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

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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