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.

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.

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.

ARE YOU STRUGGLING WITH YOUR SMSF REPORTING REQUIREMENTS?

One of the main reasons for the popularity of SMSFs (self-managed superannuation funds) is that the fund members can make their own investment decisions as opposed to putting their money into retail funds and having no such control. Of course, this requires the trustees, who are also the members, to have a reasonable understanding of investment options and strategies.

The purpose of the fund is to accumulate savings for retirement, so it is a big responsibility and a major financial decision requiring specific skills and the time to manage the fund properly. It also involves a high level of reporting to the ATO (Australian Taxation Office) and this reporting must be done in an approved manner and within set timelines.

Along with the responsibility of making investment decisions comes the requirement to prepare regular reports, which is also time consuming. These reports must be accurate and lodged on time or attract a penalty from the ATO for non-compliance.

SMSFs must be audited every year and once the audit is finalised, the trustee must lodge an annual return with the ATO. This return is more than just a tax return. It is also used to report on a range of other matters such as superannuation regulatory information and member contributions.

While the tax return part of this reporting is a regular occurrence, the other matters are just some of the special reports that a trustee will be expected to complete at some point in the life of their SMSF. A recent addition that commenced on 1 July 2018 is the event-based reporting framework (EBR) for SMSFs.

This framework is used by the ATO to administer the transfer balance cap and is required to be completed by a trustee when their first member starts a retirement phase income stream. The actual report is called a Transfer Balance Account Report and it is separate from the annual return. The ATO uses this report to track an individual’s balance for both their transfer balance cap and total superannuation balance.

There are a number of events that affect a member’s transfer balance and all or any of these events must be reported to the ATO. There are specific instructions to follow regarding when and how this reporting must be done and timeframes for reporting are determined by the total superannuation balances of the SMSF members.

As the level of reporting required by the ATO becomes more complex, many SMSF trustees are looking for ways to improve their business reports to ensure they are accurate and lodged when they are required and in the required format. Trustees are also realising that as the reporting requirements increase, they have less time for managing their investment portfolios.

This has led to an increase in demand for the assistance of companies such as SMSF Assure. These companies are specialists in SMSF administration and are often operated by qualified accountants and other staff with the experience and skills to help trustees manage their administration and reporting responsibilities.

If you are a trustee struggling with your reporting, seeking the expertise of one of these companies is the best and quickest way to improve your business reports and keep your fund compliant with ATO requirements and regulations.