fbpx

1800 951 855

[email protected]

Register?

LOGIN

Archive July 9, 2019

  • Home   /  
  • 2019
    • ( Page4 )

Can you take your SMSF overseas?

Comments Off on Can you take your SMSF overseas?

Moving overseas is never a simple undertaking. But the process of selling your property and tying up your affairs in Australia can become especially intricate if you’re a member of a self managed super fund (SMSF).

Australians love to travel and it’s not unusual for an Aussie to decide to pursue their career on the other side of the world.

According to the Australian Bureau of Statistics, there were over 7 million migrants living in Australia in 2018. In the year to 30 June 2018, 289,000 people left Australia to live overseas.

However, while many Australians dream about exploring personal and work opportunities overseas, there are several things to consider. This includes SMSF compliance.

If you’re an SMSF trustee and plan to go overseas for an extended period of time, the Australian Taxation Office (ATO) and Netwealth advise that you seek professional advice about maintaining the residency status of your fund.

Residency test

In order to be compliant in Australia, an SMSF must be an Australian super fund at all times.

Remember, if you fail the residency test, you’ll face severe consequences, as your fund will become non-complying.

There are three residency conditions that your fund must meet:

1. The fund was established in Australia, or at least one of its assets is located in Australia.

The fund was ‘established in Australia’ if the initial contribution to establish the fund was paid and accepted in Australia.

2. The central management and control of the fund is ordinarily in Australia.

This means the SMSF’s strategic decisions are regularly made, and high-level duties and activities are performed, in Australia. It includes formulating the investment strategy of the fund, reviewing the performance of the fund’s investments, formulating a strategy for the prudential management of any reserves, and determining how assets are to be used for member benefits.

In general, your fund will still meet this requirement even if its central management and control is temporarily outside Australia for up to two years. If central management and control of the fund is permanently outside Australia for any period, it will not meet this requirement.

3. The fund either has no active members or it has active members who are Australian residents and who hold at least 50 per cent of:

The total market value of the fund’s assets attributable to super interests; or

The sum of the amounts that would be payable to active members if they decided to leave the fund.

Note: For the purposes of condition three, a member is an ‘active member’ if they are a contributor to the fund or contributions to the fund have been made on their behalf.

 

Appointing a power of attorney

If you’re a member of an SMSF and are planning to move overseas, appointing a resident enduring power of attorney (POA) to act as the trustee on your behalf may be an option.

Note: your replacement will be governed by the fund’s trust deed and will need to comply with the Superannuation Industry (Supervision) Act.

You can appoint a POA by following these steps:

  • Choose someone who is a resident of Australia that you know and trust to provide the services;
  • The individual will need to complete a trust deed addendum, consent to act as trustee and a trustee declaration;
  • If your fund has a corporate trustee, the directors of the corporate trustee will need to inform ASIC of the change. The POA will then need to be added into the fund as an alternate director; and
  • Inform the ATO of the appointment of the POA.

ATO case study

Andrew works for a large international group of companies. He and his wife, Jane, are trustees and members of their SMSF.

From 1 February 2009 Andrew is transferred to an overseas company for an indefinite period of time. In accordance with the relevant state legislation, Andrew and his wife each execute an enduring power of attorney in favour of their trusted friend and retired accountant, Trevor.

In addition, Andrew and Jane both resign as trustees of their SMSF and appoint Trevor as the trustee.

The appointment of Trevor as trustee is. Other than the fact that Andrew and Jane are not trustees of the SMSF, the superannuation fund satisfies the other requirements of the definition of an SMSF.

 

Winding up your fund

In many cases, trustees who know they will be away from the country for more than two years may choose to wind up their fund.

Here are some steps you should consider if you’re looking to close your fund, which a financial adviser can help you with:

  1. Check the trust deed of the SMSF – The trust deed may include wind-up instructions, so this should be your first step.
  2. Written agreement – All trustees or directors will need to agree about the wind-up and you need to document their decision. This is vital to avoid unnecessary complications.
  3. Pay existing member benefits – You need to payout or rollover the balance of members’ super to another fund; this may involve selling assets or transferring them without selling the underlying investment (in-specie transfer).
  4. In the case of pension members, trustees must ensure that at least the minimum pension (pro rata) has been paid.
  5. Prepare draft financial statements – Draft financial statements are important as they determine the value of each member’s benefits.
  6. Sale or transfer of assets – Trustees must arrange the sale of assets or arrange for them to be transferred in specie either to the member, if exiting super altogether, or to the receiving fund directly if rolling over.
  7. Final accounts and audit – A final set of accounts and an audit must be completed before you lodge your last SMSF annual return, making sure to indicate your fund is being wound up.
  8. Tax and compliance – You need to pay any outstanding tax and other debts (or arrange to) before closing your fund’s bank account.
  9. Notify the ATO – Notify the ATO in writing within 28 days of the fund being wound up.
  10. If you’re a corporate trustee, the steps may be slightly different and you may want to apply to ASIC for a voluntary deregistration of the company.

Source: netwealth.com.au

 

Cash rate sits at record low

Comments Off on Cash rate sits at record low

The Reserve Bank of Australia (RBA) recently announced an unprecedented reduction in the official cash rate of 0.25% to 1.00%, which is the lowest on record.

This will have implications for cash returns on fixed interest investments such as term deposits which are often a significant portion of a Self-Managed Superannuation Fund (SMSF) investment portfolio. It will also impact on self-funded retirees who have assets outside of superannuation.

Whilst most banks and financial institutions have factored in these rate cuts to some extent, the full impact will be felt once existing term deposits come up for renewal.

There is some debate among analysts around what economic changes can be expected over the next 12 months. Many commentators are predicting a further rate cut of at least 0.25% this calendar year with further consequential effects on cash investment returns.

The future is bright for SMSFs, however these lower cash returns may result in slower growth of some superannuation balances and, for those in pension phase, the possibility of having to sell assets to meet minimum pension withdrawal standards.

Cash assets are traditionally seen as being more capital secure than growth investments (such as shares) but in a very low interest rate environment there are risks of erosion in the real value of cash based investments (i.e. where returns are less than the inflation rate).

Trustees of a SMSF would be wise to review their existing investment strategy, particularly in regard to target asset sector allocations (fixed interest, equities, property, etc.). Any changes to an investment strategy should take into account relevant considerations such as; a member’s age, immediate plans for their SMSF, whether the fund is in accumulation or pension phase, risk appetite of the members, the need for diversification of investments and liquidity requirements. Trustees should considering seeking professional advice to assist in this process where appropriate.

Bob Locke – CA SMSF Specialist – CEO of Practical Systems Super

The information and examples provided in this article are general in nature and do not take into account personal circumstances, needs, objectives or financial situation. This information does not constitute financial or taxation advice. Before acting on any information in this article, the reader should consider its appropriateness in relation to their personal situation and seek advice from an appropriately qualified and licensed professional.

Practical Systems Super – June Newsletter

Comments Off on Practical Systems Super – June Newsletter

In this bi-monthly newsletter we examine SMSF strategies surrounding contribution caps and we showcase the statistics recently released by the ATO which outlines the continued growth of the SMSF industry.

Read More

Kim Collins, Tamworth

Comments Off on Kim Collins, Tamworth

“I have been a Chartered Accountant for approximately 38 years, 28 of those being as a Principal or Partner in Accountancy Practices.

I have known Bob for 30 of those years in his position as a Chartered Accountant also.

I commenced my first Self Managed Superannuation Fund in June 1984.

When Superannuation Fund Regulations required Self Managed Superannuation Funds to be audited, Bob was appointed as auditor of my Funds.

Over the period that Bob has been auditor of my Self Managed Superannuation Funds I have not only received a Professional Service from him as an auditor but also proactive advice in respect of my role as a Director of the Corporate Trustees of the funds. As a result I have no hesitation in contacting Bob in respect of any query that I may have in respect of Self Managed Superannuation and as such would have no hesitation in recommending Bob as a Self Managed Superannuation Specialist.”

Accepting EOFY contributions after 30 June

Comments Off on Accepting EOFY contributions after 30 June

Under certain conditions, an SMSF may be able to accept an end of financial year contribution after 30 June; however, getting this wrong may have far-reaching tax implications.

Typically, SMSF contributions aren’t counted until the payment is received in the fund’s bank account. The problems start, however, when 30 June falls on a weekend or Monday, as this provides minimal scope for contributions to be accepted at the last minute.

The secret to maximising end of financial year contributions is understanding the conditions that create the opportunity to accept contributions even after 30 June.

What is a contribution?

According to TR 2010/1, the ordinary meaning of a contribution is anything of value that increases the capital of a superannuation fund provided by a person whose purpose is to benefit one or more particular members of the fund or all of the members in general.

The capital of an SMSF may be increased directly by:

  • Transferring funds to the superannuation provider,
  • Rolling over a superannuation benefit from another superannuation fund,
  • Transferring an existing asset to the superannuation provider (an in-specie contribution),
  • Creating rights in the superannuation provider (also an in-specie contribution), or
  • Increasing the value of an existing asset held by the superannuation provider.

The capital of an SMSF can also be increased indirectly by:

  • Paying an amount to a third party for the benefit of the superannuation provider,
  • Forgiving a debt owed by the superannuation provider, or
  • Shifting value to an asset owned by the superannuation provider.

Upon further inspection, TR 2010/1 also outlines the circumstances where contributions can be lawfully received by a fund after the end of the financial year.

Payment by cheque

A contribution is made when a personal cheque or money order is received by the SMSF trustee. As cheques can’t be cashed immediately, the question is whether the fund can still accept the contribution without having the money deposited into the fund’s bank account.

The answer is, the contribution can be accepted as long as the cheque is dated on or before 30 June, and it is presented “promptly” within a few business days.

To this end, a contribution received into the fund’s bank account in late July would be questionable and, if received in August, would not be accepted without extenuating circumstances.

In the situation where the cheque or note is dishonoured, no contribution will have been made by the member.

Electronic payments

The rule of thumb is that an electronic funds transfer is made when the amount is received in the fund’s bank account.

Technically, a BPAY payment must hit the fund’s bank account prior to 30 June. The reality is that a transfer of funds only between the member’s personal linked accounts at the same financial institution results in simultaneous debit and credit to those respective accounts.

When 30 June falls on a weekend, such as in 2019, it is common for the bank statements to show the transaction occurring on the next business day, which means the contribution falls into the next financial year.

The personal contribution will be allowed, however, where an SMSF trustee can provide evidence that substantiates the transfer, such as a bank transaction statement or other print-out that records the receipt of the amount into the fund’s bank account.

In-specie contributions

Remember, too, that an SMSF acquires the beneficial ownership of listed shares by way of in-specie contribution when the trustee obtains a properly executed off-market share transfer form.

It is the date on a properly executed off-market share transfer form is the date of acquisition, not the date that the share transfer is effected by the share registry. Understanding this distinction — and filling in the form correctly — can be the difference between maximising contributions in the current financial year or exceeding the caps in the following year.

The NPP solution

The introduction of the New Payments Platform (NPP) will resolve the transaction lag of electronic payment by facilitating faster payments for the benefits of SMSF members.

Eliminating transaction lags will enable critical payments in superannuation to be processed without delays and hidden costs.

Contributions to SMSFs from employers, top-up contributions by members, and payouts to members and other funds will start happening in real time once this technology is adopted by all banks and financial institutions.

Conclusion

Getting contributions wrong can have far-reaching tax implications for SMSFs. The use of new technologies, such as the NPP, will stop a member accidentally breaching their contribution caps where contribution limits change between years, such as the reduction in non-concessional caps from $180,000 to $100,000 in the 2018 financial year.  

Until then, taking advantage of the few exceptions available in TR 2010/1 may provide some assistance in ensuring that contributions are maximised in the current financial year, regardless of what day 30 June falls on.

Source: SMSF Adviser

Younger SMSF clients seeking transparency, ethical investment focus

Comments Off on Younger SMSF clients seeking transparency, ethical investment focus

While ATO statistics indicate a slight rise in the number of younger SMSF trustees, advisers looking to attract and retain these younger clients may need to tailor their current service offering, according to a wealth management platform.

Shannon Bernasconi, the managing director and co-founder of Wealth O2, a wealth management platform for advisers, said advice firms looking to target a younger a demographic of SMSF clients should ensure their service has a focus on ethical and sustainable investments, high-touch content and transparency.

Statistics released by the ATO in May indicate there has been a slight rise in the number of younger individuals setting up SMSFs, with 79.8 per cent of the individuals establishing new funds below the age of 55. Around two-thirds of SMSF entrants are now under the age of 50.

Ms Bernasconi explained that younger clients have a much bigger focus on ethical and sustainable investments, so advice firms looking to target this segment of the market will need to be able to cater to this in how they manage client funds.

“You need to be able to override or substitute different assets, so if a client has an ethical issue with oil or mining, for example, it can be substituted with another investment,” she said.

Having transparency around the investments in their portfolio is also critical to younger clients, she added.

“They’re not as trusting as older generations. They like the idea of having transparency and that everything is clear in terms of where their assets are and how you’re managing them,” she said.

Having this transparency, she said, provides them with a greater sense of control over their own money and portfolio.

They also want to hear from their adviser more than once a year, she explained, so advisers may want to look at providing automated newsletters and communication on a regular basis.

“They should be looking at providing high-touch content with low administration. To be honest, the older generations also like this, but the younger generations demand it,” she explained.

“It’s important to keep them constantly updated, even if it’s just a bit of news. There’s so much going on in the world these days and they want to know that you’re going to look after their portfolio if something happens with Trump in a particular week.”

She also stressed that younger clients want to have instant access to their portfolio and client portal through their phone and other devices at all times.

“That digital connectivity is a huge must,” she said.

Source: SMSF Adviser

Top 10 tips to SMSF Compliance

Comments Off on Top 10 tips to SMSF Compliance

It’s frustrating when SMSF audits aren’t finalised in a timely and fuss-free manner. Chasing up documents adds precious time to the audit for both the accountant and auditor, resulting in unnecessary and costly delays.

Trying to find paperwork for an SMSF audit that’s completed almost a year after balance date means that documentation requests continue to represent the largest number of queries raised during an audit. SMSF auditors live by the motto that if there’s no documentation, it doesn’t exist.

Here are our top 10 tips to help reduce the time taken to finalise audits and keep your SMSFs compliant. 

  1. Contributions  Ensure that all contributions are received into the fund’s bank account before midnight 30 June 2019. Otherwise, the contribution cannot be received by the fund during 2019 or, where received on or after 3 June, also counted as a reserve to be allocated in the 2020 financial year.
  2. Minimum Pension The minimum pension must be taken to avoid a pension shortfall, otherwise exempt current pension income cannot be claimed for the year. Where the shortfall is less than 1/12 of the minimum pension amount, the trustee can self-assess and a catch-up payment can be made in the following year. Note that this exemption is a one-off payment allowed at the fund level only (not per member)
  3. Expired related party lease agreements If the lessee has the option to renew the lease agreement, best practice is to provide a minute/letter stating that the option has been taken up. If there’s no option to renew, a newly signed lease agreement must be provided.
  4. Property rental valuation for related parties. Make sure that a rental valuation is included in the property valuation report, confirming that the rent received from the related party is at arm’s length.
  5. Related party property information. Whether the property is held by a related party or directly by the fund, the checks and verifications are the same. Provide all related party property information as per the SMSF property audit checklist.
  6. Current Year Signed Documents  The trustees are required to sign the current year’s financial statements, trustee representation letter, terms of engagement letter (if applicable for that year) and annual minutes. The audit report cannot be finalised and issued without these signed documents.
  7. Takeover Documents  Provide your new SMSF auditor with the fund’s statutory documents, signed financials, audit report and management letter for the previous year (and yes, we know this isn’t always easy!)
  8. Sundry Debtors Provide an explanation or workpaper if it relates to a compliance breach and provide all supporting evidence where the outstanding amount has been paid back during the next financial year.
  9. Insurance Ensure the policy explicitly states that the fund is the policy owner; the names of the insured members; the insurance type and the level of cover
  10. Work test declaration Where the member makes a contribution over the age of 65 they are required to provide a signed work test declaration stating they have worked a minimum of 40 hours over a 30-day period

It’s easy to lose sight of attending to the finer details of fund documentation, but a lot simpler to take the time to get it right the first time and avoid a breach altogether.

Remember, too, that getting help in rectifying a reportable contravention from the outset will make all the difference when the ATO is reviewing fund compliance.

In the long run, being guided safely through the myriad of SMSF rules and regulations by an independent, highly experienced SMSF audit specialist firm means that the future retirement income of your SMSF client remains safe and secure.

Written by: Shelley Banton, ASF Audits

Source: SMSF Adviser

53% unaware of changes to insurance in superannuation on 1 July

Comments Off on 53% unaware of changes to insurance in superannuation on 1 July

Over half of Australians are unaware of changes which could mean they lose insurance cover they have in their super fund from 1 July.

A study conducted for the Association of Superannuation Funds of Australia (ASFA) found that 53% of those surveyed were unaware of the changes to insurance in superannuation coming into effect on 1 July 2019.

As part of the Government’s ‘Protecting Your Super’ package of laws, insurance cover will be stopped for superannuation accounts which are classified as ‘inactive’ because they haven’t received contributions for 16 months or more.

The Protecting Your Super package is aimed at reducing erosion of superannuation balances though unwanted insurance, though it also has a net boost to the Federal Budget bottom-line. There has also been concern from industry about the short deadlines involved. 

ASFA says the change could impact over 3 million Australians. The survey found that 38% said they had a super account that hadn’t received any contributions in the last 16 months, including both people with a single account and people with multiple accounts.

While 47% of those surveyed said they were aware of the changes, only 19% thought they had a good understanding, while 28% said they had heard of the changes but didn’t know any details.

Super funds have been trying to contact members, but the research found that 34% of respondents rarely or never open communications from their super fund. This rises to 52% for Australians aged 18 to 34.

When informed about the changes, 63% said they were likely to seek out more information. The superannuation industry has launched a website to provide information about the changes: timetocheck.com.au

ASFA CEO Dr Martin Fahy said the research echoed industry concerns about the impact of the changes.

“This legislation has been introduced for very good reasons, however the time frame for implementation has meant it has been challenging for superannuation funds to engage their members to ensure they understand the consequences of the changes in just a few short months.”

“We already know Australians are not highly engaged with their superannuation – from the balance to the insurance products they hold – however this study demonstrates that the problem only becomes more acute when looking at those Australians most likely to be impacted by the changes.”

The research was conducted by YouGov Galaxy, based on a “nationally representative sample of 1,026 Australians aged 18 years and older,” according to ASFA.

Source: www.solepurposetest.com/news

Five things you won’t believe your SMSF can invest in

Comments Off on Five things you won’t believe your SMSF can invest in

The most common reason Australians switch to a self-managed super fund is for the flexibility and control over how their super is invested.

For many, this can mean a venture into property investment, specific shares or a risk-averse term deposit. But there are a number of more unusual ways you can diversify your SMSF.

1. A property for your business

If you have a business, or are looking to start one, your SMSF can purchase a commercial property that your business can operate from.

But this isn’t a way for you to skimp on your rental payments; you will need to pay the rental market rate to your SMSF in order to pass the ATO’s strict sole purpose test of your SMSF only providing benefits for retirement.

Fortunately, when your SMSF owns the building and your business pays the rent into your SMSF, rather than a third-party landlord you’ll effectively get that rent back for yourself in retirement.

2. Whiskey or wine

Yep, it’s been known that some SMSFs have invested in barrels of whiskey or cases of collectable wine, which is great news if you are a wine connoisseur or whiskey enthusiast – although you can’t drink any of it, sorry.

If you know how to spot a good vintage that’s likely to give a good return on investment, then you could choose to invest your super in this rather exotic asset class with an SMSF.

However, to satisfy the sole purpose test, you have to make the investment on an arm’s length basis meaning that the wine or whiskey cannot be stored at your home or a place you would have access to it (such as a garage or shed). You also need the investment to be independently valued by a qualified third party.

3. Classic cars

While you are not allowed to use your SMSF to purchase a new ride, you could invest in a classic collectable car. Before you start envisioning yourself driving through vineyards in the convertible of your dreams, remember that your SMSF’s car cannot be used by the trustee or anyone related to the trustee.

This means neither you nor your family can take the car out for a ride or have restoration work done on the car. In addition, you are not allowed to store or display the car at your private residence as even looking at it in your garage could constitute benefiting from the investment before retirement.

As is the case with all collectable investments, you would need to have the car independently valued and make sure that it is appropriately insured within seven days of acquisition.

4. Corporate artwork

We have a number of clients who have invested in artwork through their SMSF and have found a unique way of making a return on their investments.

They are renting out their sculptures and paintings to corporate spaces, such as the large atriums in skyscraper office buildings or event spaces. Some are even making 10% returns a year.

There are very strict rules for investing in artwork with an SMSF, especially when it comes to insurance as specialist insurance policies are often necessary for these types of investments. The ATO also requires your decision to invest in art to be documented and kept for a period of 10 years.

5. A marina berth

A marina berth is another unusual asset that SMSFs could consider as a long-term investment plan. Investing in a marina berth does not actually give you direct ownership. Instead, your SMSF becomes the long-term leaseholder and makes a return by renting out the berth to short-term tenants at a higher rate.

Remember, you cannot use the berth for personal use such as storing your own boat – but if you’re a boat enthusiast, this is a creative and potentially lucrative way of diversifying your SMSF.

Whether you decide to invest in traditional assets such as shares or term deposits, or something a little more uncommon, it’s crucial to consider the long-term potential returns for your investments in your SMSF. After all, your retirement depends on it.

Source: moneymag.com.au

Eight things you need to know about SMSFs and property

Comments Off on Eight things you need to know about SMSFs and property

How do I decide if buying a property through my SMSF is right for me?

Having an SMSF is usually all about having greater control over your super, but with this comes a serious set of responsibilities and obligations, along with the requirement to exercise self-control. These attributes are even more important should you consider purchasing property through your SMSF.

One very strict rule that is commonly misunderstood or not known is that if you are purchasing a residential property through your SMSF, you can’t live in it and neither can anyone related to you, even if they pay market-based rent.

Further to this, if you already own a residential property, your SMSF cannot purchase this from you – again, even at market price. If you feel you may be tempted to utilise said property, or need to purchase an investment property for family to live in – don’t use an SMSF.

Commercial/business premises, however, can be leased to you or a third party related to you, providing this is done on a commercial arms-length basis. This is a particularly attractive proposition to small business owners. Your SMSF can purchase a business premises from which you can conduct your business, and pay rent to the super fund.

Many small business people don’t pay themselves super, so paying rent that would otherwise go into someone else’s pocket into the super fund for their own retirement makes a lot of sense.

You may already own the building you run your business from. Subject to contribution caps and considering stamp duty and capital gains tax personally, you can contribute the premises to an SMSF, providing it is done at market value.

You need to have a decent balance already in super to make setting up an SMSF to buy property a viable proposition. This is very important should you need to obtain finance to complete the purchase.

Why? Banks will require an SMSF to have at least 40% of the value of the property as a deposit, will most likely charge a higher rate of interest and will not entertain approving finance for a fund that doesn’t have at least $200,000 initially, and decent liquidity (cash and/or shares) in the fund post property purchase.

This is due to the requirement that an SMSF can only borrow via a limited recourse borrowing arrangement (LRBA).

You need to consider whether the fund can cover ongoing property ownership costs should the property be vacant for a period and there is no rental income.

Similarly, if the meeting of mortgage payments is reliant on super guarantee contributions – what happens if one or all the members of the super fund become unemployed?

You can contribute personal monies (subject to contribution caps) if there is a cash flow issue within the fund, but they are counted as contributions and cannot be repaid to you. Do you have adequate monies outside of super to put into your SMSF should the need arise?

An SMSF can invest in anything, providing it meets the “sole purpose test”. That is, each investment made or action undertaken by the SMSF is done so for the sole purpose of providing retirement benefits for its members, or death benefits to a member’s beneficiaries if they die.

In the case of purchasing property, will it be providing an adequate income stream and what is the likelihood of capital growth? Will these be sufficient to ensure the members of the fund are able to access suitable income streams when eligible?

As a trustee of an SMSF you are required to formulate an investment strategy and consider among other things, the diversification of assets held. Diversification is considered an integral part of any long-term investment plan. It doesn’t guarantee gains or protect you from losses but assists in ensuring consistent returns over a period of time.

If your super fund’s only asset is property, you are putting all your “super eggs in one basket”. Is this appropriate for the members of the fund, their circumstances, age and risk tolerance? There is nothing that prevents the fund holding only real property, but make sure it is appropriate and is justified by the fund’s investment strategy.

Depending on your personal marginal rates of tax, the concessional tax rates offered to complying super funds may provide an incentive to consider setting up an SMSF to purchase property.

All earnings of an SMSF are taxed at 15%, and the effective rate of tax on any capital gains is 10%. Once the super fund is in retirement phase there is no tax payable on earnings and capital gains.

Are you willing to be very hands on with your super? Other asset classes allow for a “set and forget” approach. You need to be willing to be actively engaged in managing and being responsible for not only the SMSF, but also a property.

If you are a fan of the “renovator’s delight” and want to use your ability to flip a property to improve your super balance, you need to understand the additional rules that apply when the property is owned by an SMSF. If you’ve had to borrow to purchase the property, any improvements can only be paid with existing super monies, you can’t borrow to finance the renovations.

In addition to this, you will be in breach of the restrictive LRBA terms if you improve the property to the point it becomes “substantially different to the original asset”.

By Kimberlee Brown, Director with H&R Block SMSF Solutions

2. What are the key advantages of investing in property through my SMSF?

Combined investing as a couple or family

Combining your account balances with the other members of your family may give you the purchasing power you need to invest in a property that would be beyond your personal capacity at present.

It can be tax effective

The earnings within your superannuation fund are taxed at only 15% with a 33% capital gains discount for assets held more than 12 months (that is 10% CGT) and if you hold on to that property into pension phase, the rent and/or sale proceeds may be tax free. (Subject to the $1.6m pension transfer limit per member from 1 July 2017.)

Salary sacrifice

You can salary sacrifice additional income to pay off the loan quicker from pre-tax dollars. Paying 15% tax on salary sacrifice and then making additional repayments rather than paying your marginal tax rate on the income.

Supporting business growth

You can buy a business property to lease back to your own business. This may help free up funds to grow the business.

Bricks and mortar – feeling more in control of your investments

Many SMSF investors appreciate having control over the investments they buy and the ability to “value add” to their property repairs or renovations.

Land tax

The SMSF is a separate entity for land tax

By Liam Shorte, director of Verante Financial Planning

3. What are the risks of investing in property through my SMSF?

Property investment using an SMSF will not make it immune to any of the usual risks involved in property investment. There are some issues, however, that are unique to holding property in an SMSF and they are outlined as follows.

Property is a lumpy, relatively illiquid asset. It can take time to sell and settle and you aren’t able to sell a part of it – it’s all or nothing.

Once members move into retirement phase there must be a minimum drawdown from the fund each year to maintain the funds’ tax-exempt status. If the property isn’t positively geared, and the fund only holds the property and little cash, it is difficult to meet these requirements.

It proves a difficult asset to hold when the focus of the fund moves from the building of wealth for retirement, to being in retirement and needing to draw a regular income stream.

The usual strategy is to sell the property when members reach retirement to have sufficient liquidity to pay the appropriate income streams. The timing of this may not be ideal if the property hasn’t been held for sufficient time or there is still a decent mortgage over the property. These scenarios need to be worked through as part of the fund’s long-term investment strategy.

Properties have ongoing costs and without sufficient contributions to the fund and rental income these become difficult to finance within the fund. As well as regular ongoing costs, there may be large unexpected costs that will also need to be financed. You may need to find personal monies to cover these costs, and they can’t be paid back by the fund.

You need to consider the impact that purchasing property within an SMSF will have on your non-superannuation monies.

The superannuation space continues to be subject to legislative changes. It is not known whether future changes may impact negatively on those who hold property within an SMSF.

If the property investment requires finance, the additional requirements involved because it is being purchased in an SMSF are both more expensive and complicated. Failure to understand these complexities or engage appropriate professionals who know how to navigate the space can result in further unnecessary costs and potential loss of your retirement savings.

Additional stamp duty is a big danger if a property purchased via an LRBA for an SMSF is not executed correctly.

If you don’t already have an SMSF but want to establish one to purchase property and you require finance, it is strongly recommend you gain pre-approval first.

If you set up an SMSF then seek finance, you may be disappointed to find that you are unable to gain sufficient finance for your proposed plan and you are left with having to pay for the establishment of the fund and the ongoing compliance obligations that come with it. It’s a much harder set of rules and obligations that need to be met by the SMSF than if you were to do the same personally.

The temptation! If you have purchased a residential property or holiday home through your SMSF, you must resist temptation to use it personally or let anyone related to you do so. Doing so risks the complying status of your super fund and, in the worst-case scenario, the loss of the majority of your super in tax and fines.

By Kimberlee Brown, Director with H&R Block SMSF Solutions

4. Is buying a property through an SMSF a good idea if I’m close to retirement?

Generally speaking, buying a property through an SMSF when you are close to retirement is not a great idea, unless you were seeking to diversify the asset mix in your portfolio and the property only formed part of a broad asset mix. The primary reason for this is illiquidity.

The whole point of superannuation is to build up a pool of assets that will sustain your lifestyle throughout retirement, and when retirement comes, you will need to start drawing on this pool. That requires liquidity, which property, being a “bulky asset”, does not give you.

Furthermore, if your SMSF is paying you a pension in retirement, you need to ensure that the assets in your SMSF are able to generate enough cash flow in order to pay the legal annual minimum pension of at least 4% of the value of SMSF pension assets, which may be difficult if your SMSF is fully invested in low-yielding property.

By Andrew Yee, director of superannuation at HLB Mann Judd

5. What is a limited recourse borrowing arrangement?

A limited recourse borrowing is an arrangement where an SMSF borrows money to purchase an asset, either from a commercial lender or a related party of the SMSF (the lender can even be the members themselves).

As these can be complex arrangements, it is crucial that trustees turn to their adviser to help them navigate any compliance pitfalls and avoid running foul of the legislation.

Legislative requirements include the asset being held by a holding trustee (or custodian) for the SMSF trustee while the loan remains in place, the SMSF providing all of the purchase money and limitations on improvements to the property.

In addition to legislative requirements, the SMSF will need to obtain specialist advice on the stamp duty implications of their proposed acquisition prior to signing any transactional documents.

If the arrangement is not properly set up and implemented from the start, the SMSF runs the risk of not only contravening the superannuation legislation but also incurring double (or even triple) the amount of stamp duty that would normally be payable.

By Julie Hartley, an associate with Townsends Business & Corporate Lawyers

6. Can I buy overseas property within my SMSF?

The short answer is yes, your SMSF can buy overseas property. This is course assuming that your SMSF trust deed allows for it and your SMSF investment strategy has specifically provided for such investments.

The main difficulty for an SMSF buying overseas property is that many countries have restrictions on overseas property buyers, especially where the buyer is not a natural person.

For example, in many states of the US, SMSFs can only buy property through a US limited liability company. The SMSF may be required to open an overseas bank account for the rental receipts and payments.

This may be problematic if the overseas banking institution does not allow or recognise an SMSF to be a valid holder of an overseas bank account. Also the SMSF may need to report its income on the property to the overseas taxing authority, for local, state and federal taxes.

By Andrew Yee, director of superannuation at HLB Mann Judd

7. Can I renovate a property owned by my SMSF?

Yes, you can renovate the property but you cannot use borrowed money to do so. So, for example, if you borrow to buy the property and intend to renovate the kitchen then you can only use the SMSF’s own funds or additional contributions from the members to pay for the renovation, not borrowed money.

Also, while the property is under a loan you cannot change the nature of the property.

For example, you could not change a residential house into a three townhouse development. The good news is that you can add a granny flat under the rules.

Be very careful as trustee if you take payment for doing the renovations, as trustees must have the formal skills and qualifications that allow them to perform a specific duty or deliver a service for which remuneration is normally expected.

So as a DIY renovator you cannot charge the fund for your time painting the property if your usual job is an accounts manager. 

By Liam Shorte, director of Verante Financial Planning

8. What happens when I want to sell the property?

When the SMSF decides to sell the property, the usual transaction methods for a sale should be followed, for example contract, deposit, outgoings adjustments, settlement, etc.

While this would generally be expected if the purchaser is an independent third party, it is important to also proceed in this manner if the property is to be sold to a related party of the SMSF.

In addition to the above, the trustee should also make sure that the property is sold at market value to avoid any compliance or detrimental tax implications.

If the property is held by a holding (bare) trustee under a limited recourse borrowing arrangement, the property can be sold directly to a third party without being first transferred to the SMSF trustee. It is important, however, that the relevant compliance documentation is prepared to note the vesting of the holding trust arrangement.

By Julie Hartley, an associate with Townsends Business & Corporate Lawyers

Source: moneymag.com.au

© Practical Systems Super | All Rights Reserved

Privacy Policy | Disclaimer | Financial Services Guide | Sitemap

Practical Systems Super Pty Ltd is a Corporate Authorised Representative of PSA Super & Financial Services Pty Ltd.

AFSL no. 488562 | ABN: 72 626 268 237