CASE STUDY – Putting inheritance into SMSF – Maria, a middle-aged business woman

CASE STUDY – Putting inheritance into SMSF – Maria, a middle-aged business woman

Putting inheritance into SMSF

WHERE she is at – Maria had helped run a family hobby farm for years. Having sold it, the question was what to do with her portion of money. She continued in business now, not farming but buying-in the basic raw product they used to grow and concentrating on new products that had a demand she was beginning to successfully tap into.

What she WANTED to have – Maria wanted to be able to live without Government support, by having enough to be self-funded in retirement. She enjoyed her new venture, so there was no rush to stop work yet – there was demand so why miss it? She wanted to be able to support her mother as there was a good chance her mother would live well into senior years, but also to be able to enjoy some time together after all the hard work. She aimed to pay off her house and would then consider travel, but it was not a priority yet.

What it will COST - She had a meeting with one of our planners to sort out the issues and get clarity. She was not too risk-adverse, and having come to our Self-Managed Super Fund (SMSF) seminar at the council, she attended our follow-up seminar about share investing and was very pleased with the method the broker used to sort out healthy companies. Maria already lived modestly but comfortably and demands of the business had curtailed any substantial holidays for now. She lived on $30,000 a year, as she didn’t travel and didn’t live extravagantly.  She just ran her car, mostly local trips, which had running costs of $4-5,000 each per year. If she looked after her mum more, extra money would help – so up to $40,000 would be comfortable for one person.

What she would NEEDTo self-fund, the planner ran some figures – using a conservative return of 5%, (one 20th of 100%) this meant converting to needing at least 20 times the comfortable income aimed-for – the min would be $800,000. This seemed very achievable as she had been fortunate with the business sale, and her current business was going well, but she would need to save some profits to sell it for a total of $400,000 at least altogether. She was also on track to pay off her home in 10 years. Maria would also set a goal to sell the business – but she wasn’t ready to put a date/year yet!

What to do NOW - Having attended our seminar on SMSF which explained the administration and compliance requirements relating to SMSF, I refreshed her about how SMSF was set up, her compliance responsibilities and what we would do – obtain the Trust Deed, AND, TFN and have a bank account papers set up ready for her to sign. She had a friend who would be co-trustee, but she would be the only member. She had been very pleased so-far with the support for her many questions, and that other investment ideas could be pursued in the future such as property. While she was flat-out with her current business, she just wanted to be able to know she had a team helping look after the super side and over-all plan for retirement.

Maris now had the components in place -

Strategy – To take control of her super, and contribute extra, in time and learn more later when she could

Structure To set up an SMSF as well as other aspects the advisor recommended,

Support With resources and all compliance taken care of by SuperBenefit, and other professionals in our network, she could learn more about investment in property & shares later on. Maria was very happy.

Note – This is a simplified summary of one client – we recommend asking for a FREE consultation and/or seeking further professional advice with our recommended advisors or your own.

Got questions? If you want experts who have years of helping others, without the hype – then call for a FREE strategy session today and also get your FREE Expert GuideSelf-Managed Super and Youtop right hand side above.

If you have any questions, why not give us a call – it’s FREE also! No obligation.

0407 361 596, Paul.

 

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MASTERCLASS Investing – Return on Capital – How does it work?

MASTERCLASS Investing – Return on Capital – how does it work?

Investing – Return on Capital – how does it work?

Let’s look at Return on Capital (different to Return on Equity, ROE) and ask how does it work for analysing strong healthy companies?

Return on capital is the same formula as return on equity ROE, but in addition of the value of ownership interests in a company (equity), also includes the total value of debts owed by the company in the form of loans and bonds.

The Formula is:

ROC =             Net Income (profit/earnings) EBIT

                     ( Shareholders’ Equity + Total Liabilities)

How It Works/Example:

Let’s assume Company ABC generated

  1. $5,000,000 in net income last year
  2. shareholders’ equity equalled $20,000,000 last year, and
  3. total liabilities were $10,000,000,

then  we can calculate ROC as:

ROC = $5,000,000/($20,000,000+10,000,000) = 0.17 or 17%

This means that Company ABC generated $0.17 of profit for every $1 of shareholders’ equity

Why It Matters:

ROC is a measure of profit as well as a measure of “efficiency” which takes into account debt/borrowings.

If there is NO debt, the result will be the same as return on equity (ROE), however, when there is debt, the denominator figure is larger, resulting in a lower ratio figure than the ROE.

 

Want to learn the core issues of share investing? Our workshopNavigate to Successful Share Investinggives a 2.5 hour practical session to learn to easily understand Company Financial Statements, how to find healthy companies, what tools and ratios to use, work on examples, and also includes how to get better investment outcomes. Other Bonuses as well.

Check the next one see Share WORKSHOP or call 0407 361 596 for a phone seminar at a time that suits you.

 

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Pensions – Deeming changes for Account Based Pensions

Pensions – Deeming changes for Account Based Pensions

Pensions – Deeming changes for Account Based Pensions

New rules will apply for calculating eligibility of government pensions –  one notably is that from 1 January 2015, superannuation account based income streams will be deemed under the existing deeming rules for the Age Pension.

Eligibility for Age Pension is determined by looking at BOTH Income and Asset Tests and the pension you get is the lower of the rates determined by each test. Normally the ACTUAL income received from what Centrelink calls “financial products/assets” such as shares and term deposits is not used but a “deemed” amount (about 2% currently used) where an assumed amount is earned by those assets (this can be an advantage where you DO earn more that the deemed rate). With super income streams, currently (and existing ones before 31 December 2014, will continue as currently assessed, after 1 January due to grandfathering allowances) super income streams are counted against the Age Pension Income Test –  there is a special calculation which allows for the Tax Free (Deductible) portion of the super account to be not counted. And the account balance is used as part of the Asset Test. So for the Income Test, the income stream less the tax free-deductible amount is taken. It is known as a return of capital.

It looks like this –

Means test

(Source - Retirement Income Strategic Issues Paper)

From 1 January 2015 any new super income streams commenced or altered/re-freshed/combined, will have the full super account income stream “deemed” – an amount determined/assumed to be earned as part of assessing the Income Test.

What are the test levels above which pension reduces?

Income asset levels

(Source – Financial Planning Magazine)

This means if the value of a pensioner’s financial investments falls between $139,000 and $253,000, their pension entitlement will be assessed by the Income Test. These pensioners are then affected by deeming changes, because the additional assessable income will reduce their age pension entitlement. 

A single homeowner pensioner with financial investments in excess of $253,000 will have their pension entitlement assessed under the Assets Test and as such, will not be immediately affected by deeming changes. They may, however, be affected by deeming changes in the future, as the value of their financial investments reduces.  

One result is more non-homeowners will be affected by these changes than homeowners. The reason being is that non-homeowners can have higher levels of assets when compared to homeowners before their pension entitlement is determined by the Assets Test.  

In Summary –

From 1 January 2015, new ABPs will be assessed the same way as financial investments, such as cash, shares and managed funds, are assessed. This means that these ABPs will be subject to deeming rules for Income Test purposes when determining an individual’s entitlement to Centrelink and DVA benefits.  

The deeming will apply to: 

* Account Based Pensions.  
* Account Based Annuities (currently not offered in Australia). 

The deeming will not apply to: 

* Defined Benefit Pensions.
* Lifetime and Life Expectancy Annuities.
* Fixed Term Annuities if the term is longer than five years. 

Grandfathering provisions will apply to ABPs commenced before 1 January 2015 where: 

* the person was receiving an eligible Income Support Payment immediately before January 2015; and
* since 1 January 2015, the person has been continuously receiving an eligible Income Support Payment. 

These ABPs will retain the current Income Test assessment for social security purposes where the pension payments are assessed concessionally, allowing for the return of the capital (also known as the Centrelink Deductible Amount).  

Grandfathering will also apply to ABPs that meet these conditions and revert to a reversionary beneficiary following the death of the pensioner if the reversionary beneficiary is in receipt of an eligible Income Support Payment at the time of reversion and if they continue to receive an eligible Income Support Payment.

For more see case studies at Financial Planning Magazine, and more explanation at Super Guide .

Got questions? If you want experts who have years of helping others, without the hype – then call for a FREE strategy session today and also get your FREE Expert Guide – Self-Managed Super and You top right hand side above.

If you have any questions, why not give us a call – it’s FREE also!

No obligation. 0407 361 596, Paul.

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SMSF Basics – What is a Self-Managed Super Fund (SMSF) and what types or structures do they have?

SMSF Basics – What is a Self-Managed Super Fund (SMSF) and what types or structures do they have?

SMSF Basics – What is a Self-Managed Super Fund (SMSF) and what types or structures do they have?

Self-Managed Super Funds (SMSF) are Regulated by an Act of Parliament, have different types or structure, are a special Trust (like the major corporate super funds) and are governed by the Sole Purpose Test.

An SMSF is created under the “SIS” Act whose full name is – Superannuation Industry (Supervision) Act 1993 (or “SISA”) and can be in two main forms

       Multiple member SMSF

      2- 4 members

       Single member SMSF – 2 possibilities

      2 trustees (you and one other non-employee)

      Or have a Corporate trustee with you as sole director

NO member can be an employee of another (unless family)

NO Trustee can be paid for services

An important part of the law is to recognize and abide by the “Sole Purpose Test” – that an SMSF is established  to pay Retirement Benefits – the purpose of this is to ensure the super assets/money are preserved and protected for retirement, and in the meantime both managed and invested wisely.

This means there are some restrictions on investments in related party assets, assets that can be acquired from related parties, and restrictions on personal use of fund assets.

The difference between a self-managed superannuation fund and other types of superannuation funds is that members are also trustees, or they are directors of a corporate trustee. This means they control the investments of the fund, the payment of their benefits and are ultimately responsible for the ongoing compliance of the fund.

There are two main different types of SMSFs, based on structure, that is, whether there will be a corporate (special super company) or individual trustees. Another difference is the number of trustees, single member or multiple, up to four trustees/members.

Corporate Trustee:

§  Four or less members

§  Each member also a director of the company who is the trustee itself

§  No member an employee of another member unless related

§  Corporate trustee, nor any director is paid for services related to the fund

Individual Trustee:

§  Four or less members

§  Each member is a trustee

§  No member an employee of another member unless related

§  No trustee is paid for services related to the fund

Single Member Funds come in Two Forms:

§  With corporate trustee, member must be sole director of the corporate trustee, or one of two directors either related or not an employee of each other

§  Two individual trustees, one a member and the other either related or any other person who does not employ them

See ATO: Setting up a self-managed super fund - or NAT 71923 Pg 6-7

Interested to know what self-managed super (SMSF) is all about, and if it is for you? Come to a FREE seminar with bonuses every month  Self Managed Super Fund Roadmap (all you need to know) for the next monthly event, see 1 SMSF – FREE Seminars or call us 0407 361 596

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Masterclass SMSF – What is In-Specie Transfer, does Capital Gains Tax apply, and what other issues apply to SMSFs?

What is In-Specie Transfer, does Capital Gains Tax apply, and what other issues apply to SMSFs?

What is In-Specie Transfer, does Capital Gains Tax apply, and what other issues apply to SMSFs?

The word “In-specie refers to “non-cash” and Capital Gains tax will apply (when you transfer ownership from one entity or individual) as well as several other issues that apply to Self-Managed super (SMSF) including certain restrictions when transferring assets that are non-cash into Self-Managed Super Funds (SMSFs). Generally an SMSF cannot acquire some assets from related parties, whether purchased or contributed in-specie. This includes residential and investment residential property, life insurance policies, units in widely-held trusts, bank notes, coins and collectables. But the exceptions are related-party owned business/commercial property and listed securities (shares) which CAN be transferred in-specie to an SMSF. We explain this further in our SMSF Roadmap seminar. There are Benefits and there are Issues to watch though -

The Benefits of In-Specie Transfer to your SMSF –

Tax Benefits

Owning assets within superannuation are significant and extremely appealing in accumulation and then particularly once a member moves into pension phase as in the table below.

  Non Super Super Accumulation Super Pension
Maximum tax on earnings (Marginal Rate) 45% plus Medicare 15% 0%
Maximum CGT (assets held < 12 months) 45% plus Medicare 15% 0%
Maximum CGT (assets held > 12 months) 22.5% plus Medicare 10% 0%

Centrelink Benefits

Before reaching pension age, superannuation accumulation funds are exempt from the Centrelink asset and income tests. Therefore, transfer of direct shares from an individual’s name into a superannuation accumulation account may result in additional Centrelink entitlements.

As an example, the greatest benefit is achieved where one member is of age pension age but their spouse is not. The super accumulation account of the non-age pension recipient will be excluded from the asset and income test, potentially meaning a greater age pension entitlement for the age pension recipient.

Commonly, the greater the age discrepancy the greater the benefit there is in transferring the shares into the younger member’s superannuation account.

Administration Benefits

Owning shares in an individual’s name involves separate accounting for dividends in annual tax returns, maintaining a CGT register (especially for dividend reinvestment plans) and keeping up-to-date on shareholding balances etc.

By in-specie transferring shares into an existing superannuation fund, you effectively consolidate investments and simplify ongoing administrative and tax responsibilities.

Spread contribution over time and avoid future contribution cap reduction?

In 2007 contribution caps were introduced restricting the amount of money that could be contributed into superannuation before excess contributions tax would apply. Prior to ‘Simple Super’ there was no limit on how much could be contributed into superannuation, although RBLs often reduced the incentive of contributing too much but no contribution caps existed.

These caps were tightened at one stage then the scheduled indexation increases for both concessional and non-concessional contributions being raised in 201411.

Avoiding a future problem of possible restriction to contribute funds into superannuation and being left with investments outside the tax effective environment of superannuation could be a reason to consider an in-specie transfer of shares now whilst share prices are still relatively low.

The Issues of In-Specie Transfer to your SMSF –

Capital Gains Tax (CGT)

For an in-specie transfer of shares from an individual to a superannuation fund is a CGT event. One needs to consider this when determining whether an in-specie transfer of shares into superannuation is appropriate.

It may never be a good time to pay tax, but there are two issues to consider:

  1. CGT is unavoidable and the longer an asset is held and the more it appreciates, the greater the CGT liability will eventually be. Even if the investor never sells an asset, the beneficiary of the client’s estate will inherit the CGT cost base and subsequent CGT liability when the asset is eventually sold. Therefore, realising a CGT liability now by in-specie transferring shares into superannuation is in many cases bringing forward the inevitable, but reducing future liabilities.
  2. If a share/asset price is low, an in-specie transfer of into superannuation at this time will result in a much lower CGT liability than would have occurred if the transfer had been actioned before the start of a bear market. However delaying an in-specie transfer, if the share price continues to rise, CGT liabilities will also increase.
  3. Preservation & Contribution Caps

Remember that any shares/assets transferred via in-specie into superannuation will be preserved until a condition of release is met.

The dollar value of an in-specie transfer must be clearly known and care taken to ensure the transfer will not result in breaching contribution caps which could result in excess contributions tax of up to 46.5%.

Want to learn the core issues of share investing? Our workshop “Navigate to Successful Share Investing” gives a 2.5 hour practical session to learn to easily understand Company Financial Statements, how to find healthy companies, what tools and ratios to use, work on examples, and also includes how to get better investment outcomes. Other Bonuses as well.

Check the next one see Share WORKSHOP or call 0407 361 596

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NEWS – How does your SMSF compare to the latest returns of the commercial super funds?

How does your SMSF compare to the latest returns of the commercial super funds?

How does your SMSF compare to the latest returns of the commercial super funds?

Have you had a chance to review the year end results of your SMSF and compare them to the latest returns of the commercial super funds who manage the majority (2/3rds) of the super pool in Australia, and bonds?

SMSFs have outperformed the commercial funds in 4 out of 6 years according to a collation of data by SuperGuide from 2007-2012, with SMSF returns ranging from 16.7% to -6.7% according to ATO statistical reports of average returns.

The Financial Standard website reports on the latest Rainmaker researchThe Selecting Super MySuper (ie Workplace) rolling 12 month performance index fell sharply during September to return 9.0% compared to 11.1% at end July and 10.6% at end June.  

Three year super fund average annual returns are, however, higher at 11.7% pa with

Five year average annual returns at 7.5% pa and

10 year average annual returns at 6.7% pa.

 

Rainmaker, SelectingSuper’s research partner, noted that  -

Not-for-profit (NFP) super funds achieved 12 month returns of 9.3% and

Retail funds (ie corporate master trusts and retail MySuper products) achieved 7.9%

 

The top five Workplace super funds (by MySuper and default options) over the 12 months were Telstra Super with 11.5%, Statewide with 11.2%, PSSap with 10.8%, AustSafe with 10.7% and both AUSCOAL and Kinetic Super with 10.5%.

The top five Personal funds (by balanced options over 12 months) were

Zurich Super Plan with 12.4%, Statewide with 11.2%, both Telstra Super and AustSafe with 10.7% and Equipsuper with 10.0%.

The top five Retirement funds (by balanced options over 12 months) were

Zurich ABP with 13.5%, QSuper with 12.4%, Telstra Super with 12.0%, VISSF with 11.5% and both Statewide and UniSuper with 11.2%.

To compare with Bonds and Cash –

Domestic and international bonds meanwhile posted returns of 6.0% and 8.5% respectively.

Cash returned 2.7% and direct property 10% but A-REITs have returned 12% which continues their volatile ride as at end August they were posting returns of 20%.

As part of the SuperBenefit Programme, our service assists trustees of SMSFs with education and seminar/workshops to improve their expertise and ultimately their returns on their super savings. Many clients are achieving 12-19% returns and can be as involved as they want/have time to be with a recommended list of healthy companies to choose from, or property from well-experienced experts who research the potential growth areas and rental returns possible.

Want to learn the core issues of share investing? Our workshop “Navigate to Successful Share Investing” gives a 2.5 hour practical session to learn to easily understand Company Financial Statements, how to find healthy companies, what tools and ratios to use, work on examples, and also includes how to get better investment outcomes. Other Bonuses as well. Check the next one see Share WORKSHOP or call 0407 361 596

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Basics about Super – An Overview of Super in Australia

Basics about Super – An overview of Super in Australia

Basics about Super – An Overview of Super in Australia

Super is a long term savings arrangement by the government in Australia to save for your retirement, to ensure Australians have enough income in retirement.

The money comes mainly from employers, self-employed, and your own top up as employees and for family members (on behalf of others) as contributions to a super fund. The Government will sometimes also add to your super with co-contributions and the low income super contribution.

Currently the employer (concessional) contribution is 9.5% from 1 July 2014, called the Super Guarantee, and is increasing to 12% by 2019. Over time these contributions add up or “accumulate” which is known as accumulation phase, and the money is invested so it grows over this time, as a life-time investment.

Contributions can be made to either of 3 types of fund accounts (you have choice of fund):

  • Independent Large Super Funds – retail, industry, bank and financial institutions (APRA – Australian Prudential Regulatory Authority is the regulator);
  • Retirement Savings Accounts (RSA) banks, institutions (rare);
  • Self-Managed Super Fund (SMSF) you manage it (ATO – Australian Tax Office is the regulator), also known as SMSF or DIY funds.

Super is a low tax saving environment – currently 15% on contributions in from employers etc, and 15% in income earned on the invested super money – eg dividends, interest etc.

The 9.5% employer contributions are based on your ‘ordinary time earnings’. For example, if your ordinary time earnings are $50,000 then you should be paid an additional $4,750 into super.

Ordinary time earnings are what employees earn for their ordinary hours of work including over-award payments, bonuses, commissions, allowances and certain paid leave. See the ATO’s information on using ordinary time earnings to calculate the super guarantee.

You can make extra contributions by:

  • Putting some of your savings into your super account;
  • Asking your employer to deduct extra money from your pay (before tax is taken out) and pay this into your super account – this is called contributing extra to super;
  • Transferring super from another fund into your main super account on a regular basis.

For self-employed people, your super contributions may be tax deductible. To calculate what amount of super you should be receiving form employment, the ASIC (Australian Securities and Investments Commission) MoneySmart website has a calculator.

Most people can choose which super fund they’d like their super contributions paid into. If you want to choose your super fund, tell your employer by filling in a Standard choice form from the Australian Taxation Office (ATO) or from your employer.

In some cases your employer will decide which fund your super is paid into. If you don’t (or can’t) choose your super fund, your employer will put the money into a ‘default’ super fund, a fund nominated under an industrial award or by your employer.

See choosing a super fund at MoneySmart for more information.

Money in your super fund account is invested by your super fund. Most super funds offer a variety of investment options.

For example, if you choose a market-linked investment, the value of your super will move up and down with market movements. Or you might select a stable option with lower expected returns but fewer ups and downs.

You can choose how you’d like your money invested, if you want to. You can also transfer your money to a different investment option within the fund, or transfer to another super fund at any time.

See super investment options for more information.

When you retire and have reached your preservation age (i.e. 55 to 60), you can withdraw your super. There are three ways you can get your super:

  • As a lump sum
  • As a retirement income stream (e.g. a monthly payment)
  • A combination of both

If you choose to take your super as a retirement income stream, the money that you’re not accessing continues to work for you and earn interest. See income from super for more information.

Superannuation law is changing over the next few years.

To find out more about the changes see ASIC: Stronger Super.

Got questions? If you want experts who have years of helping others, without the hype – then call for a FREE strategy session today and also get your FREE Expert Guide – Self-Managed Super and YouTop right hand side above.

If you have any questions, why not give us a call – It’s FREE also! No obligation. 0407 361 596, Paul.

And book for our next  FREE SeminarSelf Managed Super Fund Roadmap – all you need to know plus bonuses see HERE and our SMSF and Property Boost to Super (combined) Free Seminar HERE

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