This article appeared in the August 2010 ASX Investor Update email newsletter. To subscribe to this newsletter please register with the MyASX section or visit the About MyASX page for past editions and more details.
By Bill Davies, Smartsuper
(Editor's note: Bill Davies presented at the ASX Investment Roadshow on Self Managed Super - Taking Control of Your Retirement Savings. A free webinar version of this roadshow and SMSF strategies, is available. More details are at the end of this story.)
There has never been a more important time to get your Self Managed Super Fund (SMSF) in order. Market volatility means SMSF investors must be sure about the appropriateness of their investment strategy to achieve their goals. And the Australian Taxation Office recently signalled a crackdown on SMSFs that consistently fail to lodge returns. Non-compliant SMSFs could face large tax penalties.
This is no time for SMSF trustees to overlook their responsibilities. They must review their fund's investment strategy on a regular basis. Many trustees wrongly think 'regular' means once a year at best. Or they rely on superannuation administration service providers, who may not look at their fund for up to 18 months - a risky approach.
Here are some key aspects for SMSF trustees, or those thinking of starting an SMSF, to consider:
1. Understand the obligations of running an SMSF
Take time to learn what is involved in establishing and maintaining an SMSF. Understand what the law requires. Most of all, get good advice. Do not believe your accountant can do everything and is automatically a SMSF specialist. Some are, but it can pay to use an SMSF specialist.
2. Develop a clear investment strategy
If the trust deed is the heart of every SMSF, then the investment strategy is the body. Seek advice if you are not comfortable developing an investment strategy on your own. Always ensure the strategy is appropriate for your goals. For example, an investment strategy for someone nearing retirement may have a higher weighting in fixed-interest and cash, than in shares. Consider the investment strategy's potential risks, required diversification, what liquidity the fund needs, and the fund's liabilities.
3. Document the strategy
It is a good idea to have a well-documented investment strategy, even though this is not required by law. Review the strategy at least three times a year - once is not enough.
4. Include the right assets in the fund
Assets such as a home, holiday house or anything else that is personally used, cannot be included in an SMSF. The law does allow the fund to buy from you or a related party, listed shares, managed funds and a business real property (for example, a farm) and include them in the SMSF. Your SMSF fund can buy a broad range of assets from unrelated parties. Some, such as business real property, can be leased to a related party on commercial terms.
5. Keep records of decisions
For example, if you buy or sell a share, 'minute' it after the transaction is made. Do not wait until year's end to do SMSF minutes. Minute every decision. It need not be complicated or time-consuming. For example, you could simply write, "The trustees met on this date and bought this share because it meets the SMSF investment strategy to invest in more conservative blue-chip companies with solid fully franked dividends." Or "the share was sold because it stopped paying a dividend and no longer met the SMSF investment strategy."
6. Track the fund's performance
Do not think of an SMSF as a set-and-forget investment that will automatically do well over a long period. Monitor your SMSF's performance against your goals. Is the fund providing the types of returns and level of volatility you require? How does the overall return stack up against the performance of comparable benchmarks, such as the average return from balanced managed funds?
7. Estate planning
Many SMSF trustees rarely think about estate planning within the context of their SMSF. Always consider how the SMSF fits with estate-planning requirements, and whether the SMSF is set up for estate-planning benefits.
8. Beware the traps
Understand the difference between concessional and non-concessional contributions. Concessional contributions are before-tax contributions, such as salary-sacrificed contributions and personal tax-deductible contributions. Non-concessional contributions are contributions from after-tax dollars. Know the caps for both. Exceeding contribution caps results in adverse tax outcomes.
Also, those on pensions must understand pension limits. If you do not take your minimum pension, your fund is deemed as being in 'accumulation' mode and you may end up paying more tax.
9. Tax makes a big difference
Lodge returns on time - it is as simple as that. Late lodgement could result in severe tax penalties, judging by recent indications from the ATO. Spend time on tax planning - do the extra work to ensure your SMSF is as legally tax-efficient as possible.
10. Get the basics right - compliance is a must
Have a superannuation expert review your SMSF trust deed if it is more than three years old. It may be non-compliant. Know your SMSF obligations and ensure they are complied with.
11. Understand the golden rule
The golden rule of an SMSF is 'there is no golden rule - every person is different'. Always ensure your SMSF's investment strategy and tax planning is appropriate for you. Establishing and administering an SMSF can be complex, making it worthwhile for most investors to seek specialist advice.
About the author
Bill Davies, of Smartsuper, has more than 20 years' experience in such areas as treasury risk management, private banking and wealth management, including executive positions in government, Natwest and Sumitomo banks. He works with advisory firms and advisers to implement their SMSF strategies. Bill also sits on the ATO's Superannuation Consultative Committee as the representative of Smartsuper, the only SMSF administrator in Australia to sit on this committee.
Those who did not attend the ASX Investment Roadshow on Self Managed Super - Taking Control of Your Retirement Savings - can access the information via free ASX webinars:
- Intro to SMSFs - covered the needs of investors planning to start an SMSF or for existing trustees to reassess the systems and processes in your existing fund.
- SMSF Strategies - how ASX listed products can help provide diversification, generate income, and provide capital growth.
The roadshow presentations provided an opportunity for investors to learn:
1. Intro to SMSFs
- What is an SMSF
- Why have an SMSF?
- Preparing an investment strategy
- Contributions and rollovers
- Paying benefits
- Henry Tax Review.
2. SMSF Strategies
Domestic equities - How to select shares
- Franking credits
- Protecting the fund's assets.
Presenters: Bill Davies, Smartsuper; Sam Henderson, Henderson Maxwell.
Presentation length: One hour.
Target audience: All investors, both current SMSF trustees and those wanting to find out more about SMSFs. The session did not cover the basics of share investing.
Questions: if you would like any further information about the session please email firstname.lastname@example.org
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