How troubled investment times can create super opportunities

Watching the current turmoil on the investments markets is a bit like watching a car crash (you can’t look away)…  but in these troubled times, it is important to think about and strategies for members within a SMSF.  In particular, one strategy allows for a member receiving a pension to capitalise on the current down turn by re-wiring their super components to leverage greater tax efficiency.

With the ASX All Ordinaries off around 13% since 30 June, consideration can be given to fully commuting a member’s pension back to accumulation and recommencing the income stream with new taxable and tax-free proportions (refer to TR2011/D3 regarding when a pension ceases and commences).

To demonstrate this, let’s take a look at the following example:

Arthur has a $1,000,000 member balance as at 30 June, with a tax-free proportion of 50%.  Being heavily exposed to the share market, Arthur’s portfolio feels like it is in ‘free-fall’ having dropped 20% since 1 July.  His account balance is now $800,000.  With a 50% tax-free proportion, this means Arthur’s tax-free component now represents $400,000.

However, in trying to take a positive out of the current market turmoil, if Arthur was to fully commute his pension as at 1 July and look to recommence at (or around) the current low point in the market (August), the decrease in his member account balance will be attributed to the taxable component, rather than in proportion to tax-free and taxable components (as originally stated in the commencement of his pension) .

As a result of this commutation, Arthur’s components would now show as:

  • $500,000 tax-free component; and
  • $300,000 taxable component

Arthur can then decide to commence a new income stream, where the tax-free proportion has now grown to 62.5%.  This represents a 12.5% improvement in both the tax-efficiency of any pension amount taken should he be under the age of 60, but also represent further estate tax savings (on the taxable component) when eventually paid to non-dependant beneficiaries.

NB.  Any rollback to accumulation phase would mean that the fund moves back to accumulation and be subject to tax, however the small loss of tax exemption for this period of time could pale into insignificance against the potential tax benefits of commuting and repurchasing the income stream.

It is therefore important in these troubled times to give consideration as to how strategies such as these could make a significant impact to both the current and long-term benefit of an SMSF member.

Webinar on Top10 SMSF strategies for 2011/12

A Happy New Financial Year to all my readers…

To start off the new financial year with a bang, The SMSF Academy in conjunction with Business Fitness invite you to join us for a free webinar on the “Top10 SMSF strategies for 2011/12”.  In this one (1) hour webinar, I will be going through the hottest strategies currently available within Self Managed Super Funds.

With more than 220 people already registered for this event, it is shaping up as one of the most anticipated SMSF web-events for the year.  Don’t miss out, register now.

  • When: Wednesday, 27 July 2011
  • Time: 11am AEST
  • Duration: 1 hour (including question time)
  • Cost: FREE

Register for the Top10 SMSF strategies webinar event.

Setting up a Self Managed Super Fund

After making the decision to setup a self-managed super fund, there are a range of important decisions and steps about how to structure and operate your fund to get it started.

When setting up a self-managed super fund, you take on the role of either a trustee or director of a company which acts as the trustee of your fund.  A trustee is a person or company that holds and invests the fund’s assets for the benefit of each member’s retirement.  You have the choice when establishing a self-managed super fund to have individual trustees or appoint a company to act as the trustee.

More than 70% of all self-managed super funds are established with individual trustees, with more recent statistics showing only 10% of new funds being setup with a corporate trustee.

It is a commonly held view that a corporate trustee is a far superior trustee structure within a SMSF, which was recently supported in the recommendations to government in the Super System Review.  Further information on this topic can be founding in my article, “which trustee structure is right for me?”

As a trustee or director, you are responsible for running the fund and making decisions that affect your retirement interests and that of each member. Therefore, you must act in the best interests of all fund members when making decisions, ensuring that the fund is managed separately from your own affairs and that the money in the fund is only accessed when the law allows you to do so, such as in retirement.

There are some important considerations when setting up a self-managed super fund, including deciding on whether each member will act as individual trustees or a company act as trustee in which you and the other members will be directors.  You also need to ensure that you are eligible to act as a trustee; therefore you can’t be:

  • a bankrupt,
  • someone charged with a dishonesty offence; or
  • have been subject to superannuation law penalties.

Furthermore, you must ensure that the fund meets the residency requirements to be a complying fund and receive tax concessions.

A self-managed super fund is allowed up to 4 members, with each member required to be a fund trustee or director.  This requirement is to promote engagement and equal responsibility amongst all members of the fund.  In addition, no member can be an employee of another member, unless they are related and finally no trustee can be paid for their duties or services as being a trustee.

It is possible to setup a self-managed super fund as a single member fund. Where the fund has a corporate trustee, you can also be the sole director of a trustee company.  Alternatively you must be only one of two directors ensuring that the other director is either related to you or is not employed by you.   Where you wish to have individual trustees, you must have two trustees in which in addition to you, must include a person you are related to or is not employed by you.

The process to setup a SMSF

The setup of a SMSF requires a range of steps to be completed to start operating your fund.  The first step is to arrange for a trust deed to create the fund.  This is the “book of rules” that will govern its operation and will include rules around acting as a trustee, membership, contributions, benefits and anything else to do with the fund.  The preparation of the book of rules is prepared by a lawyer who will draft the necessary rules for you.  This may be a standard set of rules or may require tailoring to meet specific requirements of the fund members.

The fund will also be required to appoint fund trustees, which must be consented to in writing.  You as a trustee will need to sign a trustee declaration within 21 days of becoming a trustee or director, stating that you understand your duties and responsibilities as a fund trustee or director of the corporate trustee.  You will need to complete for various registrations with the Australian Taxation Office to not only become regulated, which must be done within 60 days, but to also apply for a Tax File Number (TFN), Australian Business Number (ABN), along with potentially requiring additional registrations including GST and Pay-As-You-Go withholding (PAYGW).

You must apply to become a member of the fund and once accepted have the fund record your tax file number to ensure that it can accept certain contributions.

You will be required to setup a bank account for your self-managed super fund to manage the fund’s operations including accepting contributions, making investments, receiving investment income and pay all fund expenses and liabilities.  It is important that the super fund bank account is kept separate to any individual or business bank accounts that you may have.

Once the fund is legally established, it is important that an investment strategy is prepared that sets out the investment objectives and how you plan to achieve them, having regard to issues including diversification, risk and likely return from investments, liquidity of fund assets, the ability to pay benefits as and when they fall due, such as in retirement and generally meeting the member’s needs and circumstances.

You may wish to engage a licensed financial adviser to help you prepare an investment strategy, but you (and the other fund trustees) are responsible for managing the fund’s investments.   It is important that an investment strategy is documented to ensure that you can evidence your investment decisions and show that they comply with the law.

In addition, as the fund gets underway, you should give appropriate consideration to the appointment of professionals including an approved auditor, accountant or fund administrator, lawyer and financial adviser.  They will be able to assist in a variety of areas including the ongoing reporting requirements, insurance needs of the members and any death benefit nomination which sets out who receives your super benefits in the event of death.

Setting up a self-managed super fund gives you the opportunity to actively manage your own super and make your own investment choices, but with it comes responsibility.  Regardless of whether someone takes a more active role within the fund, each trustee or director is equally responsible.

Watch more of our videos on The SMSF AcademyTV.

Understanding your roles and responsibilities as a SMSF trustee

The ability to take control of your retirement has been the driving factor in the continuing growth of self-managed super funds.  They are a great way to provide for your retirement, but it is important to understand that with this greater control comes an increased responsibility as a trustee of your fund.

The ultimate responsibility of the fund always rests with the fund trustees, regardless of whether professionals such as accountants and financial advisers are engaged to assist you in operating the fund.  Therefore, it is very important that you understand what you need to do.

There are a range of duties and responsibilities that come with being a trustee and these include:

  • Making sure the fund’s sole purpose is to pay retirement benefits to members or to beneficiaries in the event of death
  • Accepting contributions and paying benefits as a pension or lump sum in accordance with superannuation and tax laws
  • Making investment decisions and complying with any restrictions contained within superannuation law and the fund’s trust deed
  • Ensuring an approved auditor is appointed for each income year
  • Making sure that the fund’s administrative tasks are met, such as lodging the SMSF annual return on time and ensuring the fund’s records are kept up-to-date; and
  • Reviewing and updating the fund’s trust deed and investment strategy

All of these responsibilities form part of the trustee declaration form that is required to be signed by all new trustees of a self-managed super fund.

Failure to comply with your duties and responsibilities can result in the Tax Office taking actions including imposing penalties, taking enforceable action against you including disqualification as a trustee and potentially even making your fund non-complying.

NB. Members of the SMSF Academy won’t have to worry as they will have available to them the appropriate information, education and tools to look after all of these issues that we have discussed.  The SMSF Academy is designed to give trustees the confidence and peace of mind to meet their duties and responsibilities as trustees.

Click here to register your interest about the launch of The SMSF Academy

What reporting obligations are required for my SMSF?

The Trustees of a self-managed super fund have various reporting obligations to both the Regulator and its members.  Many of these duties need to be completed for each financial year, by specified due dates with the Tax Office.

It is a requirement for all funds to have to lodge a SMSF Annual Return, which includes the tax return, reporting of each member’s contributions, information for the regulator about the fund and details of the auditor and completed audit.

It is important to note that the Annual Return cannot be lodged until an independent audit report has been issued.  The fund also has an obligation to prepare financial accounts each year, including the preparation of an operating statement and statement of financial position.  Upon completion of these statements, the fund arranges for the completion of an audit to examine the fund’s financial position and assess the overall compliance of the fund with superannuation law.  In addition, a self-managed super fund is required to prepare and maintain records relating to decisions affecting the fund.  For example, these may include decisions around buying and selling investments, starting a pension and the appointment of a fund auditor.

Copies of financial statements, the SMSF Annual Return and statements lodged with the tax office must be maintained by the fund trustees for a minimum of five years.  However, minutes of meetings, changes and appointments of trustees, declarations, and copies of all reports given to members must be kept for at least for 10 years.

Engaging Service Providers

Subject to your own level of skills and amount of time you have to devote to running your self-managed super fund, SMSF trustees can engage a variety of service providers to assist them in their duties and responsibilities.   For example, a lawyer will be required to prepare the trust deed for your SMSF, and would also be involved in many instances with the preparation of estate planning documentation including death benefit nominations.

Your fund will be required each year to engage an approved auditor to conduct an independent audit.  Most trustees will also typically also engage an accountant or specialist administrator to prepare the statutory reporting requirements for your fund including financial statements and SMSF Annual Return.  For pension paying funds, an actuary may be required to be engaged to prepare a certificate of tax exemption.    Trustees may also consider using a licensed financial adviser to assist in the strategic direction of the fund, the investment strategy and any insurance needs of the members.

The Australian Taxation Office as regulator of self-managed super funds has several publications available for trustees regarding thinking about, setting up and running a self-managed super fund.  These are must read documents for all trustees to ensure that they have an appropriate level of understanding about their roles and responsibilities as a trustee.

Links to these publications are shown below:

(C) The SMSF Academy 2012
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