The 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
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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)
Why Self-Managed Superannuation? Costs: For large amounts in Super, Self Managed Super can be a cost effective option. We will explore this further soon. Control: It provides you with control over the assets of the fund. You are able to have a wide range of assets in your fund - from bank deposits through to property investments and your own choice of shares. You may even use fund manager investments for diversification. Flexibility: Individuals can structure their fund to suit their own needs and situation. A Self-Managed Fund can be designed to pay lump sums on retirement, pensions for life, or even a combination of both. Tax Effective Wealth Accumulation: Self-Managed Superannuation Funds have the ability for greater tax planning than Public Offer Superannuation Funds. For example, the sale of investments can be timed to achieve the most favourable tax outcome. Access to Direct Investments: Self-Managed Superannuation Funds can be used to buy direct shares and property. Real property can’t be purchased through a Public Offer Superannuation Fund. Effective Estate Planning: A Self-Managed Superannuation Fund can provide flexibility and discretion when paying out death benefits, as the trustee of an SMSF has a closer relationship to members than a Public Offer Superannuation Fund. This can provide you with more confidence that your death benefit will be distributed as per your wishes. Effectively, this means that you have much more control over the funds you hold for your future wellbeing. You make the decisions and choose the investments which suit you.
For those of you who have not yet set one up here are the costs involved. There are many superannuation fund administration services providers around whose charges depend on the amount of work involved. Generally the set up costs are in the vicinity of $1000. Annual Costs for compliance (financial statements, tax return etc) can be from $1000 upwards depending on the quality of your records and the level of transactions. Average $2,000. This excludes investment costs, brokerage etc. If you obtain investment advice these costs are in the vicinity of what is shown above (Please adjust this to reflect your own charging regime). And of course there are costs involved in actually transacting the investments. These are ball park figures. You may be able to reduce your own costs to be less than these. If you move your investments around a lot then they will probably be higher. This is only intended to provide a very rough guide.
Here is an example of the costs for a fund with $300,000. I reiterate that it is just a ball park indicator. You may be able to reduce these costs, or they could be higher depending on the number of members, investment selection, portfolio turnover, external services that you utilise etc.
When setting up your fund you will need Trustees. All fund members must be trustees Trustees can be individuals or directors of a corporate trustee Exceptions If there is a single member there must either be a corporate trustee with one member, or someone else to act jointly as the fund trustee If a member is under a legal disability e.g. under 18 they must have a legal personal representative to act for them.
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.
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 Business property exempt from the in-house assets rule Hedging only to protect value of existing investments New law was introduced in October 2007 with regard to borrowing: section 67 (4A) of SIS Act 1993 “Exception – Instalment Warrants” 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.
Superannuation funds are generally prohibited from acquiring investments from members, trustees or their relatives and other business entities that they control. However, certain assets are exempted from this rule, including shares and other listed securities, and commercial property In view of the complexity of these rules it is worthwhile to obtain advice
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.
SIS legislation in 2007 permitted superannuation funds to borrow in limited circumstances. This included payment of the surcharge, borrowing to pay a member’s benefits and for investment settlement transactions. The amount of the loan was limited to no more than 10% of the fund and was limited to a maximum of 90 days. For most purposes this was of little or no use to self-managed superannuation funds. Indirect borrowing was possible but there were a number of risks and limitations. Indirect borrowing could be done by the superannuation fund investing in geared share funds, publicly listed companies such as listed property trusts and listed investment companies. In some cases the investments could be made in private companies or trusts which had some levels of gearing. The problems with these investments were that the level of gearing could not be selected by the investor, there was no direct control over risk and selection of investments. In the case of private companies or trusts there were limits on the amount the fund could invest if the investment was an in-house asset.
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OPTIONAL SLIDE – Borrowing
OPTIONAL SLIDE – Borrowing
OPTIONAL SLIDE – Borrowing Sandra wishes to purchase a business property out of which she will run her business. Her SMSF has assets of $800,000, however, because of the state of the sharemarket she wishes to use the cash in her fund of $100,000 plus obtain a loan of $400,000 to purchase the property. Under the SIS legislation there are two possible ways of purchasing the property. The first is the use of an ungeared unit trust and the alternative is by using an instalment warrant. The next slides will look at the use of these arrangements to purchase the property
OPTIONAL SLIDE – Borrowing The structure of the warrant will be that once the property has been purchased it will be held in trust for the superannuation fund until the last instalment has been made. Loan repayments can be made from investment income and/or contributions into the fund. As the loan is limited recourse, if the super fund defaults on the repayment of the loan, the lender is only able to recoup the amount of the outstanding loan from the sale or repossession of the property. Once the lender has discharged the loan any surplus is paid to the superannuation fund.
OPTIONAL SLIDE – Borrowing While instalment warrants can be very useful there are a number of categories of people who can benefit from the use of a warrant to a greater degree. These would include those who wish to: Use gearing via superannuation Those who have made the maximum contribution possible as concessional or non-concessional contributions Those who wish to lend to the superannuation fund for purposes of the instalment warrant and use negative gearing for their own personal tax purposes Those who are unable to contribute to superannuation because they are over 65 and unable to meet the work test of 40 hours in 30 consecutive days. Also, those over 75 may also be able to take advantage of a warrant as they are not able to make contributions to superannuation. Younger members who have some money in superannuation but not enough to purchase a property wholly by use of the money in the fund.
Here are some questions that you should be asking yourself as Trustee of a super fund. If you don’t know or are uncomfortable with the answers. That’s OK, it doesn’t mean that you shouldn’t have your own fund, but it may mean that you should seek some information and advice from credible sources.
The trustees need to ensure that the fund is administered in a timely and accurate fashion. The “shoebox of receipts” needs to be kept in a very tidy fashion.
And the Trustees need to comply at all times with the rules and regulations.
If you are prepared to take the responsibility of managing your own super, you can invest in just about any asset you choose. Advantages Gives you greater ability to tailor your portfolio to suit your needs and invest directly More control on how you design your benefits With the benefits comes plenty of responsibility The fund must be maintained for the sole purpose of providing retirement income It must formulate and implement an investment strategy for the fund Must have a trust deed and trustees (one of whom is you) Must comply with SIS rules If you fail to administer your super fund properly and the fund losses its status as a complying fund, the penalties are severe, including penalty rates on the funds earning. If the fund suffers a loss, the trustees can be fined if they are found to have breached those conditions.
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.
And what we offer at RetireInvest; 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 a specialist Self Managed Super firm called Super Concepts. 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.
SMSF Self Drive Super
Matthew Dunstone Self-drive your super Matthew Dunstone is an Authorised Representative of RI Advice Group Pty Ltd
Disclaimer <ul><li>Important Notice </li></ul>RI Advice Group Pty Ltd, ABN 23 001 774 125, holds Australian Financial Services Licence Number 238429 and is licensed to provide financial product advice and deal in financial products such as: deposit and payment products, derivatives, life products, managed investment schemes including investor directed portfolio services, securities, superannuation, Retirement Savings Accounts. The information presented in this seminar is of a general nature only and neither represents nor is intended to be specific advice on any particular matter. RI Advice Group strongly suggests that no person should act specifically on the basis of the information contained herein but should obtain appropriate professional advice based on their own circumstances.
Agenda <ul><li>What is a ‘self managed superannuation fund’ (SMSF)? </li></ul><ul><li>What investments can I use? </li></ul><ul><li>Is a self managed super fund right for me? </li></ul><ul><li>What information do I need to decide? </li></ul><ul><li>Value of advice </li></ul>
The self-drive revolution <ul><li>Statistics indicate that a rapidly increasing number of Australians are taking up </li></ul><ul><li>this option... </li></ul><ul><li>Almost 30,000 new self managed super funds were launched in the year to March 2010 </li></ul><ul><li>There are now over 400,000 self managed funds representing more than 767,000 individuals </li></ul><ul><li>Self managed funds have over $400.1 billion in assets </li></ul><ul><li>According to average figures from the Australian Tax Office. </li></ul>Running your own fund means is a lot to consider – with greater freedom comes greater responsibility.
What is a Self Managed Superannuation Fund? <ul><li>The facts... </li></ul><ul><li>Up to 4 members </li></ul><ul><li>All members are trustees </li></ul><ul><li>If using a corporate trustee, all members must be directors of the corporate trustee </li></ul><ul><li>No member can be an employee of another member unless they are related </li></ul><ul><li>Can have ‘single member’ funds </li></ul><ul><li>Regulated by the ATO </li></ul>
Self Managed Super tends to suit… <ul><li>People who: </li></ul><ul><li>Operate small or family businesses </li></ul><ul><li>Like to have hands-on control over investment decisions </li></ul><ul><li>Like to have their superannuation customised to play a key role in family wealth and estate planning </li></ul><ul><li>Wish to invest in alternative assets </li></ul>
Why Self Managed? <ul><li>Cost </li></ul><ul><li>Control </li></ul><ul><li>Flexibility </li></ul><ul><li>Tax-effective wealth accumulation </li></ul><ul><li>Access to wider range of investments </li></ul><ul><li>Effective estate planning </li></ul>
What are the expected costs? The cost effectiveness of an SMSF will depend on the level of investments! Set Up Ongoing Fund $450 to $3,000 $1,200 to $3,000 Investment Advice 1% to 4% 0.5% to 1.0% Transaction Fees 1% to 4% 0.5% to 1.0%
What are the expected costs on $300,000? Set up Ongoing Fund $1,200 $2,500 Investment Advice $5,000 $2,000 Transaction Fees $1,000 $1,000 Total $7,200 $5,500 2.40% 1.83%
Setting up a Self Managed Super Fund <ul><li>Obtain a trust deed </li></ul><ul><li>Corporate or individual trustees? </li></ul><ul><li>Obtain a Tax File Number and Australian Business Number </li></ul><ul><li>Elect to become a regulated fund </li></ul><ul><li>Open a bank account in the name of the fund </li></ul><ul><li>Establish an Investment Strategy </li></ul><ul><li>Prepare minutes and documentation to admit members to the fund </li></ul>
<ul><li>A Trustee must be appointed, either a </li></ul><ul><li>corporate trustee, or </li></ul><ul><li>individual trustees where the primary purpose of the fund is to provide a retirement pension </li></ul><ul><li>all members must be trustees and vice versa. </li></ul><ul><li>Restrictions on who can be a trustee: </li></ul><ul><li>Minors (person under 18) </li></ul><ul><li>Individuals under a legal disability (eg. has lost mental capacity) </li></ul><ul><li>Bankrupts </li></ul><ul><li>Anyone disqualified from being a company director </li></ul><ul><li>Anyone convicted of fraud or dishonesty. </li></ul>Trustees
Obligations? What obligations? <ul><li>Responsibilities of Trustees </li></ul><ul><li>Investment Strategy </li></ul><ul><li>Investment Selection </li></ul><ul><li>Administration </li></ul><ul><li>Compliance </li></ul><ul><ul><li>SIS Act </li></ul></ul><ul><ul><li>ATO </li></ul></ul>
<ul><li>It must have regard to: </li></ul><ul><li>The investment objectives </li></ul><ul><li>Diversification </li></ul><ul><li>Risk & return </li></ul><ul><li>Liquidity (cash reserve) </li></ul><ul><li>Ability to meet liabilities </li></ul><ul><li>Asset allocation </li></ul>Investment Strategy Trustees must formulate and implement an Investment Strategy. An Investment Strategy is a plan for making, holding and realising fund investments.
Complete investment control? <ul><li>Investment limits and restrictions </li></ul><ul><li>Sole Purpose Test </li></ul><ul><li>Restricted acquisitions from related parties </li></ul><ul><li>In-house Asset Limits </li></ul><ul><li>Business Real Property Exemption </li></ul><ul><li>Derivatives only for risk management </li></ul><ul><li>Arm’s length dealings </li></ul><ul><li>Limited ability to borrow via a limited recourse loan </li></ul><ul><li>Trustee covenants </li></ul>
Related parties <ul><li>SMSFs are prohibited from acquiring most assets from a related party </li></ul><ul><li>Related parties include: </li></ul><ul><ul><li>Members </li></ul></ul><ul><ul><li>Standard employer of the fund </li></ul></ul><ul><ul><li>‘ Associate of the member’ </li></ul></ul>
In-house assets <ul><li>In-house assets are: </li></ul><ul><li>Investments in, and loans to, related parties </li></ul><ul><li>Restricted to 5% of the value of the fund </li></ul><ul><li>But there are some exceptions... </li></ul><ul><li>Listed shares </li></ul><ul><li>‘ Widely held’ unit trusts (managed funds) </li></ul><ul><li>Investments in pooled superannuation trusts </li></ul><ul><li>Business real property </li></ul><ul><li>Property owned by the super fund and a related party as tenants-in-common </li></ul><ul><li>Deposits with authorised deposit-taking institutions (ADI) and approved non-ADI </li></ul><ul><li>Life insurance policy issued by a life company (not acquired from a member or relative) </li></ul>
In-House Assets? <ul><li>Smith Family Super Fund Assets: </li></ul><ul><li>Macquarie CMT $ 15,000 </li></ul><ul><li>BHP shares $ 30,000 </li></ul><ul><li>Shares in Smith Pty Ltd $ 50,000 </li></ul><ul><li>Perpetual Aust Share Fund $ 50,000 </li></ul><ul><li>Shops 1-4, 52 Main St Adelaide $500,000 </li></ul><ul><li>Loan to Smith Pty Ltd $ 5,000 </li></ul><ul><li>$650,000 </li></ul>NO NO POSSIBLE NO NO YES
Borrowing to invest <ul><li>Prior to 2007 there were very few opportunities for funds to borrow directly. </li></ul><ul><li>Indirect borrowing via trusts or companies was possible but there were a number of risks and limitations. </li></ul>
Borrowing to invest – Limited recourse loans <ul><li>A geared investment in a superannuation fund can be achieved via a structure known as a ‘limited recourse loan ’ </li></ul><ul><li>A limited recourse loan can enable a fund to utilise borrowing to purchase a range of investments including direct property. </li></ul>With the right advice and approach this can be a powerful way to boost your super and diversify your investment portfolio
The legislation now provides… <ul><li>The superannuation fund is permitted to borrow </li></ul><ul><li>The loan must be applied to acquire an asset that the fund can ordinarily invest in </li></ul><ul><li>The asset is held on trust for the superannuation fund </li></ul><ul><li>The superannuation fund has a beneficial interest in the asset </li></ul><ul><li>The superannuation fund must make one or more payments to acquire the asset </li></ul><ul><li>If the superannuation fund defaults on the loan the lenders right to recoup is limited to the value of the asset. </li></ul>
A snapshot <ul><li>You can gear with your Superannuation Fund </li></ul><ul><li>Borrowing can be for any investments as allowed by SIS </li></ul><ul><li>Borrowing is limited to newly acquired assets (ie. not for currently held assets) </li></ul><ul><li>You can swap geared assets </li></ul><ul><li>You can only do a limited recourse loan via a Debt Instalment Trust structure </li></ul><ul><li>Lenders security is limited to the asset held in the debt trust </li></ul>
Lending <ul><li>There is no limit on the amount of the loan </li></ul><ul><li>There is no restriction on who the fund can borrow from </li></ul><ul><li>The loan must be on a limited-recourse basis </li></ul>Remember, the SMSF is responsible for the loan repayments, so it is important to consider the fund’s cashflow before entering into a borrowing arrangement.
Case Study <ul><li>Her SMSF has significant investments but she wishes to use $100,000 in the SMSF to purchase the property. </li></ul><ul><li>The property can be purchased by using a limited recourse loan </li></ul>Sandra wishes to purchase a property which is currently valued at $500,000
Let’s look at a limited recourse loan structure Super Fund Trust Lender <ul><li>Commercial Property </li></ul><ul><li>Security </li></ul><ul><li>Bank </li></ul><ul><li>Institution </li></ul>$400,000 $100,000 $500,000 Assets Cash $100,000 Shares $200,000 Property $500,000
<ul><li>Gearing investments via super including property, shares and exotics </li></ul><ul><li>Those who have met the concessional and non-concessional contribution caps </li></ul><ul><li>Negative gearing by lending to the fund at a premium rate </li></ul><ul><li>Those who wish to put money in super but can’t contribute – over 65 who don’t meet work tests </li></ul><ul><li>Younger members who wish to bring forward the purchase of investments via super </li></ul>Who can benefit most?
Investment options <ul><li>Superannuation is for the long term – the rest of your life. </li></ul><ul><li>Investments need to provide liquidity, growth and income. </li></ul><ul><li>Cash and Fixed Interest provide liquidity and income. </li></ul><ul><li>Direct Property provides income and growth </li></ul><ul><li>Shares provide liquidity, income and growth </li></ul>Growth investments such as property and shares can be volatile over the short term, but generally outperform cash and fixed interest over the long term
Investment selection <ul><li>Are all the members (trustees) skilled in investing? </li></ul><ul><li>Will business or other real property be purchased? </li></ul><ul><li>When will members reach preservation age? </li></ul><ul><li>How would the withdrawal of a member affect the fund’s assets? </li></ul><ul><li>Does the investment strategy take into account the liquidity requirements for the payment of pensions? </li></ul><ul><li>Do members require insurance cover? </li></ul><ul><li>What are the Member assets outside the SMSF? </li></ul>
Administration <ul><li>Being acquainted with and carrying out the terms of the trust </li></ul><ul><li>Ensuring that title of all fund assets is in the names of the trustees </li></ul><ul><li>Accurate bookkeeping </li></ul><ul><li>Annual lodging of tax return </li></ul><ul><li>Annual audit </li></ul><ul><li>Timely and efficient </li></ul>
Compliance <ul><li>Act impartially in the interests of all beneficiaries </li></ul><ul><li>Ensure that all vesting and preservation rules are adhered to </li></ul><ul><li>Keep informed & up to date </li></ul><ul><li>Adhere to lodgement timelines & bureaucratic requirements </li></ul><ul><li>Legislative requirements e.g. investment activities & maintenance of fund documentation. </li></ul><ul><li>Severe penalties for becoming non-compliant </li></ul><ul><li>SIS Act over-rides trust deed </li></ul>
Self managed super funds <ul><li>Do it yourself </li></ul><ul><li>Advantages </li></ul><ul><ul><li>Tailor to suit you </li></ul></ul><ul><ul><li>More control </li></ul></ul><ul><li>Disadvantages </li></ul><ul><ul><li>Only for retirement income </li></ul></ul><ul><ul><li>Formulate and implement a investment strategy </li></ul></ul><ul><ul><li>Must have a trust deed and trustees </li></ul></ul><ul><ul><li>Must comply with SIS rules </li></ul></ul><ul><ul><li>Severe penalties for non-compliance rest solely with the trustees </li></ul></ul>
Is Self Managed Super for you? <ul><li>What is your fund going to be used for? </li></ul><ul><li>What is the level of involvement you are willing to commit? </li></ul><ul><li>Do you want to out-source? </li></ul><ul><ul><li>investment strategy? </li></ul></ul><ul><ul><li>investment selection? </li></ul></ul><ul><ul><li>administration? </li></ul></ul><ul><ul><li>compliance requirements? </li></ul></ul>
The way forward <ul><li>Take advantage of this opportunity and get the right advice! </li></ul><ul><li>We take a collaborative approach with your accountant and legal advisers. </li></ul><ul><li>The result is a self managed super investment that is: </li></ul><ul><li>Professionally set up </li></ul><ul><li>carefully managed </li></ul><ul><li>creates the freedom for you to take a real hands-on approach to your investment </li></ul><ul><li>minimises risk and administrative time for you. </li></ul>The personal control and potential tax and cost savings can be substantial, so it's worth considering if a SMSF could be right for you.