Forming a SMSF

1. Forming a SMSF • Decide on who will be a member and act as the trustee for the fund. Could be individual/s or Company Trustee • Acquire a trust deed for the SMSF • Make the relevant declarations. Up to 4 members (ATO regulated) over 4 members (APRA regulated) • Devise Investment strategy – important it reflects the interests of the party/parties. • Meet with your solicitor, obtain enduring power of attorney, have signed and witnessed by 2 persons. • Trust Deed must have power to hold life insurance policies.

2. Trustees • Anyone aged 18 years and over can be trustee • Except if a disqualified person i.e. Convicted of an offence, subject to civil penalty under SIS (Superannuation Industries Supervision Act), Insolvent or under administration • Leaves the country for more than 2 years • Loses mental capacity

3. Administration • Receiving and dealing with paperwork relating to investments held - Client • Correspondence with share registries - Client • Open bank account nominate signatories Client • Bank proceeds and pay expenses - Client • Apply for ABN and T/F/N - Accountant • Prepare minutes in regard to events - Accountant • Prepare financial statements and fund’s tax return annually – Accountant

4. Administration cont’d • If fund is in pension phase obtain actuarial certificate as to taxable non taxable components • Annual independent audit of the SMSF

5. Superannuation Industry Demographics

6. Why should you use a SMSF • Control – Trustees of SMSF’s self determine what the SMSF invests in. This gives them the discretion to invest in assets they understand and feel comfortable with and ensure the type of assets match their tolerance for risk. • Typical Investments in SMSF’s include Term Deposits, Australian Shares, Residential Property, Commercial Property

7. Why would you use a SMSF

8. Accessing benefits through a SMSF Pensions • Account based pensions and transition to retirement pensions can be accessed upon reaching preservation age. i.e. age 60 or meeting a condition of release • Transition to Retirement pension age 55 yrs • This does not cause a change in investment philosophy merely that an income stream is paid. Importantly the tax status of member’s account changes.

9. Commencing a TRIS Pension • Ricky is approaching 55 years • Has a fund balance of $500K from promotions • Ricky can commence a Transitional pension once he turns 55 • Known as a TRIS (Transitional-to-Retirement Income Stream) • Ricky may draw up to 10% of his fund balance annually

10. Commencing a TRIS (cont’d) • The effect of taking $50K p.a. is the following: • Income earned on the $450K remaining in the fund is not taxed, nor are any capital gains made in the fund • Provided the fund consists of 100% tax-free component, no tax is paid by Ricky on the $50K. • Otherwise, Ricky’s drawing is taxed but Ricky receives a 15% rebate on the taxable portion.

11. Commencing a TRIS (cont’d) 55 60!! Punter’s SMSF 10%

12. Accessing benefits through a SMSF • Lump Sums can be paid if the Trustee of the Fund is a company • Lump sums can be accessed assuming member has met a condition of release • Lump sums must be taken in cash (previously an in-specie payment could be used to satisfy

13. Strategies you may considerContribution strategy. Pension strategy • In specie contributions of direct shares or commercial property. This strategy would reduce personal tax and reduce capital gains tax on future capital gains • Commencement of account based pension at age 55 years. Reduces tax inside super fund • Transition to retirement/salary sacrifice. Reduce tax (personal and inside super) • Maximise concessional contributions from taxed source currently $25K and non-concessional (after tax) contributions $150K. • Bring forward non concessional up to $450K (3 years) • Withdrawal and re-contribution strategies minimise hidden death tax and reduce personal tax by obtaining tax ded.

14. Business Real Property • In-house asset rules usually render an investment in a related entity as an in-house asset. Exception to the related party rule is business real property • BRP can be acquired from related parties • BRP definition 1. Any freehold or leasehold interest of the entity in real property 2. Any interest in Crown Land … where the real property is used wholly and exclusively in one or more businesses (whether carried on by the entity or not)

15. Using related entity to acquire Property • Usually cheaper option than limited recourse borrowing arrangement $4k - $15K + • SMSF may not be able to find a lender • Usually fund the initial purchase with a pool of related parties then move the asset holding across to the SMSF • Using related trust allows the SMSF to acquire the units over time as long as the trust continues to meet requirements under SIS Regulation 13.22C

16. Case Studies • Aristotle wants to invest in property and wishes to use his SMSF reserves to acquire. • Sets up a Unit Trust issues units to SMSF • Borrows balance of funds from the bank and subscribes for remaining units in Unit Trust. • Benefit 1) Negative geared interest 2) Lower amount of capital needed to borrow 3) Rent and capital gains taxed concessionally.

17. Borrowing to Acquire Property Unit Trust Aristotle $$ rent interest $$ rent $$ $ Warbucks Bank Aristotle SMSF

18. Re-contribution strategy Scenario • Juliet is aged 59. • Juliet’s Superannuation entitlements consist of $200K taxable (employer contributions) and $100 tax-free personal contributions) • Juliet can instruct her fund to pay a low-rate cap $175K lump sum • Thus leaving $130K in the fund comprising $86,667 taxable and $43,333 tax-free. • Some time later, Juliet commences a pension of $6,000p.a. which is 2/3 taxable. • Juliet then re-contributes the $175K as a personal contribution to refresh and increase her tax-free proportion. • Her fund balance is now $82,667 taxable and $211,333 tax-free. • Government announces 15 May 2013 tax on earnings exceeding $100K • Highly likely taxable component of pensions (presently tax free) will be taxed to the recipient due to Govt widening its revenue capture.

19. Re-contribution Strategy (cont’d) Juliet’s SMSF X% tax-free Y% taxable 100% tax-free

20. ATO comments on Part IVA • Media release 2004/58 “The tax office today confirmed that commonly used superannuation strategies will not attract the anti-avoidance provisions in the tax law. The strategies and variations we have examined so far are arrangements to maximise an individual’s retirement benefits and are allowable under law”

21. Pros and Cons of a SMSF • Providing assets exceed say $300K M.E.R costs in corporate sector/retail fund of 1.97% = $5910 plus management fees. • Industry super funds say $300K invested have M.E.R costs of .68% = $2040 • SMSF costs between $1500 - $5000. Fixed Cost based on time spent • Public sector and Industry funds require conservative asset allocation after commencing a pension. Essentially a super account closes and a pension account opens. SMSF not so. • SMSF has wider discretion but requires greater personal involvement and time.