Financial Freedom & SMSF

By Jason Fittler

A successful retirement is when you achieve Financial Freedom

Financial Freedom is when you live the way you want, without having to rely on any government safety net or having to work.

Financial Freedom is when you take control of your life. This will be different for each person as it depends on what is important to you.

People with SMSF’s know this already. They know how much money they will need in retirement to live the lifestyle they choose.

This is why the average balance in a SMSF is 3 times more than that of the average Australian super fund balance.

So how much do you need to achieve Financial Freedom?

To calculate this amount work out how much a year you’ll need to live the lifestyle you want. Take this amount and divide by 6%.

Example: $90,000 a year divided by 6% = $1,500,000

Now you have your retirement goal, are you prepared to do what is necessary to achieve it? Do you have a plan?

80% of Australians fail to enjoy Financial Freedom in retirement. The main reason this happens? They fail to seek professional financial advice.

If you want to be in the 20% who do achieve Financial Freedom take the first step and learn how a Self Managed Super Fund can help.

Budget 2014: Superannuation & Social Security

Superannuation

Changes to the Superannuation Guarantee (SG) increase

On 1 July 2014 the 9.25% SG will increase by 0.25%. The Government proposes to then freeze future increases until 1 July 2018, at which time it will increase to 10%. It will then increase by 0.5% each year until it reaches 12% by 1 July 2022. 

Excess non-concessional contributions (NCC)

There is a limit on the amount of NCCs you can make to superannuation each year. If you contribute more than this, the additional amount is generally taxed at the top marginal tax rate.

The Government proposes changes to allow individuals to withdraw excess NCCs, along with associated investment earnings, made after 1 July 2013. Where this occurs only the associated earnings will be taxed at the individual’s marginal tax rate. In the event that excess NCCs are left in superannuation they will be taxed at the top marginal tax rate.

Social Security

Changes that relate to Centrelink and Department of Veterans Affairs (DVA)

There are a number of changes the Government proposes in relation to Centrelink and DVA payments that will commence at different times over the next few years. These include:

  • Age Pension qualifying age is to be increased to 70 (from age 67) by 1 July 2035. This measure will look at increasing the Age Pension age from 1 July 2025 by six months each two years until it reaches age 70 by 1 July 2035. You will only be affected by this measure if you were born on or after 1 July 1958.

People born between

Eligible for Age Pension at age

1 July 1952 and 31 December 1953

65½

1 January 1954 and 30 June 1955

66

1 July 1955 and 31 December 1956

66½

1 January 1957 and 30 June 1958

67

1 July 1958 and 31 December 1959

67½

1 January 1960 and 30 June 1961

68

1 July 1961 and 31 December 1962

68½

1 January 1963 and 30 June 1964

69

1 July 1964 and 31 December 1965

69½

1 January 1966 and later

70

 

  • The ‘Housing Help for Seniors’ pilot announced in the 2013-14 Budget will no longer take place.
  • Disability Support Pension (DSP) recipients under age 35 with an assessed work capacity of eight hours or more a week who have a participation plan will have compulsory activities. In addition the portability requirements for all DSP recipients traveling overseas will be tightened from 1 January 2015.
  • From 1 July 2017 the Income and Assets Test thresholds for the Age Pension, Carer Payment, DSP and the Veterans’ Service Pension will be frozen for three years. 
  • From 1 September 2017, increases in the Age Pension, DSP, Carer Payment, Bereavement Allowance and Veterans’ Affairs pensions will be linked to the consumer price index (CPI) only. For recipients of Parenting Payment Single, the measure will start on 1 July 2014. 
  • From 20 September 2017 the deeming thresholds will be reset to $30,000 for singles and $50,000 for couples. 

 If you would like more information on the above, please call us on (07) 4771 4577

 

Related Parties SMSF

A “related party” of a superannuation fund means any of the following:

• a member of the fund or a “Part 8 associate” of a member

• a standard employer–sponsor of the fund or a Part 8 associate of a standard employer-sponsor of the fund (SIS Act s 10(1)

All SMSF investments must be made and maintained on a strictly commercial (i.e. arm’s length) basis. In other words, the purchase and sale price of all assets should be based on a fair market value regardless of who the buyers and sellers are.

The trustees of a SMSF are strictly prohibited from lending any money (or providing any form of financial assistance) to a member of the fund or their relatives.

The trustees of a SMSF must not intentionally acquire assets from a ‘related party’ of the fund. The definition of related party is very broad and includes the members and trustees of an SMSF as well as their relatives, business partners and any associated companies and trusts.

Determining which entities will be a related party of an SMSF can be complex, so you may wish to seek advice if in doubt. There are some exceptions to the above rule for acquiring related party assets, including:

• Listed securities (i.e. shares, units or bonds listed on an approved stock exchange, such as the ASX).

• Business real property (i.e. freehold or leasehold interests in real property used exclusively in one or more businesses) acquired at market value.

• An in-house asset where the acquisition would not result in the level of the fund’s in-house assets exceeding 5%.

• Units in a widely held unit trust, such as a retail managed fund.

In broad terms, Part 8 associates are those entities that are relatives of the individual, partners, companies that are controlled or majority-owned, or entities that control the primary entity

The following diagram shows the Part 8 associate of a primary entity that is an individual (i.e. a member or an employer-sponsor).

 

How Do You Determine Superannuation Performance?

And Who Should be in Control?

By Jason Fittler

First, we need to define the word, “performance.” Performance is not based on one thing but a combination of activities. All focused on achieving a specific end result.

Retail and Industry Funds

Retail funds and industry funds market their performance on individual indicators. But are they relevant to you? Here are the four main ways they market:

  1. The low fee crowd. They tell you the only difference in performance is the fees. Because you can’t beat the market. If this is the case, why are there wealthy and poor people?
  2. The beating an index crowd. They benchmark their performance against some obscure index that has nothing to do with your risk profile or return.  When they beat this index they charge you more.
  3. The fear crowd. They tell you it is not about making money, but more about not losing it.  They offer ultra safe investments. All investments have risk.
  4. The cherry pickers. They provide you information on the performance of their investments by choosing the date when the investment has best performed. This has no relevance to current performance indicators. 

You are lead to believe that performance should be compared and measured against everyone else. This makes no sense. Performance is only relevant to you and what you are looking to achieve, your goals and your outcome.

Self-Managed Superannuation Funds

So how have SMSF performed against retail funds and industry funds? Back in 2011 a study was completed which showed that SMSF’s did outperform but this is of little importance as each fund is run by the individual for one purpose.

Some interesting facts about SMSF’s are that:

  • The average balance of a SMSF is over $1 million dollars.
  • Around $5 billion is invested in SMSF.
  • Around 2750 new SMSF are being set up each month.
  • SMSF is the fastest growing sector in the superannuation industry.

The key point is that SMSF’s have larger balances than industry and retail super funds.

The question you should be asking is why?

SMSF’s have larger balances as the investors are focused on achieving their goal of retiring comfortably. They are focused on reducing fees, saving, reducing tax, and improving the performance of their investments. Performance is not based on one thing it is a combination of activities. All focused on achieving a specific end result.

If you want to focus on low fees, chase last year’s winners. But don’t complain when you fail to get the performance you are looking for.

The people whose superannuation outperforms are the ones who “Take Control” and focus on achieving their goals.

Don’t leave it to others to look after your retirement.

Take control.

For more information on SMSF's register for our upcoming SMSF workshop. For details call me on (07) 4771 4577. 

 

SMSF Administration

By Jason Fittler

Self Managed Super Funds (SMSF) is the fastest growing sector in the superannuation industry.

Introduced back in 1994 only a few took up the idea.  Many accountants and advisers were reluctant to be involved. In fact back then you needed to be a specialist adviser to talk to clients on such issues, this regulation was done away with in time.

Since the GFC more and more people have turned to the SMSF sector.  First to get control over their investments, second to look to outperform the super sector in general.

It is difficult to gather performance returns of the SMSF sector as each SMSF is as unique as it owner. The last attempt was made in 2011.  Then it was fond that SMSFs outperformed APRA funds six out the seven years leading up to the end of 2011. The SMSFs out performed over this time by an annualized return 3.4% higher then APRA regulated funds.

Taking control of your future is more important than ever. If the GFC taught us one thing it is that large investment banks look after themselves.

SMSF's allow you to tailor your super fund to suit you and gives you direct control over the investments. However, you will need the right tools to ensure that the fund is run correctly.

The first question is who will administer your SMSF?

The administrator is the person who takes care of all of the paperwork around the SMSF. It is an important job, which needs to be 100% correct. You can of course do you own administration however as the fund gets larger the job will get larger as well.

The administration needs to keep track of all of your investments. Income, dividends, current valuations, corporate actions, buys, sells, and capital gains tax positions.

A good administrator will also be able to produce business activities statements, end of year financial statements and tax returns.

They will assist you with keeping your Trust Deed up to date, your insurance in place, paperwork for starting pensions, binding nominations and investment strategies.

Sure your accountant could do this for you but the costs would blow out. And if you hold shares most accountants are not in a position to be up to date with corporate actions.

You will also need ongoing advice on administration. And you must have an up to date view on your investments to ensure that you do not miss any opportunity or get caught with a dud investment.

You need an adviser who provides not just the software but also the advice to go along with it.

You need an adviser who understand the market and can assist you with recommendations. 

You need an advisor to be a sounding board in regards investments you are thinking about.

Recently the big end of town has recognized that the SMSF administration industry is one to be in. AMP has taken over the SMSF administration platform Supercorp. If you or your accountant is using this platform expect to start seeing AMP product marketing. 

It is easy for a SMSF owner to mistake marketing for advice.

You are better off with an administration service that offers advice and administration. 

For more information on SMSF's register for our upcoming SMSF workshop. For details call me on (07) 4771 4577. 

 

What is the Real Benefit of Superannuation?

As mentioned in a previous newsletter only 17% of the population ever gets financial advice. It is this very reason why Superannuation is so misunderstood.

Who would agree that the larger the return your superannuation achieves each year the better off you would be?

Would be surprised to know that you are wrong?

Superannuation is not all about the yearly return or even the long-term return.

The real benefit of superannuation is taxation.

Your superannuation fund is a trust, which is subject to a very low tax rate. Tax on superannuation is 15% during accumulation phase and nil once you are in account based pension phase. 

The trade off for this low tax rate is restricted access to your money until you reach retirement age.

If your average tax rate (tax paid / gross income) is above 15%, then superannuation is the very first stop to making money.

If you have surplus money to invest, by investing in superannuation you are already receiving a better return than outside simply due to the lower tax rate. 

Keep in mind that you can invest in the same type of investment both inside and outside of superannuation.

Example:

You have an average tax rate of 30% and surplus gross income (before tax) of $10,000pa to invest and expect to receive 10%pa return.

Based on this example for your investment outside of super to keep up with your investment inside of super it would need to return 33.5%pa. This is all because of the lower tax rate applied to superannuation.

If we extrapolate this out over 25 years the value of the investment will be:

  1. Outside Super   -$688,000 or income of $64,000 pa for 25 years
  2. Inside Super       - $835,000 or income of $78,000 pa for 25 years

The difference of $147,000 is purely because of tax savings. 

My point is that it is not all about the return on the investment.

Work smarter not harder. 

Having limited access to the funds turns many people off superannuation. However, the real issue is why are you investing. Investing or saving is for one purpose, to allow you to stop working.

For most people this will happen when you turn 65 and retire. Until then, you are paying of the house and raising kids. 

Having the money invested through super not only ensures that you do not spend it until retirement but gives you extra money for no extra effort. 

The real benefit of superannuation is taxation.

For more information on Superannuation give us a call on (07) 4771 4577.

If You’re Not Watching Your Super Who Is?

by Jason Fittler

For the vast majority of people their super will be their biggest asset.

But who is looking after it?

You look after your home which is a non-income producing asset. You continue to throw money at this lifestyle asset making it better or upgrading to a bigger better home.

However, unless you are prepared to sell, your home will not support you in your retirement. 

On the other hand your superannuation will provide you the income you need to live off in retirement and will make the difference between a great retirement and simply surviving the last years of your life.

What about the age pension?

For a single it is $21,000 pa ($400 per week) and a couple it is $31,700 pa ($600 per week). If this is your fallback position try living on this for 6-months and see how it feels.

In January “My Super” starts or should I say “Their Super”. This will mean slightly lower fees for those who have balances over $4,000 (so make sure if you have a number of Super Funds you consolidate) but you get no advice and no access to advice unless you pay up front. However, your fund manager will still charge you between 0.85% to 1% in ongoing fees, and upfront fees of around 2%.

Super funds are big money for those who run them and now a source of funding for infrastructure projects.

At present around 83% of Australian’s do not get financial advice as such they have little understanding of how their super is invested. It also means that the people who run the super funds do not know your expectations and will invest your money as they think is best.  We are in an economic period where our economy is slow, unemployment is on the rise and our government has a large deficit.

The government still needs to stimulate the economy, remember the school building and insulation stimulus projects of the Labor Party.

These projects take money and the government currently has none, but your super does.

In poor economic cycles the government will undertake large infrastructure projects building roads, rail and dams etc. If you are old enough you will remember the Snowy Mountain project. These projects create jobs and allow money to flow into the economy to provide stimulus, in layman's terms it jump-starts the economy, which is good for all.

Your Super will be the money used to fund these projects.

However, many of these projects fail, such as the Brisbane Riverway project and the Sydney airport link. Investors lost their savings (Super) while the investment banks made their money for putting together the deal. Infrastructure projects are very long-term, are highly geared and pay low yields. History also tells us that they are high risk and perhaps not what you want to invest in.

So I ask you again, if you are not looking after your super who is?

My Super is easy, you just do nothing and someone else plays with your money and future.

The alternative is to get some advice and make sure that you are looking out for you, because no one else will.

Last thought. Wealth is created through a combination of getting the investments right, and regular savings. Make sure you are putting extra into your superannuation (regular savings) you will save tax and have a great retirement.

Self-Managed Super Funds and Residential Property Inside Self-Managed Super Funds

By Jason Fittler

Beware the wolf dressed in sheep's clothing.

Time is running out!

Act now or you will miss out!

Your friends are doing better than you, and you need to catch up!

The marketing of investment products is becoming so sophisticated that most people now see it as information or even investment advice. It is getting harder for people to distinguish between a professional adviser and a salesperson.

My industry does not help itself as many qualified financial planners and accountants sell their soul for money. They stop providing good advice and start selling products which provides them with the best financial return. Good for them, but not in the best interest of their clients.

The big sell now is for Self-Managed Super Funds and residential property that can be purchased inside of a Self Managed Super Fund. Now this type of investment is not in itself fundamentally wrong but that does not mean it is right for you.

Self-Managed Super Funds in my experience will produce a better over all return for those people who take an active role in saving for their retirement. But they are not for everyone. You need to have an understanding of taxation, accounting and how investments work.

I have found that Self-Managed Super Funds best suit people who have owned or run a business or have worked at a high level in private enterprise. The reason being, these people tend to be better equipped to understand the regulations and paperwork, which will be required. They also understand the consequences of getting it wrong.

If you do not have this type of experience then you will need to invest some time and money to get the right advice and make sure that you are fully aware of your responsibilities and the costs and penalties associated with getting it wrong.

A free seminar will not give you the tools you need to run a Self-Managed Super Fund. You need to commit sufficient time to read and understand the regulations around running a Self Managed Super Fund. It is advisable to take a course through a recognized body. These courses take around 10-weeks to complete and have an online exam at the end.

So before you set up a Self-Managed Super Fund, you need to work out if you have the skills and time to run one.

The other big hype is all of the talk about a property bubble, which is not happening but could if more people buy property. This is simply marketing which the media are involved in. When I say media, this is a not just ads on the television or radio, this also includes people who pay to have a spot on a television show or radio show as a guest expert. This way they can make it seem as if you are getting independent advice when in fact you are receiving a sales pitch.

Ever heard of a wolf dressed is sheep’s clothing? Well it still happens.

So beware of free advice. It’s usually just a sales pitch.

The best way to lose money is to follow the latest trend or buy the latest investment product. People do this due to a fear of missing out. They are convinced that it is safe due to media reports and advertising campaigns. However, both are solely designed to convince people to buy these investment products.

The fist step to creating wealth is… “Do not lose money”.

You always need to look at the downside of any investment and if you cannot see a down side avoid the investment at all costs as marketing has blinded you.

There is always a downside.

If you would like more information about Self-Managed Super Funds and Residential Property Inside Self-Managed Super Funds please give me a call on (07) 4771 4577.

Super Contributions and The Work Test

By Jason Fittler

If you’re aged 65 or over, you must satisfy a work test before making contributions to super.

The work test isn’t onerous. At the time you are contributing, you must have been gainfully employed during the financial year for at least 40 hours over a period of no more than 30 consecutive days.

Gainful employment means you are employed or self-employed for gain or reward in any business trade, profession, vocation, calling, occupation or employment. This means you may be considered gainfully employed if you are in business and paid for gardening, baby sitting, consulting, cleaning and so on.

The 30 days can be any 30 consecutive days within the financial year - they don't have to be in one particular month. It's a minimum requirement. There are no maximum limits to how much you can work.

If you satisfy this work test, it means you are able to contribute to super.

It is important that if you are over age 65 that you consider the work test prior to making any contributions. It is also important that you work the 40 hours prior to making the contribution.

You cannot make the contribution and then set about working the 40 hours.

Always consult your financial adviser before make contributions to superannuation to ensure that you are complying with the current regulations.

If you would like to know more please call me on 07 4771 4577. 

The Big Money Grab

By Jason Fittler

I have written about the changes to lost super and lost bank account previously.

With the end of the financial year happening this week now is a great time to turn your attention to these issues.

Go now and find the old super statements and bank statements and make sure that these funds do not get sent off to the Government.

Below is a reminder of what changes are coming in, many people will get caught short please forward this note on to make sure family and friends are aware of the changes and take steps to protect their money.

Lost Super

There is estimated to be around $17 billion in lost and unclaimed super sitting in 6.1 million lost or unclaimed super accounts.

Super becomes lost because, among other causes, members change jobs or addresses without telling their funds.

From January 2013, the account balance threshold for lost accounts will be increased from the current threshold of $200 to $2,000.

This means that super funds will be required to transfer lost accounts with balances of up to $2,000 to the Australian Taxation Office (ATO).

The ATO will then use its data-matching capabilities, including tax file numbers, to help reunite the money with its owners.

From July 2013, Super funds will be required to transfer the accounts of unidentifiable members to the ATO after 12-months of inactivity where they are confident that they will never be able to pay an amount to the member in future.

At present, super funds are required to transfer these accounts after they’ve been inactive for five years or the member is not contactable.

If you have a small super balance, (you know that annoying statement which comes once a year go find it) give us a call and let’s make sure it is rolled over into your current super before it is lost.

Sure you will be able to get it back from the ATO but there will be hoops to jump through.

Lost Bank Accounts

Money may be identified as unclaimed after a period of 3 years (previously 7 years). This may occur, for example, where you do not deposit or withdraw money from a bank account for a period of 3 years or more. The payment of fees or the receipt of interest are, is not considered to be withdrawals or deposits.

Unclaimed money records that fall under the new unclaimed money definition may not be provided to ASIC by the relevant institutions until 31 May 2013.

From 1 July 2013 when unclaimed money is paid to a claimant, the Commonwealth of Australia will also pay interest to the claimant. The amount of interest and the method of calculating the interest will be determined by Regulations (which are yet to be released).

If you make a claim to ASIC for unclaimed money they will only pay interest on claims processed after 1 July 2013 and the interest is only calculated from 1 July 2013 onwards.

For more information please contact us on 07 4771 4577. 

Interesting Items: Audits of Property in Self-Managed Super Funds

The Australian Taxation Office is to step up scrutiny of property investments by self-managed super funds amid suspicions that strict lending laws are being breached.

Stuart Forsyth, assistant tax commissioner, said more than one in five contraventions identified by auditors’ involved funds lending to their members.

Salary Sacrifice and Super

By Jason Fittler,

Salary Sacrifice is about reducing the amount of tax you pay.

Salary Sacrificing into super allows you to benefit from paying lower tax and also allows you to have your money invested in a low tax environment.

The amount you can salary sacrifice into super is limited by your age based on your concessional cap.

From the 01/07/2014 the caps are as follows:

  1. Over age 60  $35,000 per year
  2. Between 50-60 $25,000 per year will change to $35,000on the 01/07/2014
  3. Less ten age 50 $25,000 per year

Concessional contributions are made up of employer (SGC) contributions and salary sacrifice. To ensure that you do not go over the cap you should first work out how much SGC you will receive in the financial year and deduct this from your concessional cap.

The balance is the amount you will be able to salary sacrifice.

For the 2013/2014 financial year, the SGC percentage is 9.25%, this means that your employer will pay 9.25% of your gross pay into superannuation.

For Example-

If you are over age 50 and earn $70,000 per annum you will receive $6,475 ($70,000 X 9.25%) in SGC contributions. You are entitled to make salary sacrifice contributions of $18,525 per annum. The effect this would have is as follows:

Salary Sacrifice works best for those people who have surplus to their current needs.  When you have paid off the house or the kids have left home.

If this surplus income is put to work in super as opposed to being wasted then you will be in a far better financial position when you do retire.

If you are younger it is harder to find the spare funds to put into superannuation, however, time is on your side.

If you are 30 years old and intend to retire at age 65, then putting away as little $4,500 per annum or $85 per week will boost your superannuation by $500,000 in retirement.  You will also save $24,000 in tax.

 Salary Sacrifice into super is necessary if you are looking to maintain your lifestyle in retirement.

You do have the ability to build your superannuation through non-concessional contributions, as you get closer to retirement, however, this requires that you have other assets to sell or move into the super fund.

Salary Sacrifice should be part of your long-term wealth creation strategy and tax strategy.

If you would like more information on Salary Sacrifice please call us on (07) 4771 4577.

Account Based Pension

By Jason Fittler

Once you have reach preservation age you are able to access your superannuation.

You can do this through a lump sum withdrawal or an account based pension. 

Before you start to take money out you first need to meet the conditions of release.

First you must reach preservation age as per the below chart:

Once you have reached preservation age you can start what is called a Transition to Retirement  (TTR) pensions this allows you to take between 4% and 10% of your super as a pension each year.

The TTR will stay in place until you either reach the age of 65 or the age of 60 and you have retired from the work force and will be working less the 10 hours per week.

Once these conditions of release have been met, you are able to move into a full account based pension. At this point you will need to meet the minimum pension requirements each year but there is no maximum pension amount.

 Age

Percentage of Fund Value

Under 65

4%

65-74

5%

75-79

6%

80-84

7%

85-89

9%

90-94

11%

95 or more

14%

 

In the 2013 Budget new tax measures were introduced in regards the tax status of pensions paid from an account based pension account. Previously, once you moved into an account based pension all of the income produced by your super fund was tax-free.

From 01/07/2014 any income your pension account earns above $100,000 will be taxed at a rate of 15% inside of the super fund.

The pension payment made to the beneficiary (you) will still be tax-free.

If you would like more information please give us a call on (07) 4771 4577.

Budget 2013 - Superannuation

By Jason Fittler

It is important to remember that the new laws proposed by the 2013 Budget have not yet come into effect.

However, I expect that some of the rules around superannuation will be pasted in the next 6 weeks of sitting before the government raises and heads to a election.

The below changes should not be acted on until it is law but at the same time we need to be aware and consider the effects on any decisions made now.

Superannuation changes

  1. Introduce a 15% tax on earnings in excess of $100,000 on superannuation retirement accounts. Once in pension phase if the income of your pension is above $100,000 any excess will be taxed at 15% this included any taxable capital gain. 
  2. Reconfirm the commitment to apply a 15% tax on concessional contributions for individuals who earn over $300,000. As at the 01/07/2012 if you earn over $300,000 in assessable income then and concessional (taxable) contribution made to your superannuation fund is subject to a 30% tax rate as opposed to the current 15% tax rate. 
  3. Simplify the design and administration of the higher concessional contributions cap. As at the 01/07/2013 the concessional cap for people 59 years of age or over will have their concessional cap lifted to $35,000 pa. From the 01/07/2014 people who are 49 years or over will have their concessional cap lifted to $35,000. It is expected that the general concessional cap will reach $35,000 due to indexation by July 2018.
  4. Change the treatment of concessional contributions in excess of the annual cap. This will allow for any excess concessional contributions to be refund to the member or left in the fund as a non-concessional contribution. However, the member will need to include this amount into their personal taxable and pay tax on the amount at their marginal rate. 
  5. Extend the normal deeming rules to superannuation account-based income streams. At present account based pension income is treated differently under the centrelink deeming rules due to their non-assessable portion. As at the 01/01/2015 all new account based pension income will be subject to the same deeming rules as income from investments outside of super. Any account based pensions started before 01/01/2015 will be grandfathered.
  6.  Deferred lifetime annuities (DLAs) will be eligible for the same concessional tax treatment that superannuation assets supporting superannuation income streams receive from 1 July 2014. This reform will provide retirees with more choice by allowing them to allocate part of their superannuation to a product that will provide an ongoing income stream for life beyond a certain age. Extend concessional tax treatment to deferred lifetime annuities
  7. The Government will increase the account balance threshold below which small inactive accounts and the accounts of un-contactable members are required to be transferred to the Australian Tax Office (ATO). The threshold will be increased from $2,000 to $2,500 from 31 December 2015, and then to $3,000 from 31 December 2016.

Super is an easy target for government and has been attacked as a source of revenue. Remember that this is your money no different to money in the bank.

So a few things you should do now:

  1. Make sure all your super is in one place to stop the government grabbing it.
  2. If over age 55 start an account based pension prior to the 01/01/2015.
  3. Make sure you are aware of the capital gains tax rules especially if you intend to purchase residential property in your super fund.

If you would like more information please give us a call on (07) 4771 4577.

SMSF – Buying Property in Super

By Jason Fittler

If you are looking to invest your superannuation into direct property then there are two main types.

Business Real Property - is defined as meaning, any freehold or leasehold interest of the entity in real property, or any interest of the entity in Crown land, other than a leasehold interest, being an interest that is capable of assignment or transfer, where the real property is used wholly and exclusively in one or more businesses, but does not include any interest held in the capacity of a beneficiary of a trust estate.

Two basic conditions must therefore be satisfied before an SMSF or any other entity related to or dealing within an SMSF can be said to hold business real property:

  • the SMSF or the other entity must hold an eligible interest in real property
  • the underlying land must satisfy the business use test, which requires the real property to be used 'wholly and exclusively in one or more businesses' carried on by any entity.

For most SMSF this generally is used when a business owner’s SMSF buys the property, which they run their business out of. If this is you always make sure that there is a valid and arms length lease in place.

Residential Property – there is now a growing trend to purchase residential property (a rental property) in your SMSF. This is allowed as long as the Trustees and any related party do not benefit (use) from the property. As such holiday homes or family renting the property is not allowed, nor can you purchase the property from a related party.

If you are looking to buy property in the SMSF I strongly recommend that you only do so if you already have sufficient cash in the fund to do so, keeping in mind that the SMSF can hold the property as tenants in common owing a defined percentage of the property.  If however you need to borrow to purchase the property then you will need a Bare Trust.

Bare Trust – a Bare Trust’s only purpose is to keep title over the investment property until the loan is paid off.  This is to ensure that the other assets inside the SMSF are not put at risk in the case of the geared property investment losses money.  The Bare Trust also is the entity, which holds the loan. The loan from the bank is required to be a “Limited Recourse Loan” which means that it can only sell the property in the case of a default on payment by the SMSF.

However the banks will normally require that the Trustee’s of the SMSF supply a guarantee for the loan. This means that the Trustee will be personally liable for any short fall on the loan and will therefore be placing their personal assets at risk. Once the loan is completed the title will go to the SMSF.

Trustees and members of a SMSF need to give careful consideration to the purchase of direct property into their SMSF as it comes with risks. You need to ensure that the property will provide sufficient liquidity to cover its expenses; proper leases are in place, that rental is at an arm’s length rate. That the property is not use for personal use either by a trustee or related party and that your investments strategy and trust deed allows for such an investment.

When it comes to retirement owing property in the SMSF will result in liquidity issues as generally the property will not generate enough income to cover the minimum pension payments as such it will need to be sold. Depending on the type of the property this can take some time. As such careful planning is required prior to making the decision to start a pension.  

For information please contact us on 07 4771 4577. 

Self Managed Super Funds – Sole Purpose Test

Section 62 of the SIS Act

Your SMSF needs to meet the sole purpose test to be eligible for the tax concessions normally available to super funds. This means your fund needs to be maintained for the sole purpose of providing retirement benefits to your members, or to their dependants if a member dies before retirement.

If you or any party directly or indirectly obtain a financial benefit when making investment decisions and arrangements (other than increasing the return to your fund), it's likely your fund will not meet the sole purpose test. When investing in collectables such as art or wine, you need to make sure that SMSF members don't have use of, or access to, the assets of the SMSF. The most common breaches of the sole purpose test are:

  • investments that offer a pre-retirement benefit to a member or associate
  • providing financial help or a pre-retirement benefit to someone, to the financial detriment of your fund.

The sole purpose test applies to all trustee activities and is bound to any investment activities to ensure that the trustees are acting accordingly. A common example of a breach in the sole purpose test is when it comes to purchasing property inside your super fund.

You are able to purchase a residential rental property of business real property inside of your super fund. The objective of the fund is that the property will provide income through rent and capital growth. This in itself is a valid investment. The problem comes if any of the trustees or their related party then use the property of rent the property.

For example if your SMSF purchased a investment property in a holiday destination and once a year the trustees used the property for a week long holiday. Even if they pay the market rate of rent you would still breach the sole purpose test. If friends of family were provided use of the property you would also breach the sole purpose test.

The penalties of such a breach are high at 46.5% of the value of the fund, as such it is important that all trustee beware of the sole purpose test and ensure at no time is there a breach.

Self Managed Super Fund – Investment Strategy

By Jason Fittler

When you are running your own Self Managed Super Fund one of the key elements is to ensure that you have an Investment Strategy. 

With recent changes to legislation it's now time to look at updating your investment strategy.

What is the investment strategy?

This is a comprehensive document, which details how you intend to invest for your retirement.

It is important to ensure that all of the trustees/members are clear on how the money will be invested and the risks they are prepared to take. This document should be reviewed at least once per year, normally when the financial accounts are prepared, to ensure that the strategy is still in line with the goals of the members.

It is important to ensure that there is sufficient detail in the Investment Strategy to provide guidance to your advisers on what your goals are and the level of risk you are prepared to take.

Be careful not to simply adopt an off the shelf strategy from your financial adviser or accountant. This may allow you to tick off this compliance measure but an Investment Strategy is more than a compliance issue.

The investment strategy should take into account the type of investments being shares, property or cash and a split between these investments.

  1. Shares - you need to look at which sectors you want to invest (i.e. only the ASX 200) and how large of small a company can be before you can invest. You need to consider if you want to invest in small speculative companies or highly geared companies. Also how much exposure you would like to have to these different sectors.
  2. Property - you need to consider if you will be looking to invest in direct property or through property trusts. One strategy is to invest in business real property ( the building your business works out off) if this is the case you should clearly indicate this in the strategy. 
  3. Cash - if you are currently invested all in cash because you are concerned about the market you need to ensure that your investment strategy correctly reflects this. You should also provide details on how much cash you will hold and how much is Term Deposits. Also you would need to define what you consider to be a cash investment.
  4. Insurance - this is a new requirement for a SMSF’s Investment Strategy. You need to outline your strategy on Life and TPD insurance. This does not make it mandatory to hold these types of insurance only that the strategy shows that you have considered what your requirements are and why this decision was made. Most investment strategies over 12 months old will most likely not have address Insurance as such they need to be updated. 
  5. Lending - if you are borrowing to buy property inside your SMSF then you also need to ensure that the strategy discusses what level of debt you can hold and that the members all agree to the increase level of risk this strategy incurs.

If you have not updated your Investment Strategy for some time now is a good time to look at doing so.

Super is a long-term investment, as such you need to continue to monitor your goals and benchmark performance.

Your Investment Strategy will assist with this process.

For more information please call us on 07 4771 4577. 

 

Proposed Super Changes

By Jason Fittler

The Government last week announced a package of superannuation reforms which will help reduce uncertainty in the industry stemming from weeks of rumours and ‘leaks’.

The proposed changes will:

  • Cap the tax exemption for earnings on superannuation assets supporting income streams at $100,000, with a concessional tax rate of 15 per cent applying thereafter, and apply the same treatment to defined benefit funds
  • Simplify the design and administration of the higher concessional contributions cap
  • Reform the treatment of concessional contributions in excess of the annual cap
  • Extend the normal social security deeming rules to superannuation account-based income streams
  • Extend concessional tax treatment to deferred lifetime annuities, and
  • Further reform the arrangements for lost superannuation.

The Government has also announced that it will establish a Council of Superannuation Custodians to ensure that any future changes are consistent with an agreed Charter of Superannuation Adequacy and Sustainability.

What does this mean?

First, keep in mind that these changes will not be introduced until after the next election as such they may never happen so no need to panic just yet.  Let’s take a look at each issue:

The clear message I took from this announcement is that shares now look like the best option when investing in super as they give you more flexibility around franking credits, timing of capital gains and control over the income your portfolio makes.

In Specie Contributions

 By Jason Fittler

In Specie Contributions allow you to move certain assets you own into your Self Managed Super Fund. The benefit of this strategy is that:

There are three main types of asset you can move into your Self Managed Super Fund;

  1. Widely held unit trusts
  2. Direct Equities
  3. Business real property

 Business real property in relation to an entity is defined as meaning:

  • Any freehold or leasehold interest of the entity in real property, or
  • Any interest of the entity in Crown land, other than a leasehold interest, being an interest that is capable of assignment or transfer,

Where the real property is used wholly and exclusively in one or more businesses (whether carried on by the entity or not), but does not include any interest held in the capacity of a beneficiary of a trust estate.

Two basic conditions must therefore be satisfied before an SMSF or any other entity related to or dealing within an SMSF can be said to hold business real property:

  • The SMSF or the other entity must hold an eligible interest in real property
  • The underlying land must satisfy the business use test, which requires the real property to be used 'wholly and exclusively in one or more businesses' carried on by any entity.

Example:

You own the building your business operates out of. It is worth $300,000. You need some new plant and equipment but do not wish to borrow for it. As such you sell your Building into the Self Managed Super fund for the market value of $300,000. You then receive the money to fund your new equipment. Note that you are not able to borrow to do this as such you will need to have the funds already available in the Super Fund. If the Super Fund is short cash there are some other options.

The benefits of this Super strategy are as follows:

  1. Provides needed funding.
  2. The property is now in a low tax environment, which will save tax on lease payments and future capital gains. 
  3. You are able to get more money into super as now your lease payments will go directly into super add your Super Guarantee Contributions you will have more money to retire on. 
  4. If you sell the property when you retire and if your SMSF is in pension phase there is no Capital Gains Tax. 

If you would like more information, please call us (07) 4771 4577.

 

What is Advice Worth?

By Jason Fittler

All too often we value advice based on what it costs us.

Advice is not about the hourly rate charged, it is about the benefit you gain.

All too often I see advice-based products sold as if they were a retail item. People go for the cheapest price. Advice is not a retail item, not all advice is the same, and you get what you pay for.

In the average person’s life there are two major financial assets they will own, their house and their superannuation. Most do not receive advice on either. 

When it comes to your superannuation it is a very complicated structure, but also a very powerful tool to build wealth. It is the very nature of Superannuation, which demands that you seek professional advice and continue to obtain ongoing advice. It is the difference between an average retirement and a great retirement.

Time for a dig at industry funds!

Their claim is that that they are run for the members as such they are cheap. This is true however there are now a number of products in the market, which are just as cheap, but you will receive ongoing advice.

Many investors due to a lack of knowledge believe that all advice is the same as such they are happy to pay a 1% fee for nothing instead of paying 2% but actually getting advice/service for their money. They are trying to apply retail-shopping practice to an advice-based service.

Advice is about future savings and benefits. Advice is about giving you a clear path to achieve goals be it financial or other. When it comes to superannuation the key issues are around salary sacrifice, tax reduction, concessional and non-concessional contributions, TTR Pensions, account based pensions, investments types and what to do once you have retired.

At age 65 the average male will have $200,000 in super person and female will have $110,000 this will mean that their standard of living will fall in retirement.

To have more, you need advice on where to invest and how to save in the most tax effective manner. This advice can make all of the difference and the tax saving along the way will more then cover the cost.

It is important to have a good relationship with your adviser; as such there are a number of variables, which you should consider:

1. Price - cheap advice is cheap for a reason. A good adviser will not be cheap, as they are not buying the work. Be prepared to pay market price or slightly higher but to not fall into the trap that the higher the cost the better the advice.
2. Following advice – professionals provide advice to assist you, they building their business based on you achieving your goals and then recommending them to others. You can choose not to follow their advice, but do not blame them for any poor result from not following their advice.
3. Second-guessing – once the advice is given, either take it or go for another opinion if you do not like the advice. Second-guessing to try and make the advice fit what you wanted to hear. 
4. Act quickly – most advice is given especially in relation to investments has a limited window of opportunity. Those clients who respond quickly to the advice will achieve a better result. It will also mean that the adviser is more likely to contact you first when an opportunity arises. 

If you would like our advice please call us (07) 4771 4577.