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Self Managed Superannuation Funds

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Superannuation - Overview

1. Why save using superannuation?

2. Superannuation funds available in Australia

3. Self Managed Superannuation Funds

Setting up a SMSF Running an SMSF Advantages of SMSFs

4. Making an informed decision on whether or not a SMSF is right for you

Why save using superannuation?

A word about saving

Why Save?

To spend on living – home, car, family, lifestyle Retirement – when income from working stops

Who will pay for your retirement?

Government? You?

Government Policy Government funded basic age pension

– means tested

Encourage private savings & investment

Compulsory employer superannuation support:

The Superannuation Guarantee

Tax concessions:

“Negative gearing” – tax deduction for interest on income earning investments

Dividend imputation – refund of tax paid by listed companies on profits paid as dividends

Superannuation

Compulsory Superannuation Superannuation Guarantee (SG) – Employer funded retirement

YearSG Rate - % of ordinary time

earnings

2014/2015 9.5%

2015/2016 9.5%

2016/2017 9.5%

2017/2018 9.5%

2018/2019 10.0%

2019/2020 10.5%

2020/2021 11.0%

2021/2022 11.5%

2022/2023 12.0%

SG rate frozen at 9.5%

Voluntary superannuation saving Government tax concessions to encourage you to contribute

to superannuation:

Tax deductible superannuation contributions:

1. “Salary sacrifice” above the 9.5% compulsory rate2. Self employed - tax deduction against business income

Low rates of tax on earnings by superannuation fund investments while “accumulating” during your working life

Tax free retirement lump sum or pension on retirement after age 60

Is Superannuation the right tax concession for you?

1. Negative gearing – tax deduction for interest on income earning investments

2. Dividend imputation – refund of tax paid by listed companies on profits paid as dividends

Personal tax rates up to 49%

3. Superannuation – tax deduction for contributions, low tax on investment earnings

Tax on earnings of superannuation investments

• While accumulating – 15%

• When retired & drawing a superannuation pension – tax free

The big “trade off” of with superannuation

? Usually better tax savings Vs Cannot spend savings until retirement

Superannuation Funds

Choice of Superannuation Fund

Australia has $1.85 trillion saved in superannuation funds*

* APRA Statistics as at 30 June 2014

SMSFs control almost 1/3rd of Australia’s superannuation wealth

There are currently around 535,000 SMSF’s in Australia

3. Self employed:

All complying superannuation funds, including SMSFs

1. Employer “default” superannuation fund:

Must be a “MySuper” approved fund:

Provides minimum life insurance cover; Maximum direct member fees

Includes Industry Funds, Retail & Corporate Funds

2. Your own “Choice of Fund”:

All complying superannuation funds, including SMSFs;

No minimum requirements for insurance cover or fees

Public-Offer Funds Vs SMSFs

Self Managed Superannuation Funds (SMSFs)

Q: How many members can a SMSF have?

A: Up to 4 members

But typically, 2 members “Mum & Dad” or 1 solo member

Q: What can a SMSF invest in?

A: Most investments!

Subject to some restrictions like including lending the SMSF’s money to yourself, your relatives or your business.

Real Estate

Typical SMSF investments:

Fixed interest e.g. bonds term deposits

Listed Shares

Q: How do you get money into an SMSF?

A: Contributions

1. By your employer – Super Guarantee + salary sacrifice contributions; or

2. Personal contributions (from your private savings)

3. Roll-overs from other superannuation funds

Q: How much can be contributed?

A: Contribution “Caps” apply to each individual

Concessional (tax deductible) contributions; or

Non-Concessional (undeducted) contributions (from your personal savings)

SMSFs - Establishment

Q: How do you establish an SMSF?

A: Once you decide you want a SMSF:

1. Lawyers draw up a “trust deed” which becomes the governing rules of the SMSF. The SMSF must have a ”trustee”, either individuals or a company

2. The prospective members & trustee(s) sign the trust deed to create the SMSF.

3. The SMSF is registered with the ATO and receives its own ABN & TFN

4. You open a bank account for the SMSF in its name at a bank of your choice

5. You roll-over benefits from other funds or make contributions into the SMSF bank account

6. You may exercise a “Choice of Fund” to have your employer contribute to your SMSF

7. You formulate an investment strategy & begin investing

Q: How do you establish an SMSF?

A: …………….

5. You roll-over benefits from other funds or make contributions into the SMSF bank account

6. You may exercise a “Choice of Fund” to have your employer contribute to your SMSF

Caution!

If you roll-over some or all of your superannuation benefits from a large fund, you may lose some or all of your life insurance cover in that fund.

If you reduce or stop employer contributions to a large fund, you may also lose life insurance entitlements in that fund

Life insurance cover in a large fund can often be transferred to your SMSF, without having to go through medical exams.

This is a good starting point in your decision process

You may need a licensed insurance professional to advise & assist you

SMSFs - Membership

Q: How many members can a SMSF have?

A: Up to 4 members

Typically, 2 members “Mum & Dad”Q: Who else can be a member?

A: Adult children? Yes, but consider:

superannuation(in any fund) is a marital asset, that can be split on divorce or de-facto separation.

Children cannot “inherit” their parents superannuation. On death of the last surviving member who is not a “tax dependant”, all remaining benefits must be paid out of the fund, typically to their Estate.

Note: “tax dependant” means a spouse, or child under age 18 or any person in an inter-dependency relationship with you .

A: Your business partners?Yes, but consider divorce risk

and business/partnership breakdown

A: Your unrelated employees?

SMSFs – The Trustee

An SMSF must have a trustee!

Trustee is responsible for:

Investing on behalf of the members Receiving contributions from members or

their employers Paying benefits to members Paying taxes and expenses of the SMSF Reporting to members & ATO

All within the rules & requirements of:

Superannuation Industry (Supervision) Act & Regulations “SIS” Income Tax Assessment Acts Various other laws e.g. Super Guarantee, State based laws.

Q: Who can be a trustee?Q: Who must be a trustee?

A: Trustee can be:

At least 2 individuals; or A company

A: All members MUST be:

trustees; or directors of the trustee company

Q: What about a single member?

A: You can:

1. have one other individual trustee who is not required to become a member; or

2. be the sole director of a trustee company

Q: Should I have individual trustees or a create a company trustee?

A: Having individual trustees is cheaper because a company costs money to buy and maintain

However, a company can be better for a few reasons:

1. Estate planning;

a company continues on seamlessly after death of a member/director, whereas individual trustees need to be replaced.

Ensuring succession to the role of trustee when you die

Administrative ease

2. Limited liability

3. SMSF Borrowing? Banks want a company trustee.

SMSF Trustee requirements:

You must be 18 years of age or more You cannot be under a legal disability You cannot currently be insolvent

(e.g. bankruptcy) You cannot have prior convictions in respect

of dishonest conduct

Trustee declaration:

You have to make a declaration to the ATO that:

You are eligible to be a SMSF trustee/trustee director; & Accept & understand the responsibilities of being a SMSF

trustee/trustee director

Q: Who regulates SMSFs?A: The Australian Taxation Office (ATO)

ATO Regulates SMSFs & says:

1. “SMSF Trustee education is very important”

2. “Persons who demonstrate that they are not suitable to be SMSF trustees should be excluded from having their own fund”

SMSF Penalty Regime – From 1 July 2014

If you break the “rules”:

Rectification directions – requiring a SMSF trustees to rectify a breach of the SMSF rules

Education directions – requiring SMSF trustees to undertake an approved SMSF education course.

Administrative penalties - assessing a monetary penalty for certain breaches of the SIS Act & Regulations which govern the operation of SMSFs

SMSF Penalty Regime – From 1 July 2014

If you break the “rules”:

Administrative penalties - assessing a monetary penalty for certain breaches of the SIS Act & Regulations which govern the operation of SMSFs

SMSFs – The “Rules”!

Self Managed Superannuation Funds (SMSFs)Q: So what are the “rules”?

A: SMSFs must comply with “operating standards”:

1. The “sole purpose” of the fund must be to provide retirement benefits

2. Trustees & Members: Max. 4 members, all members are trustees/directors

3. Acceptance of contributions: e.g. members age 65 or over must pass a work-force participation test

before they can contribute in any year.

4. Payment of benefits: Benefits can only be paid to a member on satisfaction of a “condition of

release” e.g. retirement; age 65; permanent disability, terminal illness, death

5. Reporting: Value SMSF assets & prepare Financial Statements each financial year SMSF Annual Return (ATO) includes tax & regulatory information Minutes/resolutions of meetings & decisions

6. Investment: A written investment strategy must be created & regularly maintained

c) Artwork:

Must be separately insured within 7 days after purchase Cannot be kept at the members home No personal use or enjoyment is permitted

i.e. a pre-retirement “benefit”

A: SMSFs must comply with “operating standards”:

7. Investment restrictions:

a) No financial assistance to SMSF members or relativese.g. no personal loans or other financial assistance

b) Restricted lending to related entities called “in-house assets”

e.g. loans to companies or trusts you “control”: Cannot exceed 5% of the market value of the SMSF assets at any time Must be on arms length terms e.g. loan agreement, interest rate &

repayment terms Cannot be on-lent to members or relatives from a company or trust

(anti-avoidance)

7. Investment restrictions continued/-

d) A SMSF must not acquire assets from a member or a related party

e.g. a SMSF cannot purchase a residential rental property that you own

e) A SMSF cannot rent a residential property it owns to a member or a relative, not even for holiday letting or if they pay rent.

f) Exceptions:

A SMSF can acquire “business real property” from a member or related party provided:

It is used wholly & exclusively in a business (no residential part);& Is acquired at market value

A SMSF can lease business real property it owns back to a member’s or related party’s business; provided it is rented at arms length rental & terms

An SMSF can buy listed shares from a member or related party at market value.

SMSFs – Making the most of the tax rules

While “accumulating” in super:

Investment earnings taxed @ 15%

Capital gains realized are taxed @ 10%

(1/3rd discount ) if held > 12 months

Dividend imputation credits refunded

(30% company tax – 15% super tax = 15% tax refund)

SMSF investment income:

interest

dividends on shares

realized capital gains

Superannuation fund income - Taxation

Contributions:

Personal tax deductible “concessional”

Personal undeducted “non-concessional”

Employer 9.5% & salary sacrifice “concessional”

Concessional contributions taxed at 15%

Non-concessional contributions – tax free

While in “pension” phase

Investment earnings are tax free

Capital gains realized are tax free

Dividend imputation credits refunded

(30% company tax – nil super earnings tax = 30% tax refund)

SMSF investment income:

interest

dividends on shares

realized capital gains

Retirement

Retire after age 60; or

Simply reach age 65 (even if still working)

Commence a superannuation pension

Pension: Age 60+ tax free

Retirement

Retire after age 60; or

Simply reach age 65 (even if still working)

Contributions: Personal tax deductible

“concessional”

Personal undeducted “non-concessional”

Employer 9.5% & salary sacrifice “concessional”

Deductible contributions & earnings taxed at 15%

Transition to Retirement Income Stream No need to retire, reduce working hours (if

you want to)

Supplement your personal income with a superannuation pension

Pension: Age 60+: Tax free

Age 55 to 59: 15% tax rebate **based on individual circumstances

Tax free earnings & capital gains

SMSFs – Making the most of the investment rules

Q: Can I buy or contribute my business premises to my SMSF; & Can I lease it back to my business?

One of the unique features of an SMSF

6. Investment restrictions continued/-

d) A SMSF must not acquire assets from a member or a related party

e.g. a SMSF cannot purchase a residential rental property that you own

e) A SMSF cannot rent a residential property it owns to a member or a relative, not even for holiday letting or if they pay rent.

f) Exceptions:

A SMSF can acquire “business real property” from a member or related party provided:

It is used wholly & exclusively in a business (no residential part);& Is acquired at market value

A SMSF can lease business real property it owns back to a member’s or related party’s business; provided it is rented at arms length rental & terms

An SMSF can buy listed shares from a member or related party at market value.

A: Yes; provided:

The property (land & buildings) are wholly being used in a business, The property has no debt or mortgage on it, The SMSF acquires is based on a written valuation, If the SMSF is purchasing it from you, it has the cash to do so.

(Alternatively, you may be able to “contribute” the property to the SMSF, within your contribution caps?)

Important!: Capital gain on sale? Stamp duty Land tax Can’t use that property for

business finance/borrowing

A: Yes; provided:

The property is leased at market value to your business

Rent taxed at 15% - accumulation fund

No tax if a pension fund

Rent is tax deductible to your business

SMSFs – Borrowing

Superannuation:

Borrowing Update

Holding trust holds title to asset until loan is repaid

Super Fund receives rent, claims interest tax deduction, repays borrowing

Title passes to superannuation fund on completion

Important! SMSF can only repair the property, can’t improve it (to keep out property developers)

SMSF can only borrow once on this property. Cannot use it to borrow to buy other properties

Interest deduction at 15% or nil (pension fund).

SMSFs – Contribution Caps

Financial Year Age 50 & Over Under age 502014/2015 $35,000 $30,000

2014/2015If you were at least age 49 on 30 June 2014, your concessional cap is be $35,000 for the year ending 30 June 2015.

For all others the concessional cap is $30,000 for 2014/2015.

Superannuation Contributions

Concessional Contributions

Capped at $180,000 per person p.a.

Can be accelerated for those under age 65 using a “bring forward” rule

e.g. contribute up to $540,000 in any 3 financial year period.

Non-concessional “undeducted” contributions

SMSFs – The Decision?

You are the trustees & the members

Choose your own investments: Cash, fixed interest, bonds Shares in listed companies Managed funds & property trusts Residential or commercial property

Flexibility in implementing your financial strategies

Surety in Estate planning

Being in control

Q: Why do people establish their own SMSF?

Some important questions:

Self Managed Superannuation Fund

Q: You have to want to take control of your superannuation & investments

Q: Do you have the time?

Make an informed decision

Q: Do you need to see a financial adviser first?

Q: What are the costs involved for an SMSF?

Estate planning:

Q: Who will receive my superannuation on my death?

A: Your Will does not necessarily control to whom your super will be paid (in any fund)

Q: If you have a SMSF, who will be the trustee when on your death?

A: Succession to the role of trustee of the SMSF is vitally important if you are not intending on leaving your superannuation to your current spouse!

Hanrick Curran Superannuation

We are Accountants who are Superannuation Specialist Practitioners

Our Services:

Arrange for establishment of SMSFs

SMSF annual administration SMSF annual audit

SMSF compliance & taxation advice

SMSF Trustee “mentor/coach’

Chris Campbell – Partner

Clive Todd – Director

Frances Hill - Manager

Chris Campbell – Partner

Clive Todd – Director

Frances Hill - Manager

We are Accountants who are Superannuation Specialist Practitioners

We are not financial planners, we are not licensed to give financial advice. We don’t advise on investments

We give you the facts about superannuation, you make your own decisions

Ongoing role of SMSF Trustee “mentor/coach’

Q: Where do I start?

Q: Which way do I go?

Q: How do I…?

Q: Can I…..?

A: Working together with you & other professionals

More information on SMSFs?

https://www.ato.gov.au/super/self-managed-super-funds/

ATO videos:

What’s involved with an SMSF

SMSF – You can’t do it all yourself

SMSF annual obligations

SMSF sole purpose test

SMSF loans and early access

SMSF investment strategy

SMSF paying an income stream

SMSF planning for the unexpected

SMSF trustees – individual or corporate

SMSF – trustee declaration

DisclaimerThis document contains information in summary form and is therefore intended for general guidance only. It is not intended to be a substitute for detailed research or the exercise of professional judgement. It does not purport to be comprehensive or to render professional advice. The reader should not act on the basis of any matter contained in this publication without first obtaining specific professional advice.

We believe that the statements made by us in this document are accurate but no warranty of accuracy or reliability is given. Our conclusions are based on interpretations of accounting standards and other relevant professional pronouncements and legislation current as at the date of this document. Should the interpretations, accounting standards, other relevant professional pronouncements or legislation change, our conclusions may not be valid. We are under no obligation to update the matters considered in this document after its publication.

These notes specifically contain factual information concerning the taxation and compliance implications of certain superannuation matters. The notes are intended as a guide only and may not apply to circumstances of particular individuals. Do not act on the contents of these notes without first obtaining specific advice from a qualified tax or legal professional about your particular circumstances.

Hanrick Curran Group, its associates and the presenter hereby disclaim any responsibility for persons relying in whole or in part on these notes or the information presented at this seminar.

The Corporations Act 2001 deems superannuation funds, self managed superannuation funds (SMSFs) and pensions to be “financial products” and may consider a recommendation to contribute to a fund, increase or decrease contributions, establish or join a SMSF, or to commence a superannuation pension to be financial product advice as defined by that Act. We are not licensed to give such advice. You should consider taking advice from an AFS License holder before making a decision on any financial product.

Thank you

www.hanrickcurran.com.au

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