, with a thorough description of how you intend to make money for the fund. This should also include insurance to protect the investment.

Thoroughly investigate any legal compliance issues before committing any funds to this type of investment. For example, because SMSFs are a uniquely Australian vehicle, do not assume that our laws and rules will apply outside of the country. Here, the SMSF trustee is legally required to hold the title to the property. This may not be the case elsewhere and, in fact, it will vary from country to country.

Some foreign countries do not recognise our trust structure for SMSFs, and many do not allow a foreign entity to hold property directly. As a result, you may be required to set up a limited liability company in a foreign country and open a bank account in its name. It is the limited liability company that purchases the overseas property and the SMSF then invests in shares in that company. This will have tax implications both here and overseas, so make sure you check these out before proceeding.

There will also be additional costs involved, as there is no getting around the Australian Tax Office (ATO) audit requirements for SMSFs. This may involve having to hire a local accountant in the country of your investment to assist with tax and auditing issues. This will be an additional cost on top of the audit costs here in Australia.

If you do your research and purchase an overseas investment property, knowing all the costs involved as well as the legal, compliance and tax requirements in both countries, there is no reason for you not to proceed. Like any other investment, do your research, balance risk and reward, so that your fund may have a very lucrative asset working for its members.