SMSFs – are you suited to managing your own super?


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First of our 4 part series on using Self Managed Superannuation Funds as part of your Wealth and Retirement Planning.

this is the introduction to SMSF and why and how to use them as well as the respobsibilities and some tips and traps to avoidT

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  • Thank you for the opportunity to speak to you. Tonight’s presentation looks at self-managed super funds (or SMSFs for short) ultimately to get you thinking about whether an SMSF might be suitable for you. How many of you here tonight are already thinking that an SMSF is the way to go? [wait for response] It will be interesting to see if that show of hands changes! Of course, don’t worry if you don’t know much (or anything) about SMSFs – tonight we’re here to change that and demystify self-managed super funds.
  • So, what exactly will I be covering tonight? Well, firstly, I’ll give you some general information about SMSFs and their popularity at the moment. We’ll look at some of the high-level benefits and also look at some of the factors you need to consider when deciding if an SMSF is right for you . There are a couple of responsibilities that come with SMSFs and we will go through the set-up process. We’re going to also briefly look at the costs involved in setting up and running an SMSF, before moving onto investment strategy and what you can invest in via an SMSF. And of course, ultimately, how you can reap the rewards of an SMSF .
  • he decision to have a self managed superannuation fund is not an easy one. There are many things to consider. This will include your level of involvement in the fund and whether you have the time to devote to it - especially when it’s your retirement savings. This presentation provides you with most of the information you’ll need to decide whether the self managed superannuation fund is right for you. It may be that the reason you want your own self managed superannuation fund is just a question of control. We will consider that as we look at: what exactly is a SMSF, and how does it compare with the alternatives who does a SMSF suit and why the expected costs investments - do’s and don’ts your roles as trustees and members
  • Well apart from your neighbour leaning over the fence and telling you about SMSFs, the ATO (the regulatory body for SMSFs) is telling us that SMSFs are becoming more popular than ever. As people have been hurt in the past few years due to poor returns, individuals have attempted to take control of their superannuation back from the larger public or industry superannuation funds and drive their super themselves.
  • Read out slide, then >>> To move on to the benefits of Self Managed superannuation. We find that SMSFs tends to suit these types of people, because of the very nature of Self Managed. Do you recognise yourself? And why does Self Managed tend to suit these people? It’s because they like the benefits associated with running their own fund, which are… (next slide)
  • So, why use an SMSF? Firstly, portability . Self-managed superannuation funds give you the ability to combine all your various superannuation funds into one investment portfolio. It also provides the ability to ‘carry through’ superannuation benefits as a person changes employment. Thus allowing benefits to stay together within the accumulation stage up until retirement. But more than this, SMSFs enable you to control your own destiny . You can actively manage your portfolio, to establish an investment strategy that is designed specifically for you, and to invest in assets of your choice. SMSFs allow you to personalise your superannuation investments, to create a portfolio of investments with your financial objectives in mind. And you can also design your own requirements . For example, you can structure your payments as lump sums, pensions , or a combination of the two. Insurance such as death and disablement is also available through your SMSF. And there are more advantages…
  • SMSFs give you control over the costs associated with managing your super. For example, you decide who audits your funds, you decide what administration you wish to do and what will be delegated to professional administration companies, therefore you control the costs. And this means potential cost savings. SMSFs have less legal obligations with regards to reporting and compliance than other larger superannuation funds, which gives you more flexibility to design a super fund that is appropriate to you. This also gives you flexibility in your tax planning – we’ll have a look at this later on. SMSFs also give you flexibility in estate planning . Self-managed funds can be a family superannuation fund that passes to the next generation as time goes on.
  • As with all good things, there is some fine print we should read. SMSFs do carry with them additional administration requirements when compared to being a member of your company’s superannuation fund. The risks to you as a trustee of an SMSF are much greater, with non-compliance potentially carrying penalties of up to 45% of your fund’s balance and additional monetary penalties. To make an SMSF work for you, you need to obtain economies of scale . That means that, the more money you have in your SMSF, the more economical it will be. And you still need to optimise your investment returns by choosing investments wisely and balancing your portfolio. Good and accurate advice can help you to decide if an SMSF is right for you, and a financial planner can also help you put together an investment strategy as part of your overall financial plan.
  • There are obligations of having your own superannuation fund, and they have been noted as follows: Responsibility rests with you as Trustee: All decision making and ultimate responsibility rests with the trustee or trustees. The trustees must also be the members. Trustees may outsource all administration and legal tasks, much like a company director, however, the trustee is still ultimately responsible. Responsibility for the Investment Strategy and Investment selection. A strategy is needed in order to make members aware of the trustees’ investment decisions and the rationale behind them. And, of course, as it is your Fund you are responsible for selecting the actual investments that will be made. Responsibility for all administrative and compliance tasks: Each Self-Managed Superannuation Fund must complete all relevant administrative and compliance tasks. Again, outsourcing will remove this obligation, however the trustee is still ultimately responsible for ensuring all administration and compliance tasks are completed correctly. You must keep up to date: As a Trustee of a Self-Managed Superannuation Fund, you will be required to keep up to date with rules and regulations affecting superannuation investments. With the amount and rate of change within the Superannuation area it would be difficult for an individual fund trustee to keep up to date with all legislative amendments. Accessing expert legal and taxation advice to assist in these areas will help with this onerous task.
  • Trusteed need to have an investment strategy. Your strategy should aim to build the assets of the fund whilst ensuring that there will be sufficient liquid assets to meet expenses and benefit payments when they are due to be paid. The fund’s investment strategy should be linked to the members’ retirement objectives. Some samples of objectives might be on average over a five year period, at least say 2% above CPI and to have a negative return no more than once in any five year period. at least the same as the All Ordinaries Accumulation Index over five years What are the characteristics of the members - Ages, level of contributions Diversification as a means to manage risk. (Should be discussed) How do the members feel about risk? If the members are near preservation age do the investments take into account that they might want to cash in their entitlements. What should the asset allocation be for each member, and for the total fund. If Account based pensions are to be paid then ensuring that growth assets are not sold at the wrong time to pay pensions. Actuarial requirements must be taken into account. This means that assets may have to be segregated to certain strategies.
  • There are a lot of investment rules that an SMSF must adhere to, to stay complying. This slide lists some of these. BUT Do you have complete investment control to invest in whatever you want. The answer is no! Golf Club membership which allows member to play golf? No you can’t because it does fit with the Sole Purpose Test. Investment strategy must satisfy sole purpose to provide benefits on death or retirement of member Members and related parties cannot receive immediate benefits Cannot purchase from members - except listed securities at market value, business real property or widely held unit trusts. All transactions on arm’s length basis eg. Listed securities must be acquired at market value on the day of acquisition Hedging only to protect value of existing investments More interestingly, there are some very important exceptions to these rules. For example, although a fund can’t acquire an asset from a related party , it the asset is business real property, a listed security or a unit in a managed fund, then the fund CAN acquire the asset providing it fits with the investment strategy of the fund and the asset is acquired at market value. This is particularly useful for small business owners who might want to transfer ownership of their business premises into their SMSF. Business real property is an exception to the acquisition rule and the in-house asset* rule, meaning it can be acquired by the fund and the member can lease the property back from the fund so he or she can run the business. Of course, all of these transactions must be done at market value New law was introduced in October 2007 and amended further in 2011 with regard to borrowing: section 67A of SIS Act 1993 “Exception – limited recourse borrowing arrangements ” offers limited ability for a Super Fund to borrow via the use of a Debt Instalment type arrangement under. The Super Fund may borrow to acquire a beneficial interest in an asset that is held in trust. Breaching these rules may mean that your fund loses its complying status and in effect receives tax penalties. . Another exception relates to the rule that an SMSF cannot borrow . A new exception was inserted into law in September 2007 allowing a fund to put in place an instalment warrant arrangement in order to borrow to purchase an asset. Although these arrangements can now be set up, there are still some issues that the industry is waiting for clarification from the tax office. * In-house asset = a loan to a related party, an investment in a related party, or an SMSF asset that is leased to a related party.
  • There is also a restriction on the amount an SMSF can invest in, or loan to, a related party . These investments and loans are called ‘in-house assets’. For example, let’s say you have your own business which you run through your own private company. Your SMSF is able to invest in your private company (ie acquire shares), but the investment must be less than 5% of the total value of the SMSF. There are some assets which are exempt from the in-house asset rules, and these are listed here on the screen.
  • So, SMSFs really put you in the driver’s seat for your superannuation. In the past you may have sat in the passenger seat and not understood what was happening with your super, but now you can consider the alternative: to take control of your super and design a flexible solution that let’s you do what you want to do with your super. SMSFs provide you with the ability to take advantage of many perks and benefits that are not available to you through larger industry or corporate superannuation funds. So, think about the possibilities….. could your super be doing better? Do you deserve a better retirement? Now at the start of this session I asked how many of you had already pretty much decided that an SMSF was the way to go…who thinks it could be the investment vehicle for them?
  • OK, We are coming to the end of this session. Your questions to answer for yourself are Your fund is to - reduce tax, build wealth, create retirement income, protect you assets from creditors? How much work and how large your day to day involvement will be what skills and and knowledge of your own can you use what are the skills and knowledge of others that you can use. In business speak this is outsourcing, using specialists to do the work more efficiently that most people can do.
  • We, as financial advisers can help you formulate and document your investment strategy. We can then help you put into place that strategy. If Direct shares are part of that strategy we have a service that can provide stock specific advice and sharebroking facilities. We also have, of course, access to a wide arrange of unit trust, pooled super trusts and a wrap account. And on the Administration and Compliance fronts, we can provide these services through local specialist Self Managed Super savvy accountants. This is a menu of services, we can work with you on any one of these areas, a mix of these, or all of them. It only depends on where you believe you would like the assistance.
  • I’m going to open the floor to questions now, but I’ll also be available after this formal part of the evening if you’d like to discuss SMSFs further. You can also ring me at my office any time.
  • SMSFs – are you suited to managing your own super?

    1. 1. SMSFs – are you suited tomanaging your own super?Liam Shorte BBS SSA™ AdvDipFS (FP) AMCFinancial Planner & SMSF Specialist Advisor™Authorised RepresentativeGenesys Wealth Advisers
    2. 2. Important InformationThis presentation has been prepared by GenesysWealth Advisers Limited ABN 20 060 778 216,Australian Financial Services Licence Number 232686and Principal member of the FPA. Any advicecontained in this presentation is general advice onlyand does not take into consideration the participantspersonal circumstances.To avoid making a decision not appropriate to you thecontent should not be relied upon or act as asubstitute for receiving financial advice suitable toyour circumstances. Any reference to the participantsactual circumstances is entirely coincidental. Whenconsidering a financial product please consider theProduct Disclosure Statement. Genesys and itsrepresentatives receive fees and brokerage from theprovision of financial advice or placement of financialproducts.
    3. 3. “Our goal at NextGen & is to work with and educate clients to a level they can deal with their SMSFwithout us, but they see thebenefit of having us on their team of advisors” by Me!
    4. 4. AGENDA• What is a ‘self managed Superannuation fund’ (SMSF)?• What investments can I use?• Is a self managed super fund right for me?• What information do I need to decide?• Value of advice
    5. 5. How big is the demand for SMSFs• Total number of SMSFs is 450,498 (September 2011).• $397 billion total assets:  $14.8 billion – residential real property  $45.4 billion – non-residential property.• 56% of members above age 55 (as at end of June 2011).• Over 30,000 new funds registered between 1 January and 31 December 2010. That’s an average of over 2,500 each month. ATO Statistics & APRA Reports
    6. 6. What is a SMSF?• SMSFs are primarily used to independently manage and build wealth for retirement.• SMSFs are different from other super funds in that all members are also trustees so members are responsible for running the fund.• including investing the member’s contributions, paying benefits and meeting the administrative and compliance requirements of the fund.• You are responsible for ensuring the fund meets its responsibilities and obligations under the law.
    7. 7. What are the main requirements of a fund • A SMSF can have up to 4 members • a trust deed which meets the requirements of the Superannuation Industry (Superannuation) Act 1993 (SIS Act); • members cannot be employees of other members of the fund unless they are related; • trustees cannot receive any remuneration; • all members must be trustees or, if the trustee is a company, all fund members must be directors of the trustee company.The Australian Taxation Office (ATO) regulates SMSFsto ensure they comply with the SIS Act and regulations.
    8. 8. Self Managed Super Funds tend to suit….People who:• Own and Operate small or family businesses.• Like to have hands-on control over investment decisions.• Like to have their superannuation customised to play a key role in family wealth and estate planning.• Wish to invest in a wider selection of assets.
    9. 9. Why use a SMSF? Advantages Disadvantages• To exercise more control • Responsibility rests with• Flexibility you • Administration• Portability • Fees Again!• Dissatisfaction with • Time current superannuation Fees v Performance • What happens on your death• For tax and planning advantages suggested by their accountant or financial planner.• Effective Estate Planning
    10. 10. Control• As a trustee, you are responsible for setting the investment strategy of the fund and determining the asset mix. Where and how much!• You are also responsible for monitoring and reviewing your investment strategy on an ongoing basis. Buy-Sell-Hold.• So, in effect, you are in control of your retirement nest egg. But you can seek advice when needed.
    11. 11. Flexibility• You are responsible for deciding the investment strategy of the fund and investing the assets accordingly.• You also have more options when you retire. You can pay yourself certain types of pensions out of the fund, and enjoy a tax-free income stream.• Estate planning -quicker and smoother via death nomination. This means your dependents receive payment sooner, relieving any financial burden upon your death.
    12. 12. Fees• You have greater control over the fees you pay.• By choosing your investments carefully and keeping transactions to a minimum, you can reduce the ongoing fees of the fund.• Administrative fees can be high so make sure you compare the potential fees against what you are paying now.
    13. 13. Ok so the costs to set up a SMSF Set Up Ongoing Fund $450 to $3,000 $1,200 to $3,000 Investment Advice $800 - $5500 0.5% to 1.0% Transaction Fees 0.25% to 1.5% 0.5% to 1.0%The cost effectiveness of an SMSFwill depend on the type and level ofinvestments!
    14. 14. What are the expected costs for$300,000 Set up OngoingFund $1,200 $2,500Investment Advice $2,500 $2,500Transaction Fees $1,000 $500Total $4,700 $5,500 1.57% 1.83%
    15. 15. Tax• 15% max on earnings v’s MTR of up to 46.5%• Better still 0% tax in Pension Phase – Thanks Pete! (remember Mr Costello?)• Control CGT by using 12 month rule or retirement concessions• Franking Credits to offset other taxes or in pension phase get a REFUND!
    16. 16. SMSFs – a tax example• Investment held for over 10 years, then sold Company Capital gain $200,000 Discount $0 Net gain $200,000 Tax rate 30% Tax payable $60,000
    17. 17. SMSFs – a tax example• Investment held for over 10 years, then sold Company Individual Capital gain $200,000 $200,000 Discount $0 $(100,000) Net gain $200,000 $100,000 Tax rate 30% 46.5% Tax payable $60,000 $46,500
    18. 18. SMSFs – a tax example • Investment held for over 10 years, then sold Company Individual Accumulation PensionCapital gain $200,000 $200,000 $200,000 $200,000Discount ______$0 $(100,000) $(66,667) $(66,667)Net gain $200,000 $100,000 $133,333 $133,333Tax rate 30% 46.5% 15% 0%Tax payable $60,000 $46,500 $20,000 _____$0
    19. 19. Why use a SMSF? Advantages Disadvantages• to exercise more • Responsibility rests control with you• Flexibility • Administration• dissatisfaction with • Fees Again! current superannuation • Complaints Fees v Performance • What happens on your• For tax and planning death advantages suggested by their accountant’s or financial planner
    20. 20. Responsibility• Legally responsible for all decisions concerning the fund.• Responsibility as trustee to ensure you understand the rules governing your fund and any legislative changes. - the ultimate responsibility rests with you.• Penalties for mismanaging a fund or a compliance breach are high. non-complying = 46.5 per cent is potentially payable on all income or other gains, and on the assets of the fund in the first year of non-compliance. ATO no longer Softly Softly!
    21. 21. AdministrationStatutory obligations, such as• filing tax returns,• keeping minutes of meetings,• developing and writing an Investment Strategy and• lodging annual tax returns, takes time(look at the smile on the Accountants face!) For more information on the administration requirements of managing your own superannuation fund, please see booklet in your pack
    22. 22. Time – Not a weekend job! Running a SMSF takes time and effort. • keeping records, meeting reporting requirements • investing assets according to your investment strategy. Solution: Good and accurate adviceAgain, you don’t need to do all the paperwork yourself. Asuperannuation administration service from an AccountingFirm / Financial Planner can take care of it for you, at anadditional cost.You should weigh up the fees against the time you willsave and compare them to what you are paying in yourcurrent superannuation fund.
    23. 23. What if one Partner is the only“Interested” partner!• On your death/disability will your partner be capable of managing the fund• What plans have you in place to manage this risk• Have you structured any nominations/ pensions to meet their needs• Do they know logins, Id’s, password’s• Do they have EPOAs• What if they suddenly want out of the fund!
    24. 24. Is an SMSF right for you?• Assets > $200,000• Commitment to Responsibilities• Skill – financial literacy of all trustees Help is at hand from Accountants, Financial Advisers and Lawyers but chose those that Educate their clients REMEMBER Our aim at NextGen is to work with and educate clients to a level they can deal with the SMSF without us – but they see the benefit of having us on their team of advisors
    25. 25. Setting up an SMSFGet professional advice first!There are many types of Trust deeds onthe market and options that need to beconsidered before ordering them.Know what you need before leaping intothe process.Example: Individual or Company Trustee.Web-based Instant updating or ClientInitiated Update.
    26. 26. Getting your fund startedAn SMSF is a trust so you need to look at• Obtaining a trust deed• Appointing trustees Corporate or Individual?• Registering with ATO for TFN & ABN• Signing a trustee declaration• Recording each member’s tax file number (TFN)• Opening a bank account• Establish an Investment Strategy• Check your progress and make sure nothing missed
    27. 27. What’s in a Trust DeedThe deed will detail:• who the trustees are;• how trustees are appointed and removed;• trustee powers;• fund membership eligibility;• how contributions are accepted;• how benefits are paid; and• how the fund will be wound up.
    28. 28. What are the main requirements of aTrusteeA Trustee must:• act honestly in all matters concerning the fund;• exercise the same degree of care, skill and diligence as an ordinary person;• act in the best interest of fund members;• retain control over the fund;• keep money and assets of the fund separate from other monies or assets;• develop and implement an investment strategy; and• allow members to access certain information, such as the financial situation of the fund.• You can’t access or allow others access funds early!
    29. 29. Trustee Compliance Check Does the Fund have a Yes Does the Fund have fewer No This Fund is NOT a SMSF company as trustee? than 5 members?Is this because a legal personal Norepresentative is acting as trustee Yes Is this because a legal personalon behalf of a member who: representative is acting as trustee on • Is under 18 behalf of a member who: • Is under a legal Are all the directors of the trustee Are all members of the Fund • Is under 18 disability company members of the Fund also trustees of the fund AND • Is under a legal • Has died & death AND are all members of the Fund are all trustees of the Fund also disability directors of the trustee company? members of the Fund? No benefits have not been • Has died & death paid benefits have not been• Is an acting trustee holding an No paidenduring power of attorney on • Is an acting trustee holding an enduringbehalf of a member power of attorney on behalf of a member Yes Yes Is any member of the Fund an Are they related? Yes employee of any other member? No No Yes No No Yes NoThis Fund is NOT a SMSF Does the trustee receive This Fund IS a SMSF remuneration for trustee This Fund is NOT a SMSF services?
    30. 30. Accounting & Auditing• Talk to your accountant and make sure they are confident with SMSF work.• Agree on the work they will carry out.• They may choose to recommend a specific Auditor
    31. 31. SMSF Investment Strategy? Consider and show how you will manage the following: • Diversification (investing in a range of assets and asset classes) • the risk and likely return from investments, to maximise member returns • the liquidity of fund’s assets (how easily they can • be converted to cash to meet fund expenses) • the fund’s ability to pay benefits when members retire and other costs the fund incurs • the members’ needs and circumstances • Investment restrictions – “in-house asset” rules etc • Reserves, Lending, Borrowing, Acquisition, Security.Your investment strategy should be inwriting so you can show your investmentdecisions comply with it and the super laws.
    32. 32. The main investment rules –in brief• SMSF is maintained to provide benefits on retirement or to dependents upon death (sole purposes test)• Limited ability to borrow via a limited recourse loan• SMSF must not give a charge over a fund asset• All transactions must be entered into on an arm’s length basis• SMSF must not acquire assets from related parties• SMSF must have an investment strategy and review it regularly• In-house assets are limited to 5%• Derivatives only for risk management• SMSF must not lend money to members or their relatives Exceptions may apply in relation to business real property, listed securities and widely held unit trusts.
    33. 33. In-house assetsIn-house assets are:• Investments in, and loans to, related parties• Restricted to 5% of the value of the fundBut there are some exceptions...• Listed shares• ‘Widely held’ unit trusts (managed funds)• Investments in pooled superannuation trusts• Business real property• Property owned by the super fund and a related party as tenants-in-common• Deposits with authorised deposit-taking institutions (ADI) and approved non-ADI• Life insurance policy issued by a life company (not acquired from a member or relative)
    34. 34. Asset Allocation is the KeyResearch confirms the key to long-term performance is assetallocation – that is, the amount you allocate to shares, property,bonds and cash.•Superannuation is for the long term – the rest of your life.•Investments need to provide liquidity, growth and income.•Cash and Fixed Interest provide liquidity and income.•Direct Property provides income and growth•Shares provide liquidity, income and growthLook at Risk Profiling, Member’s Experience, the “Sleep WellFactor”, Current Market Conditions, time to retirement, pensionneeds, insurance and other assets outside Super. Your lifestyle in retirement will depend on it
    35. 35. Conclusions• SMSFs give you flexibility and control• Provide tax concessions and deductions• Allow you to re-juggle your assets in most tax- effective manner• A ‘one-stop shop’ for your retirement needs
    36. 36. Is Self Managed Super for you?• What is your fund going to be used for?• What is the level of involvement you are willing to commit?• Do you want to out-source? – investment strategy? – investment selection? – administration? – compliance requirements?
    37. 37. Outsourcing Financial Adviser • Investment AdviceInvestment Strategy • Direct Share advice • Managed FundsInvestment Selection • Ongoing Investment and Strategic Advice Lawyer / Accountant / SuperAdministration specialists • Trust deed & other document services • Annual accountsCompliance • Audit • Tax return preparation • Estate Planning
    38. 38. The next step Take advantage of this opportunity and get the right advice! We take a collaborative approach with your accountant and legal advisers. The result is a self managed super investment that is: •Professionally set up •carefully managed •creates the freedom for you to take a real hands-on approach to your investment •minimises risk and administrative time for you.The personal control and potential tax andcost savings can be substantial, so itsworth considering if a SMSF could be rightfor you.
    39. 39. Where can I get more information?• Come and talk to us– Strategy, Structure & Investments• ATO site – Guide to SMSF• Your Accountant – Tax, Auditing, Admin• Our dedicated SMSF blog• Great a free education session• Our Twitter Feed @smsfcoach• Your Lawyer – Estate Planning
    40. 40. Financial services
    41. 41. Thank youANY QUESTIONS?
    42. 42. We can put you back in controlLiam Shorte – The SMSF Coach @smsfcoachNextGen Wealth SolutionsCastle Hill, Windsor or By Appointment Worldwide!0413 936 299