Having your SMSF capitalise on a market recovery

The last month or so has seen the ASX recover strongly after a disastrous start to the new financial year.  Whilst we are well short of the ASX highs of mid-2007, we may start to see some further gains with some hopeful news emerging from Europe and other parts of the world.

As a result of this recent positive change, it is important from a strategic point of view, to start thinking about some of the key strategies that will bolster you or your client’s superannuation savings in a market recovery:

1. Boost the 10% pension limit with a Transition to Retirement ‘reboot’ – an effectively implemented transition to retirement strategy can add tens of thousands of dollars to a member’s retirement savings.  For some clients who regularly take a 10% maximum pension, recovering markets can provide the ability to roll back the existing income stream and reset the pension with a higher balance.  Conversely, if clients are looking to take the smallest pension possible, especially in light of the 25% reduced minimum for the 2011/12 financial year, now may be an opportune time to roll back their pension to accumulation to reduce the amount required to be taken for the financial year.

2. Locking in tax-free proportions – the use of recontribution strategies is still one of the most effective tools to build greater tax efficiency into income streams under age 60 and also for estate planning purposes.  The creation of multiple pensions with additional contributions or recontributions allows a member to potentially benefit from a higher tax-free proportion when drawing an income stream from the fund.  Subject to the level of pension taken each financial year, you can continue to grow the higher tax-free super balance when markets rebound.

In poor markets, there is some significant tax savings that can be obtained by rolling back pensions to accumulation phase (full commutation) to ‘absorb’ the negative returns against the member’s taxable component, rather than proportionately against their tax-free and taxable components.  At an appropriate time in response to recovering markets, the ability to recommence the pension allows for the member to lock in a higher tax-free component, saving tax on pensions taken prior to 60 and providing long-term benefits for non-dependant beneficiaries.

3. Have you considered segregation? – to further benefit the use of multiple pensions, trustees have the ability to segregate specific assets to different members, pools of members or different superannuation interests.  For example, by applying the fund’s growth assets to a member’s super interest with a 100% tax-free proportion, it can potentially:

  • accelerate the grow of the account balance;
  • provide a greater pension amount that can be withdrawn under a transition to retirement income stream; and
  • decrease the fund’s potential future exposure to death benefits tax for non-dependants.

Segregation may also be useful where the fund is not 100% in pension phase (i.e. one member in accumulation, one in pension).  It could be used to assist in the realisation of a particular asset which has risen significantly off a low cost-base.  By applying segregation, the particular asset(s) with a significant capital gain is fully exempt from tax, rather than partially exempt by having an unsegregated fund.  It is important that any segregation strategy is appropriately documented by the trustees to show specific assets being applied to a particular member, interest or pool of members.

4. Time to build reserves? –  Reserves within a self-managed super fund can play an important current day and longer term estate planning role.  For the majority of SMSFs, you typically see any positive returns applied towards each member’s balance.  However, it is important to consider whether to capture some of these positive earnings into fund reserves to look at implementing a range of strategies including future anti-detriment payments, self-insuring members, enabling future crediting of 100% tax-free pensions, etc.

Fund Reserves can play an integral role in any SMSF and are typically generated by earnings over time.  Planning to capitalise on recovering markets allows for SMSFs to implement many of these reserving strategies effectively.

These are just some strategies that you can start to plan with your clients to help bolster your client’s superannuation savings in recovering markets.

Last chance to register for Top 10 SMSF Strategies webinar

With close to 400 attendees already registered for this much-anticipated webinar event, this is your last chance to join us as we explore the Top10 SMSF Strategies for 2011/12.

In this 1 hour webinar event, I will be working through the Top10 strategies being used within self-managed super funds and providing case studies to demonstrate their power.

There’s even a surprise gift  for attendees to be announced in tomorrow’s session!!

Title: Top10 SMSF Strategies for 2011/12
Time: 11:00am AEST
When: Wednesday, 27 July 2011

It’s an event not to be missed…

Anti detriment is back as a popular strategy for SMSFs

The use of anti-detriment within SMSFs as a strategy has been stymied over the past couple of years since the Australian Taxation Office (ATO) indicated that any allocation from a reserve for the purposes of paying this tax saving amount was to be counted as a concessional contribution.  Subject to the amount of the allocation, and other levels of contributions, it appeared likely that this amount was going to incur excess contributions tax (ECT).  As a result, the benefit of the strategy would be eroded by the potential excess contributions tax.

There has been some uncertainty within the industry about the amount to be included for the calculation of the anti-detriment tax deduction since the introduction of section 295-485 of the Income Tax Assessment Act 1997 (ITAA 1997).  The old section 279D within the ITAA 1936 required the whole balance to be paid out as lump sum to qualify for the deduction.  However, this didn’t necessarily appear to be the case when interpreting the new laws.

A question was raised at the March 2011 NTLG Superannuation Technical Committee meeting as to how much of a member’s account balance must be paid as a superannuation lump sum in order for a super fund to qualify for a tax deduction under section 295-485 of the ITAA 1997?

The good news from the ATO’s interpretation is that the tax deduction for the tax saving amount can be claimed on the amount paid out as a lump sum; it does not require the entire benefit to be paid out (as a lump sum).  In other words, a member could receive a combination of income stream and lump sum and claim the deduction for the tax saving amount on the proportion paid as lump sum only.

To demonstrate this, let’s use the following example:


Frank (58) recently died and was survived by his wife, Maria. He had a balance of $550,000 in his SMSF, in which Maria wishes to take a lump sum of $150,000, with the balance to be taken in the form of an account based pension.

Use the SMSF Academy Anti-detriment calculator

From the above calculation, the tax saving amount is calculated as $72,056 on the entire benefit.  As $150,000 has been taken as a lump sum, the proportionate tax saving amount is $19,652 (15/55 x $72,056).  This would mean that an amount of $169,652 would be paid to Maria by way of lump sum. The SMSF would be entitled to a tax deduction of $131,013 ($19,652/0.15).

The ATO’s views expressed from the NTLG March 2011 meeting in my view brings anti-detriment right back into play as a key estate planning strategy for SMSFs.  Whilst still having to consider the issue of allocations from reserves as concessional contributions, there appears now to be a greater scope for planning around the level of deduction that may be required within fund, rather than simply determining it based on the deceased member’s entire benefit.  This deduction may be used to mitigate CGT or simply to benefit future generations of fund members.

Furthermore, there is greater scope to consider how the anti-detriment amount may be ‘funded’ within the SMSF without necessarily having to use reserves.

This positive news means all advisers dealing in the area of SMSFs should again turn their attention to how this strategy may benefit their client’s overall estate plan.

Register your interest to attend the SMSF Academy InPractice August Webinar on Anti-detriment and Future Liability to pay benefits.  Free for SMSF Academy members, $77 for non-members.  Details of this session to be announced shortly.

A family super fund or a family feud?

The concept of the family super fund (FSF) has started to enter the vocabulary amongst SMSF trustees and advisers over the past year as a way to bring together family members to invest and manage their total wealth.

The focus of the family super fund concept is to provide for not only the members today, but to also provide for the effective transfer of wealth for future generations.

The effective transfer of wealth is an important issue moving forward, because as we live longer, it will not be uncommon that the next generation of beneficiaries will be close to retirement themselves.

Statistics as at 30 June 2010 shows the average fund having only 1.90 members, well below the minimum of four members allowed.  The recent Super System Review (Cooper Review) which covered SMSFs, considered the issue of the number of fund members, but the Panel recommended no change to this arbitrary figure as the average didn’t support any need to.

So, with a limitation of up to four fund members, what are the real benefits as to why you would consider setting up a “family super fund”? or by doing so, are you simply setting yourself up for a family feud?

Let’s take a look at the pro’s and con’s of the family super fund:

Pro’s of the Family Super Fund

  • You have the ability to ‘control’ the family wealth through a single tax structure that provides significant tax concessions to benefit all members, both through accumulation and pension phase;
  • The FSF could look to acquire property using a limited recourse borrowing arrangement.  The older members could pay the deposit, with future contributions being made by the younger members to repayment the loan.
  • Wealth of the younger members could be ‘housed’ within mum or dad’s account to be taxed at concessional rates (maybe no tax) and redrawn as and when needed through a pension or lump sum (assuming mum or dad have retired and met a cashing condition).  This concept is in reverse to what we understand with family trusts, as the focus is on distribution of wealth through members over 60, rather than spreading income across multiple beneficiaries.
  • You have the ability to run reserves within the FSF to:
    • transfer wealth from older members into the next generation.  This can be done via allocated surplus amounts from reserve accounts
    • self-insure all members – in particular be able to provide an income stream for a child within the fund in the event of disablement;
    • To generate a large tax deduction through the payment of an anti-detriment amount (the tax-saving amount), when a lump sum is paid to a SIS dependant in the event of the death of a member; and
    • hold specific assets (such as the family business premises) within the Reserves separate investment strategy to retain within the fund over many generations.
  • The ability for the younger members of the fund to over time take a more active role in the fund as the parents get older and have less ability to manage the overall affairs of the fund.  This can be achieved through granting an enduring power of attorney.

Con’s of the family super fund

  • SMSFs are naturally limited to no more than 4 members.  How do you decide who to include or exclude when it comes to families of more than four?
  • The marriage of children adds in-laws and a new life together for husband and wife and their own family.  The supposed benefits of  a family super fund can become lost on future generations as they start a new family of their own.
  • In this day and age with people travelling and working all around the world, careful consideration needs to taken to ensure that the fund retains its complying status as an Australian Super Fund (meets the residency requirements to receive tax concessions).  This could cause concerns should members decide to move overseas for a significant period of time.
  • Operating a family super fund will add significant cost to the ongoing operation of the SMSF.  Whilst many of the strategies can add significant benefit to the members, expect significant cost to manage these highly-technical strategies.  It may simply be too cost prohibitive to consider running.  Subject to the size of the family, this concept may need to be run through two SMSFs, with unit trusts, which as you can imagine, starts to add significant layers of costs.

A further issue to consider in deciding whether to proceed to build a family super fund includes how should you structure the voting rights of the fund – should each member have one vote or are votes based on account balance?

When deciding to build a family super fund, it is important  to look at tailoring specific provisions of the fund’s trust deed or introducing other agreements to deal with key family matters of holding this wealth inside a SMSF.  For example, appropriate consideration needs to be given to issues around what happens to the business premises inside the super fund that runs the family business in the event of the death of a fund member? Can it be sold?  Who can make this decision?  Who has first rights to acquire?

The case of Katz vs. Grossman is an excellent example of how the concept of a family super fund can go wrong.  Whilst not a family super fund in its own right, this case demonstrated the issues of adding in children (and subsequently in-laws) into the fund without understanding the impact of doing so – in this case at the exclusion of Ervin Katz’s son.  Without appropriately documenting the wishes of how a member’s benefits are to be dealt with, the benefits of strategies introduced for the “family” can be quickly eroded in solicitors fees fighting over an estate.

Personally, I’m an advocate of the family super fund in certain circumstances, but it is not for everyone.  I believe the size of the fund has a big role to play, including the amount of wealth held outside of super.  The age of the beneficiaries and their own financial circumstances will also influence the result. Where a beneficiary is closer to retirement, their focus will be towards building super, assuming they have significantly reduced debt or even paid off their family home.  Younger family members will still be struggling with mortgages and kid’s school fees, so super simply isn’t attractive at this stage of their lives.

I heard recently of a person who stated in their Will (after their death benefit nomination stated that their super benefits are to be paid to their Legal Personal Representative), that in the event of their death, $450,000 of their estate was to be paid to each child on one (1) condition…  that they made a $450,000 contribution into superannuation to build for their own retirement.  If they didn’t do this, then these benefits were to be paid to the father’s nominated charity, The Red Cross.  If you are one of the beneficiaries, it makes for a pretty easy solution I would have thought!! however, it would arguably be more prudent for this member to start thinking about building a family super fund to benefit his next generation.

(C) The SMSF Academy 2012
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