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Jordan George
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+ About Jordan George

About Jordan George

Jordan George is Senior Manager Technical & Policy at the SMSF Association. Jordan is a key member of the Association's technical team. He is responsible for managing the associations submissions to government and regulators on new policy and legislative measures, and is a main contributor to the Associations advocacy and technical work.

Prior to joining the SMSF Association, Jordan spent four years in Canberra at the Australian Treasury where he worked on business tax policy issues, primarily on capital gains tax and also small business and tax administration issues. As such, Jordan brings to the Association first-hand experience in developing tax policy and legislation, and advising government and Ministers on budget, policy, and regulatory issues.

Jordan has a Masters of Taxation at the University of New South Wales, an Honours degree in Economics and a Law degree from Adelaide University, along with a Graduate Diploma in Legal Practice from the Australian National University.

What could an ALP Government mean for your SMSF?

Thursday, January 10, 2019

2018 was a tumultuous year for SMSFs with volatile investment markets and an even more volatile political environment giving SMSFs plenty to think about. However, as we move into the festive season, this is the ideal time to review your SMSF plan and consider what awaits in 2019. Taking some time to review and plan can help ensure your SMSF is on track to achieve your superannuation goals.

The key issue that will occupy the mind of most SMSF trustees is the imminent 2019 Federal election, expected in May, and the possible change to a Labor Government. We already know that the Australian Labor Party has announced significant policies impacting SMSFs.

The most substantial planned policy change is Labor’s proposal to end the refundability of franking credits. SMSFs that receive franking credits for the tax paid by Australian companies will often receive a refund of the tax paid at the corporate level.

This has the biggest benefit for SMSFs in retirement phase, with franking credit refunds playing an important role in providing retirement income for many retirees. The SMSF Association has estimated that the Labor policy would likely result in a 10 per cent reduction in retirement income for most SMSF members in retirement phase.

Under Labor’s proposed policy, SMSFs with a member who was receiving the age pension on 28 March 2018 will benefit from Labor’s “Pensioner Guarantee” meaning that they still receive a refund for franking credits received by the fund. Those who begin to receive the age pension after this date will not be eligible for this treatment under the current proposal.

So, if you are concerned about this policy’s potential impact on your SMSF and want to prepare for it, what can you do now?

First, consider diversifying asset holdings away from Australian shares that have attracted fully franked dividends to other income yielding assets. SMSFs may want to be shifting their asset allocation towards other income yielding assets such as international shares, property trusts and fixed interest investments. However, it is important to remember that franking credit refunds are only form part of the total return from Australian shares. Also, Australian shares tend yield higher dividend payments than intentional shares, still making them appealing to SMSFs looking for income to fund pensions.

Adding adult children to an SMSF to increase the fund’s taxable income to offset franking credits is an option SMSF trustees could also consider.  However, this comes with the added complexity of having members with vastly different investment horizons and goals in the same SMSF, requiring careful management.

SMSF trustees could also consider shifting their Australian shares out of their SMSF to be held in a ‘member direct’ option in an APRA-regulated fund.  Most large superannuation funds will still be able to pass on the whole value of franking credits on to members in retirement phase as they are likely to have enough taxable income to use the credits against.

In addition to changes to franking credits, Labor has also proposed changes to superannuation contributions and limited recourse borrowing arrangements (LRBAs).

Labor has signaled if they are elected, they will cut the limit for post-tax contributions to superannuation from $100,000 to $75,000, repeal the ability to carry forward unused concessional contribution cap space and make “catch-up” contributions, and, reverse recent changes that allow all taxpayers to contribute to superannuation and claim a tax deduction for doing so (personal deductible contributions). They will also lower the income threshold for the extra 15 per cent tax high-income earners pay on concessional contributions from $250,000 to $200,000.

Consequently, SMSF members may want to consider strategies to make the most of the current contribution rules if their financial circumstances allow them to.  The current rules allow for more flexibility and scope to contribute to their SMSF than what may exist under Labor after the election.

In addition, with Labor proposing to ban new LRBAs if elected, SMSF trustees who believe that a geared investment strategy is right for their fund should considered pursuing this before the next election. This should always be done with specialist SMSF advice and with a long-term investment strategy in mind.

In addition to considering potential impacts on your SMSF from the upcoming election, a break over Christmas is a practical time to review your investment strategy and whether your current asset holdings are in line with your long-term goals. Recent SMSF Association research has shown that around 65% of SMSFs have not adjusted their asset allocation significantly over the past 12 months, meaning that many SMSFs may be coasting when they should be actively reviewing and rebalancing investment allocations.

While recent market falls and volatility naturally lend a shorter-term focus to investment considerations, it is important to remember that investing for retirement is a long-term proposition. Estate planning and SMSF exit strategies should be looked at too.

Finally, reviewing compliance obligations at this time of the year is a valuable exercise for SMSFs. An SMSF that is paying a pension to its members should check whether it is on track to make its annual minimum pension payments by the end of the 2018-19 financial year and whether it is meeting its pension reporting obligations.

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Alternative ways to make money in a low-rate environment

Wednesday, May 18, 2016

by Jordan George

Post the GFC, there have been few periods in the history of the capital markets where investment markets have been so volatile. In this environment, and especially when coupled with a low interest rate regime, it has placed a premium on yield and capital preservation. SMSF trustees have not abandoned capital gain as an investment goal, but it’s not to the extent it was in those heady years before 2008.

What this new investment paradigm has meant for many trustees is a search for new sources of yield at a time of historically low interest rates. Since the GFC, blue-chip, fully franked shares on the ASX (think the big four banks and Telstra) have largely met this objective, but as the sharp drop in bank share prices earlier this year reminded trustees, these yields can go hand in glove with a capital loss. And in the case of the big miners lower dividends. For trustees, especially for those in the retirement phase, this can cause sleepless nights if the asset allocation is heavily weighted in this direction.

So trustees, often in partnership with their specialist SMSF advisors, are responding. Like an ocean liner, the shift in investment direction is slow; but it is happening.

What is occurring is a thirst for alternative investments that are defensive in nature while offering a yield that’s better than the cash rate. In the past, the obvious choice would have been fixed interest. Leaving aside the fact trustees have traditionally shied away from this asset class (a pity considering the bull market it enjoyed post GFC as interest rates fell and bond prices rose), the reality is that interest rates are unlikely to fall further, with any movement more likely to be on the upside.

Alternative assets

So what alternative assets have appeal? Property has an obvious attraction, particularly if it’s unlisted and non-residential. Despite all the hype around SMSFs and residential property, trustees have a far larger percentage of their property assets in commercial/industrial/retail holdings. At 31 December 2015, non-residential property investment stood at $75 billion compared with $24 billion for residential. Although unlisted property has the disadvantage of lacking liquidity (many fund managers want the capital for a set period), it does offer yields in the high single digits and relative capital security compared with equities. Trustees also have bad memories of REITs post the GFC.

Over the past 15 years, the average compound annual return and volatility (standard deviation) for commercial property has been 10.4% with a volatility level (standard deviation) of 5.5%. By contrast, the numbers for Australian equities over the same period show an 8% annual return with an 18.1% volatility.

Trustees have noted the lower volatility and higher returns and acted accordingly. ATO figures show investment in non-residential property rose from $48 billion at 31 December 2011 to $75 billion at 31 December 2015 – a 54% increase. Admittedly, the total SMSF asset pool rose 49% over the same four-year period, but what that number conceals is the increase in non-residential investment in the past year to 31 December, up $9 billion or 14%.

Looking overseas

Trustees are also looking increasingly to investments that diversify their risk geographically as they understand that overseas assets create a more balanced portfolio.

The early entry point to these investments was via ETFs and managed funds, but investors are now seeking advice to do this individually. It’s only for a minority, and typically requires specialist advice, but it’s a growing minority.

Infrastructure

The asset class that would offer yield and relative capital security, but is largely out of reach of the SMSF trustee, is infrastructure. SMSFs are effectively excluded from this asset class due to regulatory and economy-of-scale impediments, despite the fact there is an obvious relationship between SMSF trustees with long-term investment horizons and lower risk infrastructure assets.

But the investment reality is that SMSFs find it extremely difficult to invest directly in infrastructure, due to the high dollar threshold – typically $A100 ($US80 million) to $A500 million ($US400 million), illiquidity and the high entry and ongoing management fees these investments often attract. A solution needs to be found to give trustees access to these assets.

Finally, for trustees still in the accumulation phase, there is often the option of paying down the mortgage instead of topping up their SMSF either pre or after tax. There are several factors to consider, such as a trustee's age, likely rate of return of any investment versus the interest rate, mortgage balance and financial commitments. It’s not a simple decision, so trustees should get advice.

No one doubts the challenges low interest rates and heightened volatility pose for SMSF trustees – or the APRA-regulated funds for that matter. What’s encouraging is that on the available evidence they are rising to the challenge. Just as SMSFs emerged from the GFC in far better shape than many believed possible, now they are adapting to a difficult investment environment with a sure touch that’s still surprising many.

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