Self managed super funds Take control of your super Speaker’s name Title/department April 2013 Disclaimer This information was prepared by Securitor Financial Group Ltd, ABN 48 009 189 495 AFSL & Australian Credit Licence (ACL) 240687 (Securitor) and is current as at January 2013. Material contained in this presentation is an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such. This presentation contains general information only and does not take into account your personal objectives, financial situation or needs and so you should consider its appropriateness having regard to these factors before acting on it. All case studies and examples used in this presentation are for illustrative purposes only and nothing in this presentation should be construed as an indication or prediction of future performance or results. Any taxation position described in this publication should be used as a guide only and is not tax advice. You should consult a registered tax agent for specific tax advice on your circumstances. As the rules associated with the super and pension regimes are complex and subject to change and as the opportunities and effects differ based on your personal circumstances, you should seek personalised advice from a financial adviser before making any financial decision in relation to any matters discussed in this presentation. 3 April 2013 Agenda What is a self-managed superannuation fund (SMSF)? Setting up an SMSF Things to consider as a trustee Things to consider when managing the fund How should trustees be investing? Strategies for SMSFs Next steps Questions 4 April 2013 What is an SMSF? What is a self-managed super fund (SMSF)? An SMSF is a superannuation fund that you manage yourself. It provides retirement benefits for its members in the same way as a regular super fund. There are however some complex rules and regulations to be mindful of. SMSF market1: – 478,263 funds registered with the Government SMSF Share of Super – 35,276 new funds established last 12 months – 31.3% of total super assets are held in SMSFs ($439 billion) SMSF 69% Non SMSF – 913,550 members 1 ATO Quarterly Statistics June 2012 6 April 2013 31% Self Managed Type Super - Can choose risk profile - Insurance benefits - Task: Keep beneficiaries updated Wrap Type Super Fund Low Direct property Collectables Cash Shares Bonds - Cash - Shares - Bonds Responsibility/Time/Expertise 7 April 2013 - Retail Super Fund Low Choice/Flexibility/Control High Where do SMSFs fit into the super landscape? High Customer drivers of SMSF Advantages Disadvantages Control of investment decisions Full trustee responsibilities Direct Investments options Lack of knowledge Investment returns Time consuming to run Lower costs Tough penalties for breaching rules Ability to gear May be uneconomic for low balances Tax management Extra legal responsibilities Flexible retirement pension options Potentially higher costs Flexible estate planning / protection options Maximum of four members 8 April 2013 Setting up an SMSF Steps to setting up an SMSF 1. Obtain a trust deed 2. Appoint trustees 3. Sign a declaration 4. Collect members’ TFNs 5. Contribute or transfer assets to the SMSF 6. Lodge an election with the ATO 7. Open a bank account 8. Establish an investment strategy 9. Obtain death benefit nominations from each member 10 April 2013 Obtain a trust deed A trust deed establishes the rules and conditions governing the fund. These may include: – Details of the trustees and who can be a trustee – How trustees may be appointed and removed – Trustee powers – Who can contribute to the fund – What types of benefits can be paid – What types of investments can be used – Procedures for winding up the fund – Intention to create a Trust It is important that the trust deed is signed and properly executed 11 April 2013 Appoint trustees The trustees of a SMSF can be either: Individuals – each member must be a Trustee and each Trustee must be a member, and – except for single member funds, which must have 2 Trustees Corporate – each member must be a director of the corporate trustee company, and – each director must be a member of the SMSF 12 April 2013 Sign a declaration All trustee(s) or director(s) of the corporate trustee of the SMSF must declare they understand their obligations, duties and responsibilities. Some obligations and responsibilities include: – Acting honestly in all matters affecting the SMSF – Acting in the best interests of the members – Formulate and implement the investment strategy – Keep SMSF assets separate from personal and business assets – Allow members access to certain information 13 April 2013 Lodge an election with the Regulator To become a complying super fund and receive the associated tax concessions, a fund must elect to become regulated. Must register with the ATO within 60 days of starting fund ATO will allocate a TFN and ABN to all registered funds 14 April 2013 Open a bank account Set up a bank account to accept contributions, rollovers and earnings, pay fund expenses and liabilities and purchase investments. Bank account must be in the fund’s name. The bank account is used to manage daily fund operations and often referred to as the “Hub account” Should be kept separate from individual trustee bank accounts 15 April 2013 Establish an investment strategy Trustee obligation to have an investment strategy which sets out the guidelines for all future investments by the fund. Must have regard to whole circumstances of fund: – Risk & return – Diversification – Liquidity – Ability of the fund to discharge liabilities – Strategy should consider objectives of each member – Separate strategy to manage fund reserves – Include insurance coverage – Review investment strategy 16 April 2013 Obtain death benefit nominations Members can provide the trustee with a written death benefit nomination. Nominations should state who is to receive their super benefit upon their death and in what proportion. Nominations can be: – Binding – Non-binding – Reversionary (for pensions) 17 April 2013 Things to consider as a trustee Things to consider as a trustee An SMSF can have no more than four members. The trustees of an SMSF can be either individuals or a company. No member of the SMSF can be an employee of another member, unless the members concerned are relatives. Trustees must carry out their duties without payment. Trustees are bound by law to responsibly manage the fund and are personally liable for any actions of the fund. Trustees will be required to set aside time for the ongoing management of the SMSF. 19 April 2013 Things to consider as a trustee A trustee cannot be a ‘disqualified person’, meaning the trustee: – has never been convicted of an offence involving dishonest conduct – has never been subject to a civil penalty under the SIS Act – is not insolvent under administration (an undischarged bankrupt) – has never been disqualiﬁed from acting as a trustee of a superannuation fund by the regulator. A company cannot act as trustee if: – a responsible officer of the body corporate is a disqualiﬁed person – a receiver, official manager or provisional liquidator has been appointed – the company has been wound up. 20 April 2013 Things to consider when managing the fund Things to consider when managing the fund Investment strategy – Trustees are required to prepare and implement the investment strategy and regularly review it. – Strategy must reflect purpose and circumstances of the SMSF. – Must consider whether insurance should be purchased by the SMSF. – The SMSF’s assets must be held separate to the trustee’s personal assets, and valued to market each year. Insurance via superannuation – Death, TPD and Income Protection policies can be purchased by the SMSF. Beneficiary nominations – binding and non-binding 22 April 2013 Things to consider when managing the fund... SMSF must provide an independent audited annual return to ATO – Must include member contribution information including rollovers from other super funds. Record keeping – Accounting records, such as annual operating statement, annual statement and annual returns, must be kept to record and explain transactions and the fund’s financial position. Compliance – Trustees must ensure the SMSF complies with Superannuation Industry (Supervision) legislation (SIS) 23 April 2013 How should trustees be investing? The Fund’s investment strategy As a trustee you must consider: Risk involved, likely returns and fund objectives Composition of a fund’s investments, diversification Liquidity requirements of the fund Ability of the fund to discharge present and future liabilities Insurance needs for members Members risk profile: – Risk profiling will impact on asset allocation – One risk profile for the fund? – Multiple risk profiles for individual members? 25 April 2013 Question: How much are members prepared to lose and still be comfortable? The different types of assets Core type Satellite type Cash / Term Deposits Directly held shares High interest savings a/c Self-finding instalment warrants Diversified fixed interest Specialised managed funds Tailored term deposits Global property Australian property Hybrid securities Managed funds Global fixed interest Exchange Traded Funds (ETFs) Capital protected products 26 April 2013 Strategies for SMSFS Strategies for SMSFs 1. Purchasing a residential investment property with borrowed funds 2. Purchasing a business real property with borrowed funds 3. Avoid the liquidity trap – helping trustees plan for the future 4. Insurance in SMSFs – helping trustees meet their members’ insurance needs 5. Borrowing to invest within an SMSF 6. SMSF and Estate Planning 28 April 2013 Strategies for SMSFs... 1. Purchasing a residential investment property with borrowed funds – If an SMSF don’t have sufficient funds for a full purchase, but has enough for a partial funding. – Your SMSF can purchase a residential investment property under a Limited Recourse Borrowing Arrangement (LRBA). 29 April 2013 Strategies for SMSFs... 2. Purchasing a business real property with borrowed funds – Your family company wants to unlock cash that’s currently tied up in your business premises, which is owned outright. – Your SMSF, which holds a significant amount of cash, can purchase the business premises from your company under a Limited Recourse Borrowing Arrangement (LRBA). 30 April 2013 Strategies for SMSFs... 3. Avoid the liquidity trap An advantage of having your own SMSF is the variety of investments you can invest in (i.e. rental and business properties) However, there is a potential problem when large assets like property are held. If an SMSF must meet an obligation to pay benefits property may be may be slow or difficult to sell in an emergency. 31 April 2013 Strategies for SMSFs... 3. Avoiding the other liquidity trap – at pension time The liquidity trap for SMSFs isn’t just about emergencies Pension payments in retirement mean you need ongoing cash flow Take care before committing to the purchase of a single asset that will represent the majority, if not all of the fund’s assets A diversified investment portfolio including cash, managed funds, and listed shares can be effective in managing: – volatility; and – the need for liquidity and divisibility To enable timely payment of super benefits to members. 32 April 2013 Strategies for SMSFs... 4. Insurance in SMSFs Providing insurance cover within a SMSF Insurance cover for members is owned by the fund on the life of the members The fund can insure members for: – Life Insurance as a result of death – Total and Permanent Disablement – Income Protection The fund can claim a tax deduction for certain insurance premiums. Provides cash liquidity to enable payment of death benefits to beneficiaries. Provides protection for any borrowings within the fund. 33 April 2013 Strategies for SMSFs... 5. Maximising franking credits in your SMSF Purchasing high-yielding, fully franked stocks, means you can earn higher franked dividend income and potentially generate excess franking credits in your SMSF. Excess franking credits may be used to: – offset taxable contributions; or – offset tax payable on earnings from other investments within the SMSF; or – obtain a refund of any excess credits after offsetting tax on other income within the fund Using instalment warrants to borrow to invest can help to maximise the franking credits available to you 34 April 2013 Strategies for SMSFs... 5. Borrowing to invest within an SMSF It is a concessionally taxed environment Can use super contributions and investment income to service loan repayments Have met the concessional and non-concessional contribution caps but still wish to increase their SMSF portfolio Want to bring forward the purchase of investments via superannuation How does it work? 35 April 2013 Strategies for SMSFs... 5. Borrowing to invest within an SMSF.... Issues to consider: Steps to borrow through SMSF: Cost SMSF trustees must formally agree to the use of a borrowing arrangement. Cash flow Decide which asset to purchase in line with the fund’s investment strategy. Investment restrictions Establish the Custodian Trust to purchase the asset Arrange finance – either related party or commercial loan Arrange the relevant loan documentation 36 April 2013 Strategies for SMSFs... 6. SMSF and Estate Planning In the event of death of a member the SMSF can pay death benefits in the form of: – a lump sum to beneficiaries – a pension to a SIS spouse dependant or child dependant beneficiaries – a reversionary pension to spouse for existing pensions Super death benefits do not form part of your estate unless the estate is nominated as beneficiary under binding or non-binding death benefit nomination form. If structured correctly the SMSF can be an efficient way to pass assets to beneficiaries 37 April 2013 Next steps Next steps Consider whether an SMSF is right for you. Speak to a Westpac Financial Planner to discuss your goals and financial circumstances 39 April 2013 Questions?