October 2021 - Practical Systems Super

If you’re not across non-arm’s length expenditure rules or whether a six-member fund would suit you, it’s probably time you got specialist advice.

While the Productivity Commission’s major report into super in 2018 focused on Australian Prudential Regulation Authority-regulated funds, there were two important findings about self-managed super funds.

First, SMSF members, along with those approaching retirement or with higher balances, were more engaged with their superannuation. Second, the quality of financial advice provided to some super fund members – including those with SMSFs – was questionable and often conflicted.

To quote the PC, “the need for information and affordable, credible and impartial financial advice for retirees will increase as retirement balances grow with a maturing system and given the rising diversity and complexity of retirement products”.

These are telling comments. The PC is saying that SMSF members are engaged with their super – but often can’t get the advice they often sorely need. Yet considering SMSF members total more than 1.1 million, the number of funds is about 600,000 and assets at June 30, 2021 stood at $822 billion, clearly there is an imperative for them to be able to do so.

Certainly, the PC thought so, making the following recommendation: “The Australian government should require specialist training for persons providing advice to set up an SMSF; require persons providing advice to set up an SMSF to give prospective SMSF trustees a document outlining ASIC’s (Australian Securities and Investments Commission) ‘red flags’ before establishment; and extend the proposed product design and distribution obligations to SMSF establishment.”

Three years later, the need for this advice has only grown. The legislation underpinning SMSFs is more complex (including temporary changes because of COVID-19) and, as trustees well know, is subject to constant change. This is why it’s critical that advisers providing SMSF advice have specific SMSF competencies.

Disagreement in numbers

To take three recent examples, the proposed introduction of a retirement income covenant, the Australian Taxation Office’s non-arm’s length expenditure (NALE) ruling and the increase in the maximum number of SMSF members from four to six are all timely reminders of the need for SMSF specialist advice – and why the PC’s recommendation has never been more relevant.

Being able to transact with related parties is one of the attractions of SMSFs – whether it be acquiring a business premise from a related party that is then leased back to a related party, doing your own fund’s bookkeeping or investing in related entities within the confines of the legislation.

Many funds have such transactions, explaining why they need to be fully cognisant of the latest ATO ruling on NALE after changes to the non-arm’s length income rules in 2019. Failure to do so can result in the imposition of significant tax penalties, with some or all of a fund’s income being taxed at 45 per cent.

On the issue of the recent increase in the maximum allowable number of SMSF members from four to six, it might sound like a great idea, but there are risks. For example, more decision makers around the table is likely to lead to more disagreements.

Before adding new members, consideration must be given to how any decisions will be made and whether enduring powers of attorney should be put in place to reduce the likelihood of disputes. In these circumstances, an SMSF specialist adviser is well-placed to tailor an outcome specific to a fund’s situation.

Including as a potential problem the proposed introduction of the retirement income covenant (which aims to increase member engagement with their superannuation and retirement planning) might seem odd considering SMSFs have been specifically excluded from the legislation.

But the absence of a legal requirement doesn’t mean SMSFs shouldn’t consider the retirement needs of their members and retirement products in the market – and this will be difficult to do without specialist SMSF advice.

This advice could include:

Developing specific drawdown patterns that provide higher incomes in retirement;
Providing tools such as expenditure calculators to identify income and capital needs over time;
Providing information about key retirement topics, such as eligibility for the age pension, the concept of drawing down capital as a form of income or the different types of income streams available; and
Providing guidance to beneficiaries early in accumulation about potential income in retirement through superannuation calculators or retirement estimates.

In its report, the Retirement Income Review said a simplification of the superannuation system should be a policy imperative. It’s a motherhood statement that everyone concurs with. The only problem is that most legislative and regulatory changes tend to add complexity to the system, making it progressively more difficult for SMSFs to navigate the system. Specialist advice would seem one way to stay inside the regulatory fence and avoid the onerous penalties that can befall those who stray outside.

Opinion piece written by John Maroney, CEO, SMSF Association.
First published in the Financial Review on 5th October, 2021

Nobody wants to pay a $150,000 + tax bill if they can avoid it, but this is becoming increasingly common among property investors, and is one of the reasons why more Australians are starting self-managed superannuation funds – including a rising number of people aged under 40.

SMSFs are a legal way to avoid paying hundreds of thousands of dollars in capital gains tax, but industry experts warn people to beware of property spruikers operating in this space.

New data from the Australian Taxation Office shows SMSF member numbers have grown at their fastest rate in five years, with 43,000 more people signing up in 2020-21 to take the total past 1.11 million.

SMSFs require more work than many super fund members are comfortable with, but offer more choice, control and potentially huge tax benefits.

Let’s crunch the numbers. If a median-priced property of $667,000 is bought by a typical investor and sold a decade later for double the value, their capital gains tax can be $157,000. If it eventually doubles again in value, the tax bill climbs above $300,000.

But if that property is held in a SMSF member in retirement, Australia’s superannuation rules cut the CGT to zero after age 60.

These generous tax rules also apply for shares, cryptocurrencies and other investments.

SMSF Association CEO John Maroney says self-managed super funds can now have six members, following rule changes in July, and can become a lifetime family savings vehicle.

Business owners are big users of SMSFs, but Maroney says “it’s got to be part of your strategy, not just because other small businesses or friends at a barbecue are doing it”.

He says renewed interest in SMSFs reflects greater interest in super since Covid hit, and younger people having bigger super balances thanks to years of compulsory employer contributions.

“It’s the cheapest option once you get to a certain size,” he says.

The SMSF Association says combined assets of $200,000 can make running costs comparable with other forms of super, while others say balances above $500,000 are preferred.

You can borrow money within a SMSF to invest in real estate, but beware of property spruikers who overemphasise the benefits of this.

“We encourage people to get professional advice from someone who doesn’t have a financial interest in selling the property,” Maroney says.

“You would need to think carefully about setting up a self-managed super fund just to finance the property side.”

SMSF Loan Experts managing director Yannick Ieko says the costs of borrowing within super to buy property have been dropping, and he is seeing more people aged under 40 set up SMSFs.

“You have the freedom to manage things yourself or appoint a professional to assist you,” he says.

“You have complete control over your own super.”

Big banks stopped providing SMSF loans in 2018, but current lenders include Bank of Queensland, La Trobe Financial and Reduce Home Loans, with rates as low as 3.6 per cent.

Paul Dugdale, 39, and wife Kat, 36, set up their SMSF for several years ago to invest in residential and commercial real estate.

“Our annual concessional super contributions, together with the incoming rent from tenants, means that our mortgages can be reduced at a rapid rate and our properties are cashflow positive,” Dugdale says.

“We can also invest in shares and other assets to diversify our portfolio risk.

“Running a SMSF certainly takes more time and effort than an industry super fund and SMSFs definitely aren’t for everyone.”

SMSF PROS AND CONS

For

• Control where your money is invested.

• Ability to invest in property directly.

• Lower costs when SMSF expenses are spread over bigger balances.

• Lower taxes while saving, and no tax in retirement.

• Can borrow to invest.

Against

• Managing a SMSF can be time-consuming.

• A high level of financial literacy is required.

• Auditing, insurance and other costs must be managed.

• No government protection if money is lost through fraud or theft.

• Complexities around maintaining or selling property.

Written by Anthony Keane, Personal Finance Writer.
Published in The Australian, 13th September 2021
Source: SMSF Association

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Archive October 15, 2021

Who is the expert steering your SMSF?

Self-managed super attracts new members seeking tax benefits

SMSF PROS AND CONS