Understanding self-managed super fund performance

New research released

When used in the right circumstances a self-managed super fund (SMSF) can provide important benefits for individuals looking for greater levels of investment flexibility and control over how their super savings are invested.

New research released by the University of Adelaide shows an SMSF may be a suitable option for individuals with lower superannuation balances than previously thought.

In its report, titled “Understanding self-managed super fund performance” the University of Adelaide used data from over 318,000 SMSFs between 1 July 2017 and 30 June 2019, to identify the minimum amount of capital required for an SMSF to achieve comparable investment returns with much larger funds.

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What is a Director Identification Number (director ID) and do I need one?

You may have heard about the new rules which require directors of Australian companies to obtain a Director Identification Number (director ID). The new requirement to obtain a director ID also applies to individuals who have an SMSF with a corporate trustee, which is why I wanted to bring this new requirement to your attention. All directors of your corporate trustee will need to apply for their own director ID by the prescribed deadline.

This document provides some important information about Director Identification Numbers, including how to apply for one and by when.

An application for a director ID must be made individually and only by those who are applying for the director ID. As you are required to prove your identity as part of the process, our firm, or any other third party, is not able to apply for a director ID on your behalf.

What is a Director Identification Number (director ID)?

A director ID is a unique identifier that directors need to apply for, like a tax file number. If you are a director of multiple companies, you are only required to have one director ID that will be used across all companies. You will keep your director ID forever even if you change companies, resign altogether from your director role(s), change your name, or move overseas.

Why do I need a Director Identification Number?

As part of the Government’s Digital Business Plan, it is rolling out a Modernising Business Registers program which includes the introduction of director IDs. The main purpose is to prevent the use of false or fraudulent director identities as well as to improve the efficiency of the system by making it easier to meet registration obligations and trace director activity and relationships. By improving the integrity and security of business data it is expected to reduce the risk of unlawful activity. (more…)

Setting up an SMSF – What do you need to consider?

Setting up an SMSF can be complicated.  Not getting it right can materially affect your financial situation and retirement plans.

The first question you need to be sure about is whether an SMSF is the right fit.  Seeking specialised financial advice can help you determine this answer. Some considerations include:

Low balances

You must ensure you have an appropriate superannuation balance before considering an SMSF. While a low balance can be a red flag, it is not always a barrier to entry.  Establishing an SMSF with a small balance may not be in your best interests. This is because SMSFs tend to be more cost-efficient with larger balances. Therefore, before rolling over your superannuation balance to an SMSF, you should establish and justify that by doing so you are likely to end up in a better position in retirement.

Motivation

You must also understand your motivation for establishing an SMSF. The most common motivation SMSF trustees indicate is control. Control of an SMSF allows individuals to have a wide range of investment choice, flexibility and engagement with their superannuation. However, superannuation law is complex and you need to ensure your ambitions are allowed under the law and will be able to achieved in an SMSF.

Costs and time

SMSFs incur a wide range of costs in establishment and the day to day running of the fund. Ensure you are across the estimated establishment, accounting and audit costs that will be incurred by your SMSF. Speak with your advisers so you are across all other incidental costs, which unlike large super funds generally occur with fixed rates rather than as a proportion of your balance.

SMSFs also require dedicated attention from trustees which will take time out of your daily life to manage. Understanding from the outset your legislated responsibilities and obligations before establishing an SMSF is important.

Establishment process

Once you have decided that an SMSF is right for you, the process of establishing the fund can commence. A Specialist SMSF adviser is the best person to help you with this process which generally involves choosing a trustee structure, selecting a trust deed, completing the ATO registration,  opening a unique fund bank account, getting an electronic service address and arranging for rollovers to the fund to occur.

Investment Strategy and Insurance

Upon establishment you must also create an investment strategy which must be regularly reviewed.

Your investment strategy should be in writing and must consider:

•             Diversification (investing in a range of assets and asset classes).

•             The liquidity of the fund’s assets (how easily they can be converted to cash to meet fund expenses).

•             The fund’s ability to pay benefits (when members retire) and other costs it incurs.

•             The members’ needs and circumstances (for example, their age and retirement needs).

•             Whether to hold insurance in your SMSF.

Property investment

It is also common for SMSF trustees to be motivated by investing in property when establishing an SMSF. You should be sure that any investment in property, particularly when gearing is involved, is appropriate for your circumstances. Holding properties in an SMSF can also require some complex structures to ensure the law is being followed and specialist advice may be needed before making an investment choice. A lack of diversification, low balances and inappropriate property investments can have a detrimental impact on your retirement savings.

How can we help?

If you are considering an SMSF, please feel free to give me a call to arrange a time to meet so that we can discuss your particular requirements and circumstances in more detail.

Superannuation death benefits – Review succession plans

1 July 2021, saw the Transfer Balance Cap (TBC) indexed for the first time to $1.7 million from the original $1.6 million limit which was introduced on 1 July 2017. Indexation of the TBC means there is no longer a single cap that applies to all individuals. Instead, every member has their own personal TBC of between $1.6 million and $1.7 million, depending on their circumstances. If you are already in receipt of a pension, it is important to review your personal TBC and seek help if you unsure how to calculate, or locate, your personal TBC

The TBC not only imposes a limit on the amount of capital that you can transfer to the retirement phase of super, but it also has an impact on what happens to your superannuation when you die. The $1.7 million TBC applies to pensions paid to your dependants after you die (called death benefit pensions or reversionary pensions) meaning it has a substantial impact on estate planning. 

When it comes to the TBC, the main issues that you need to plan for in the event of death include:

  • If your death benefit will be paid as a death benefit pension, your beneficiary’s TBC will be relevant in determining how much can be paid as a pension to them. Any excess death benefit above their TBC must be paid as a lump sum to them.  This limits the amount of money that can now be retained within the superannuation environment upon your death.
  • Where your dependant has already used some of their TBC, you may need to consider strategies which maximise the amount of your benefits that can remain in the SMSF on your death and minimize the amount that would need to be paid to your beneficiaries as a lump sum.
  • The special rules which delay when the reversionary pension counts towards the new recipient’s TBC and the differences between how reversionary and non-reversionary pensions are counted towards the new recipient’s TBC.
  • The special rules that operate to modify the TBC of a child in receipt of a death benefit pension to ensure that their personal TBC is not exhausted.
  • The ability for a recipient of a death benefit pension to rollover the pension to another super fund (note, to satisfy the regulatory rules, a new death benefit pension must be commenced in the new fund or the amount must be withdrawn from the superannuation environment as a lump sum death benefit).

Given the significant shift in the landscape with respect to SMSFs and estate planning, we also strongly recommend that trustees have their SMSF trust deed reviewed to ensure maximum flexibility when dealing with excess TBC amounts, rollover of death benefits, reversionary pensions and child pensions. This should be done alongside the review of any binding death benefit nomination(s) you have in place to ensure that they too are valid and provide the certainty in how your death benefits will be dealt with upon your death.

The payment and tax treatment of death benefits paid from an SMSF has traditionally been a complex area, with the need to obtain advice from a specialist. With the recent introduction of the TBC, the need for specialist advice has never been more important.

Moving from Working Holiday Maker to Temporary Skills Shortage 482

When you are moving from Working Holiday Maker (WHHM) Visa to a Temporary Skills Shortage 482 (TSS482) you need to ensure that you complete the attached Withholding Declaration form and give it to your employer.

The ATO receives your tax status from your employer, so without doing this you could end up under or over paying tax. It could come as quite a shock when you are completing your end-of-year tax returns.

“If you’re on a working holiday visa, you’ll be taxed at 15% for the first $37,000 you earn. If your residency status changes during the financial year, you’ll need to notify your employer by completing a withholding declaration to notify them of the change in your residency status and you elect to start claiming the tax-free threshold.

When your residency status changes partway through a financial year, you’ll be entitled to a pro-rata tax-free threshold based on the number of months you’ve been a resident of Australia. If you’re concerned you won’t have enough tax withheld based on your situation, you can request extra tax to be withheld by completing an upwards variation form.”

(https://community.ato.gov.au/t5/Working-visa/Tax-moving-from-a-417-to-482-TSS-Visa/td-p/13622)

Should you have any queries in relation to your working visa please contact our office at foxton@foxtonfin.com.

SMSF Trustee Program

An SMSF is a very important financial planning decision. When operated within the rules they provide a powerful wealth creation tool, however too often SMSF trustees drift ‘outside the flags’ and end up in need of rescue.

To ensure you ‘stay between the flags’ complete our comprehensive SMSF Trustee Program, which comprises 7 lessons. This course is suitable if you have received an education direction from the Australian Taxation Office (ATO) and are required to complete an approved ATO education course.

Is your SMSF adequately diversified?

SMSF trustees need to truly understand diversification and better diversify their portfolios.

The benefits of a well-diversified portfolio are numerous but the key ones that SMSF trustees should focus on are the benefits of mitigating volatility and short-term downside investment risks, preserving capital and the long-run benefits of higher overall returns. By spreading an SMSF’s investments across different asset classes and markets offering different risks and returns, SMSFs can better position themselves for a secure retirement.

However, did you know that 82% of SMSF trustees believe that diversification is important but in practice many do not achieve it?

This is because half the SMSF population cite barriers to achieving diversification. The top being that it is not a primary goal for SMSF trustees, and they believe they have a lack of funds to implement it.

Furthermore, 36% of SMSF trustees say they have made a significant (10%) asset allocation change to their SMSF over the last 12 months. This demonstrates that SMSFs may not be actively restructuring their portfolio on an annual basis to respond to changing market conditions.

Another clear problem regarding diversification is the amount of SMSFs with half or more of their SMSF invested in a single investment. SMSF trustees say they primarily invest in shares to achieve diversification in their SMSF, while just a quarter say they invest in at least four asset classes to achieve this.

The bias and significant allocation to domestic SMSF equities conversely may highlight the fact that SMSFs are not adequately diversified, especially across international markets and other asset classes.

So what can you do?

Some of the steps you, with the help of an SMSF Specialist, can take to diversify your retirement savings and control your investments in a disciplined and planned way include:

  • Ensuring there is a clear and demonstrable retirement purposes in the choices you make.
  • Ensuring you have an investment objective and a strategy to achieve that objective in place.
  • Reviewing your portfolio and assessing it against the objectives you have set as often as you feel is necessary.
  • Minimising concentration to any one asset class.
  • Ensuring your Australian share portfolio is sufficiently diversified.
  • Considering the benefits of geographic diversification.
  • Ensuring your cash allocation is appropriate.
  • Considering the benefits of exchange traded funds, listed investment companies and other digital investment platforms that allow low cost access to different markets.

Always remember to document your actions and decisions, as well as your reasons, and keep them as a record in order to demonstrate that you have satisfied your obligations as a trustee.

Given the importance of having an appropriately diversified portfolio and its impacts on quality of life in retirement trustees ought to consider professional assistance in managing this important aspect of an SMSF.

How can we help?

If you need assistance with diversification with your fund, please feel free to contact us so that we can discuss your particular circumstances in more detail, or refer to the SMSF Association Trustee Knowledge Centre.

Family Trusts

Family Trusts

Family Trusts are used for holding assets or for running family-based businesses. It is referred to as “inter vivos discretionary Trust” which means that an individual establishes a family Trust throughout their lifetime to maintain or manage investments, assets and to support beneficiaries including the family members of the individual.

There are several advantages to having a family Trust, they are beneficial for protecting the assets from going bankrupt or from business failures. The Trustees own the assets in the Trust instead of the beneficiaries therefore, they cannot be utilised to pay off creditors of the beneficiaries, unless they were invested in the Trust with the intention of paying off the creditors.

They are also beneficial to protect the family assets in context of divorces and marriage breakdowns. When an event involves property settlement in terms of law of a family, the assets that are invested in the family Trust fund are likely to be excluded from the property settlement than the assets which are directly held by the individual. Family Trusts can also ensure that challenges of Will are avoided considering any of the assets in the Trust will not be considered as part of the deceased’s estate. It can also be considered as a motivator to retain assets within a family group for a family business, example a family farm. In a Trust that is fully discretionary, the Trustee makes the decision of who gets to access the Trust assets and is responsible for splitting the assets. In Australia, the Family Law Courts considers the Trust assets owned by the Trusts that are discretionary and the spouses are the beneficiaries, as sources of finance and include this into their judgments regarding splitting the assets during divorce.

In Australia, most of the working individuals aim to live a comfortable retired life which is natural. Almost all Australian working individuals create their retirement funds through superannuation, the discretionary Trust plays can play an efficient role in supplementing this earning. The Trust does not have limits to contribution unlike the funds of superannuation. They do not even have any restrictions on where the funds are invested, neither do have any limits to borrowing. Throughout one’s life, they can flexibly give and take from the Trust as they deem necessary which enables an increased financial flexibility.

A large number of Australian businesses run on discretionary Trusts, especially when they are family businesses. The beneficiaries of this Trusts include the immediate or extended family of the individual. The beneficiaries do not hold any interest or rights in the property or assets of the Trust unless the Trustee distributes the assets as they see fit to the beneficiaries.

Tax Purposes can also be a reason Trusts are advantageous when the Trustees have a higher tax bracket, and the beneficiaries fall under a lower one. The effective distribution income to beneficiaries through marginal rates that are low will result in a low amount of tax payment.

If you would like to know more, please contact us.

How much money do you need to start an SMSF?

New research released

SMSFs are not for everyone, but for those individuals where an SMSF is entirely appropriate for them, the benefits can be considerable.

In the context of ongoing public debate regarding the appropriate minimum size for an SMSF, new research has been provided to provide insights into the true costs of running an SMSF. And the research shows SMSFs are cheaper to run than many people may think.

The findings allow SMSF trustees and potential SMSF trustees to compare appropriate estimates of fees for differing SMSF balances with institutional superannuation funds (commonly referred to as APRA regulated funds).

The costs include establishment, annual compliance costs, statutory fees and some investment management fees. Direct investment fees have been excluded.

What does the research tell us?

SMSFs with less than $100,000 are not competitive in comparison to APRA regulated funds (SMSFs of this size would generally only be appropriate if they were expected to grow to a competitive size within a reasonable time).

SMSFs with $100,000 to $150,000 are competitive with APRA regulated funds (SMSFs of this size can be competitive provided the Trustees use one of the cheaper service providers or undertake some of the administration themselves).

SMSFs with $200,000 to $500,000s are competitive with APRA regulated funds even for full administration. (SMSFs above $250,000 become a competitive alternative provided the Trustees undertake some of the administration, or, if seeking full administration, choose one of the cheaper services).

SMSFs with $500,000 or more are generally the cheapest alternative regardless of the administrative options taken. (For SMSFs with only accumulation accounts, the fees at all complexity levels are lower than the lowest fees of APRA regulated funds).

This research highlights that SMSFs with a low complexity can begin to become cost-effective at $100,000. This is a significant departure from what many had believed to be the case. For simple funds, $200,000 is a point where SMSFs can become cost competitive with APRA regulated funds or even cheaper if a low cost admin provider is used. With the proposed expansion to six member SMSFs, we may see many more take up this option at this threshold.

Comparing 2 member funds

From a cost perspective, the real benefit of an SMSF is when it achieves scale in balance and this can occur when members pool their superannuation savings.  The below comparison can be used to grasp the ranges you might fall into.

Combined BalanceSMSF Compliance Admin (2 members)APRA regulated fund Low fees (2 members)
$50,000$1,689$503
$100,000$1,690$863
$150,000$1,691$1,216
$200,000$1,693$1,566
$250,000$1,694$1,942
$300,000$1,696$2,301
$400,000$1,699$3,013
$500,000$1,703$3,725

But it’s more than cost

When determining whether an SMSF is right for you, your analysis must go further than just a simple comparison of the costs versus APRA Regulated Funds. It should also factor in your retirement and income goals and whether you have the desire, time and expertise to take on the role of an SMSF trustee. It’s also worth factoring in SMSF members may not receive the same level of protection in the event of theft or fraud that members in APRA regulated funds do.  

2020-21 Federal Budget Update – Government spends on jobs

The 2020-21 Federal Budget is all about jobs, jobs and jobs. COVID-19 has resulted in the most severe global economic crisis since the Great Depression. This Budget provides an additional $98 billion of response and recovery support under the COVID-19 Response Package and the JobMaker Plan.

The centrepieces of the Budget are a new JobMaker Hiring Credit for businesses and lower taxes for individuals.

Pleasingly, the Government committed to their election promise that there will be no adverse tax changes to the superannuation system. In addition, for the first time in a number of years, there were no measures specifically relating to SMSFs in this year’s Budget.

However, the Government did announce a ‘Your Future, Your Super’ package to address APRA superannuation fees and poor performances. The four measures in this package are outlined below:

‘Stapled’ superannuation accounts – A new default system

From 1 July, existing superannuation account will be ‘stapled’ to a member to avoid the creation of a new account when that person changes their employment. Employers will be required to pay super contributions to their employees existing superannuation fund if they have one, unless they select another fund.

A ‘YourSuper’ portal

The Australian Taxation Office will develop systems so that new employees will be able to select a superannuation product from a table of MySuper products through the YourSuper portal. The YourSuper tool will provide a table of simple super products (MySuper) ranked by fees and investment returns.

Increased benchmarking tests on APRA funds

Benchmarking tests will be undertaken on the net investment performance of MySuper products, with products that have underperformed facing stringent requirements. Products that have underperformed over two consecutive annual tests prohibited from receiving new members until a further annual test that shows they are no longer underperforming.

Strengthening obligations on superannuation trustees – Large APRA funds

By 1 July 2021 super trustees of large APRA funds will be required to comply with a new duty to act in the best financial interests of members. Trustees must demonstrate that there was a reasonable basis to support their actions being consistent with members’ best financial interests.

This will affect those large APRA funds to ensure they are spending in the best interests of the members, rather than SMSFs.

In addition to previous COVID-19 relief, there are also further economic payments for pensioners

The Government will provide two separate $250 economic support payments, to be made from November 2020 and early 2021 to eligible welfare recipients and health care card holders. 

This includes the:

  • Age Pension
  • Disability Support Pension
  • Carer Payment
  • Family Tax Benefit, including Double Orphan Pension (not in receipt of a primary income support payment)
  • Carer Allowance (not in receipt of a primary income support payment)
  • Pensioner Concession Card (PCC) holders (not in receipt of a primary income support payment)
  • Commonwealth Seniors Health Card holders
  • eligible Veterans’ Affairs payment recipients and concession card holders.

Personal income tax changes brought forward

The Government will lower taxes for individuals by bringing forward its ‘stage two’ tax cuts that were due to start in July 2022.  This means from 1 July 2020, the 32.5% tax rate will apply to incomes up to $120,000 (previously $90,000).

In 2020–21, low- and middle-income earners will receive tax relief of up to $2,745 for singles, and up to $5,490 for dual income families, compared with 2017–18 settings.

Other announcements and changes

  • A deficit for 20-21 of $213.7 billion (11% of GDP).
  • Gross debt is $872 billion (44.8% of GDP).
  • A JobMaker Hiring Credit will give businesses incentives up to $200 per week per employee to take on additional young job seekers

Additional $14 billion in infrastructure projects across Australia over the next four years.