The Experts

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Sinclair Taylor
SMSF Expert
+ About Sinclair Taylor

Sinclair Taylor is Westpac’s Head of Self Managed Super Funds customer strategy, responsible for leading Westpac's growth in this highly affluent market.  He also leads Westpac's Many Rivers microfinance program, providing unsecured micro loans to disadvantaged Australians wishing to start an enterprise.  With a background in law and banking, Sinclair has been a Senior Relationship Manager in Westpac's Commercial Bank and Corporate Business Group, managing a range of business customers, and has spent time working in Westpac's in-house legal team. Prior to joining Westpac, Sinclair ran a successful entrepreneurial SME business.

SMSF: Beauty of buying what you already own

Thursday, November 14, 2013

by Sinclair Taylor

If you’re a business owner with an SMSF, you may have heard of the idea of your fund borrowing money to buy the commercial property you already own. It’s not as crazy as it sounds, and it’s legal! Despite much of the recent media focus being on SMSF’s investing in residential property, the actual fact is that the dollar value of SMSF investments into commercial property is three times higher. This huge disparity is largely driven by superannuation rules that permit related party transactions to occur with ‘business real property’, more so than investor belief that commercial property is a better longer term investment than residential property. 

Still reading? Good, because having your SMSF purchase a commercial property that you may own personally, or via a family company or trust, can unlock cash tied up in your business premises. Although this can be a financially appealing, as with everything related to SMSFs, it requires careful planning and good quality advice.

Let me explain

  • If your SMSF purchases your commercial property the money it borrows is paid to you, or more specifically, the legal owner of property, and can be reinvested in your business.    
  • If in 10 years you sold your commercial property outside the SMSF and took advantage of small business CGT concessions, the sale may still leave you with a CGT liability (based on current tax laws).
  • Whereas, if your SMSF sold the property when you are pension phase, there is no CGT payable (based on current tax laws). Also, while you are in pension phase, the fund also pays no tax on the rental income earned from the property.

 
Of course, if you do decide to sell the property to your SMSF you will trigger a CGT event now (if you’ve purchased the property since September 1985), however you may be able to take advantage of small business CGT concessions, which could reduce the impact of CGT. Your SMSF might also need to pay stamp duty on the purchase price, which must be at fair market value.  

Most business owners think of their own commercial property as their superannuation, which the government’s preferential super rules applying to the acquisition of related party ‘business real property’ acknowledge. What I’m suggesting above aims to make the property ownership structure much more tax effective, over the long term, by getting this asset into a lower tax environment.

How does it work?

Your SMSF must hold a significant amount of cash as it will need to make a partial payment on the business premises (generally at least 35% of the property’s value), then borrow the remaining funds to pay the balance and costs. The loan itself must be a Limited Recourse Borrowing Arrangement, which essentially means that in the event of a default the lender only has recourse to the property, not to other SMSF assets.

Once the purchase is made the property is held in trust for the SMSF (via a separate property trustee – that needs to be established) and your business pays rent at market value. All rental income from the investment is received by the SMSF, to use towards repaying the loan over an agreed period. Once that loan is paid off, legal ownership of the property may be transferred from the property trustee, to your SMSF.

What’s in it for me?

For a business owner, apart from the longer-term potential tax and superannuation benefits (and asset protection benefits), a significant amount of cash is unlocked for use by the business. The SMSF’s funds are also not completely drained by the acquisition of the property as borrowed funds have been utilised, meaning the SMSF’s remaining assets can be diversified in other asset classes.  Adequate diversification is important, with lack of diversification in smaller SMSF being a key focus of much ASIC’s commentary on the SMSF sector.

Within the SMSF, any interest expenses may be claimed as a tax deduction, potentially reducing the fund’s tax liability. While you’re contributing money to your super, any income after expenses, and any capital gain on disposal, may be taxed at a lower rate (between 10% and15%) in the SMSF environment, and tax-free during pension phase. And of course the fund can use income from the investment to pay off the loan more quickly.

What else should I consider?

Having your SMSF own your business premises perpetuates an existing investment concentration risk, as the SMSF and your business are related parties.  However, this risk needs to be consciously re-considered within the context of your fund’s written investment strategy. Does it represent an acceptable risk to all fund members?  What would happen if the business failed unexpectedly and could no longer pay rent? Could the fund meet loan repayments without rental income for several months, or minimum pension payments, if members are in pension phase? 

If you’re going to take on a loan inside the SMSF, the fund should consider obtaining life insurance for the benefit of fund members, to provide a timely injection of cash into the fund if a member dies.  The insurance proceeds will provide additional liquidity to assist the fund to extinguish its property loan, or provide a lump sum payment to the member’s beneficiary, avoiding the need for the property to be sold in a hurry.  

If you’re considering going down this route, you must:

  • Seek an independent valuation of the property to come to a fair market value for the purchase price and lease terms – all dealings must be on an arms-length basis,
  • Consult with your financial adviser, accountant and lawyer to calculate the tax and stamp duty implications of this strategy, and ensure the transaction is documented correctly. There are stiff penalties for non-compliance,
  • Check that your SMSF’s trust deed allows the fund to borrow, and
  • Make sure the purchase fits in with your fund’s investment strategy, and that you’ve adequately considered the concentration risk this strategy may create.


This article provides an overview or summary and it shouldn’t be considered a comprehensive statement on any mater or relied upon as such. The information in this article does not take into account your objectives, financial situation or needs and so you should consider its appropriateness having regard to these factors before acting on it and obtain financial advice. Any taxation position described in this article is a general statement and should only be used as a guide. It does not constitute tax advice and is based on current tax laws and our interpretation. Your individual situation may differ and you should seek independent professional tax advice. The rules associated with the super and tax regimes are complex and subject to change and the opportunities and effects will differ depending on your personal circumstances. 

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Take the good with the bad? No, thanks!

Thursday, September 19, 2013

by Sinclair Taylor

A fascinating research study was conducted recently by ASIC and it returned some disturbing results. Within this column, and within broader Westpac SMSF marketing and communications messages, I have always stressed the absolute necessity of getting good advice around the establishment and ongoing management of your SMSF. But it seems some trustees, assisted by advisers who should know better, have not been doing all they can to fully understand the challenges, as well as the benefits, of an SMSF.

ASIC is the regulator of the ‘gatekeepers’ of the SMSF sector – the advice providers, SMSF auditors and providers of financial products and services to SMSFs. ASIC’s SMSF taskforce looking into the quality of advice within the SMSF sector recently reviewed 100 investor files sourced from 18 financial planning and accounting businesses, targeted by ASIC’s surveillance.  The files selected related to the establishment of an SMSF, for consumers in higher-risk categories - people with lower super balances (less than $150,000), and with one or more of the following attributes: older members, members with low income, borrowings inside the SMSF, or investments in a single asset class (eg. real property). The fact that such high-risk SMSFs even exist is cause for concern.

Of the files reviewed, 28.4 per cent were found to have been the subject of ‘poor advice’, 70.3 per cent were offered ‘adequate advice’ and just 1.3 per cent had received what ASIC deemed, ‘good advice’.  Hardly a glowing result.

The good, the bad and the ugly

If you’re considering establishing an SMSF, or are already a trustee of an SMSF, these findings could be valuable for you.

ASIC’s SMSF taskforce defined ‘poor’ advice as having the following characteristics:

  • Did not meet the investor’s financial needs and objectives
  • The investment strategy was inappropriate
  • Use of gearing inside the SMSF was inappropriate for the investor
  • Investor demonstrated low financial literacy and was incapable of running an SMSF
  • Original super fund balance was too low and not suitable for an SMSF
  • Insurance advice was inappropriate


‘Good’ advice, however, looked more like this:

  • Considers all of the investor’s relevant information
  • Pays specific attention to the investor’s financial needs and objectives
  • Includes well considered personal insurance recommendations
  • Clearly explains the scope of the advice
  • Is supported by a logical and clear Statement of Advice


Safe harbour steps

If you’re keen for your SMSF to be a financial success (and I’d be perplexed if you were not) then before you even establish the fund you ought to go through a process that educates you fully on all aspects of such a venture.

Within an SMSF all legal and financial responsibility lies with you. If something goes wrong there is little scope to blame your adviser or your accountant or your lawyer – unfortunately it’s all on you. 

So be sure to first speak with somebody that can educate you responsibly and in great detail around:

  • The roles and obligations of SMSF trustees, including penalties for contravention of regulations
  • The suitability of an SMSF structure
  • Risks involved in an SMSF structure
  • The right investment strategy
  • What’s involved in switching from your current fund into an SMSF, including changes in insurance options
  • Alternatives to an SMSF structure


Importantly, make sure your adviser specialises in SMSF.  All of the major accounting and financial planning bodies are evolving their professional education and support for advisers that specialise in SMSF, as does SPAA, the Self Managed Super Funds Professionals Association.  If your adviser cannot thoroughly brief you on all of these areas, walk away and find somebody else. Your future, quite literally, depends on it.

I have said it before and in the future you will hear me say it again and again, an SMSF is a powerful investment structure for the right type of investor, but it is not for everybody.

Don’t put your retirement funds into a structure you don’t fully understand. It’s your retirement and your family’s future. Demand expert advice.

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What to consider when starting a pension in your SMSF

Wednesday, August 14, 2013

Sinclair Taylor

Given the sole purpose of superannuation is to provide a retirement benefit to members, if you’re over the age of 55 then you may be thinking of accessing your super this year via a lump sum payment (in the form of cash, shares or property) or starting cash-based pension payments from your SMSF. However, before you start paying benefits there are a number of things SMSF Trustees need to consider and do. 

Firstly you need to ensure that you meet a ‘condition of release’, in order for your fund to start paying you superannuation benefits. A ‘condition of release’ can be met through age (55+), death, incapacity, financial hardship, or retirement from the workforce. Importantly, if you are not retired and are under 60 years of age, any super benefits paid to you form part of your taxable income (albeit at a concessional rate), whereas if you are over 60 years of age, super benefits are tax free, even if you’re still working.    

The Trustee(s) then need to decide what type of pension you are going to be paying the member, there are two different types:

  • Account based pension (e.g. retirement pension)
  • Transition to retirement (TTR) pension (e.g. pre-retirement pension)

An account based pension is the most common type of pension. The rules of an account based pension include:

  • You must have reached your preservation age (55+, dependent on your date of birth) and be retired, or meet another condition of release
  • A minimum pension payment must be paid each year.
  • The minimum pension payments change based on your age.
  • You have flexibility as to how often you pay the pension payment, as well as lump sums, subject to meeting the minimum payment each financial year.
  • The pension can be commuted to a lump sum, stopped and started as required.
  • The capital value of the pension cannot be added with further contributions or rollovers), unless the pension is stopped and repurchased.
  • You can nominate a ‘reversionary beneficiary’, such as a spouse, to receive your pension upon your death.

A Transition to retirement (TTR) pension is a more restrictive form of an account based pension that allows you to draw on an income stream from your SMSF if you have reached your preservation age and are still working and therefore don't meet a condition of release to start a regular account based pension.

As the name suggests, this type of pension was introduced to assist members who are in a 'transition phase' to retirement, where you may still be doing some work (say part time or even full time) but need a top up of income drawn from your SMSF assets. However the rules are slightly different:

  • A minimum pension payment must be paid each year. The minimum amounts change based on your age. 
  • No more than 10% of the member’s account balance can be paid each year.
  • You cannot convert your TTR to a lump sum, as such, the fund’s underlying capital cannot be accessed in a lump sum until you retire or satisfy some other condition of release (such as reaching the age of 65 years).
  • Members must have reached their preservation age.
  • Further contributions to super can be made into a separate member accumulation account whilst receiving a TTR pension, however contribution caps still apply. 


With both the account based pension and the TTR pension, the SMSF converts your current accumulation account into a pension account and begins to pay you your pension entitlements as requested. The tax rate applicable to the income earned from these SMSF assets drops to 0 per cent once the pension commences, however the Government recently announced that they intend legislating a tax of 15 per cent on pension income over $100,000, effective 1 July 2014.

Other important questions you need to answer and possibly action before starting any pension payments for members in your SMSF include:

  • Is the member eligible to start a pension?
  • Does the fund’s current Trust Deed allow for the payment of pensions, including a TTR pension?
  • Is the member’s request to start a pension in writing and indicates the intended start date, level of income required and the frequency of pension payments?
  • Is the member under age 60? If yes then the SMSF Trustees must register for PAYG withholding tax.
  • Do you have a current market valuation for the assets that will support the pension payments?
  • Have you calculated the tax free and taxable components of the member’s account balance?
  • Does your investment strategy support the payment of an income stream? Often the fund will need to hold more cash liquidity to support the pension payments required.
  • Has the member been notified in writing by the SMSF Trustees of the minimum payment requirements, any tax free amount and if the member is under age 60 then the withholding tax amount from each pension payment?
  • If you have members who are still in accumulation phase, and other members in pension phase, are you able to segregate the fund’s assets or get an actuary to provide the fund an actuarial certificate each year to identify the tax-exempt pension income?


Payment of a pension from an SMSF requires careful consideration, good advice and good record-keeping to ensure your pension complies with the current superannuation legislation. If you’re unsure how to get started, seek professional assistance.

The ATO sets annual minimum pension payments each financial year. The table below shows the percentage of the account balance that must be paid as a pension for the year ending 30 June 2014.

Pension minimum payment standards
Under 65 - 4 per cent
65-74 - 5 per cent
75-79 - 6 per cent
80-84 - 7 per cent
85-89 - 9 per cent
90-94 - 11 per cent
95 and older - 14 per cent

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

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SMSFs: avoid pitfalls to avoid penalties

Wednesday, June 12, 2013

When your annual SMSF audit is conducted the independent auditor has a legal obligation to inform the Australian Tax Office (ATO) and the SMSF’s trustee(s) of any contraventions which may result in a very stiff penalty. For the trustee there is often nobody else to blame for compliance issues - not their accountant, financial advisor or specialist administrator. Ultimately, the compliance responsibility rests with the SMSF trustee, regardless of any delegation of duties to third parties. SMSF’s are a powerful investment vehicle, so managing an SMSF requires knowledge and skill if it’s to be driven safely.

Each year the ATO releases a report outlining the top compliance issues made by SMSF trustees. Such a list is vital reading if a trustee is going to know what to look out for in order to recognise the dangers that have caught others out. Here are the biggest no-no’s from the list:

  1. The biggest breach of all is the provision of loans or financial assistance to the fund’s members. These account for a massive 20.9 per cent of contraventions, since contravention reporting began in 2005, up until the financial year ending June 30, 2012. No matter how tempting your retirement savings happen to be, an SMSF can never loan money to one of its members.
  2. Making up 18.3 per cent of breaches is when the fund owns or invests too much in the way of ‘in-house assets’. Such assets (or investments) – for example, at stake in your own business - cannot make up more than 5 per cent of the fund’s value. It’s important to remember that if the value of other assets held in the SMSF fall, or if the value of the in-house assets rises, a previously low percentage of in-house assets could now be over the 5 per cent limit. If that is the case you are in breach of the requirements of the SIS (Superannuation Industry Supervision) legislation.
  3. When the SMSF assets are not clearly separated from personal assets and/or business assets then alarm bells will ring at the ATO, as they did for 12.9 per cent of contraventions in the 11/12 financial year. So don’t muddy the waters by blurring the lines between personal/business and SMSF ownership - make sure SMSF assets are clearly identified.
  4. The ATO refers to the next common mistake as ‘administrative contraventions’ but they really mean ‘shoddy paperwork’.  These account for 12.0 per cent of contraventions. An SMSF does not manage itself, it requires the trustee’s time and attention and this must be reflected in flawless paperwork. Ask a specialist to look after this side of things if that helps - perhaps your accountant. But remember that in the eyes of the ATO the compliance responsibility of the trustee alone.
  5. SMSFs have several compulsory operating standards, such as an independent annual audit, and more recently, a regular review of the fund’s investment strategy. The ATO says 8.3 per cent of contraventions were around such standards not being met. Stay up to date with the changes by seeking professional advice - never assume that your knowledge from last year will keep you in the clear this time around.


Other big issues included:

  • SMSF investments failing the ‘sole purpose test’, meaning members are using their fund to profit now rather than at retirement
  • not investing at arm’s length, or not paying market price for specific assets
  • the fund acquiring prohibited assets from related parties, such as a residential property owned outside of superannuation.


Depending on the nature and number of contraventions, severe penalties can apply. The most severe of which is sometimes referred to as the ‘nuclear strike option’ in which the ATO taxes the entire fund 46.5c in the dollar - a very bad result, indeed. They may also de-register the fund, for non-compliance. Subject to the passing of new legislation currently before parliament, the ATO’s enforcement powers are about to be increased further, with a range of new civil and criminal penalty powers being introduced on 1 July 2013.    

Use this time of year to make sure everything is in order within your SMSF to help guarantee yourself a happy new financial year.

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From cash to shares

Thursday, May 09, 2013

Westpac’s annual SMSF research study indicates that billions of dollars in self managed super fund value is set to move in new directions over the next 12 months.

Some of the most fascinating aspects of turbulent economic times are the measurable, regularly changing patterns in investor sentiment. The Westpac Self Managed Superannuation Report has tracked such sentiment over the last couple of years and the most recent study indicates a strong shift away from the perceived safety of cash, towards Australian shares.

The vast majority of self managed super fund (SMSF) members hold cash in their funds and it’s not just a minimal value. The average asset allocation to cash over the last 12 months accounted for 27 per cent of the fund’s value.

But as the RBA cash rate has continued to decrease over the past 12 months, cash has become a less attractive investment option for some SMSF members, despite its safety. This could explain why we are seeing 14.5 per cent of respondents intending to move out of cash in the next 12 months.

Most importantly, this percentage represents an average shift of $12.7 billion in asset allocation. Last year just 30 per cent of those looking to reduce their cash exposure said they planned to instead invest in direct Australian shares or equities. This year that number has shot up to 70 per cent. That will represent quite a shot in the arm for the Australian share market.

Reading the Signs

As financial institutions do their own research to gain as much insight into the market as possible, investors are also constantly looking for signs that might help them choose the right time to move out of the cash environment and towards higher risk assets.

SMSF members tell us they’re still wary of the impact of the GFC, the European debt crisis, concerns over Chinese and Australian economic growth and other geopolitical events. These issues cannot be underestimated in their impact on sentiment - even one-off, completely unpredictable events such as the recent, tragic Boston bombing have a real effect on markets and a further effect on sentiment. As a result, 44 per cent of respondents report that they are waiting for a more stable market before reducing cash investments.

Further Insight

What else do the numbers tell us? More people than ever are considering SMSFs, with an 8 per cent improvement from 54 per cent last year to 62 per cent this year, amongst those that are not currently members of an SMSF. That’s six in ten people outside the SMSF environment currently considering taking more direct control of their retirement investments.

SMSF members are also growing in investment confidence. Last year only 23 per cent said they believed they could make a better investment decision than managers of APRA funds but this year the number stands at 62 per cent.

Despite this growth in investor confidence, it’s worth noting that an SMSF is not right for everyone.  Prospective SMSF trustees need to know exactly what it is they are taking on when they start an SMSF, or become a member of an existing SMSF. It’s not a set-and-forget investment environment. SMSFs require constant attention from their fund member/s, including a regular review of the fund’s written investment strategy.  

In order to help SMSF trustees manage their personal finances and super, Westpac is now offering SMSF customers who open a DIY Super Solution bank account the option of having their own Relationship Manager – who specialises in SMSF – to help take the hassle out of running their SMSF plus their everyday banking. This means members are not entirely alone in managing their investments and have easy access to expertise and advice around investment options and super laws.

Self-reported positive investment returns within SMSFs have risen in the last 12 months from 59 per cent of survey respondents in 2012 to 74 per cent this year. That’s a good indication of investment savvy and market health. The booming SMSF sector itself must now ensure newcomers have the very best chances of achieving the same levels of success.

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EOFY tips for SMSFs

Friday, April 12, 2013

The end of financial year (EOFY) period doesn’t own exclusive rights over extra superannuation contributions. Contributions can be made at any time of the year as long as they don’t exceed your relevant contributions cap. So why is the EOFY period important for SMSF members?

First of all, it tends to be the main time of the year that we think about making tax effective investments and purchases. Secondly, it’s often not until we’re nearing EOFY that we actually know how much we can afford to contribute in terms of spare funds. And finally, timing is important when it comes to the ‘bring-forward rule’.

But first let’s discuss employer or personal deductible contributions. These types of contributions are classed as ‘concessional’ contributions. For those under the age of 50 the limit per year for concessional contributions has stayed static at $25,000 for the last few years. But, since their introduction, the concessional cap for those aged 50 years and over has been double that of the under-50s. This financial year, for the first time, the cap for those aged 50 years and over has been brought down to the same level as everybody else - $25,000.

So the risk for those 50 years and over of accidentally exceeding their concessional contributions cap has increased this year. Additional contributions that take you over the $25,000 level will be heavily taxed, including a penalty tax of 31.5 per cent in addition to the usual 15 per cent tax payable on the contribution. So be sure to seek advice from an expert this year before contributing too much into your SMSF.

What is the ‘bring-forward rule’?

Aside from concessional contributions, you can also contribute personal after-tax contributions – classed as non-concessional contributions. If you are eligible to contribute to super then you are allowed to make non-concessional contributions of up to $150,000 a year. If you are under the age of 65 years, you can also potentially utilise the “bring forward rule” which enables you to “bring forward” the next two years of non-concessional contributions by making up to $450,000 of contributions over three years. You just have to be less than 65 years of age at the beginning of the financial year in which you trigger the “bring forward” rule.

If you are under 65 and have more than $450,000 ready to contribute now (and assuming you haven’t already triggered the “bring forward” rule in the past period) then timing is everything. Consider contributing up to $150,000 before 30 June – making sure you don’t trigger the “bring forward” rule. And then wait until July when you can then utilise the “bring forward” and contribute up to $450,00.

Don’t forget that while your personal contributions are generally cash, you can also make an “in specie” transfer of assets such as ASX-listed shares or a commercial property, as long as the value does not exceed $450,000 at the time of contribution. Please seek advice on what can and cannot be transferred as the rules are strict in relation to “in-house assets”– for instance, residential property you own cannot be transferred.

Don’t forget that if you exceed your non-concessional contributions cap, you’ll have to pay 46.5 per cent tax on the excess amount AND any amount you exceed your concessional contributions cap by will be added to your non-concessional contributions.

While such major contributions may not be realistic for every superannuation account holder, statistics show us that SMSF members hold an average superannuation balance that is 17 times higher than those outside the SMSF environment. This indicates that SMSF members are more likely to have extra funds and non-superannuation investments to utilise to top up their super balance, and this is the time of year to think about it.

But get in early. If you want to maximise your contributions to super this financial year, whether concessional or not, make sure you make an appointment with your adviser and ensure your contributions are banked to your SMSF before 30 June.

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Get your asset allocation right

Wednesday, March 06, 2013

The wisdom of assigning asset allocation strategies depending on stage of life, risk profile and end goal is not unique to self managed super funds (SMSF). In fact, it’s universal across the investment spectrum. But within an SMSF the law states that you must review on a ‘regular’ (we say at least annual) basis your investment strategy, including your risk and diversification options. And to tell the truth, it’s a fairly responsible piece of legislation.

The basic questions to ask before developing an investment strategy are around what you’re hoping to achieve in retirement, how you’re planning to reach that end goal and how much risk you’re comfortable to carry along the way. Information from these topic areas should guide your decisions around which asset classes will fill various percentages within your portfolio.

Importantly, each member’s actual asset allocation mix must match what is written in your investment strategy document. This will be checked by your fund’s independent auditor on an annual basis.

What do I need to consider?

Superannuation legislation specifies that your SMSF investment strategy must document the consideration of five key points:

  1. Risk level. You must provide a risk and investment statement for each member of the SMSF.
  2. What is the role and level of diversification within your portfolio?
  3. How liquid or illiquid are your investments? How does this affect your end goal and the possible challenges along the way to achieving that goal?
  4. How solvent is your fund? You have to be sure you can meet the bills of the fund whenever they fall due.
  5. You must now also consider the role of insurance for members inside the fund.

Which asset classes are generally allowed?

The popular investment classes within Australian SMSFs right now are cash (31 per cent), shares (31 per cent) and commercial and residential property (15 per cent). Managed funds, foreign property and listed property trusts are also generally acceptable holdings.

You’ll need to seek professional advice on whether specific types of derivatives, warrants and other structured products are allowed, as well as collectables such as art works and precious metals.

Which asset classes could land you in hot water?

Perhaps most important in terms of asset class is knowledge of the investments generally not allowed within an SMSF. Remember the sole purpose of an SMSF is to provide retirement wealth for the member. With this in mind, some investments could be questioned within superannuation law. Breach this law and the financial penalties can be enormous.

Generally unacceptable investments (all contain exceptions, please check with your adviser/lawyer/accountant) include:

  • Investments that deliver benefits to the member now, rather than in retirement.
  • Loans to members or their relatives. - Non arm’s-length transactions. In other words, everything bought and rented etc via an SMSF must be paid for at true market value.
  • In-house assets, or investments in related parties of the fund (a member’s business, for instance) must not add up to more than 5% of the fund’s value.
  • Assets purchased from a related party, unless those assets are listed shares, business real property or managed funds.

Asset allocation is an important and sometimes complicated issue. We would always recommend it is planned in consultation with your advisor, lawyer and accountant.

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Always look on the bright side of life ... insurance

Wednesday, February 06, 2013

When new regulations are introduced to a rapidly expanding sector, as they are in the world of self-managed super funds, they are often met with a groan as they spell change, new processes and increased management time. But of course the regulations are intended to protect one’s future financial wealth and once in a while they offer an opportunity to increase that wealth.

So it was with the announcement of new regulations in August 2012 that outlined the fact that SMSF trustees are now required to ‘consider’ holding insurance cover for fund members. I mentioned this in my August 2012 post. The Cooper Review of Australia’s superannuation system found that as few as 13 per cent of SMSFs hold a contract of insurance for the fund’s members. The new regulations do not mandate that members of SMSFs are insured through their fund, but they do create a legal obligation on the SMSF trustee to document the regular (most likely annual) decisions around insurance for members. 

It’s a very reasonable request, and one that should be taken very seriously. After all, there are many potential financial benefits of insurance held within an SMSF.

Follow Regulations, Save Tax


Generally SMSFs can hold Term Life insurance, Total and Permanent Disablement (TPD) insurance and some Income Protection cover. If these are held within the SMSF then the fund actually owns the policies and the premiums must be paid from its funds. For many this will spell tax benefits. Let me explain.

Life and TPD policies, when owned and paid for personally, are generally not tax-deductible. But they generally are tax-deductible when paid from within an SMSF*. Tax paid by a properly set up fund can be reduced because an SMSF can claim tax deductions for taxes paid on super contributions that cover insurance premiums.

As an added bonus, to help pay the premiums and to make up for the fund dollars that go towards the insurances, a member may be eligible to make concessional, before-tax contributions into the SMSF. These could take the form of salary sacrifice or employer/personal deductible contributions, all of which can reduce the amount of tax a member may pay personally.

For a person on the highest tax rate who personally pays $2,000 annually in premiums for Term Life and TPD insurance (the actual before-tax income cost is $3,738), paying the premiums through a SMSF can represent a first-year personal tax saving of $1,738**. Plus, $2,000 of personal cash flow is freed up as it is now paid by the SMSF.

But Wait, There’s More

When a member of an SMSF dies, the fund has to pay a benefit to the deceased member’s beneficiaries. If much of the fund’s investments are tied up in large and relatively illiquid assets such as property, the asset may have to be transferred out of the fund or sold to make such a payment.

However, generally if the SMSF is structured in a particular way, then insurance proceeds received by the fund can provide the fund with the cash it needs to make this pay-out, keeping the major assets within the fund and avoiding a potential re-shuffle of investments. Similarly, in a well-structured fund the proceeds from Term Life insurance may be utilised to pay out loans on major assets, in the event of death or disability of a member.

Just remember to look into the regulations around in-fund insurance, including the fact that insurance claim proceeds will be paid to the SMSF and not to a member personally. To receive the insurance proceeds personally, the fund must also be satisfied that  the member meets a superannuation condition of release.

In-fund insurance is one more example of how a self-managed super fund hands the control over to you, the fund’s trustee.

* The exception to this rule is 'Own Occupation' TPD, which is only partially tax deductible within super.
** Assumes the policy is an 'Any Occupation' TPD policy and meets criteria to obtain 100 per cent deduction.

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SMSFs and Collectibles & Personal Use Assets

Tuesday, October 09, 2012

For a moment it looked like SMSFs were no longer going to be able to invest in art and other collectables after the Cooper Review recommended a ban on holding these assets. The report also suggested that those SMSFs who already owned them should have five years to remove them from their fund, or convert their fund to a Small APRA Fund. However, this was met with strong opposition with the result being that collectables and personal use assets are still allowed as an investment option although the Government has tightened up some of the requirements for SMSFs who invest in them. 

The tightened rules apply to collectables and personal use assets acquired by an SMSF after 1 July 2011, and transitional rules apply to collectables and personal use assets held by the fund prior to 1 July 2011, until 1 July 2016, upon which date the SMSF must comply. 

Collectables and personal-use assets are defined by the Superannuation Industry (Supervision) Act to be artwork, jewellery, antiques, artefacts, coins, medallions, bank notes, postage stamps or first day covers, rare folios, rare books, rare manuscripts, memorabilia, wine, spirits, motor vehicles, recreational boats and memberships of sporting or social clubs.

It’s worth noting, that whilst bullion coins are considered to be a collectable where they have a value in excess of face value and metal content, gold bars are not. As a commodity, bullion is looking increasingly attractive to SMSF trustees as awareness increases of the value of precious metals held as an investment asset.

Besides defining what is meant by artwork and collectables, the regulations also outline how SMSFs can own or use them. These include:

1. Not Stored in Private Residence

Collectables and personal use assets cannot be stored at the private residence of any related party of the SMSF, specifically at the primary residence of an individual. This does not refer to a location such as a place of business or specially constructed storage facility. However, whilst it is possible to store collectibles in the business premises of a related party, they cannot be placed on display.

2. Reasons for Storage in Writing

An SMSF must also document why they stored the investment at a particular location, with the documentation being kept on file for 10 years.

3. Maintain Insurance

SMSF trustees must also ensure the asset is insured in the name of the super fund and the insurance must be in place within seven days of the asset being purchased. Sensibly, this rule doesn’t apply to sporting or social club memberships.

4. Valuation by Independent Party

When a super fund sells any piece of artwork or collectible to a related party, the super fund must get an independent valuation of the item and the agreed sale price cannot be less than that valuation.

5. Not leased to a Related Party.

Collectables and personal use assets must not be leased to any related party of the SMSF. A related party of the SMSF includes the members of the SMSF, their relatives and any partnerships, partners of partnerships (if a member is in partnership with them) trusts and companies that members of the SMSF control.

The ATO has already warned that it will be strongly policing rules prohibiting the leasing of collectables to related parties and ensuring they are independently valued.

Besides the new rules you also need to consider whether a collectable or personal use asset conforms to your SMSFs written investment strategy, particularly given that collectables are generally illiquid. Consider the impact on your SMSF’s capacity to manage its cash flow requirements and provide timely access to liquidity to meet both its expenses and member benefit liabilities.

Westpac can help. To find out more visit www.westpac.com.au/smsf

This information is general in nature and provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such. It does not constitute a securities recommendation, financial or taxation advice. This information does not take into account your personal objectives, financial situation or needs and so you should consider its appropriateness having regard to these factors before acting on it.

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New Regulations for Self Managed Super Funds

Friday, August 31, 2012

Earlier this month, some new Superannuation Industry (Supervision) Regulations took effect following recommendations by the Cooper Review of Australia's superannuation system. One of these regulations focus on improving the level of governance of Self Managed Superannuation Funds (SMSFs), particularly in relation to how trustees manage and review their investments.  

So how will the other new regulations for SMSF affect you?

1. Regularly Review Investment Strategy

Under the new regulations, trustees need to ensure that they undertake regular reviews of their investment strategy. Whilst for many funds this will not have a huge impact, since their funds already undertake regular reviews (at least annually), it was imposed to ensure trustees remain continually updated on the investment environment and ensure their fund’s strategy reflects that environment.  The new regulations do not define regular, but depending on the size and complexity of the fund, trustee reviews will need to be taken, quarterly, twice a year or on an as needed basis.  Importantly, funds aren’t obligated to make any changes to their investment strategy, upon each review.

2. Value Assets at Market Values

Linked to regularly reviewing the fund’s investment strategy, is the need to have an up-to-date value of the fund’s assets to see how individual assets are performing. Previously, trustees have been able to choose to report the value of their assets at either market or historical values.  Trustees are now required to value the fund at ‘market value’ when preparing accounts and statements, commencing for the 2012 – 2013 income year. The requirement to value assets at ‘market value’ already exists for funds that have in-house assets, or are paying a pension, although the new regulations create a uniform approach to asset valuations across all SMSFs. Additionally, forcing the SMSF to be valued at market value rather than historical value should ensure SMSF members receive more accurate information of their fund’s financial position.

3. Separation of Assets

The separation of assets under the new regulations requires a clear distinction be maintained between a fund member’s personal or business assets and their fund’s assets. Failure to adequately separate assets is one of the most common breaches reported to the Tax Office by SMSF auditors. Basically, the new operating standard will require a fund’s trustee to keep the assets of the SMSF separate from their assets owned personally, or that of the fund’s employee sponsor, or some other associate of the fund. This is particularly relevant with cash in bank accounts.  Trustees should ensure that the fund’s cash is held in a bank account in the name of the SMSF, not the personal or business accounts of members. Whilst separation of assets in many ways has already been an established requirement under the Superannuation Industry (Supervision) Act, the new regulations will give the Tax Office the power to enforce it.  

4. Insurance Strategy

Under the new regulations, insurance for members of the SMSF will need to be considered. Many SMSFs already hold insurance for their members, however as part of the regular review of the investment strategy of the fund, SMSF trustees must now consider whether they hold insurance for one or more members of the fund.  Importantly, the new regulations don’t mandate that member be insured through their fund – you only need to consider it as an option.  However, the fund members will need to ensure the chosen insurance strategy is documented in their investment strategy and be reviewed regularly.
It is important that you consider how the new regulations impact your SMSF. Westpac can help. To find out more visit www.westpac.com.au/smsf
 
This information is general in nature and provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such.  It does not constitute a securities recommendation, financial or taxation advice. This information does not take into account your personal objectives, financial situation or needs and so you should consider its appropriateness having regard to these factors before acting on it.

© 2012 Westpac Banking Corporation ABN 33 007 457 141 AFSL and Australian credit licence 233714.
 

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