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.

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.

Protect Your SMSF Assets Against Fraud

According to the Australian Taxation Office (ATO), self managed superannuation funds (SMSFs) held $700 billion in assets as at 30 June 2017. This sector of the superannuation industry has grown steadily and where once the number of funds was counted in the thousands, the ATO advises that there are now more than one million SMSFs, holding almost 30% of the asset value of the $2.2 trillion superannuation sector.

This growth and popularity of SMSFs is fuelled by the desire of many investors to have more control over where their superannuation contributions are invested. However, it may prove to be a double-edged sword if SMSF trustees do not heed the warnings from industry experts to be wary of becoming victims of fraud.

ATO figures show that in the last 10 years, $30 billion has been lost by SMSF trustees and members through fraud and financial misconduct. However, one superannuation research firm suggests that the true losses could be more in the range of $100 billion when the loss of investment returns is factored in. This is very concerning, and fund trustees should be looking at these figures with alarm.

A major issue for SMSF trustees is that there is no compensation scheme available to them should they fall victim to bad advice or deliberate fraud. APRA, the Australian Prudential Regulation Authority, oversees the safeguards in place to protect the assets of regulated funds, which include not-for-profit industry funds and for-profit retail funds.

These trustees can apply to the federal government for compensation on behalf of the members if money is lost through theft or fraud. This compensation scheme is funded by an industry levy on large funds, but no such scheme exists to benefit SMSF trustees and members.

The few avenues open to SMSF trustees come with restrictions. The Financial Ombudsman Service will accept complaints from SMSF trustees who have received bad financial advice, and while the service is free, there are monetary caps in place. Financial planners are also required to have professional indemnity insurance, but this could be a long road for an SMSF trustee as there are exclusions and caps and it would likely require a lengthy legal process with no certainty of success.

SMSF trustees must exercise care when choosing who they approach for financial advice. The integrity and reputation of the advisors will be just as important as their track record, but there are a few things the trustees can do to reduce the risk. One issue they should put to rest first is to secure the services of a reliable company like SMSF Assure to look after the administration and compliance of their fund, so they can concentrate on protecting the investment side.

A good place to start is to ignore over-inflated claims about likely returns and remember that if something is too good to be true, leave it alone. Beware of high pressure sales pitches, and if a scheme is too complicated to understand, give it a miss. Protect yourself by investing in a range of asset classes, and regularly monitor them to check their performance. Lastly, only work with advisors who disclose incentives that they receive from third parties and who will advise conflicts of interest when they make recommendations.