SMSF Flashcards
SMSF’s
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
Financial Advising and SMSF’s
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
Benefits of SMSF’s
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
Disadvantages of SMSF’s
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
Establishing a DYI fund
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?
Steps required to establish an SMSF
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
Rules of governing DIY Funds
o SMSFS are trusts, therefore subject to trust law and common law
o Trust deed contains governing rules of the fund
Trust deeds
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
Trustee duties
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
Devising an investment strategy
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
Appointing a corporate trustee
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
Sole purpose test
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
In-House assets test
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%
SMSF borrowing
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
SMSF indirect borrowing
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
Limited Recourse Borrowing Arrangement – Pros and Cons
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
Collectables and Artwork
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
SMSF’s and insurance
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
Small fund
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
SAF vs SMSF
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
