SMSF

Question 1

 SMSF’s

Answer 1

o Designed to provide tax efficient retirement benefits to members
o Need 200k in super before you can start a SMSF
o Can be established from an eligible termination payment rolled over from an existing super fund
o Established by execution of a trust deed that sets out who can be members, and the rules and principles upon which the fund operates
 The contract

o Has up to 4 members
o Operated by the fund trustee, as legally they take the form of a trust
o All members are trustees, all trustees are members’
 A family or business partners
 A corporate trustee can be used
o A fund trustee has wide discretion in selection of investments for the fund
o Trustees cannot be receiving any fee for services to the fund
o Must ensure that the fund is run for the sole purpose of providing retirement benefits for members
o Must have an investment strategy that is likely to result in an increase in the retirement income of fund members
o Members are all involved in decisions
o Assets of the fund must be kept separate from the assets of trustee

Question 2

 Financial Advising and SMSF’s

Answer 2

o When giving advice on SMSF, the adviser needs the appropriate license
 E.g. special training, different legislation
o Holders of AFSL must demonstrate both their own competence and that of their authorized representatives
o Licensees may therefore decide not to provide SMSF advice or requires completing training

Question 3

 Benefits of SMSF’s

Answer 3

o Provide control, flexibility, tax advantages and possible cost reductions for members

o Control
 Member sets fund rules via trust deed
 Members decide on investments

o Flexibility
 Fund is portable
 Ability to invest in wide range of investments
 Timing of investments for capital gains tax purposes
 Ability to invest in own business real property

Question 4

 Disadvantages of SMSF’s

Answer 4

o Responsibility, liability, administration, costs and investment issues
o Strong onus on trustee / members to comply with rules
o Serious consequences for breaches

o Costs can be expensive
 No access to wholesale rales
 Inability to access group insurance rates
 Mistakes are made due to lack of knowledge

o Investment issues
 Clouding judgement, believes wrongly they have better judgement
 Failure to adequately manage investments
 Retaining poor or non-performing assets – affected by bias

o Initial establishment
 Trust deed fee of up to 3k
 Advice fees, brokerage fees, bank chargers

Question 5

 Establishing a DYI fund

Answer 5

o Is the SMSF strictly for retirement purposes?
o Does the taxpayer have the time and skills?
o Are benefits worth the costs?
o How will switching to SMSF affect taxpayer’s super?

Question 6

 Steps required to establish an SMSF

Answer 6

o Decide on name of the fund
o Draft the trust deed
o Obtain written consent of trustees to act
o Obtain and sign ATO trustee responsibility form
o Obtain applications for membership of fund, personal details, TFN etc

o	Hold first meeting of trustees. An agenda might include
	Discuss main implication of trust deed
	Agree to apply for TFN, ABN
	Agree on investment strategies
	Bank accounts etc
	Confirming everything in the trustee

Question 7

 Rules of governing DIY Funds

Answer 7

o SMSFS are trusts, therefore subject to trust law and common law
o Trust deed contains governing rules of the fund

Question 8

 Trust deeds

Answer 8

o	Contain governing rules of the fund
o	Mechanisms for appointing and removal of trustees
o	Decision making powers of trustees
o	Process for admission of members
o	Mechanisms for appointment of advisers
o	Investment objectives and strategies
o	Rule of acquisition and disposal of investment
o	Procedures for changing trust deeds
o	Procedure for winding up fund

Question 9

 Trustee duties

Answer 9

o A lot of obligations of a SMSF trustee
o Some overlap of SIS and trust law duties
o Difficult to figure out what is applicable

Question 10

 Devising an investment strategy

Answer 10

o Must be in trust deed
o Must take account of the whole of the circumstances of the fund including
 Investment risk cash flow needs
 Composition of funds investment as a whole
 Liquidity
 Capacity to discharge liabilities

o	Also need to be addressed
	Investment objectives of members
	Portfolio allocation strategy to meet the objectives
	Preferred investment style
	Investment types for each asset class
	Specific assets in each asset class

Question 11

 Appointing a corporate trustee

Answer 11

o Limits trustee legal exposure
 Limited liability of a company means any claim against the fund is limited to the assets of the corporate trustee company

o Corporate trustees are typically companies attached to banks / financial institutions due to economies of scale
 Offer reduce compliance costs

o Change of membership is less trouble with a corporate trustee
 Individual trustees can come and go
 New trust deed does not need to be created

o Compliance for pay lump sums is easier with a corporate trustee

Question 12

 Sole purpose test

Answer 12

o Retirement benefits accumulating prior to retirement / condition of release
o Benefits on meeting a condition of release
o Benefits to LPR on death of a member

o Investments must be made and maintained on a strict arm’s length basis
 At prevailing market rates
 Penalty is that the fund is taxed at 47% on non-arm’s length income earned

Question 13

 In-House assets test

Answer 13

o Those closely related to parties associated with the fund

o Lending/borrowing/investing fund money with associates is restricted
 Maximum value of a funds in-house assets can not be more than 5% of market value

o Trustees prohibited from acquiring assets from members, their relatives or other related parties unless the asset is
 Real estate used wholly and exclusively in business acquired at market value
 A listed security acquired at market value
 A unit in widely held unit trust
 Certain insurance policies
 In-house assets under 5%

Question 14

 SMSF borrowing

Answer 14

o Forbidden to borrow except in following situations
 If it needs cash to pay a member’s benefit
• Money can be borrowed for up to 90 days
• Must not exceed 10% of the market value of the fund’s assets

 If it needs cash urgently to settle a share transaction
• Must not exceed 10% of market value
• Must not be for longer than 7 days

o Can arise if fund is heavily invested in illiquid assets

o Or if members suddenly become disabled or die

Question 15

 SMSF indirect borrowing

Answer 15

o SMSF can enter an arrangement to acquire a single asset that the SMSF is permitted to acquire and hold directly

o Investment held on trust

o In the event of default on the asset acquired, lender against the SMSF trustee is limited to rights over the asset

o Isolate asset

Question 16

 Limited Recourse Borrowing Arrangement – Pros and Cons

Answer 16

o LRBA
o Pros
 Diversification benefits
 Other assets are protected if you default
o Cons
 Benefits of rental income and capital growth may not outweigh mortgage interest and cost of property maintenance
 Exposure to property market risks
 Illiquidity risk exposure
 Rules around borrowing changes on a regular basis

Question 17

 Collectables and Artwork

Answer 17

o New rule
 Must meet specific rules regarding use and storage for these to be allowable

o Rules
 These investments must not give rise to a current-day benefit /enjoyment
 Genuine retirement purposes for investing
 Stored somewhere other than the private residence
• Must not be used
 Must be insured in the name of the fund within 7 days of purchase

o Artwork can be leased

Question 18

 SMSF’s and insurance

Answer 18

o Trustees must consider whether to hold a contract of insurance for members

o Considerations
 Continuity of insurance cover even with a change of employment
 Super funds can’t offer trauma insurance
 Unlikely to be able to acquire premiums as cheaply as those offered by large superannuation funds

Question 19

 Small fund

Answer 19

o SAF
o Subject to APRA regulation
o Has appointed an approved trustee, a professional trustee company
o Can include as a member an arm’s length person such as an employee
o Members have access to Super Complains tribunal

Question 20

 SAF vs SMSF

Answer 20

o Old age, decide to hand over responsibility
o If you become a non-resident for income tax purposes, SMSF may be made a non-resident super fund
o Bankruptcy
 Bankrupt cannot be an SMSF trustee and SMSF member
o Lack of time
o Access to Superannuation complains tribunal