self managed super funds take control of your super

Self managed super fundsTake control of your super

Speaker’s name Title/departmentApril 2013

3April 2013

Disclaimer

This information was prepared by Securitor Financial Group Ltd, ABN 48 009 189 495 AFSL & Australian Credit Licence (ACL) 240687 (Securitor) and is current as at January 2013.

Material contained in this presentation is an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such.

This presentation contains general information only and does not take into account your personal objectives, financial situation or needs and so you should consider its appropriateness having regard to these factors before acting on it.

All case studies and examples used in this presentation are for illustrative purposes only and nothing in this presentation should be construed as an indication or prediction of future performance or results.

Any taxation position described in this publication should be used as a guide only and is not tax advice. You should consult a registered tax agent for specific tax advice on your circumstances.

As the rules associated with the super and pension regimes are complex and subject to change and as the opportunities and effects differ based on your personal circumstances, you should seek personalised advice from a financial adviser before making any financial decision in relation to any matters discussed in this presentation.

4April 2013

Agenda

What is a self-managed superannuation fund (SMSF)?

Setting up an SMSF

Things to consider as a trustee

Things to consider when managing the fund

How should trustees be investing?

Strategies for SMSFs

Next steps

Questions

What is an SMSF?

6April 2013

What is a self-managed super fund (SMSF)?

An SMSF is a superannuation fund that you manage yourself.

It provides retirement benefits for its members in the same way as a regular super fund.

There are however some complex rules and regulations to be mindful of.

SMSF market1:

– 478,263 funds registered with the Government

– 35,276 new funds established last 12 months

– 31.3% of total super assets are held in SMSFs ($439 billion)

– 913,550 members

31%

69%

SMSF Share of Super

Non SMSF

SMSF

1 ATO Quarterly Statistics June 2012

7

Where do SMSFs fit into the super landscape?

RetailSuperFund

Wrap Type

Super Fund

Self Managed Type Super

Ch

oic

e/F

lexib

ilit

y/C

on

trol

Responsibility/Time/ExpertiseLow High

Low

Hig

h

- Can choose risk profile

- Insurance benefits

- Task: Keep beneficiaries updated

- Cash- Shares- Bonds

- Direct property- Collectables- Cash- Shares- Bonds

April 2013

8April 2013

Customer drivers of SMSF

Advantages

Control of investment decisions

Direct Investments options

Investment returns

Lower costs

Ability to gear

Tax management

Flexible retirement pension options

Flexible estate planning / protection options

Disadvantages

Full trustee responsibilities

Lack of knowledge

Time consuming to run

Tough penalties for breaching rules

May be uneconomic for low balances

Extra legal responsibilities

Potentially higher costs

Maximum of four members

Setting up an SMSF

10April 2013

Steps to setting up an SMSF

1. Obtain a trust deed

2. Appoint trustees

3. Sign a declaration

4. Collect members’ TFNs

5. Contribute or transfer assets to the SMSF

6. Lodge an election with the ATO

7. Open a bank account

8. Establish an investment strategy

9. Obtain death benefit nominations from each member

11April 2013

Obtain a trust deed

A trust deed establishes the rules and conditions governing the fund.

These may include:– Details of the trustees and who can be a trustee – How trustees may be appointed and removed– Trustee powers– Who can contribute to the fund– What types of benefits can be paid – What types of investments can be used– Procedures for winding up the fund– Intention to create a Trust

It is important that the trust deed is signed and properly executed

12April 2013

Appoint trustees

The trustees of a SMSF can be either:

Individuals

– each member must be a Trustee and each Trustee must be a member, and

– except for single member funds, which must have 2 Trustees

Corporate

– each member must be a director of the corporate trustee company, and

– each director must be a member of the SMSF

13April 2013

Sign a declaration

All trustee(s) or director(s) of the corporate trustee of the SMSF must declare they understand their obligations, duties and responsibilities.

Some obligations and responsibilities include:

– Acting honestly in all matters affecting the SMSF

– Acting in the best interests of the members

– Formulate and implement the investment strategy

– Keep SMSF assets separate from personal and business assets

– Allow members access to certain information

14April 2013

Lodge an election with the Regulator

To become a complying super fund and receive the associated tax concessions, a fund must elect to become regulated.

Must register with the ATO within 60 days of starting fund

ATO will allocate a TFN and ABN to all registered funds

15April 2013

Open a bank account

Set up a bank account to accept contributions, rollovers and earnings, pay fund expenses and liabilities and purchase investments.

Bank account must be in the fund’s name.

The bank account is used to manage daily fund operations and often referred to as the “Hub account”

Should be kept separate from individual trustee bank accounts

16April 2013

Establish an investment strategy

Trustee obligation to have an investment strategy which sets out the guidelines for all future investments by the fund.

Must have regard to whole circumstances of fund:– Risk & return– Diversification– Liquidity– Ability of the fund to discharge liabilities– Strategy should consider objectives of each member– Separate strategy to manage fund reserves– Include insurance coverage– Review investment strategy

17April 2013

Obtain death benefit nominations

Members can provide the trustee with a written death benefit nomination.

Nominations should state who is to receive their super benefit upon their death and in what proportion.

Nominations can be:

– Binding

– Non-binding

– Reversionary (for pensions)

Things to consideras a trustee

19April 2013


An SMSF can have no more than four members.

The trustees of an SMSF can be either individuals or a company.

No member of the SMSF can be an employee of another member, unless the members concerned are relatives.

Trustees must carry out their duties without payment.

Trustees are bound by law to responsibly manage the fund and are personally liable for any actions of the fund.

Trustees will be required to set aside time for the ongoing management of the SMSF.

20April 2013


A trustee cannot be a ‘disqualified person’, meaning the trustee:

– has never been convicted of an offence involving dishonest conduct

– has never been subject to a civil penalty under the SIS Act

– is not insolvent under administration (an undischarged bankrupt)

– has never been disqualified from acting as a trustee of a superannuation fund by the regulator.

A company cannot act as trustee if:

– a responsible officer of the body corporate is a disqualified person

– a receiver, official manager or provisional liquidator has been appointed

– the company has been wound up.

22April 2013


Investment strategy– Trustees are required to prepare and implement the

investment strategy and regularly review it. – Strategy must reflect purpose and circumstances of the

SMSF.– Must consider whether insurance should be purchased by

the SMSF.– The SMSF’s assets must be held separate to the trustee’s

personal assets, and valued to market each year.

Insurance via superannuation– Death, TPD and Income Protection policies can be

purchased by the SMSF.

Beneficiary nominations– binding and non-binding

23April 2013

Things to consider when managing the fund...

SMSF must provide an independent audited annual return to ATO

– Must include member contribution information including rollovers from other super funds.

Record keeping

– Accounting records, such as annual operating statement, annual statement and annual returns, must be kept to record and explain transactions and the fund’s financial position.

Compliance

– Trustees must ensure the SMSF complies with Superannuation Industry (Supervision) legislation (SIS)

How should trustees be investing?

25April 2013

The Fund’s investment strategy

As a trustee you must consider:

Risk involved, likely returns and fund objectives

Composition of a fund’s investments, diversification

Liquidity requirements of the fund

Ability of the fund to discharge present and future liabilities

Insurance needs for members

Members risk profile:

– Risk profiling will impact on asset allocation

– One risk profile for the fund?

– Multiple risk profiles for individual members?

Question:How much are

members prepared to lose

and still be comfortable?

26April 2013

The different types of assets

Core type

Cash / Term Deposits

High interest savings a/c

Diversified fixed interest

Tailored term deposits

Australian property

Managed funds

Exchange Traded Funds (ETFs)

Satellite type

Directly held shares

Self-finding instalment warrants

Specialised managed funds

Global property

Hybrid securities

Global fixed interest

Capital protected products

Strategies for SMSFS

28April 2013

Strategies for SMSFs

1. Purchasing a residential investment property with borrowed funds

2. Purchasing a business real property with borrowed funds

3. Avoid the liquidity trap – helping trustees plan for the future

4. Insurance in SMSFs – helping trustees meet their members’ insurance needs

5. Borrowing to invest within an SMSF

6. SMSF and Estate Planning

29April 2013

Strategies for SMSFs...

1. Purchasing a residential investment property with borrowed funds

– If an SMSF don’t have sufficient funds for a full purchase, but has enough for a partial funding.

– Your SMSF can purchase a residential investment property under a Limited Recourse Borrowing Arrangement (LRBA).

30April 2013


2. Purchasing a business real property with borrowed funds

– Your family company wants to unlock cash that’s currently tied up in your business premises, which is owned outright.

– Your SMSF, which holds a significant amount of cash, can purchase the business premises from your company under a Limited Recourse Borrowing Arrangement (LRBA).

31April 2013


3. Avoid the liquidity trap

An advantage of having your own SMSF is the variety of investments you can invest in (i.e. rental and business properties)

However, there is a potential problem when large assets like property are held. If an SMSF must meet an obligation to pay benefits property may be may be slow or difficult to sell in an emergency.

32April 2013


3. Avoiding the other liquidity trap – at pension time

The liquidity trap for SMSFs isn’t just about emergencies

Pension payments in retirement mean you need ongoing cash flow

Take care before committing to the purchase of a single asset that will represent the majority, if not all of the fund’s assets

A diversified investment portfolio including cash, managed funds, and listed shares can be effective in managing:

– volatility; and

– the need for liquidity and divisibility

To enable timely payment of super benefits to members.

33April 2013


4. Insurance in SMSFs

Providing insurance cover within a SMSF

Insurance cover for members is owned by the fund on the life of the members

The fund can insure members for:

– Life Insurance as a result of death

– Total and Permanent Disablement

– Income Protection

The fund can claim a tax deduction for certain insurance premiums.

Provides cash liquidity to enable payment of death benefits to beneficiaries.

Provides protection for any borrowings within the fund.

34April 2013


5. Maximising franking credits in your SMSF

Purchasing high-yielding, fully franked stocks, means you can earn higher franked dividend income and potentially generate excess franking credits in your SMSF.

Excess franking credits may be used to:

– offset taxable contributions; or

– offset tax payable on earnings from other investments within the SMSF; or

– obtain a refund of any excess credits after offsetting tax on other income within the fund

Using instalment warrants to borrow to invest can help to maximise the franking credits available to you

35April 2013


5. Borrowing to invest within an SMSF

It is a concessionally taxed environment

Can use super contributions and investment income to service loan repayments

Have met the concessional and non-concessional contribution caps but still wish to increase their SMSF portfolio

Want to bring forward the purchase of investments via superannuation

How does it work?

36April 2013


5. Borrowing to invest within an SMSF....

Issues to consider:

Cost

Cash flow

Investment restrictions

Steps to borrow through SMSF:

SMSF trustees must formally agree to the use of a borrowing arrangement.

Decide which asset to purchase in line with the fund’s investment strategy.

Establish the Custodian Trust to purchase the asset

Arrange finance – either related party or commercial loan

Arrange the relevant loan documentation

37April 2013


6. SMSF and Estate Planning

In the event of death of a member the SMSF can pay death benefits in the form of:

– a lump sum to beneficiaries

– a pension to a SIS spouse dependant or child dependant beneficiaries

– a reversionary pension to spouse for existing pensions

Super death benefits do not form part of your estate unless the estate is nominated as beneficiary under binding or non-binding death benefit nomination form.

If structured correctly the SMSF can be an efficient way to pass assets to beneficiaries

Next steps

39April 2013

Next steps

Consider whether an SMSF is right for you.

Speak to a Westpac Financial Planner to discuss your goals and financial circumstances

Questions?

self managed super funds take control of your super

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