Top 10 SMSF strategies for 2010


A New Year is here and 2010 is going to be a significant one for SMSFs and superannuation in general.

Opportunities around strategy will continue to drive SMSF growth throughout 2010 and beyond regardless of the many outcomes of the Cooper review, Henry tax review, Rippoll enquiry, and any other government committee.

One thing that I have learnt over time is that regardless of the amount of legislative change that a government wishes to undertake to ‘move the goal posts’ for SMSFs, the underlying theme of “wanting to take control” will continue to spur-on growth of the sector.

So, what do I believe to be the Top10 SMSF strategies for 2010?

When thinking about my top 10, there were a couple of key themes that prevailed – gearing in super and the global recovery.  The strategies below provide some wonderful opportunities both short term and long term for clients to partake and for advisers to get their clients involved in.

Here’s my list of the Top10 SMSF strategies for 2010:

  1. Gearing in Super – transferring business premises into an SMSF
  2. Gearing in Super to acquire assets (property or shares)
  3. Establishing Reserves with investment gains
  4. “Lock in” tax-free proportions for income streams
  5. Maximising Contribution Caps (cash & in-specie)
  6. Segregating to capitalise on the recovery
  7. ‘Double dipping’ contribution caps?
  8. Gearing in Super – BYO banker property development
  9. Recontribution and multiple income streams post age 60; and
  10. Using Reserves effectively for pension accounts

1. Gearing in Super – transferring business premises into an SMSF

The revolution of being able to borrow money within a self managed super fund has opened the door to many wonderful strategies not seen since the halcyon days of pre-August 1999 unit trust arrangements.  For business owners, this strategy provides a fantastic opportunity to buy, upgrade or transfer business premises into an SMSF.

For business owners currently operating from their premises outside of super, the opportunity to move this asset from outside super to inside an SMSF provides an opportunity to convert non-deductible debt into deductible debt (inside the SMSF) and extract any unrealised gain on the property into cash (for personal use).  Furthermore, any capital gains tax (CGT) may be offset with the use of the small business concessions.

To add icing to the cake, this strategy then provides the business owner a tax deduction in their business for rent which is paid to towards their own retirement.  The business will therefore be making two payments (i.e. rent and SGC and/or salary sacrifice amounts) towards the debt.  If that wasn’t enough on the basis the asset is sold post retirement, any future capital gain is tax-free.

I truly believe that once people realise the potential of this strategy it will accelerate like no other in SMSF history.

2. Gearing in Super to acquire assets (property or shares)

As mentioned above, gearing in super will gain significant momentum in 2010, with the only thing going to rain on this parade being any government change post reviews.

With property being the initial driver of SMSF borrowings, expect to see more activity in this area but also through direct equities and managed funds. Many SMSFs are already using instalment warrant equities within their portfolio through institutions such as Macquarie, Citigroup or UBS.

Further clarity from the regulator and government would be appreciated as there is still some levels of uncertainty in areas such as personal guarantees.

3. Establishing Reserves with investment gains

The last two financial years for many SMSFs has been a bit like watching a car crash as the stock market took a pummelling.  However, this financial year to date we have seen stocks recover upwards of 30%.  For most SMSFs, the accounting of these gains will simply be applied towards a member’s balance, however specialist SMSF advisers will be parking some of these profits into reserves for a range of strategies including future anti-detriment amounts, funding self insurance, crediting to 100% tax-free pensions and so on.

Fund Reserves are an integral part of any SMSF and are typically generated by earnings over time.  This financial year provides a fantastic opportunity to build reserves for future use.

4. “Lock-in” tax-free proportions

The global financial crisis (GFC) had a significant impact of super funds and ultimately those drawing down on their super savings as a pension.  With the government providing a 50% reduced minimum pension to assist in the liquidity crisis that some funds were facing, it provide an opportunity to assess the components of income streams and whether strategies should be put in place to improve the tax-free proportions of a pension, or where possible create multiple income streams (see more below).

With recovering markets, it is now more important than ever to review existing income streams to maximising their tax effectiveness for either those drawing a pension <60 (e.g. Transition to Retirement) or >60 for estate planning purposes.

5. Maximising Contribution Caps (cash & in-specie)

My philosophy with contribution caps is to use them or you lose them.  Easier said than done, but for those with a capacity to utilise either/or the concessional contribution (CC) cap or non-concessional contribution (NCC) cap limits, it is important to do so.  For those over 60, recycling components of their existing super can make a significant difference for an estate planning point of view, so consideration about recontributions and their timing should be an important part of any SMSF strategy at retirement.

6. Segregating to capitalise on the recovery

With the market having recovered half of what it lost from the high point of the ASX back in September 2007, many SMSFs who have bought into the market at a low point over the last 12 months are sitting on nice capital gains. These profits where not in pension phase if realised will attract either 15% or 10% (if held for >12 months).

Where there is a pension and accumulation member or account within the fund, the trustees have the ability to segregate assets into the pension account or pension pool (for the benefit of all pension members).  Why?  By simply applying segregation, the assets with significant capital gains can be exempted from tax, rather than a proportion of the amount being exempt in accordance with an actuary tax certificate.

The important thing to do here is to appropriately document the decisions of the trustees to segregate assets to a particular member or pool of members.  It also doesn’t have to be all members, it can simply be one asset to the pension member and the rest of the income shared across all members.  The strategy allows absolute creativity!!

7. ‘Double dipping’ contribution caps?

This strategy might not have far reaching application, but it is probably the ‘jewel in the crown’ when it comes to my top10 list.  With the concessional contribution caps halved from 1 July 2009, the month of June becomes the years most important month as the ability to ‘double dip’ on a tax deduction into super can save thousands of dollars in tax.  This strategy entails the use of a contributions reserve, whereby amounts need to be credited to members within 28 days.

Take somebody (over 50) who wants to transfer a $700,000 share portfolio or commercial property into their SMSF.  They can effective transfer this in June 2010 and have no excess contributions, plus claim a $100k tax deduction to offset any CGT.  By virtue of using a contributions reserve, $500k of contributions will be parked until post 1 July (but no longer than 28 days) with the amounts being credited as non-concessional and concessional contributions.

The ability to claim a deduction in the tax year in which you made the payment, but then crediting and being assessed for contributions tax and in a follow year sounds too good to be true?  Well, the strategy has been confirmed as “OK” from the Regulator; refer to  the ATO NTLG Superannuation Technical Sub-Group committee minutes for further details (http://www.ato.gov.au/taxprofessionals/content.asp?doc=/content/00211947.htm&page=14&H14).

Keep this one in the memory bank for clients come June.

8. Gearing in Super – BYO banker property development

One of the regular questions that I get asked by clients and advisers is whether a super fund can ‘develop’ property.  The legislation is somewhat ambiguous in this regard as superannuation law does not specifically disallow a super fund not to run a business, but it is seen unfavourably in light of the sole purpose test.

It is common practice therefore that when a super fund wants to be involved in a development, that a unit trust arrangement is established with the SMSF subscribing for units.  These trusts for superannuation law purposes must be ungeared and not have a charge held over the assets of the fund.

However, with the introduction of borrowing in super, an SMSF can now effectively loan money to acquire a property and develop and/or renovate. It is virtually impossible to think that a bank will lend on the basis of a charge being held over units in a unit trust, but when you can be the “bank” in a BYO banker loan (redraw against own equity – see, http://thedunnthing.com/2009/10/12/gearing-in-super-a-property-revolution-has-begun/) you are likely to be comfortable to lend on this basis?

Therefore, this strategy allows you to borrow funds within the SMSF to not only acquire an asset, such as land, but you can then have the fund subscribe for units in the unit trust to effectively purchase the land and have money to develop a property or properties.

9. Recontribution and multiple income streams post age 60

Since the introduction of simpler super on 1 July 2007, this has been part of the staple diet of SMSF strategies.  Quite simply, the ability to the optimise tax efficiency of income streams for members under 60 drawing a pension, or from an estate planning point of view post 60, the ability to recycle taxable component into tax-free component can save tens or hundreds of thousands of dollars in tax in the event of death.

A simple recontribution of $450,000 for Mum and Dad between 60 to 64, will save the next generation up to $148,500 (15% if paid to estate), in what is simply cash going in and out of a bank account.

Nothing like effective planning…

Refer to previous articles on this topic:

10. Using Reserves effectively for pension accounts

With fund earnings beginning to look respectable again, the use of reserves for short and long term purposes should be strongly considered.  In the same ATO NTLG minutes mentioned earlier, the regulator confirmed that amounts applied from a reserve to an accumulation account form part of the taxable component, however an amount transferred to a pension account is applied in the same proportions as the pension was established.

So, what does this mean?  Well, an amount from a reserve has certain conditions that must be met other it may be counted as a concessional contribution and against the CC cap.  One of the conditions is a ‘fair and reasonable’ allocation to all superannuation interests (accounts).  For somebody who is not contributing into super and has $50k of concessional contributions that can be applied, there is no reason why disproportionately a crediting from the reserve can’t be given to a pension account with 100% tax-free component?  Better still, why couldn’t all earnings in the current year be applied to a reserve, undertake a recontribution strategy and create a 100% tax-free income stream and then credit a large amount to the member on the basis that it is ‘fair and reasonable’ (need to also consider amount being <5% of total balance)?

Whatever the case may be, any strategy that builds tax-free amounts has got to be better than sending it to the Bank of Canberra (ATO) in the future.  Quite simply, it will go a long way to ensure that you client stays a client when it passes to the next generation.

Summary

My top10 strategies hopefully get the “creative juices” flowing with SMSF strategies for 2010.  I did deliberately leave out any estate planning strategies as the evolution of the SMSF Will and/or binding non-lapsing death benefit nominations really took shape in 2009 as a strategy for clients.

If you would like to know any more about the above strategies, please do not hesitate to contact me.

I hope 2010 is a great one for you…

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Comments

  1. Hi,

    did you do a Top Ten for 2011?

  2. I am considering a recontribution strategy ( Strategy No. 9 as listed in your article above). I have $300k in my pension asset account, and my SMFS ( with my wife as another member in pension phase) has total net assets of $500k , consisting of $100k cash and $400k listed shares. Assets in the SMSF are pooled. I wonder if it is acceptable strategy for me to withdraw $100k cash from SMSF and then immediately recontribute this $100k back to my SMSF and repeat this same procedure for another two times in the same day to achieve the net effect of withdrawing total pension of $300k (i.e.$100 x 3) and re-contribution of $300k (i.e. $100k x 3) ? This will save me the trouble and brokerage charges of selling shares to the value of $200k to make up the total cash of $300k for a single withdrawal and recontribution. Your comments would be appreciated.

    • Hi Keith,

      Whilst what you have proposed is acceptance, you will not extract the same benefit as doing it as one lump sum and recontribution. The reason is because each time you undertake the re-contribution you will be refreshing your tax-free component. Each subsequent withdrawal must be taken proportionately between tax-free and taxable component, therefore you will be undertaking the strategy on a diminishing returns basis for each recontributed amount.

      Regards,
      Aaron

  3. Hi Aaron.
    Thanks for reply. My proposed withdrawal of $100k each time , say on the 28th June , is from the pension asset account and the non-concessional recontribution $100k each time is towards the accumulation account. My intention is to withdraw all the pension assets of $300k by 3 withdrawals of $100k each and then stop the pension ( zero balance by then) on the 30th June, and commence a new pension from the total balance in the accumulation account ($300k from 3 separate non-concessional recontributions of $100k each) on the 1st July. The new pension to be commenced on 1st July should have almost 100% tax free components, if there is a negligible change in the market value of the listed shares between 28th and the 30th June. This should give the same benefit as doing it as one lump sum and recontribution. Do you agree ?

  4. Hi Aaron,

    My wife and I are looking to buy a business and we were wondering if we could use our superannuation via our SMSF to ‘invest’ into the new business to offset the purchase?

    We are under 60 and there are no bricks and mortar involved in the business purchase.

    We are somewhat unsure of the practice and the area seems somewhat grey – The broker, selling the business says ‘yes’ we are able to get around the current laws by purchasing ‘shares’ within the company (new business is set up as standard PTY LTD), could you be good enough to comment and tell me if in your opinion this is (a) legal and (2) viable?

    Many thanks in advance.

    Scott Carlyle

    • Hi Scott,

      Thanks for your email. Yes, a SMSF can buy shares within the private company however you are limited to 5% of the value of your Fund (i.e. $5k with fund assets of $100k). This obviously limits any investment into such an entity. Also the ATO don’t look too favourably on these arrangements, and may potentially tax any dividends at the highest tax rate of 46.5%, rather than the concessional limit of 15%.

      These rules are in place to make sure your super benefits are there for retirement, not a current ay benefit.

      Regards,
      Aaron

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