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 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 or investment property, life insurance policies, units in widely-held trusts, bank notes, coins and collectables. But the exceptions are business property and listed securities (shares). 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? The last 12 month returns for Retail funds are less than those for Not For Profit (NFP) – that is 7.9% compared to 9.3%.

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% loss according to ATO statistical reports of average returns.

The Financial Standard website reports on the latest Rainmaker research

The 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%.

Underpinning the super fund performance fall is that the S&P ASX300 accumulation index performance over the rolling 12 months contracted further from 14% at end August to 6% at end September although this was offset by the rolling 12 month returns for international shares increasing from 15% at end August to 20% at end September.

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, or 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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Masterclass SMSF – Transition to Retirement – What are the steps and advantages when you have self-managed super?

Masterclass SMSF – Transition to Retirement - What are the steps and advantages when you have self-managed super?

SMSF – Transition to Retirement – What are the steps and advantages when you have self-managed super?

Transition to Retirement is a strategy for people to consider when they are 55 and over and meet a condition of release and here we look at and what are the steps and advantages when you have a self-managed super fund (SMSF).

For the details about Transition to Retirement (TTR or TRIS – Transition to Retirement Income Stream) see HERE.

STEPS to set up Transition to Retirement (TTR/TRIS)

When used as a tax strategy, if your income tax rate is more than 15% then TTR could provide benefits while still building your super, and maintain your current income, but reduce the tax you pay.

  1. Check the SMSF Trust Deed allows a TTR strategy (to avoid contravention).
  2. Calculate the results on several amounts to salary sacrifice and the tax due on the lower salary – this is usually the next tax bracket below your current salary, ie sacrifice enough to bring your gross salary into the next lower tax bracket.
  3. Prepare member letter to apply to the Trustees to start a pension/income stream account with some of your super monies, leaving some in accumulation account, or start another accumulation account for employer contributions to your fund. Record the Trustee Resolution of Minute of the Meeting that tabled the TRIS application.
  4. Arrange the salary sacrifice with your employer and draw a regular pension payment from the super. The salalry sacrificed amount will be PAYG taxed at a reduced rate (concessional), which means less tax when going into the fund instead of your marginal rate, and PAYG will need to be paid by the super fund when paying you.
  5. Check the calculations to determine what amounts work best for your case. Always seek professional assistance to ensure laws are not breached and that there is really a tax advantage.

Advantages

  1. Tax on your pension/income stream and salary should overall be less than your current tax (PAYG).
  2. Overall take-home pay can be maintained, while saving tax.
  3. No tax on investment earnings in the pension account. Only tax on the Income Stream you take, when in your hands.
  4. You can potentially be increasing your super faster than the employer %.
  5. Increased super can sometimes mean you could reduce your work hours, and receive a similar income.

If you would like a no-obligation discussion of possible strategies, give Paul a call 0407 361 596

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 Seminar – Self 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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NEWS – 40% of Australians retire 5 years before financially ready

NEWS – 40% of Australians retire 5 years before financially ready

40% of Australians retire 5 years before financially ready

It seems there are factors OUTSIDE people’s control that could mean you become one of the 40% of Australians who retire before you are financially ready – 5 years too early!

Nicholas O’Donoghue writes in Money Management –
“Uncontrollable factors are derailing the best laid retirement plans of many Australians, with the average retiree outliving their superannuation savings by five years, new research reveals. Data from Mercer’s ‘Expectations versus reality of retirement’ survey showed that 40% of Aussies were forced into earlier retirement before they were financially ready, due to redundancy or for health reasons. While half the population underestimated their life expectancy by more than two years, with one in four white collar workers living four years longer than average. Although the survey found that a large proportion of pre-retirees & retirees were concerned about the longevity of their savings, Mercer’s managing director and Pacific market leader, David Anderson, said few had a formal plan to address this issue, with just one in three engaging a financial planner.

“Despite most of us believing we’ll work and save for our retirement well into our 60s, the reality is that uncontrollable triggers can derail the best laid plans for retirement,” he said. Read MORE

Get our FREE Expert Guide Self-Managed Super and You – it has all the info you need to know, with bonus TIPS and CHECKLISTS  to determine if SMSF is for you and what steps are needed to set up, as well as how to get your SMSF set up FREE . It also gives you ALL the Aust Tax Office publications about SMSF (NAT XXXX). Get your copy now – click “Download” top right hand side above. You’ll also get monthly SMSF news, investment teaching and upcoming seminar and workshop briefs! Download your FREE Guide now!

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MASTERCLASS Investing – What is Debt to Equity and how is it used by investors in analysing healthy companies to invest in?

MASTERCLASS Investing – What is Debt to Equity and how is it used by investors in analysing healthy companies to invest in?

Investing – What is Debt to Equity and how is it used by investors in analysing healthy companies to invest in?

When looking for financially strong companies to invest in, one fundamental ratio, Debt to Equity (D/E) gives us a measure of a company’s financial leverage (borrowings) calculated by dividing its total liabilities by stockholders’ equity. It indicates what proportion of equity and debt the company is using to finance its assets.

The ratio formula is:

Debt to Equity =   Total Liabilities

                                 Total Equity

***Note – Sometimes only the interest-bearing, long-term debt is used instead of total liabilities in the calculation.

How It Works/Example:

Let’s assume Company ABC has:

  1. Total liabilities $10,000,000  and
  2. Shareholders’ equity of $20,000,000, and

then we can calculate Debt to Equity as: D /E = $10,000,000/$20,000,000 = 0.5 or 50%

This means that Company ABC has Debt that is 50% of shareholders’ equity.

Having a high debt/equity ratio generally means investors say the company has been aggressive in financing its growth with debt. However, this can result in volatile earnings as a result of fluctuating interest rates. 
But if debt is used to finance increased operations (high debt to equity), the company has the potential to generate more earnings than it would have without this outside financing.

The D/E ratio is also closely monitored by the lenders and creditors of a company, since it can provide early warning that an organization is too weighted by debt that it is unable to meet its payment obligations. There can also be a funding issue. For example, the owners of a business may not have/want to contribute any more cash to the company, so they acquire more debt to address the cash shortfall. Or, a company may use debt to buy back shares, thereby increasing the return on investment to the remaining shareholders.

To see what under 50% D/E can mean to a company, more examples with Telstra, and Buffet’s take on Debt, see our other article MASTERCLASS Investment – Debt to Equity explained

Want to learn the core issues of share investing? Our workshop Navigate 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

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