Monday, October 22, 2012 Spruikers linked to DIY debacle · the largest and fastest-growing sector...
1
6 YOUR MONEY thewest.com.au Monday, October 22, 2012 Self-managed super funds offer great flexibility and can give people an opportunity to actively partici- pate in their own retirement planning But concerns that they are being oversold continue to surface. Financial adviser Crystal Broad- foot says she is dismayed at the number of people she is seeing who have been poorly advised to set up a self-managed super fund (SMSF) — frequently because they have been drawn by the buzz around holding property inside your own fund. “We do see the need for DIY funds in certain and limited situations, and that’s generally with your high-net-wealth, high super-bal- ance clients,” says Ms Broadfoot, whose firm is a member of the Count Financial group. “But we are dismayed at the num- ber of clients who come to us who have been, we feel, incorrectly set up with an SMSF.” Those people either have very low balances or rely totally on plat- form-administration services, “which defeats the purpose of an SMSF” and adds an extra, expen- sive layer of fees to the costs already involved in having a DIY fund, she says. Ms Broadfoot says the oversell- ing may be linked to a rule change that allowed DIY funds to borrow to invest, which has drawn property promoters to the SMSF sector. A wealth management partner at HLB Mann Judd Sydney, Jonathan Philpot, has similar concerns. “Many property spruikers are encouraging people with super bal- ances of $50,000 — and even less — to purchase a residential property in their SMSF,” he says. His rule of thumb is that most people should not consider an SMSF unless they already have a balance of $300,000. The first problem with the prop- erty strategy is that gearing does not make sense in a low-tax envi- ronment, Mr Philpot says. Gearing is more useful when a taxpayer is on higher rates. Second, focusing on property in this way means an SMSF may not be well diversified, and this will be so for a very long time while it is repaying the loan with rent and super contributions. There is also the challenge of meet- ing loan payments if the property falls vacant, he says. An allied problem can be access to cash for members as they go into pension mode. “You can’t sell the kitchen” to pay a pension, Ms Broadfoot says. At last count there were more than 478,000 DIY funds, holding $439 billion of assets, making them the largest and fastest-growing sector in superannuation. SMSFs now account for 31 per cent of super assets, ahead of retail funds (27 per cent) and industry funds (19 per cent). The Australian Securities and Investments Commission’s Peter Kell told a conference of financial advisers in July that while SMSFs can have benefits for experienced consumers, they are “not suitable for all investors”. Mr Kell says the regulator is con- cerned that not everyone is aware of the time and resources needed to run a fund; the expertise needed to manage it effectively; and the legal responsibilities, including their potential liability. On the other hand, the chief exec- utive of the SMSF Professionals’ Association of Australia, Andrea Slattery, defended SMSFs against the charge that they were being opened with low balances, saying the latest statistics show that both the average and the median bal- ance of SMSF members were trend- ing upwards. Ms Slattery points to the Cooper review of the superannuation sys- tem, which concluded in 2010 that there was no need for wide-ranging changes to the SMSF sector and, specifically, rejected the idea of a compulsory minimum. Mr Philpot says SMSFs offer peo- ple with healthy super balances a range of benefits, but the flipside is they can be complicated structures. His rule of thumb of $300,000 is based on the likely compliance costs (for accounting, auditing and tax returns), which start at about $3000. At this level, the costs would be equivalent to a one per cent fee — in line with what you would pay for a managed super fund. Then there are other transaction and investment fees to consider, such as share brokerage, fees charged by wholesale fund manag- ers and bank charges. Even though you are “doing it yourself”, you may want to pay for advice and help with administration. The $300,000 is not a hard-and- fast rule, though, Mr Philpot says. Some people with lower balances may have plans to build their super quickly, and so an SMSF might make sense for them. Spruikers linked to DIY debacle PROS & CONS & CONS BENEFITS Control: You can decide on how much to contribute and where to invest those funds. Security: Your member benefits generally are protected from creditors. Flexibility: Retirement income options can be tailored to a member and their family’s specific needs. Cost efficiency: Structured properly, an SMSF (which can have up to four members) can be cheaper than holding multiple superannuation funds. Tax efficiency: You can minimise tax payable if the fund uses imputation credits available from dividends. Excess imputation credits are fully refundable to the SMSF. Estate planning: An SMSF is the most flexible and tax-effective way for a member to provide lump sums or income streams to his or her surviving spouse, children or grandchildren. PITFALLS Five questions to ask yourself Will I save money or waste it? If you pay $3000 in professional fees to administer a self-managed super fund with just $60,000 in retirement savings, your expenses will be 5 per cent. You need to be sure you have enough money to absorb the fees, otherwise your retirement savings could disappear within a few years. Will I lose valuable benefits? Managed super funds usually offer life and disability insurance and a range of investment options. If you set up a DIY fund, you have to organise and buy these yourself. Will my fund outperform a managed fund? Super funds use professional managers to invest your super money. Can you do better than the professionals? If you’re thinking about setting up a self-managed super fund just because you’re not happy with your current fund, consider changing to another fund first. Do I know enough? Do you know all your legal responsibilities? Are you on top of the investment market? Do you know the tax implications? Ultimately you’ll be responsible for your fund, even if you receive incorrect advice from professionals. What if something goes wrong? Sometimes things can go wrong. For example, you may lose money because of fraud. But DIY funds don’t have access to the sorts of compensation available to public offer super funds. SOURCE: ASPIRE RETIRE FINANCIAL SERVICES, MONEYSMART.GOV.AU ■ Lesley Parker Couples who have established a self-managed superannuation fund (SMSF) need to ensure that their fund meets the technical definition of an “Australian Superannuation Fund” when they decide to go overseas for a holiday. This is not something to be taken lightly. Currently in Australia, 68.8 per cent SMSFs are two member funds, consisting of husband and wife who are members and trustees of the fund and many people have fallen foul of the rules. Tax legislation lists three conditions that a SMSF must satisfy in order to maintain its complying status and continue to receive concessional tax treatment. The first condition is that the SMSF must be established in Australia. The second is that the person who makes all the major decision for the fund must ordinarily be residing in Australia. The third is that at least 50 per cent of the total assets of the SMSF must belong to resident members. their minds as their period of absence also ceased to be temporary. Another thing to consider as well as the trustees’ intention is also the two-year period stipulated under the tax legislation. Because the legislation lists the two-year period of absence, a lot of trustees misinterpret this as meaning that as long as they are overseas for a period of no more than two years their SMSF would remain as a resident fund. Example 8(b) of the ruling details where the trustees were outside Australia for a period of less than two years. However, before leaving Australia, they divested themselves of the majority of their assets. They also intended to leave Australia indefinitely. Then due to an illness in the family, the trustees return to Australia after only being away from Australia for 18 months. In this example because the trustees moved overseas with the intention of remaining indefinitely, their absence would still not be considered temporary even though it turned out to be for less than two years. Tax ruling points out the pitfalls of living overseas ........................................................................................ SUPERWATCH ■ Monica Rule Picture: Getty Images ................................................................................. ■ Monica Rule is the author of The Self Managed Super Handbook. www.sunshinepress.com.au It is the second condition that most people fail to comply with when they go overseas. This condition requires the person in the SMSF that makes all the high-level decisions such as formulating, reviewing, updating the investment strategy and determining how the assets of the SMSF are to be used must ordinarily be in Australia. So if this person also goes overseas, they need to make sure that their period of absence from Australia is temporary. The test is a real-time test — which means the duration of absence must either be defined in advance or related (both in intention and fact) to the fulfilment of a specific, passing purpose. It cannot be established in retrospect or with the benefit of hindsight. This means, the person must always have the intention to return to Australia and not have established a home outside Australia. If at any time their intention ceases, then their absence from Australia also ceases to be “temporary”. They cannot be absent from Australia for an indefinite time or have divested a majority of their assets in Australia before going overseas. The Australian Taxation Office has published Tax Ruling 2008/9 on this topic. The ruling gives lots of examples on how to meet the above three conditions. In example 7(a) of the Ruling, trustees comprising of a husband and wife go overseas for a period of three years due to the husband being transferred to work in London by his employer. It was always the trustees’ intention to return to Australia at the expiration of the husband’s secondment. They rented their family home in Australia and lived in a furnished house in London provided by the husband’s employer. They continued to maintain bank accounts and private health insurance cover in Australia. They travelled back to Australia for a holiday during the Christmas period. The ruling states that the high-level decision-making exercised by the trustees in their London home would result in the trustees being ordinarily in Australia as their absence is considered temporary. Then in example 7(b), the same scenario is provided as in example 7(a) but this time the husband abandons his intention to return to Australia at the expiration of the secondment and continues to work in the London office on an indefinite basis. The trustees would not be considered as being ordinarily in Australia from the time they changed
Transcript of Monday, October 22, 2012 Spruikers linked to DIY debacle · the largest and fastest-growing sector...
6 YOUR MONEY thewest.com.au Monday, October 22, 2012
Self-managed super funds offergreat flexibility and can give peoplean opportunity to actively partici-pate in their own retirement planning
But concerns that they are beingoversold continue to surface.
Financial adviser Crystal Broad-foot says she is dismayed at thenumber of people she is seeing whohave been poorly advised to set up aself-managed super fund (SMSF) —frequently because they have beendrawn by the buzz around holdingproperty inside your own fund.
“We do see the need for DIY fundsin certain and limited situations,and that’s generally with yourhigh-net-wealth, high super-bal-ance clients,” says Ms Broadfoot,whose firm is a member of theCount Financial group.
“But we are dismayed at the num-ber of clients who come to us whohave been, we feel, incorrectly setup with an SMSF.”
Those people either have verylow balances or rely totally on plat-form-administration services,“which defeats the purpose of anSMSF” and adds an extra, expen-sive layer of fees to the costs alreadyinvolved in having a DIY fund, she says.
Ms Broadfoot says the oversell-ing may be linked to a rule changethat allowed DIY funds to borrow toinvest, which has drawn propertypromoters to the SMSF sector.
A wealth management partner atHLB Mann Judd Sydney, JonathanPhilpot, has similar concerns.
“Many property spruikers areencouraging people with super bal-ances of $50,000 — and even less —to purchase a residential propertyin their SMSF,” he says.
His rule of thumb is that mostpeople should not consider anSMSF unless they already have abalance of $300,000.
The first problem with the prop-erty strategy is that gearing doesnot make sense in a low-tax envi-ronment, Mr Philpot says. Gearingis more useful when a taxpayer ison higher rates. Second, focusingon property in this way means anSMSF may not be well diversified,and this will be so for a very long
time while it is repaying the loanwith rent and super contributions.There is also the challenge of meet-ing loan payments if the propertyfalls vacant, he says.
An allied problem can be accessto cash for members as they go intopension mode. “You can’t sell thekitchen” to pay a pension, MsBroadfoot says.
At last count there were morethan 478,000 DIY funds, holding$439 billion of assets, making themthe largest and fastest-growing sector in superannuation. SMSFs
now account for 31 per cent of superassets, ahead of retail funds (27 per cent) and industry funds (19 per cent).
The Australian Securities and Investments Commission’s PeterKell told a conference of financialadvisers in July that while SMSFscan have benefits for experiencedconsumers, they are “not suitablefor all investors”.
Mr Kell says the regulator is con-cerned that not everyone is awareof the time and resources needed torun a fund; the expertise needed tomanage it effectively; and the legalresponsibilities, including theirpotential liability.
On the other hand, the chief exec-utive of the SMSF Professionals’Association of Australia, AndreaSlattery, defended SMSFs againstthe charge that they were beingopened with low balances, sayingthe latest statistics show that boththe average and the median bal-ance of SMSF members were trend-ing upwards.
Ms Slattery points to the Cooperreview of the superannuation sys-tem, which concluded in 2010 thatthere was no need for wide-rangingchanges to the SMSF sector and,specifically, rejected the idea of acompulsory minimum.
Mr Philpot says SMSFs offer peo-ple with healthy super balances arange of benefits, but the flipside isthey can be complicated structures.
His rule of thumb of $300,000 isbased on the likely compliancecosts (for accounting, auditing andtax returns), which start at about$3000.
At this level, the costs would beequivalent to a one per cent fee — inline with what you would pay for amanaged super fund.
Then there are other transactionand investment fees to consider,such as share brokerage, feescharged by wholesale fund manag-ers and bank charges. Even thoughyou are “doing it yourself ”, youmay want to pay for advice and helpwith administration.
The $300,000 is not a hard-and-fast rule, though, Mr Philpot says.Some people with lower balancesmay have plans to build their superquickly, and so an SMSF mightmake sense for them.
Spruikers linked to DIY debacle PROS & CONS& CONS
BENEFITS� Control: You can decide on how much to
contribute and where to invest those funds.� Security: Your member benefi ts generally
are protected from creditors.� Flexibility: Retirement income options can
be tailored to a member and their family’s specifi c needs.
� Cost effi ciency: Structured properly, an SMSF (which can have up to four members) can be cheaper than holding multiple superannuation funds.
� Tax effi ciency: You can minimise tax payable if the fund uses imputation credits available from dividends. Excess imputation credits are fully refundable to the SMSF.
� Estate planning: An SMSF is the most fl exible and tax-eff ective way for a member to provide lump sums or income streams to his or her surviving spouse, children or grandchildren.
PITFALLS Five questions to ask yourself� Will I save money or waste it?
If you pay $3000 in professional fees to administer a self-managed super fund with just $60,000 in retirement savings, your expenses will be 5 per cent. You need to be sure you have enough money to absorb the fees, otherwise your retirement savings could disappear within a few years.
� Will I lose valuable benefi ts?Managed super funds usually off er life and disability insurance and a range of investment options. If you set up a DIY fund, you have to organise and buy these yourself.
� Will my fund outperform a managed fund?Super funds use professional managers to invest your super money. Can you do better than the professionals? If you’re thinking about setting up a self-managed super fund just because you’re not happy with your current fund, consider changing to another fund fi rst.
� Do I know enough?Do you know all your legal responsibilities? Are you on top of the investment market? Do you know the tax implications? Ultimately you’ll be responsible for your fund, even if you receive incorrect advice from professionals.
� What if something goes wrong?Sometimes things can go wrong. For example, you may lose money because of fraud. But DIY funds don’t have access to the sorts of compensation available to public off er super funds.
SOURCE: ASPIRE RETIRE FINANCIAL SERVICES, MONEYSMART.GOV.AU
■ Lesley Parker
Couples who have established aself-managed superannuationfund (SMSF) need to ensure thattheir fund meets the technicaldefinition of an “AustralianSuperannuation Fund” when theydecide to go overseas for a holiday.
This is not something to betaken lightly. Currently inAustralia, 68.8 per cent SMSFs aretwo member funds, consisting ofhusband and wife who aremembers and trustees of the fundand many people have fallen foulof the rules.
Tax legislation lists threeconditions that a SMSF mustsatisfy in order to maintain itscomplying status and continue toreceive concessional taxtreatment.
The first condition is that theSMSF must be established inAustralia. The second is that theperson who makes all the majordecision for the fund mustordinarily be residing inAustralia. The third is that at least50 per cent of the total assets of theSMSF must belong to residentmembers.
their minds as their period ofabsence also ceased to betemporary.
Another thing to consider aswell as the trustees’ intention isalso the two-year period stipulatedunder the tax legislation.
Because the legislation lists thetwo-year period of absence, a lot oftrustees misinterpret this asmeaning that as long as they areoverseas for a period of no morethan two years their SMSF wouldremain as a resident fund.
Example 8(b) of the rulingdetails where the trustees wereoutside Australia for a period ofless than two years. However,before leaving Australia, theydivested themselves of themajority of their assets. They alsointended to leave Australiaindefinitely.
Then due to an illness in thefamily, the trustees return toAustralia after only being awayfrom Australia for 18 months. Inthis example because the trusteesmoved overseas with the intentionof remaining indefinitely, theirabsence would still not beconsidered temporary eventhough it turned out to be for lessthan two years.
Tax ruling points out the pitfalls of living overseas
........................................................................................
SUPERWATCH■ Monica Rule
Picture: Getty Images
.................................................................................■ Monica Rule is the author of The Self
Managed Super Handbook.www.sunshinepress.com.au
It is the second condition thatmost people fail to comply withwhen they go overseas.
This condition requires theperson in the SMSF that makes allthe high-level decisions such asformulating, reviewing, updatingthe investment strategy anddetermining how the assets of theSMSF are to be used mustordinarily be in Australia.
So if this person also goesoverseas, they need to make surethat their period of absence fromAustralia is temporary.
The test is a real-time test —which means the duration ofabsence must either be defined inadvance or related (both inintention and fact) to thefulfilment of a specific, passingpurpose.
It cannot be established inretrospect or with the benefit ofhindsight. This means, theperson must always have theintention to return to Australiaand not have established a homeoutside Australia.
If at any time their intentionceases, then their absence fromAustralia also ceases to be“temporary”. They cannot beabsent from Australia for anindefinite time or have divested amajority of their assets inAustralia before going overseas.
The Australian Taxation Office
has published Tax Ruling 2008/9on this topic.
The ruling gives lots ofexamples on how to meet theabove three conditions.
In example 7(a) of the Ruling,trustees comprising of a husbandand wife go overseas for a periodof three years due to the husbandbeing transferred to work inLondon by his employer. It wasalways the trustees’ intention toreturn to Australia at the
expiration of the husband’ssecondment.
They rented their family homein Australia and lived in afurnished house in Londonprovided by the husband’semployer.
They continued to maintainbank accounts and private healthinsurance cover in Australia.They travelled back to Australiafor a holiday during the Christmasperiod.
The ruling states that thehigh-level decision-makingexercised by the trustees in theirLondon home would result in thetrustees being ordinarily inAustralia as their absence is
considered temporary.Then in example 7(b), the
same scenario is provided asin example 7(a) but this timethe husband abandons hisintention to return toAustralia at the expiration
of the secondment andcontinues to work in
the London officeon an indefinitebasis. Thetrustees wouldnot beconsidered asbeing ordinarilyin Australia
from the timethey changed
