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.

What SMSF Trustees Dislike Most About Running Their Fund

Are you doing a job where you are responsible for the performance of a portfolio of investments, but you have very little time for research? Does this job involve trying to keep up with constantly changing regulations and managing a stack of administration? Are you struggling to set aside time to plan while reviewing your current position? Then you must be a trustee of a self-managed superannuation fund (SMSF).

As many trustees are finding out, there are many responsibilities that go with the role. Chief among them is the knowledge that if a fund trustee makes poor investment choices, their lifestyle and that of the other fund members could be adversely affected in retirement.

A recent survey of SMSF trustees named the five most difficult tasks that come with managing your own fund; the top two were ranked by over 30% of survey respondents. The next two were ranked by 16% of respondents and the final difficult tasks were a lowly 12%.

It is no surprise that choosing investments was the most unpopular task, and the one that weighed heavily on the shoulders of the trustees. They were all doing their best to place SMSF funds in secure investments that gave a good return but were very conscious of the consequences if they made an honest mistake.

Having to deal with changing regulatory requirements was next. Everyone agreed that an environment where superannuation rules were not subject to constant change would give trustees the confidence to make decisions without needing external advice. This kind of uncertainty is stressful and made them apprehensive about even minor issues.

Time is money as the saying goes, and this is very pertinent to those trustees who struggle to find enough time to research investments. This, along with the first unpopular task of choosing investments makes investing an area where inexperienced fund trustees can quickly find themselves in trouble.

Administering the fund, keeping records and lodging the required returns on time are all tasks that require attention to detail and superb organisation. If a trustee does not have these attributes, it will always be a struggle to keep track of everything. Thankfully, there are companies like SMSF Assure that will take over this burden.

Finally, planning and reviewing are the two tasks at the bottom of the list, possibly indicating that most trustees would rather do these than any of the others. However, all tasks are of equal importance because they are all part of the responsibility of being a fund trustee.

Does your LRBA comply with the new ATO requirements?

Since the rules around using an SMSF to purchase property were relaxed, first in 2007 and with further amendments in 2010, thousands of SMSF trustees used this as an opportunity to invest in both residential and commercial property. However, loans were restricted to a limited recourse borrowing arrangement or LRBA and this practice continued for a decade.

Two issues arose in that time, and the first was concern by the Reserve Bank of Australia about the number of SMSFs going into significant debt to acquire property. The second came from the ATO (Australian Taxation Office) and the possibility that some taxpayers were dodging superannuation caps. By using LRBAs, they could place extra money into their super funds where they would be taxed at concessional rates.

As a result, the ATO issued new guidelines to SMSFs choosing to use related-party loans rather than bank finance to purchase property. Trustees had until 31 January 2017 to review their fund arrangements and it is possible that some trustees have not yet made the necessary arrangements to ensure compliance with the new rules.

Trustees must understand that any loan terms they have accepted to buy property must be “an arms-length commercial arrangement”. In some cases, LRBAs have been established with related-party lenders on terms that would not typically be accepted as a commercial arrangement. Usually these terms are more generous than bank finance with lower interest rates, excessively long loan terms and no requirement to make regular payments.

While this may seem a good deal at the time, it puts at risk the overriding purpose of establishing an SMSF, which is to provide retirement income for the fund members. There are key issues with some LRBAs that put this purpose at risk such as:

  • The possibility that there will be insufficient income and contributions into the SMSF to service the loan;
  • How the members would pay out the loan when they have retired and are no longer making contributions to the fund; and
  • Whether the property or properties will be sufficiently liquid or earning enough income to pay pensions to members in retirement.

SMSF trustees who did not use bank finance for their property purchases and who have not sought information about the new rules themselves or by consulting SMSF service providers such as SMSF Assure should act immediately. It could be that they need to wind up the LRBA or refinance their loans on commercial terms, and notify the ATO that this has been done.

These are major changes to previously accepted loan arrangements that will have financial consequences for members if they are not addressed. The income from these properties can be taxed at the highest rate of 47% instead of the 15% concessional rate. If you are a fund trustee and have not addressed this issue yet, get professional advice on what steps to take, and act now.

Setting Up Your Own SMSF? With Rewards Come Risks

Setting up your own SMSF (self-managed superannuation fund) is a bit like becoming a parent. Everyone thinks it is a great idea, many of us become one at some stage, but we don’t know how it feels until it happens. We look for advice so we can be good parents, but at the beginning, we can only imagine the joys and the challenges before us.

How is that like setting up an SMSF? Well, everyone thinks it is a great idea; many Australians have one but until it is up and running, the trustees can only guess at the responsibility and the time involved to get the best result for their retirement. Will the challenges outweigh the joys? Can investment decisions be made while keeping the administration up to date?

Initially, the idea of taking the reins yourself may seem exciting. You may be getting statements from your current superannuation fund and questioning its fees and performance. It is not such a great leap from wondering what is happening to thinking you could do better yourself, but what are the risks if you go your own way?

Lack of time and administration skills are the two obvious risks for trustees of an SMSF. However, there are other, lesser known risks to be aware of. For example, if the SMSF suffers a loss due to fraud or theft in the underlying assets, the members are not eligible for compensation under the superannuation laws. They also do not have access to the Superannuation Complaints Tribunal if there is a disagreement between fund members. There are other avenues open, such as legal action, but these are at the members’ expense.

Limited access to life insurance is another risk worth considering. In a large superannuation fund, life and disability insurance is easy to access, with default levels of cover often given without a medical assessment. With thousands of members, these funds negotiate reduced premiums but for an SMSF, insurance may be difficult to obtain and more expensive.

Also, most people are usually not considering an exit strategy at the beginning, but there are several trigger events that may need one. For example, a trustee may become a disqualified person through bankruptcy. Loss of capacity, losing residency status and the death of a member are other scenarios that could trigger the wind-up of the SMSF.

To ease the time constraints and administration tasks, most SMSF trustees work with experienced SMSF administrators similar to SMSF Assure who are up-to-date with the relevant legislation. They assist fund trustees with lodging returns, compliance issues and other administrative tasks, and generally lighten the load.

As any sole parent will tell you, the biggest challenge they have is being solely responsible for every aspect of their child’s wellbeing. This is not something they can hand to someone else. An SMSF trustee, however, can access the technical expertise of a dedicated and experienced superannuation team.

While the trustees are still solely responsible for the performance of their fund, just being able to talk things through with someone who knows the industry well makes running their own fund less of a burden. Trustees who know the risks as well as the rewards at the start are making a genuinely informed decision.