Self-Managed Super Fund Basics and Buying Property with your SMSF Money

Transcription

1 RETIRE WITH MORE Self-Managed Super Fund Basics and Buying Property with your SMSF Money YOUR GUIDE TO BUYING PROPERTY WITH YOUR SMSF MONEY $$$ Unit 1, 3 Robinson Place Rockingham WA 6168 admin@integratax.com.au (08) (PO Box 581, Kwinana WA 6966)

2 Contents What is a SMSF?... 3 How is a SMSF set up?... 4 Who can t be a Trustee?... 6 So what does a SMSF structure look like?... 7 Who should set up a SMSF?... 8 How much do I need to start a SMSF?... 9 What are the benefits of a SMSF? So, Property or Shares? What is best? The 6 most costly mistakes that could rob you of your retirement money Non Compliance Fees Insurance Poor Investment Decision Making Centrelink Policies Contribution Caps How to SMSF with borrowing CASHFLOW NON RECOURSE LOAN TRUSTEE COMPANY v s INDIVIDUAL TRUSTEE DOCUMENTATION YOUR QUALITY PROFESSIONAL SEMINARS Can I do it now? When s the best time So now what? Page 2

3 What is a SMSF? A Self-Managed Superannuation Fund (SMSF) is a trust fund that holds money for the purpose of saving for retirement. A SMSF is a small fund, run and controlled by its members. Compared to a non SMSF which can have many members and is controlled usually by a board of directors, a SMSF must have 4 or less members and all members must be trustees (or a director of the corporate trustee). This means that the members are responsible for all the investment and operational decisions of the fund and for following the rules under the SIS legislation and their own trust deed. A SMSF fund that complies with the legislation is called a Complying Superannuation Fund. A Complying fund is eligible for concessional tax treatment under the Tax Act. A non-complying fund can lose half its assets in penalty taxes. The members of a SMSF must also not be employees of each other (unless they are related) nor receive any remuneration for being a trustee of the fund. That is; you can t pay yourself for looking after your own money. All Superannuation Funds must follow the rules of the Superannuation Industry (Supervision) legislation which comprise of 7 acts. The Australian Prudential Regulation Authority (APRA) is the prudential regulator for superannuation funds and has the responsibility for administering the SIS Act and the SIS regulations. SMSFs however are regulated by the Australian Taxation Office (ATO). SMSF are not subject to prudential regulation since all its members of the fund are trustees and are able to protect their own interests. SMSFs are exempt from some of the SIS legislation. This includes not requiring to have an Australian Financial Services Licence under the Corporations Act 2001, the need to report members transactions in the member reports and not requiring disclosing information on significant events or dispute resolution procedures. However the SIS act and regulations still apply in all other respects. SMSFs are allowed to purchase Business Real Property and rent it back to their business. They are also exempt from the compliance/culpability test which other superannuation funds must comply with. (Ie. the trustee must have been involved in the breach knowingly - indirectly or directly) Page 3

4 How is a SMSF set up? A SMSF is established by a trust deed. An Accountant or Lawyer can help you here. The trust deed outlines: Who is / are the Trustee(s), = who is responsible for the operation of the Trust Who are the initial members = who are putting money in the Fund What are the trust rules (including following the SIS Act) The purpose of the trust fund (the sole purpose test) = which is to provide for retirement pensions. The Trustee can be a company (with one or more shareholders) or 2 or more individuals. A member must be a Director of the Trustee Company OR a Trustee individual. The Trustees are required to undertake the following steps: 1. Be appointed as trustees of the Fund; 2. Execute the fund s trust deed (sign it) 3 Provide information to new or existing members of the Fund to assist them in understanding their benefits, rights and entitlements in the Fund; 4. Accept members into the Fund upon their being eligible and providing consent to become a director of the trustee of the fund; 5. Apply to become a regulated superannuation fund; 6. Apply for an Australian Business Number and a Tax File Number for the Fund; 7. Establish a bank account for the Fund; 8. Formulate and implement an investment strategy for the Fund in accordance with section 52(2)(f) of the Superannuation (Industry) Supervision Act 1993 ( SIS Act ) as soon as practicable. It needs to include a review of the personal insurance requirements of the members 9. Appoint an administrator to the Fund. The administrator s role is to provide information and reports as required under any administration agreement between the trustee and the administrator (usually the person doing the books); 10. Appoint an auditor to the Fund. The superannuation laws provide that an approved auditor must be appointed on a yearly basis to provide an assessment of the Fund s compliance with the superannuation laws. The appointment must be in writing where required by the SIS Act; and Page 4

5 11. Appoint a self-managed superannuation fund (SMSF) specialist and any other professional - including an investment manager, valuer or actuary - to assist the trustee in their duties and responsibilities as trustee and at the same time being able to advise the members of the Fund on their benefits and entitlements in the Fund. Any such appointment must be made pursuant to the SIS Act and/or to the Corporations Act To comply with the deemed covenants which include: to act in the best interests of the members ( beneficiaries), to keep fund assets separate, to act honestly and exercise a degree of care, skill and diligence, responsibly manage reserves and allow members access to certain information. Page 5

6 Who can t be a Trustee? Not all people can be Trustees of a SMSF. A Trustee cannot be a disqualified person. Under the SIS legislation, a person is disqualified if they: Have ever been convicted of an offence involving dishonest conduct Have been subject to a civil penalty imposed under the SIS legislation Are insolvent under administration (undischarged bankrupt) Have been disqualified by the regulator This also extends to being a director of a Trustee company. Therefore a company cannot be a Trustee of a SMSF if: A responsible officer (director, secretary or executive officer) of the company is a disqualified person A receiver, official manager or provisional liquidator has be appointed or The company is being wound up A person can apply to the regulator ATO for the waiver of their status but only if the offence did not involve a serious dishonest conduct Page 6

7 So what does a SMSF structure look like? SMSF with a Company Trustee COMPANY SMSF SMSF with Individual Trustees MEMBERS Individual Individual SMSF INDIVIDUAL MEMBERS Page 7

8 Who should set up a SMSF? People that would best suit a SMSF would have the following characteristics: Have sufficient investments within super to achieve cost efficiencies of running the fund Have sufficient financial comprehension to understand the legal obligations and regulations that must be followed That wish a more hands on approach to their investing and control over their retirement savings That have Business Real Property which they want to put into their Super Fund. That wish to maximise tax effectiveness, death benefit streaming and Centrelink planning outcomes using superannuation as a vehicle People that a SMSF would not be suitable are those who: Have small account balances ( say under $150,000 to $200,000) *** - see below*** Do not have the time, inclination or understanding to manage the fund within its legal and regulatory guidelines Do not have any wish to manage their funds other than the offerings that larger retail funds already provide. (e.g. managed funds in an accumulation or pension mode or just cash.) Have simple objectives with no issues with death benefits, Centrelink planning or unusual investments such as collectibles etc. Page 8

9 How much do I need to start a SMSF? There is no SIS, ATO, or Trust Deed requirement that the fund have a minimum or maximum amount invested or held within the fund. The minimum is purely a calculation based on the following reasoning: A) Industry and retail superannuation funds generally charge as a percentage of the Funds under Management (FUM). These fees are often known as an Administration charge, a trail and / or a Management Expense Ratio (MER). B) A SMSF usually has mainly fixed costs like Bookkeeping, Accounting and Auditor fees which need to be paid regardless of the FUM size. C) Therefore, in order to compare a SMSF with a more traditional fund, you need to convert both into whole dollars based on your circumstances D) Remember that you can combine you and your partners/ spouse s balances to achieve more together than separately E.G. Members balance = $100,000 (FUM) Industry / Retail Superannuation Fund Admin fee $ 80 / yr MER 2% of FUM = $2000/yr Total fee $2080 SMSF Accounting fee $ 2000/yr Audit fee $ 450/yr TOTAL FEE $ 2730/YR SAVE $650/year in a traditional fund Actuarial Fee* $ 280/ yr (* needed if pension & accumulation mode both within the same fund like a TTR) Compare that to a Members balance of $300,000 (FUM) Industry / Retail Superannuation Fund Admin fee $ 80 / yr MER 2% of FUM = $6000/yr Total fee $ 6080 SMSF Accounting fee $ 3000/yr Audit fee $ 650/yr TOTAL FEE $ 3930/YR SAVE $ 2150/year with a SMSF Actuarial Fee* $ 280/ yr (Needed if pension & accumulation mode both within the same fund like a TTR) Page 9

10 Of course this is a simplistic example and doesn t cover all the benefits and risks associated with a Do It Yourself solution but it does demonstrate why a minimum FUM is important to consider. I must also point out that there are a lot of differences between the costings. Not only between retail superannuation funds fees, but also what professionals charge for SMSF services. This is general advice only. It is important that that your personal circumstances be taken into account before making a decision. A qualified Financial Planner can assist you with making these important decisions. *** In the last few years the rules have changed that allow SMSF to effectively borrow. A SMSF is unable to borrow money to invest, however they can have an agreement with a Bare Trust (or Property Trust) that borrows the money on its behalf. This effectively increases the potential asset base of the fund such that now lower Fund balances such as $80,000 may be effective to commence a SMSF. If you like investing in direct property (i.e. a rental or investment property) then this structure may allow you to use you Superannuation savings to commence an investment into your first or maybe next rental property. Page 10

11 What are the benefits of a SMSF? Control The apparent benefit of commencing a SMSF is the control that the members have over their own superannuation monies. They make their own investment decisions or investment strategy and usually feel they can make better decisions based on their own circumstances compared to a faceless organisation managing their money for the mass result. Cost There is also the perception (right or wrong) that a SMSF is cheaper than a managed Superannuation Fund. This would depend on the funds under management and the cost of the administration of the fund (accounting, audit and investment advice fees) Capital Gains Tax Tax effectiveness is a benefit of a SMSF. Decisions on selling investments which have imbedded CGT (Capital gain that you know you will have to pay tax on) can be delayed until the fund is in pension mode, thus avoiding the CGT payable. Flexibility The ability to structure the investment style to minimise tax is a huge benefit of a SMSF. You can invest in higher yield investments once in pension mode compared with accumulation mode. You can choose investments which prefer more capital growth with franking credits. The choice is yours. The fund can also be transferred from accumulation mode to pension mode easily. Estate planning SMSF members also have more perceived control over the distribution of death benefits to their beneficiaries and the way they are paid (pension s v s lump sum). The trust deed can be amended to accommodate this flexibility of payments. Page 11

12 So, Property or Shares? What is best? That really depends on YOU. Each individual has a certain aversion to risk and all investments have a certain amount of risk. These include: Risk of losing the capital volatility of share market, damage by tenants, tighter property markets forcing a lower price for a fast sale Risk of losing income no tenants, low dividend yields Risks of interest rate change how much will a 1% change make to the loan repayments? Risk of exchange rates having investments in a different currency. Risk of employment changes as your life goes on there is a risk of redundancy, decrease in salary, increased cost of living, which all affect the amount you can put towards supporting an investment. A licensed Financial Planner can assist in this area by assessing your adversity to risk (via a Risk Profile) and discussing your circumstances to outline what could be at stake if stuff happens. This will enable a plan be established outlining the good, the bad and the ugly of individual investment types and what suits you best. The plan (or Statement of Advice) also can double as an Investment Strategy which is a requirement for Trustees to prepare under the SIS Act. Remember, diversification is the key. A good mix of investments will decrease investment risk, improve liquidity, reduce volatility and should achieve your saving goals in a controlled fashion. Page 12

13 The 6 most costly mistakes that could rob you of your retirement money 1- Non compliance 2- Fees 3- Insurance 4- Poor investment decision making 5- Centrelink policies 6- Contribution Caps Non Compliance A SMSF needs to be careful to follow the rules under the SIS Act to maintain its complying Fund status. The main ones are: a) Assets need to be in the name of the SMSF (Trustee atf SMSF) and not in the personal names of the Trustees b) Money or assets can t be used for the benefit of the Trustees or members personally c) Money used for provision of retirement. If the fund becomes non complying then a penalty tax of 45% of the fund assets may be level by Australian Tax Office. Fees As demonstrated earlier, if a SMSF has a small account balance the fixed fees of Accounting, Audit & Administration become a major cost to the fund. Sometimes a retail offering may be more appropriate for smaller account balances until you have enough to transfer to a SMSF. Insurance Personal Insurance can be a necessary evil in an uncertain world. However the premiums will erode the capital of your Super Funds moneys. A Financial Planner can determine appropriate levels of insurance and discuss if these premiums are best inside or outside the Superannuation Fund (either a SMSF or Retail Fund). Poor Investment Decision Making It s great to have the ability to make decisions about YOUR own Money, but how much do you really know? Gut feelings and mate s best tips are not a great foundation for a long term investment strategy. Professional advice and second opinions should not be discounted. Having a mentor that can allow you to discuss your research and strategies could save you thousands. A second or third point of view is invaluable in the highly dynamic world of investing. Remember, even people whose jobs it is to watch the market day and night, get it wrong. So how much time and effort are you willing to invest in keeping up with all the changing legislation, shifting economies, a range of product choices available while still having time for a 9-5 job and a social life? And remember, diversification is all important in managing most risk. Page 13

14 Centrelink Policies Centrelink have various rules in accessing your benefits. The main tests are the assets test and the income test. Asset Test Centrelink will add up all your personal and Investment assets (excluding the home) and compare them to a scale to determine your entitlements. There are 4 tables: - with spouse - with principle residence. - without spouse, - without principle residence. Income Test Centrelink will add up all your sources of income and compare them to a scale to determine your level of entitlement. Income to Centrelink is assessed differently to normal concepts. Some investments are deemed to make a certain return of income. Others are calculated on their life expectancy. Calculation of Benefit Once the benefit is calculated on both the asset and income tables, the lower benefit level is the one you will be paid. The important factor here is the amount of benefits you could be missing out on based on the structure of your finances. Allocated pensions, annuities, age of each person and loans will affect the calculation of the income and asset test. A Financial Planner can assist in calculation and structuring your affairs to maximise your entitlement. Page 14

15 Contribution Caps The government have imposed contribution caps, which is the maximum an individual can contribute into a Superannuation Fund (SMSF or Retail fund) per financial year. A concessional contribution is limited to $25,000 per person per year. New laws are coming into play with over 60 yo being able to contribute $35000 for 2013/14 and then further extending that the following year. Timely advice is needed to discuss the current law of the time as the changes are constant. Seek advice before you go above the $25000 limit Exceeding these caps is very costly. The excess is taxed in the individual s names at 47.5%. A formal request can be made that the SMSF pays the excess contribution tax. The concessional contributions include the Super Guarantee Levy, salary sacrifice and any personal premiums that you wish to claim a tax deduction for. Non-Concessional caps also exist. $150,000 pa or $450,000 lump sum excluding the next 2 years contributions per person within the fund. There are also aged- based contribution restrictions and the work test The funds trust deed (either SMSF or retail fund) may also have contribution restrictions. For example, some super funds cannot receive the Governments Co-contribution monies into their fund. Lastly, there are also rules for rolling in active asset exemption money from a sale of a business asset which is limited to $500,000 per person Page 15

16 How to SMSF with borrowing COMPANY 1 Trustee BANK COMPANY 2 Trustee $$ LOAN Deposit Owner SMSF $$ PROPERTY Property Trust MEMBERS OF FUND The SMSF provides the deposit for the house. The bank supplies the loan funds and the Bare Trustee owns the property. Once the loan is paid out, the Property transfers ownership to the SMSF without stamp duty and without incurring Capital Gains Tax. if its structured correctly from the beginning. CASHFLOW The SMSF receives the Rent and the Superannuation contributions as income. The SMSF then pays the interest on the loan, the Shire Rates, Insurance, Repairs and other property expenses. It also pays for the Accounting, Audit & Administration fees of the Fund. If there is excess money after all the bills it can then transfer money off the loan. Once the loan is paid out, the security is released and the Property can transfer to the SMSF. NON RECOURSE LOAN Existing SMSF assets and Personal assets cannot be used as security when purchasing the new property. Thus the Lender (usually a Bank) must issue a loan that has no recourse on the other assets of the SMSF. Accordingly, to maintain the lenders comfort zone in lending against one asset only, the lender will ask for a higher deposit than normal lending. Also depending if you have an individual Trustee or a Company Trustee (for the Bare Trust +/or the SMSF), the lender will further change the deposit it requires. Page 16

17 TRUSTEE COMPANY v s INDIVIDUAL TRUSTEE The lender may provide a bigger loan if there are two Company Trustees as per the diagram above. When there is an individual Trustee on one of the Trusts (either SMSF or Bare Trust), and there is a legal argument, concern arises over who in fact owns the assets if there is a dispute. This could be a marital argument or creditors in a bankruptcy case. With an Individual trustee, the lender has to go to court to determine that the asset is held on trust for the SMSF or on trust for the Bare trust. With a company there is no question that the company is holding the assets on trust as the Company has no other function. (The company should not trade i.e. run a business). DOCUMENTATION It s important to get this right! Each State of Australia has different rules regarding when to set up the Bare Trust. Before signing the Offer & Acceptance for the purchase of the property, during or afterwards. Similarly, each State of Australia has its own rules on what Owner should be listed on the Offer & Acceptance to avoid double stamp duty when transferring the property from the Bare trust to the SMSF once the loan is discharged. The wrong advice could cost you thousands so it s important to get quality advice before you commit. YOUR QUALITY PROFESSIONAL Here at INTEGRA WEALTH, TAX & ACCOUNTING, we specialise in SMSF structures with and without borrowing. We can offer advice on whether a SMSF is right for you and calculate the costs before you proceed. We can set up the SMSF structure, assist in the rollover of funds from your previous Superannuation Fund, arrange replacement insurance within the Fund, advice on contribution rates (including salary sacrifice) and also assist in preparing an Investment Strategy for the Fund. We have a range of Mortgage Brokers that we can recommend to you, who are well versed in the complex SMSF-Borrowing structure. SEMINARS We hold regular seminars in Rockingham, Western Australia, that discuss SMSF borrowing and how it can be beneficial in wealth creation. Call our office on to confirm the date and time of the next seminar and to register your place. Page 17

18 Can I do it now? When s the best time Most probably YES Based on information in this e-book and other advisory sources, a SMSF is not for everyone. There are: Rules and Regulations to follow Minimum account balances to make it cost effective Cash flow concerns Investing decisions to make (Costly) Pitfalls if you get it wrong It is important to get qualified advice from a licensed Financial Planner +/or qualified Accountant who can address these issues, and more, and look at your personal circumstances. At INTEGRA WEALTH, TAX & ACCOUNTING we offer both a financial planning service plus qualified accountants to offer the best of both worlds. So now what? You can do one of 3 things. Nothing and nothing will change. Contact us through Contact Integra Tax to make an appointment. OR CALL US TODAY on (08) for a 20 MINUTE RETIRE WITH MORE Fact Finding session. It s Free! Phone: (08) Fax: (08) Website: admin@integratax.com.au Address: 3/1 Robinson Place, Rockingham WA 6168 Postal: PO Box 581, Kwinana WA 6966 Page 18