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Property through super in a SMSF – Part 3: 20 most common mistakes

Buy Sell PropertyFollowing on from our previous 2 articles on SMSF and Property, the next logical step is to show where others have commonly made mistakes and how to avoid these errors. I have looked at the errors as they would be experienced in the pre-planning phase, during the borrowing process and once the loan is in place to make it easier to follow and to refer to later. In my opinion, these errors are the most common cause of investor angst and additional costs. They can lead to extremely negative experiences when borrowing to buy property inside a SMSF and are best avoided!

Before the purchase:

Error #1 – Believing purchasing an SMSF property purchase is a standard process

The superannuation system was set up as a concessionally taxed system with one sole purpose and that is to provide for retirement income. The regulators therefore are determined to preserve the integrity of this aim and you should keep this in mind when dealing with any issue related to superannuation and your self-managed super fund in particular.

There are numerous compliance obligations that you must consider that would not be of concern to you if buying a property in your own name or that of a family trust.

Those jumping in and expecting to be able to fix mistakes should be aware that the system leaves little room for error or mitigation of mistakes.

Error #2 – Not seeking pre-approval of a loan and knowing the lender’s requirements before incurring costs

I recommend you use a broker to find out exactly what the lender will require for a loan and check if you would qualify in financial terms before incurring any of the costs in the process. You should expect closer scrutiny of the fund’s deed and financials, your own position and the advice you have received than with ordinary property loans because the lender is offering you a limited recourse product.

Error #3 – Using out of date SMSF trust deeds

Limited recourse borrowing arrangements for superannuation funds is still relatively new and was introduced in September 2007 with a major update to the law in July 2010 and 2013. Further clarifications were made only recently and they may be needed to implement your chosen strategy. Any trust deed set up before July 2007 is unlikely to have the relevant powers required to borrow, grant a charge over an asset, or use a holding trust. As such, I would always recommend a deed upgrade before commencing the process.

And as the lender’s solicitors will review your deed before authorising the loan, any omissions in the deed will only result in delays, costs to rectify the deed and possibly additional fees to the lenders solicitors to approve such subsequent changes. You may miss your settlement date and breach your contract as a result.

Error #4 – Not having a consistent record of contributions or ability to forecast future contributions

Another reason for planning in advance for this strategy is to be able to display a history of making regular contributions to the fund to satisfy bank requirements. They will question the lack of contributions as an indication of financial hardship or lack of commitment to building liquidity in the fund. Likewise, you need to be able to show capacity to make future contributions. Already, the lowering of the concessional contributions cap to $25,000 has put some single member funds in trouble.

During the contract process:

Error #5 – Not making one person responsible for management and control of the process

The process, as outlined in last week’s article, involves the lender, the vendor and your own legal advisers, your tax advisor/accountant, possibly a legal document company and a mortgage broker. You can see that a delay in any part of the process can be a nightmare to sort out. You can see the benefit of having someone on your side who does know what they’re talking about when it comes to SMSF property investment. Ideally that person should be prepared to overview the deal and be the central point of contact for the others involved who may have issues. Having been brought in to handle problems I can tell you that it can be a mess to untangle.

Error #6- Buying a property before the SMSF is properly set up or the holding trustee registered

There is no room for “buy now – think later” moves on a weekend buying spree when dealing with an SMSF. If the SMSF has not been setup then a trust does not exist. If you sign a contract or place a deposit for a property without having the name holding Trustee Company established then you face double stamp duty and capital gains tax issues. Us of “and/or nominee” is very dangerous outside of Victoria.

Error #7 – Not setting up the SMSF and holding trust correctly

Using individual trustees for either the SMSF or the holding trustee may lead to finance being delayed or refused. It may also lead to potential exposure to litigation, putting personal assets at risk. For example, should a trades person be injured while working on the property and sue all parties for negligence, an individual trustee will be directly exposed. Using a trading company as trustee for either position is also a mistake, likely to compromise the “bare” trust arrangement.

In some states, such as NSW, using “and/or nominee” clause could result in ad valorem duty being charged when you then nominate the holding trustee as the alternative purchaser, as this can be seen as a ‘sub-sale’. From what I understand currently Victoria is the only state where ‘and/or nominee’ can be used, but you should check the rules with a local solicitor/conveyancer.

In NSW, Tasmania, the ACT, South Australia, Queensland and Victoria (subject to above), the purchasing entity should be the name of the holding trustee only. You should not use any references to “as trustee for the bare trust” or “as trustee for the XXX SMSF”. If you get this wrong, it may result in adverse and possible double stamp duty implications.

In WA, the word ‘for’ instead of “as trustee for” must be used between the holding trustee and SMSF trustee names. It should be “Holding Trustee Pty Ltd ACN for Super Fund Trustee Pty Ltd ACN”.

The name of the purchaser on the contract for NT property is very specific. It needs to be “Holding Trustee Pty Ltd ACN as trustee for Name of Holding Trust as bare trustee for Fund Trustee Pty Ltd ACN as trustee for Name of Fund ABN”.

Error #8 – Not properly implementing rules concerning ‘single acquirable assets’

In simple terms, the rules state that trusts should purchase a single asset on one title. The ATO ruling SMSFR 2012/1: application of key concepts with LRBAs, provides a degree of clarity by explaining under what circumstances an asset could be viewed as a single asset, which predominantly revolves around whether it cannot be dealt with separately (even if multiple titles are involved). The ATO gives 15 examples as a guide.

Error #9 – Using the lender as holding trustee in a related party loan (where you lend to your fund)

The presence of any conflict, like in a case where the holding trustee is also the lender to the fund, may weaken the “absolute entitlement‟ of the SMSF to the asset. This could have capital gains and land tax consequences for the fund. An example would be the loan coming from your family trust and having the trustee of that family trust also act as the trustee of the holding trust.

Error #10 – Signing up the holding trustee as the borrower instead of the SMSF trustee

Again, I would emphasise that the holding trustee simply holds the title and nothing else. The SMSF trustee is the beneficial owner and must be the borrower on all documentation. If the holding trustee is the borrower, then full stamp duty will be payable on any transfer of title from the holding trustee to the SMSF Trustee when the loan is paid up. Sometimes the holding trustee will have to sign documentation in order for the documentation to be effective. Where this is the case, it should be recorded that the trustee is acting on the instructions of the beneficial owner (i.e. the SMSF trustee).

Error #11– Paying holding fee, deposit, settlement payment or any costs from any source other than from the SMSF

All payments in respect of the transaction must come from the SMSF bank account or the loan facility. In order to facilitate the property transfer on completion of the loan, a documentary evidence showing the trail of payments will be need to be submitted with the request. This is another reason for getting the holding trust deed stamped as recommended later in order to pick up on errors early and seek remedies before financials are completed. This is far better than trying to find solutions years later.

After the settlement:

Error #12 – Breaking the “safe harbour”, “arm’s length” and “sole purpose” rules when dealing with related parties

If you have any interaction with the SMSF directly yourself, or through a company or trust entity controlled by you or a related party, you must be very careful to do so as if dealing with a third-party. Here are a few examples of what this means:

  • putting a proper lease in place for business real property;
  • paying rent on time;
  • making loan repayments on time or charging penalty rates as per the loan agreement;
  • not making personal use of an SMSF residential property even if you agree to pay rent; and
  • not letting your child or sibling move in to a residential property while they get through a rough time.

See: ATO guidance on related party SMSF loans (LRBAs)

Tip: For an online source to a flexible comprehensive lease agreement that ticks all the boxes  you can visit DIY Legal Kits – Lease Agreements

Error #13 – Leaving the stamping of the holding trust deed to be completed too late

The holding trust deed must be stamped to ensure that the final transfer from the holding trustee to the SMSF trustee attracts only nominal stamp duty. Best practice, and in some states the rules dictate it, is to have the final transfer stamped generally within 30-90 days after it has been activated. As mentioned previously, it makes common sense to gather all the supporting documents stamped while available, and the process confirmed before doing the funds financials for the year.

Imagine if your spouse had passed away, or you lost some of the bank’s statements/documentation when trying to do it later, and found double stamp duty being applied by the regulators in your state. Better safe than sorry.

Error #14 – Holding Trustee doing anything other than holding legal title

The holding trustee only exists to hold legal title to the property while there is a loan outstanding. It may also grant security via a mortgage to the lender and enter into leases of the property on behalf of, and as instructed by, the SMSF trustee. A common mistake is for the holding trustee to have its own Australian business number (ABN), tax file number (TFN), or bank account, which should all be avoided.

If the holding trustee performs any other active duties and does not act solely at the direction of the SMSF trustee, then the holding trust may be found to be a separate entity for the purposes of reporting GST. It would then need to prepare and lodge tax returns and the look-through approach to the holding trust may not apply for income, land tax and CGT purposes, which of course means outside of the concessional superannuation environment.

Beware of any lender that requests additional duties on the holding trustee and have your solicitor seek to remove these clauses.

Error #15 – Not considering the liquidity needs of the SMSF during retirement phase

If you plan to put your fund into pension phase while still holding the property then you need to ensure the fund has enough liquidity to pay the minimum pensions, expected lumps sums and maintenance costs of the fund, such as accounting and advice fees. If unable to do so you may exacerbate the position by having to return to accumulation phase and pay tax on the rental income.

Error #16 – Not considering the liquidity needs of the SMSF during periods the property is unoccupied

Property occupancy is rarely continuous and you need to ensure you have the liquidity to make loan repayments and property expenses during periods without tenants. This is why we warn about setting up funds with small balances or using a high proportion of the fund balance for a single asset purchase.

Error #17 – Not considering insurance for the property, the SMSF members’ lives, or your contribution capacity

You need to make sure the property is insured in the name of the SMSF trustee so a loan can be paid out in the event of fire or destruction. You should also ensure that unless you have other funds available within the fund, or can contribute enough to repay the loan on death of a member, that you have life and disability cover up to at least the value of the loan on each member. It is now a legal obligation of the Trustees to consider the insurance needs of the members regularly. If you are negatively gearing, and will rely on your contributions to the cover loan repayment shortfall, then you should additionally consider income protection insurance.

Error #18 – Not understanding the rules regulating the use of borrowed funds for repairs and maintenance, rather than improvements

You can harness the DIY renovator within you but the property developer may need to be shackled when it comes to SMSF property under a limited recourse borrowing arrangement.

Again, I refer to SMSFR 2012/1 for an explanation of the differences between these very similar terms. In basic terms, you can repair and maintain with the borrowed funds but can only improve the property to a certain extent with other funds of the SMSF. Your SMSF’s auditor and the ATO will keep a close eye on any such expenses and the source of funding. Read here for more detail SMSF Borrowing: What Can I Do With An Investment Property Within The Rules.

Error #19 – Going a step too far and creating a ‘replacement asset’

Remembering this is not a business venture, it is an investment within a heavily legislated structure that has a primary focus of providing for your retirement, you need to be wary of any form of ‘development’.

If you proceed to make improvements so extensive that the result is an asset that is substantially different from the original then you may have in effect created a ‘replacement asset’ in the eyes of the regulator: the ATO.

Some examples of ‘replacement assets’ provided by the ATO include:

  • the subdivision of a single plot of land on a single title into smaller plots with individual titles;
  • the building of a house on a vacant plot of land;
  • the demolition of an existing house and its replacement with three strata title units; and
  • the re-zoning of the land upon which an existing house stands and its transformation into commercial premises.

If the ATO considers that the character of the asset has been changed to such a degree, as outlined in the examples above, it now constitutes a replacement asset that they will deem falls outside the guidelines and may make the SMSF non-compliant.

Error #20 – Not registering for GST in the name of the SMSF trustee only

Thanks to recognition of the strategy by the tax office, where the property is commercial and the GST turnover is greater than $75,000, you do not need to register the holding trust for GST, only the SMSF needs to be registered.

This also means if the property is transferred to the SMSF trustee, this doesn’t constitute a taxable supply and thus does not give rise to a GST liability.

The bottom line: This is a comprehensive, but probably not exhaustive list of the errors that SMSF trustees can make in the process of managing a loan to purchase a property in their super. It is essential that you plan the purchase of a property well and do not act in haste or take advice from someone well-intentioned but without a clear understanding of the laws. Experience in dealing with the transaction from start to finish is essential to avoid repeating other peoples’ mistakes.

As always please contact me if you want to look at your own options. You can make an appointment by clicking here. We have offices in Castle Hill and Windsor but can meet clients anywhere in Sydney or via Skype

Liam Shorte B.Bus FSSA™ AFP

Financial Planner & Fellow SMSF Specialist Advisor™

 

     

Tel: 02 9899 3693, Mobile: 0413 936 299

PO Box 6002, Norwest NSW 2153

40/8 Victoria Ave Castle Hill NSW 2154

Corporate Authorised Representative of Viridian Advisory Pty Ltd ABN 34 605 438 042, AFSL 476223

This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs. This website provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such.

29 Comments
by Liam Shorte - SMSF Coach on January 4, 2013  •  Permalink
Posted in Borrowing, Loans, LRBA, Property, SMSF
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Posted by Liam Shorte - SMSF Coach on January 4, 2013

https://smsfcoach.com.au/2013/01/04/property-through-a-smsf-part-3-20-most-common-mistakes/

Property through super in a SMSF – Part 2: The Process

Follow the Process on SMSF BorrowingThis is Part 2 of a 3 part series. In the first article, we looked at the background to the limited recourse borrowing arrangements that can be used by SMSFs to invest in an asset, specifically a residential or commercial property. Now we look at the actual process (using NSW as our base as different states have slightly different rules).

  • Real estate investing and self-managed superannuation can be combined activities, but there are rules to be aware of.
  • Borrowing is one of the more complex areas in this process, but it can still be broken down into relatively simple steps.
  • It’s certainly not child’s play, but this week we show how limited recourse borrowing arrangements can work.

As we detailed last week in the first of this series, placing real estate investments into self-managed superannuation funds (SMSFs) needn’t been a Herculean task, but it does require careful planning. Most of all, however, you or your advisors need to be fully conversant with the current borrowing exception that is detailed in section 67A of the Superannuation Industry Supervision (SIS) Act. SMSF borrowing is more correctly termed as a limited recourse borrowing arrangement (LRBA). This week we take a closer look at LRBAs and show you the typical steps involved.  (more…)

9 Comments
by Liam Shorte - SMSF Coach on December 28, 2012  •  Permalink
Posted in Borrowing, Loans, LRBA, Property
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Posted by Liam Shorte - SMSF Coach on December 28, 2012

https://smsfcoach.com.au/2012/12/28/making-your-property-a-super-asset-part-2-the-process/

Questions to Ask Yourself Before Considering an SMSF Property Investment

I have had a lot of enquiries lately for advice on SMSF loans for property investment and we have run regular educational seminars on the issue for clients and the public. My main observation from the enquiries I have received is that people are jumping on the band wagon without checking if they really need to take on the additional risk and costs involved. Here are some simple questions to consider before starting the process.

  1. Are you ready to seek advice, take advice and follow that advice? This is not an area to mess around with and the penalties of getting it wrong are expensive and time-consuming so unless you are willing to learn the rules, follow the rules and do the necessary paperwork as well as pay the initial set up costs then STOP NOW! Look elsewhere for a get rich quick scheme.
  2. Are you only considering this option because you have run out of equity to fund property purchases in your own name or are you genuinely interested in using property as a part of a diversified strategy to meet your retirement income needs. Using superannuation funds means the focus has to be on providing for your retirement and you need to ensure that is the primary intent of the investment.
  3. Would the prospective property investment stand up on its own to a proper assessment of its potential without the tax benefits allowable in this superannuation strategy. If an investment does not stack up under normal circumstances then do you really want to rely on future governments keeping their fingers out of the Superannuation pie to meet your retirement needs!
  4. If you have attended a seminar where you were actually offered a property and if so do you know what commission/fee/marketing allowance the promoter is getting as part of the deal? If you pay $6-$10K to set up the SMSF structure, $10-$20K Stamp Duty and the promoter gets say$17,500 which is 5% on a $350K property then you will need the property to grow by at least 10%-15% before you break even. In Forbes – Australian Property Market Outlook 2024 they forecast a 4-5% growth in most capital cities
  5. Are you prepared to do the hard slog yourself and research a decent deal in an area you understand and to ensure you are paying a fair price for a property with rental and growth potential over the longer term.

Property is a great part of a long-term savings portfolio but like every investment you have to do the ground work and the current hype in this area has attracted the spruikers who promise much but deliver little long-term. Seek out the professionals who have an established reputation in the property sector and always do simple things like doing a Google search on  the person or business and the word “scam” or “complaint”.

I hope these thoughts  have been helpful and please take the time to comment if you know of others questions investors should ask as I know this is not an exhaustive list.

Are you looking for an advisor that will keep you up to date and provide guidance and tips like in this blog? Then why now contact me at our Castle Hill or Windsor office in Northwest Sydney to arrange a one on one consultation. Just click the Schedule Now button up on the left to find the appointment options.

Liam Shorte B.Bus FSSA™ AFP

Financial Planner & Fellow SMSF Specialist Advisor™

SMSF Specialist Adviser 

 Follow SMSFCoach on Twitter Liam Shorte on Linkedin NextGen Wealth on Facebook   

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Tel: 02 9899 3693, Mobile: 0413 936 299

  • PO Box 6002 NORWEST NSW 2153
  • Suite 40, 8 Victoria Ave, Castle Hill NSW 2154
  • Suite 4, 1 Dight St., Windsor NSW 2756

Corporate Authorised Representative of Viridian Advisory Pty Ltd ABN 34 605 438 042, AFSL 476223

This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs. This website provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such.

10 Comments
by Liam Shorte - SMSF Coach on November 14, 2012  •  Permalink
Posted in Borrowing, Loans, LRBA, Property, SMSF
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Posted by Liam Shorte - SMSF Coach on November 14, 2012

https://smsfcoach.com.au/2012/11/14/questions-to-ask-yourself-before-considering-an-smsf-property-investment/

Government bonds arrive for retail investors but may not jump out of the gate

Legislation passed through parliament yesterday that followed through on a promise by “the world’s greatest treasurer” Wayne Swan that Government bonds will be listed for the retail market (I nearly said the ASX but now we have to be generic as we have Chi-X as well). the Treasurer took his time getting the legislation together but now we have it in place.

Click the link below to read more of this article

http://www.smh.com.au/business/government-bonds-set-to-fail-with-retail-investors-20121102-28nqj.html

Are you looking for an advisor that will keep you up to date and provide guidance and tips like in this blog? Then why now contact me at our Castle Hill or Windsor office in Northwest Sydney to arrange a one on one consultation. Just click the Schedule Now button up on the left to find the appointment options.

Liam Shorte B.Bus SSA™ AFP

Financial Planner & SMSF Specialist Advisor™

SMSF Specialist Adviser 

 Follow SMSFCoach on Twitter Liam Shorte on Linkedin NextGen Wealth on Facebook   

Verante Financial Planning

Tel: 02　98941844, Mobile: 0413 936 299

PO Box 6002 BHBC, Baulkham Hills NSW 2153

5/15 Terminus St. Castle Hill NSW 2154

Corporate Authorised Representative of Viridian Select Pty Ltd ABN 41 621 447 345, AFSL 51572

This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs. This website provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such.

1 Comment
by Liam Shorte - SMSF Coach on November 2, 2012  •  Permalink
Posted in Bonds, Term Deposits
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Posted by Liam Shorte - SMSF Coach on November 2, 2012

https://smsfcoach.com.au/2012/11/02/government-bonds-arrive-for-retail-investors-but-may-not-jump-out-of-the-gate/

Is your SMSF lending money to someone?

Is that loan in your SMSF’s best interest?

The Tax Office issued an information sheet on their website last November warning trustees about the perils of lending an SMSF’s funds to the wrong person. This includes your own business, someone who advises you or a family member or friend.

An all too common occurrence is the practice adopted by some people of withdrawing funds from their SMSF to “temporarily” help keep their business afloat when cash flow is tight.

Has your SMSF loaned money? If so, you need to make sure the loan terms comply with the law and are in the best interests of your funds sole purpose test which is to provide for your retirement.

The boys and girls at the ATO are rightly concerned some trustees are lending money from their fund to people who provide advice or assist in the running of the fund. This may not be in the best interest of your SMSF, and may place your retirement savings at risk. If someone is recommending you set up a SMSF and then to lend them or a related party money for a development, you have to ask yourself in who’s best interest are they working? Might be time to scrutinise the minute details of this “too good to be true one time only opportunity”.

So when would a loan agreement not be seen to be in the best interest of your SMSF ? Basically, when you have given discount loan rates or favourable terms – this could have serious consequences. Here is one example they give:

 when you have given discount loan rates or favourable terms – this could have serious consequences. In addition to putting your member’s benefits at risk, your SMSF could be found to be non-complying and would, therefore, not qualify for concessional tax rates.

They advise that before lending any money, you should consider your fund’s investment strategy and determine whether the investment is appropriate and, in particular, whether lending money to people providing you with services or advice is in the best long-term interests of your SMSF.

If you are not sure about making these types of investments choices, they recommend that you seek advice before entering into such arrangements.

If you still decide to go ahead and lend money from your SMSF, the ATO advise that “you should:

  • write an appropriate loan agreement and have it signed by all the parties involved
  • ensure the loan agreement specifies all the terms of the loan, such as:
    • what the security for the loan
    • what is the repayment period
    • when repayments will be paid
    • the amount of the repayments
    • the interest rate
  • ensure the interest and repayments are received by the fund according to the loan agreement
  • take appropriate action to protect the fund’s investment if the loan agreement is not followed
  • ensure the loan is sensible and does not put the members’ benefits at risk
  • ensure that the conditions of the loan agreement do not provide the borrower with favourable terms.

Remember that you are the one ultimately responsible for running your SMSF, and you must make sure you understand your duties, responsibilities and obligations.”

With regards to taking funds out to help your business, you need to firstly know that should the business go under that your Superannuation is in most cases protected in bankruptcy from creditors so you should be careful about accessing this protected asset.

Regardless of how much you trust a person even if they are your accountant, lawyer, financial planner, mortgage broker or best mate, you need to get independent third-party advice. Don’t be embarrassed about not completely trusting the promoters scheme as it is often too late later to get your funds back and hindsight is a cruel tormentor when facing loved ones having lost your retirement nest egg.

For further information on the issues raised in this blog please contact our Castle Hill SMSF Centre or Windsor Financial Planning Office.

I hope this guidance  has been helpful and please take the time to comment. Feedback always appreciated. Please reblog, retweet, put on your Facebook page if you found information helpful.

Liam Shorte B.Bus SSA™ AFP

Financial Planner & SMSF Specialist Advisor™

SMSF Specialist Adviser 

 Follow SMSFCoach on Twitter Liam Shorte on Linkedin NextGen Wealth on Facebook   

Verante Financial Planning

Tel: 02　98941844, Mobile: 0413 936 299

PO Box 6002 BHBC, Baulkham Hills NSW 2153

5/15 Terminus St. Castle Hill NSW 2154

Corporate Authorised Representative of Viridian Select Pty Ltd ABN 41 621 447 345, AFSL 51572

This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs. This website provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such.

18 Comments
by Liam Shorte - SMSF Coach on October 18, 2012  •  Permalink
Posted in Audit, Checklists, Loans, SMSF, SMSF Management, Trustee
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Posted by Liam Shorte - SMSF Coach on October 18, 2012

https://smsfcoach.com.au/2012/10/18/is-your-smsf-lending-money-to-someone/

Are SMSF Investors really comparing Hybrids vs. Company Shares?

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Every article I  read at the moment the commentators are more and more sceptical about the recent issues of Australian listed hybrids and notes. They constantly compare the hybrid against the equity in the actual shares of the issuer.

And yes I have been saying to younger clients who wanted to invest that I personally would buy the shares of the blue chip issuers, not the hybrid, because the successful hybrid issue shifts risk from equity investors to the hybrid investors and if you are going to take long-term risk then get recompensed for it from the  issuer.

Yet the majority of people buying these hybrids are not my younger clients and they probably don’t look at the case for hybrids vs. shares. They are my SMSF Retiree and Pre Retiree clients. They look at the investment case of hybrids vs. their HISA (High Interest Savings Accounts) rates and term deposit rates. I know from these clients the majority of the demand for Australian hybrids has come from maturing term deposits and falling interest rates as the RBA cuts.

The banks and their advisers have worked out these “yield plays” seem to be in favour and hybrid issuance is increasing as term deposit and cash rates fall. They are tempting clients to put some of their “defensive portfolio” in to this sector rather than trying to grab some of the Share portfolio allocation.

Commentators say that the banks who are the main issuers are getting the best deal and yes their ratings have been improving when they finalise these issues.

They recommend that you buy the Shares in these companies rather than the “mutton dressed up as lamb” hybrids.

Christopher Joye in the SMH provided the following as an example where he compared the results using CBA PERLS IV vs. CBA Shares themselves over the period July 2007 to July 2012. Yes, with hindsight, you would be far better off owning the shares but they miss the point. Regardless of the outcome many SMSF trustees have a lower risk tolerance and they would be content with the returns from the PERLS IV (25.4% over 5 tumultuous years) during that period while they may have had a meltdown if in the CBA shares during the highlighted volatile period July 07-Mar ’09.

The other point I should make is that clients are making much smaller risk adjusted plays in these hybrids by quality issuers only and are willing to hold to maturity. When they have  a $100K Term Deposit maturing they are placing 10K-30K in to one or two of these hybrids and putting the rest back on Term Deposits. It is recognition that these hybrids do carry more risk and that they understand that risk.

Their aim is not to attain equity like returns but an average portfolio income in the 5.5-6% mark and that can no longer be achieved by cash and TDs alone. So yes they are taking on more risk to achieve their objectives but they are not being silly and getting over exposed. That is why we have avoided Crown, Caltex, Bendigo & Adelaide and even SunCorp issuances.

So yes the Banks get the benefit of cheaper finance but SMSF investors get access to that yield, in bite sized manageable chunks that they require with less volatility than the underlying share. The risks in hybrids are not to be scoffed at but if you do your home work, understand the risk, keep the allocations small and think long term, then they may have a place in your portfolio.

If you want to read more about hybrids generally, the ASX has produced a guide – Understanding hybrid securities – that you can download here.

Are you looking for an advisor that will keep you up to date and provide guidance and tips like in this blog? Then why now contact me at our Castle Hill or Windsor office in Northwest Sydney to arrange a one on one consultation. Just click the Schedule Now button up on the left to find the appointment options.

Liam Shorte B.Bus SSA™ AFP

Financial Planner & SMSF Specialist Advisor™

SMSF Specialist Adviser 

 Follow SMSFCoach on Twitter Liam Shorte on Linkedin NextGen Wealth on Facebook   

Verante Financial Planning

Tel: 02　98941844, Mobile: 0413 936 299

PO Box 6002 BHBC, Baulkham Hills NSW 2153

5/15 Terminus St. Castle Hill NSW 2154

Corporate Authorised Representative of Viridian Select Pty Ltd ABN 41 621 447 345, AFSL 51572

This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs. This website provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such.

Image courtesy of Stuart Miles at FreeDigitalPhotos.net

4 Comments
by Liam Shorte - SMSF Coach on October 15, 2012  •  Permalink
Posted in Asset Allocation, Bonds, Franking Credits, Hybrids, Term Deposits
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Posted by Liam Shorte - SMSF Coach on October 15, 2012

https://smsfcoach.com.au/2012/10/15/are-smsf-investors-really-comparing-hybrids-vs-company-shares/

2 Hits to Retirees On The Cards – Term Deposit Rates down & Swanny On The Pillage

Danger to Retirement IncomeWait until you see the news reports this week talking about how great it is for mortgage holders and first home buyers rejoicing at the drop in interest rates by the RBA on Tuesday. In reality only 1/3 of the population has a mortgage but they get the headlines.

However the self-funded retiree or those in pre-retirement looking to save for a decent income in retirement will not be rejoicing as they have to get used to a 4 in front of their Term Deposit rates and worry about the possibility of a 3 within 12 months. These are the people who often don’t have the ability to work a little extra overtime or take on part-time job to supplement their income as older workers aren’t exactly swamped with employment offers.

It may be time to bite the bullet and lock some of your funds in for 2-5 years for the best rate you can get as anything around the 5% mark is looking very attractive and not a big risk in terms of exposure to rising rates as the USA has guaranteed they will keep their rates at or near 0% until 2015. I can’t see Australia getting to far out of step with them in the coming years and it is more likely we will have to lower rates further to weaken our dollar for the economy’s sake.

Other governments are buying our Dollar to invest in what they consider stable Australian Government Bonds and Companies. A blog by my friends at Macro Business lists new countries targeting Aussie assets as reported by various media including the AFR is scary including:

Czech Republic, Kazakhstan, Switzerland, Brazil, Poland, Hong Kong Vietnam, Abu Dhabi, Kuwait,  Qatar , South Korea and of course China with possibly Peru, Malaysia and Singapore as well. All their interest means demand for our currency rises and the exchange rate goes up which the RBA has to try to manage through Interest rate strategies. All that does not bode well for your average Aussie SMSF investor seeking yield or in more simple terms income.

So time to either load up with the best long-term interest rate you can get risk free or prepare to re-enter or increase your exposure to the share market and other sources of income. Be careful chasing yield and understand the risk of any investment paying more than 1-2% above the RBA’s 3.25%.

The second possible hit is harder for me to discuss as I tend to be apolitical in my views under normal circumstances but I feel I have to say something as the leaks to the media in the last few weeks seem to be softening up the SMSF sector for some hard hits.

So on top of the interest rate cuts to your income  we have a Treasurer likely to just compound the problem because in his desperation not to give the Liberals ammunition to throw at him over budget deficits appears willing to destroy the confidence in the Australian Superannuation system by dipping his hands in to the “honey pot” that is the retirement savings of everyday Australians. He is being goaded on by the unions and industry fund sector who control a massive position of the retirement pot but mostly those with insufficient savings to fund their retirement. They seem hell-bent on making sure NO ONE can afford a comfortable retirement and all will depend on an Age Pension to some degree. They have Self Managed Super Funds (SMSF) in their sights! It may be more layers of compliance fees or reduction in tax concessions or some similar theft of your savings by stealth but we know something is coming so better to be prepared.

I urge all SMSF investors and self funded retirees in general to get on the front foot before the Half Year Budget update and be prepared to speak up to your local member of parliament and write tot he press now rather than later to try to stop this government pillaging your savings to fund a  meaningless surplus. If the opposition took the pressure off the need to bring in a surplus that would help too but I know I am dreaming with that idea. The short-term gain of accessing funding from our Superannuation will lead to a huge drop in confidence in a system that has already been hammered in the last few years by Government changes and the CFC.

For further information on the issues raised in this blog please contact our Castle Hill SMSF Centre or Windsor Financial Planning Office.

Are you looking for an advisor that will keep you up to date and provide guidance and tips like in this blog? Then why now contact me at our Castle Hill or Windsor office in Northwest Sydney to arrange a one on one consultation. Just click the Schedule Now button up on the left to find the appointment options.

Liam Shorte B.Bus SSA™ AFP

Financial Planner & SMSF Specialist Advisor™

SMSF Specialist Adviser 

 Follow SMSFCoach on Twitter Liam Shorte on Linkedin NextGen Wealth on Facebook   

Verante Financial Planning

Tel: 02　98941844, Mobile: 0413 936 299

PO Box 6002 BHBC, Baulkham Hills NSW 2153

5/15 Terminus St. Castle Hill NSW 2154

Corporate Authorised Representative of Viridian Select Pty Ltd ABN 41 621 447 345, AFSL 51572

This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs. This website provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such.

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by Liam Shorte - SMSF Coach on October 2, 2012  •  Permalink
Posted in News & Stats, Term Deposits
Tagged , , , , , , , , , , , , , , , , , , , , , , , ,

Posted by Liam Shorte - SMSF Coach on October 2, 2012

https://smsfcoach.com.au/2012/10/02/2-hits-to-retirees-on-the-cards-term-deposit-rates-down-swanny-on-the-pillage/

Trading Company as SMSF Trustee or Sole Purpose SMSF Trustee Company?

 Traditionally the majority of SMSFs steered away from using a company trustee due to the costs associated with it. This has been changing in the last decade as Trustees see the difficulty of adding or removing members or trustees from a fund. The process of replacing a director on the other hand is relatively simple.

The cost to establish a company to act as Trustee for a fund varies from $660 – $1600, depending on who you engage to organise it for you. A SMSF with a corporate trustee can usually be set up within a few days with the ABN and TFN taking up to a month to organise with the ATO and get listed on the Super fund Lookup site http://superfundlookup.gov.au/

The Company is required to prepare and lodge an Annual Review with ASIC each year  and pay an ASIC lodgement fee of $276. (The lodgement fee is reduced from $290 to $59 for companies who are used solely as SMSF Trustee companies commonly now known as a Sole Purpose SMSF Trustee Company).

The problem is people still look to save on costs so occasionally clients ask if they can utilise an existing trading company to act as the SMSF Trustee, to save on “cost”.

The strict answer is yes but just because you can do something, doesn’t mean you should. Using a company for multiple purposes is fraught with risk. You would have to be meticulous about keeping transactions and record keeping of the 2 functions absolutely accurate.

I really recommend against this for a number of reasons:

  • the accounts and bookkeeping for the trustee company inevitably become much more complex, having to account for its trading activities separately from its activities as a trustee. This in turn results in higher accounting fees and risk of mistakes;
  •  SMSF auditors are very delicate individuals who follow rules to the nth degree. There can’t be any overlap between SMSF funds and other company funds. We often get clients calling and advising us that they accidentally used the wrong cheque book or transferred funds by Bpay to or from the wrong account. (This is also a reason I suggest clients use a different bank for the SMSF )Yes it was accident, but the SIS Act and Regulations say this is totally illegal. You can never guarantee that you will never make mistakes. Avoid this hassle and set up a separate sole purpose corporate trustee;
  •  if the company gets into financial difficulty and a receiver or liquidator is appointed – the SMSF fund assets could be at risk. This is because using a trading company may result in you losing control over your SMSF if the company entered some form of administration due to trading difficulties. Even if you have kept clear records the liquidator or receiver may look to freeze those assets while you prove the true ownership which could take months or years if record keeping not perfect;
  • there are potential issues associated with identifying the true owner of the assets. If all of the company/SMSF assets are held in the same company name, how does one distinguish between assets held in capacity of trustee compared with those held beneficially for the company? For example in most States the Land Titles Office will only record the Trustee name not the “ATF XYZ Super Fund”;
  • Introduce some Business Real Property, say a warehouse, leased back to the business and it gets even messier. The company as trustee for the SMSF leases the business premises back to itself in its capacity as the trading company. Now if the trading company gets in difficulty and can’t make lease payments then the same company has an obligation in its capacity as Trustee of the SMSF to chase itself for recovery of the lease payments!;
  • then to the subject of liability. Trustees of funds are generally prohibited from borrowing but nevertheless, liabilities can still arise.  For example, a plumbing contractor engaged to repair a residential investment property might suffer an injury and can sue the trustee for damages.  This could mean that if the SMSF does not have the funds to meet any damages, the assets of the business may now become a target for the lawyers of the victim. Again in time this could be sorted and true ownership proved but could you or your business afford the time arguing the case or funding the defence.
  • The ATO ruling SMSFR 2008/2 further highlights the critical importance of the sole-purpose test for SMSFs, clarifying that SMSF trustees must focus solely on providing retirement benefits to members.

    This ruling is particularly pertinent for SMSFs with a trading company as a trustee, as it raises questions about the company’s ability to maintain the fund’s exclusive retirement focus.

For those who do have a Trading Company as Trustee, then if the company or business is in trading difficulty your first step is go to the ASIC advice for small company directors at http://www.asic.gov.au/asic/ASIC.NSF/byHeadline/Directors%20and%20insolvency

NEW UPDATE 2022

In early 2021, the Federal Government amended insolvency legislation to include a new debt restructuring process and a simplified liquidation process. It is available to small companies, and requires the appointment of a restructuring practitioner.

In December 2021, amendments were made to the Superannuation Industry (Supervision) Act (SIS Act) to reflect these changes, introducing a new category of disqualified persons.

This new category applies when a restructuring practitioner is appointed to a corporate trustee, and triggers the disqualification of the corporate trustee from managing a SMSF.

If your SMSF has a corporate trustee, and a “restructuring practitioner” is appointed to that trustee, the company will no longer be able to act as the corporate trustee, as it is disqualified. This is so even though the stated goal of the Corporations Amendments is to assist financially distressed businesses to remain viable and continue trading.

I would also suggest a quick visit to your Adviser to put in place a new Trustee Company in charge of your fund or if you really feel you are going to be in trouble you might opt to become a Small APRA regulated fund where you hand over the running of the fund to an Approved Trustee but you may struggle to find one willing to take over in such circumstances.

What are your thoughts? I would be interested in feedback from lawyers, accountants and advisers and of course auditors on this issue!

Liam Shorte B.Bus SSA™ AFP

Financial Planner & SMSF Specialist Advisor™

SMSF Specialist Adviser 

 Follow SMSFCoach on Twitter Liam Shorte on Linkedin NextGen Wealth on Facebook   

Color logo with background smaller

Tel: 02 9899 3693, Mobile: 0413 936 299

  • PO Box 6002 NORWEST NSW 2153
  • Suite 40, 8 Victoria Ave, Castle Hill NSW 2154
  • Suite 4, 1 Dight St., Windsor NSW 2756

Corporate Authorised Representative of Viridian Advisory Pty Ltd ABN 34 605 438 042, AFSL 476223

This information has been prepared without taking into account your objectives, financial situation, or needs. Because of this, you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation, and needs. This website provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such.

11 Comments
by Liam Shorte - SMSF Coach on August 9, 2012  •  Permalink
Posted in Asset Allocation, Financial Planning, SMSF, Superannuation, Tax Planning
Tagged , , , , , , , ,

Posted by Liam Shorte - SMSF Coach on August 9, 2012

https://smsfcoach.com.au/2012/08/09/trading-company-as-smsf-trustee-or-sole-purpose-smsf-trustee-company/

Last minute planning checklists for everyone from Small Business Owners to SMSF Trustees as well as Personal planning.

Have you left your financial planning until the last minute?  Go over this checklist with your accountant or financial planner as soon as possible.  Some of these strategies apply every year, while others are specific to this year because of the changes in the tax rate, the end to the flood levy, and some changes to small business write offs in the next year.

Checklists for:

Personal / Family

Small Business Owner:

SMSF Trustee

Investment Property Landlord

See full article: http://myob.com.au/blog/end-of-financial-year-planning-checklists/#ixzz1ysA6ExvQ

I hope this guidance  has been helpful and please take the time to comment. Feedback always appreciated.

Liam Shorte B.Bus SSA™ AFP

Financial Planner & SMSF Specialist Advisor™

SMSF Specialist Adviser 

 Follow SMSFCoach on Twitter Liam Shorte on Linkedin NextGen Wealth on Facebook   

Verante Financial Planning

Tel: 02　98941844, Mobile: 0413 936 299

PO Box 6002 BHBC, Baulkham Hills NSW 2153

5/15 Terminus St. Castle Hill NSW 2154

Corporate Authorised Representative of Viridian Select Pty Ltd ABN 41 621 447 345, AFSL 51572

This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs. This website provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such.

Leave a comment
by Liam Shorte - SMSF Coach on June 26, 2012  •  Permalink
Posted in Asset Allocation, Financial Planning, Franking Credits, Pensions, SMSF, Superannuation, Tax Planning, Trustee
Tagged , , , , , , , , , , , , ,

Posted by Liam Shorte - SMSF Coach on June 26, 2012

https://smsfcoach.com.au/2012/06/26/last-minute-planning-checklists-for-everyone-from-small-business-owners-to-smsf-trustees-as-well-as-personal-planning/

Consider prepaying next years Private Health Insurance before June 30th – EOFY Money Saving TIP #1

As a result of the introduction of mean testing of the Private Health Insurance Premium Rebate wewant to alert you to a one-off savings possibility in relation to the private health insurance rebate.

If you pre-pay your 2012/13 private health insurance premium before 30 June 2012, you may still be able to access the Government rebate.

As you may be aware, the Government currently provides a non-means tested rebate for private health insurance premiums. The rebate can be claimed directly from the insurer, or as a tax offset when you lodge your income tax return. the majority of clients claim it upfront and if you don’t then you may need to consider doing so this year.

The rebate is currently 30% for those under 65 and rising  from 35% to 40% of the premium depending on the age of the policy holder.

The Government has now passed the required legislation that will apply an income test to the availability of the rebate to any premiums paid on or after 1 July 2012. The more income you earn, the lower the rebate as follows:

Private Health Insurance Incentive Tiers (2011-2012) with effect 1 July 2012

Singles

<$84,000 

$84,001-97,000

$97,001-130,000

>$130,001

Families

<$168,000

$168,001-194,000

$194,001-260,000

>$260,001
Rebate
< age 65 30% 20% 10% 0%
Age 65-69 35% 25% 15% 0%
Age 70+ 40% 30% 20% 0%
Medicare Levy Surcharge
All ages 0.0% 1.0% 1.25% 1.5%

Note: The thresholds increase annually, based on growth in Average Weekly Ordinary Time Earnings (AWOTE). Single parents and couples (including de facto couples) are subject to the family tiers. For families with children, the thresholds are increased by $1,500 for each child after the first.

Singles earning $84,000 or less and families earning $168,000 or less will continue to receive the existing 30, 35 and 40 per cent rebate, depending on their age.

Once your ‘adjusted’ income is greater than $130,000 (or $260,000 as a family), no rebate will be available.

For a family with gross premiums of say $2,500, this will result in an increase to the out of pocket premium costs of $750.00

The current rebate applies to a premium ‘paid’ during the income year. Accordingly, it follows that if you prepay your 2012-13 premium on or before 30 June 2012, the current rules should apply and the rebate should be available.

If you are interested in this one-off savings opportunity, we suggest you contact your private health insurer to discuss the possibility of pre-paying next year’s premium and ensure that their is no penalty for prepayment and that their system can cope with the prepayment.

Increase to Medicare Surcharge levy for High Income Earners

For those without Private Health Cover be aware that  the Medicare levy surcharge for people without private health insurance will lift to 1.5 per cent of taxable income for those top earners without private health insurance cover. (see table above)

I hope this guidance  has been helpful and please take the time to comment. Feedback always appreciated.

Liam Shorte B.Bus SSA™ AFP

Financial Planner & SMSF Specialist Advisor™

SMSF Specialist Adviser 

 Follow SMSFCoach on Twitter Liam Shorte on Linkedin NextGen Wealth on Facebook   

Verante Financial Planning

Tel: 02　98941844, Mobile: 0413 936 299

PO Box 6002 BHBC, Baulkham Hills NSW 2153

5/15 Terminus St. Castle Hill NSW 2154

Corporate Authorised Representative of Viridian Select Pty Ltd ABN 41 621 447 345, AFSL 51572

This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs. This website provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such.

Leave a comment
by Liam Shorte - SMSF Coach on May 23, 2012  •  Permalink
Posted in Asset Allocation, Financial Planning, Franking Credits, Pensions, SMSF, Superannuation, Tax Planning, Trustee
Tagged , , , , , , , , , , , , ,

Posted by Liam Shorte - SMSF Coach on May 23, 2012

https://smsfcoach.com.au/2012/05/23/consider-prepaying-next-years-private-health-insurance-before-june-30th-eofy-money-saving-tip-1/

The added value of franking credits in a SMSF Portfolio

 One of the least understood and core benefits of SMSFs are the value of franking credits attached to many blue chip share dividends.  You can tilt your portfolio to enhance the taxation benefits to your fund.

Targeting of imputation credits received predominantly from direct share investment in Australian, and to a lesser extent through managed funds is not that difficult. Franking credits (properly known as Imputation credits) can also be used to offset the tax payable on the taxable income of the fund if still in accumulation stage or refunds can be received from the ATO if in pension phase (don’t you just love receiving money from the ATO!)

The key point to understand around franking credits is the fact that the income tax rate for super funds is only 15% in Accumulation phase and 0% in Pension phase, while imputation credits from fully franked dividends can be as high as 30% of the gross dividend of an Australian share. This means that the franking credit covers the tax payable on the dividend received, and leaves a significant excess to be used to reduce the other tax payable by the fund or to be claimed as a refund

So how does it work in reality ?

So company Widget Ltd makes $1.00 profit and therefore is required to pay company tax at the rate of 30% on this $1 profit. Consequently the taxed $0.30 (30% of $1) will be paid in cash to the tax office and the company then records this $0.30 into their franking account. The franking account is only a record of what was paid and does not contain actual money. The company’s ability to frank its dividend will depend on the balance of this franking account. If the franking credit contains a surplus, the company may declare a fully franked (100% franked) dividend. If the franking account isn’t large enough, perhaps because it pays tax overseas, then the company may declare a partially franked dividend. That is, the dividend received by the SMSF is “grossed up” by the amount of the imputation credit to achieve a grossed up dividend. It is on this amount that tax is then assessed at 15% or 05 depending on the phase of your SMSF. The fund is then entitled to a tax offset for the franking credit.

Example: a worked example below of a SMSF that only holds Telstra shares and ANZ shares:

Dividend Franking Credits Taxable Income Accumulation Phase Taxable Income Accumulation Phase
TLS Shares $1260 $540 $1,800 $1,800
ANZ Shares $840 $360 $1,200 $1,200
Total $2100 $900 $3,000 $3,000
Tax @ 15% $450
Tax @ 0% $0
Less: Franking credits $900 $900
Excess Franking credits $450 $900

In this example, not only will the fund pay no tax on the dividend income of these two shareholdings, but it will have:

  • Accumulation Phase $450 of excess franking credits
  • Pension Phase $900 of excess franking credits ;

Which the SMSF Trustees can use to offset against other tax liabilities of the fund (such as other income, capital gains, and taxable contributions) or if  none exists, then the SMSF fund can receive a refund of this amount. (Love it!)

The 45 day rule

As the examples have shown fully franked dividends and franking credits make investing in Australian shares a very tax effective strategy. However, the ATO realises this and to prevent investors from abusing the system (called dividend stripping) they introduced the 45 day rule. The 45 day rule states that shareholder must hold shares for 45 days (not counting days of purchase or sale) for any franking credits over $5,000.

Beware of blind dividend chasing , you can hit a wall!

A word of warning before you decide to put your life savings into chasing shares with the highest dividends. While some high yielding dividend stocks may look enticing it would be useless if those shares drop in value (falling capital value). Always research the company and look for strong fundamentals, for example what does the company’s dividend history look like? Are the dividends growing year on year in line with the earnings per share? Is there long term potential for this company? Will earnings rise in the near term and are they sustainable.

Want a Superannuation Review or are you just looking for an adviser that will keep you up to date and provide guidance and tips like in this blog? Then why now contact me at our Castle Hill or Windsor office in Northwest Sydney to arrange a one on one consultation. Just click the Schedule Now button up on the left to find the appointment options. Do it! make 2016 the year to get organised or it will be 2026 before you know it.

Please consider passing on this article to family or friends. Pay it forward!

Liam Shorte B.Bus SSA™ AFP

Financial Planner & SMSF Specialist Advisor™

SMSF Specialist Adviser 

 Follow SMSFCoach on Twitter Liam Shorte on Linkedin NextGen Wealth on Facebook   

Verante Financial Planning

Tel: 02　98941844, Mobile: 0413 936 299

PO Box 6002 BHBC, Baulkham Hills NSW 2153

5/15 Terminus St. Castle Hill NSW 2154

Corporate Authorised Representative of Viridian Select Pty Ltd ABN 41 621 447 345, AFSL 51572

This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs. This website provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such.

5 Comments
by Liam Shorte - SMSF Coach on April 27, 2012  •  Permalink
Posted in Asset Allocation, Financial Planning, Franking Credits, Pensions, SMSF, Superannuation, Tax Planning, Trustee
Tagged , , , , , , , , , , , , ,

Posted by Liam Shorte - SMSF Coach on April 27, 2012

https://smsfcoach.com.au/2012/04/27/the-added-value-of-franking-credits-in-a-smsf-portfolio/

Superannuation Splitting to a Spouse already in or entering Transition to Retirement Phase

So I got a question about continuing to Super Split to a spouse who is over 55 and already using a Transition to retirement Pension but not fully retired.

If a client is over 55 with a TRIS/TTRAP Pension and an Accumulation Account as they are still working or not fully retired, can they continue to receive Super Splits from their spouse?

The answer is yes they can receive the splits into their accumulation account as they are between 55 and 64 and not retired which meets the eligibility rules. The ATO guidelines state:

“Which members are eligible to apply?
All your members are eligible, although it’s your decision whether to offer a splitting facility to all members. They can apply to split contributions regardless of their own age, but their spouse, to whom you transfer the contributions, must be either:

less than 55 years old
55 to 64 years old and not retired.”

The super contributions splitting provisions operate independently from the pension payment rules. So as long as each set of provisions are complied with, there shouldn’t be an issue.

The question was then asked “could the spouse then consolidate their TRIS/TTRAP and Accumulation accounts the following year and thereby moving those funds to pension phase and possibly accessing a higher maximum pension including the amount super split from their spouse.”

 I again believe yes as otherwise the accounting would have to quarantine Super Split amounts until 65 or retirement and the ATO have again said:

“There are no requirements for funds to specially report to us amounts that have been rolled over or received as a result of a contributions-splitting application”

 This clarifies the way to continue implementing two strategies:

  • When looking to maximise clients TRIS/TTRAP pensions – often to use the 10% to pay off debt
  • Ensuring a member can do rollbacks, consolidations and recommencements to maximise the amount in pension phase.

Make sure to get individual advice on your personal circumstances and be aware that the Super split amount will count towards the receiving spouse’s concession caps.

I hope this guidance  has been helpful and please take the time to comment. Feedback always appreciated. Click here to arrange a meeting/call back or contact our Castle Hill or Windsor offices for an appointment to discuss your needs.

Liam Shorte B.Bus SSA™ AFP

Financial Planner & SMSF Specialist Advisor™

SMSF Specialist Adviser 

 Follow SMSFCoach on Twitter Liam Shorte on Linkedin NextGen Wealth on Facebook   

Verante Financial Planning

Tel: 02　98941844, Mobile: 0413 936 299

PO Box 6002 BHBC, Baulkham Hills NSW 2153

5/15 Terminus St. Castle Hill NSW 2154

Corporate Authorised Representative of Viridian Select Pty Ltd ABN 41 621 447 345, AFSL 51572

This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs. This website provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such.

Leave a comment
by Liam Shorte - SMSF Coach on April 18, 2012  •  Permalink
Posted in Asset Allocation, Divorce, Financial Planning, Pensions, Retirement Planning, SMSF, Superannuation, Superannuation Splitting, Tax Planning, Trustee
Tagged , , , , , , , , , ,

Posted by Liam Shorte - SMSF Coach on April 18, 2012

https://smsfcoach.com.au/2012/04/18/superannuation-splitting-to-a-spouse-already-in-or-entering-transition-to-retirement-phase/

What can my SMSF invest in?

Control over investment decisions lies with the Trustees of the Fund.

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We find this is the main reason so many Australians are establishing their own Self-Managed Superannuation Fund or SMSF for short. The range of investments you can consider for your portfolio include almost anything you yourself could invest in as an individual including:

  • Direct investments  (such as shares, ETFs, cash, term deposits, hybrids, income securities, gold/silver bullion and bonds)
  • Cryptocurrencies, Bitcoin, Ethereum, initial Coin Offerrings (Just because you can doesn’t mean you should)
  • Direct property (Residential houses, villas, units, as well as Commercial property such as offices, warehouses, factory units, shops and land.)
  • Managed funds (retail or wholesale, domestic and/or international)
  • Private Unit Trusts
  • A business (non-related party to avoid hassle) and business property
  • Non-traditional assets such as coins, antiques, art , taxi plate licences, ATMs (some of these have been subject to major losses)

The first step is to ensure your Trust Deed allows you to invest in the items you are considering. I know it is a long boring document but you need to know its contents so go through it regularly to get a handle on it. If it does not specifically mention cryptocurrencies then you should have the trust deed updated to allow them as they may not fall under any other category.

Once satisfied the Trust deed does not exclude an investment, the types of investments the SMSF actually holds are determined by the fund’s investment strategy, which is formulated by you, along with the other members in the fund, and often advised by an SMSF Specialist Advisor™. The fund’s strategy should reflect your objectives, risk profile/tolerance, liquidity needs and the investments you intend to utilise. This is not set and forget or forged in stone. The investment strategy can be changed as often as you wish, to suit your changing circumstances and to take advantage of new investment opportunities. The fund can also incorporate different strategies to suit each of its members.

An important benefit of this having this ultimate control is that, during retirement phase, you can continue to invest in growth assets. This contrasts the approach of many retail providers, who lock ‘pension phase’ investors into income-producing assets such as cash and fixed interest, increasing the risk that the investor may outlive their retirement savings. This is coming back on the agenda now as many funds move to ”Lifecycle strategies” which I believe are dangerous in assuming that fixed interest is low risk when inflation is a real risk and bubbles can effect the capital value of even “conservative”options.

It is important to understand that there are certain regulatory limitations placed on SMSF; for example, a fund cannot borrow money to invest in assets such as property or shares unless the funds are provided through a Limited Recourse Borrowing Arrangement (LRBA) .

A fund cannot acquire assets from related parties of the fund or invest in in-house assets; for example the fund could not purchase your assets (such as your house or residential investment property) from you. Other restrictions placed on the fund include the inability to lend funds to members or their relatives or to provide the assets of the fund as security for personal borrowing.

As part of our service, we can provide you with access to a range of investments for your SMSF.

Can I invest in equipment and leased it to my business?

Technically yes but there are so many ways you can get in trouble it may not be worth the hassle. I went into this in more debt in this article.

Can I buy a Classic or Vintage Car within my SMSF?

Again technically and theoretically yes you can, but it would be very difficult with many pitfalls. You’d also have to be able to prove to the ATO that the investment meeting the sole purpose test and was going to generate income for your retirement and not for personal enjoyment now! You can own but you or a related party cannot drive it even for maintenance purposes! If you invest in classic cars, they would have to be hired out to generate income. It would be difficult for you to drive. Remember if you are driving you need to be covered by the vehicle’s insurance, and that would make it obvious to the ATO you are using the car for your own purposes.

Can I use a property within my SMSF?

SMSFs are expressly forbidden from investing in the family home or holiday home for your personal use. But they are able to invest in investment properties – as long as the property is only used for investment purposes. Likewise properties within holiday resorts or golf courses can draw the ire of the ATO as again you may be seen to benefitting members personally rather than providing for retirement

This means fund members can’t go and stay in the property or rent it out to family members. The property should generally be managed by a real estate agent to satisfy the sole purpose test regulations unless you can show genuine evidence that you are managing it professionally yourself.

If I want to push the limits! Coins, jewellery, antiques, wine and art?

You can invest in coins – but you can’t display them if you want to satisfy the sole purpose test. Coins are collectables if their value exceeds their face value. Therefore, if bullion coins have a value that exceeds their face value and they are traded at a price above the spot price of their metal content, they will be a collectable and your SMSF must comply with regulation 13.18AA in relation to the investment

Likewise, you can invest in wine but you can’t drink it unless you are in pension fully retired and taking it out as a lump sum pension payment! If your fund acquired the wine on or after 1 July 2011 it must not be stored in the private residence of any related party. A private residence includes all parts of a private dwelling (above or below ground), the land on which the private residence is situated and all other buildings on that land, such as garages or sheds.

SMSF investments in art operate in a similar way. You can’t hang it in the hall at home, but you can rent it to a non-related company or an art bank that rents out artworks on an ongoing basis.

Here is a link to the ATO’s guidance on leasing and selling artworks:

ok so what about stepping into the Cryptocurrency or Bitcoin mania?

Just because it may be possible does not mean you should. If you want to then you need to do some major research and follow normal compliance rules to the Nth degree. Read my blog SMSF Research – BITCOIN, DOLLARS, GOLD: What Is the Future of Money?

Although it might seem like a good idea to use your super to invest in exotic assets, the value of these types of investments is notoriously volatile and the market for these asset classes is generally pretty illiquid. If you have special or professional knowledge in a particular subject then you may be able to put forward a better case than an ordinary person for engaging in those assets as part of your funds strategy. Again make sure that you are not using your SMSF or its assets to prop up your own business.

I hope these thoughts  have been helpful and please take the time to comment if you know of other investments as I know this is not an exhaustive list. Would love some feedback as well.

Liam Shorte B.Bus SSA™ AFP

Financial Planner & SMSF Specialist Advisor™

SMSF Specialist Adviser 

 Follow SMSFCoach on Twitter Liam Shorte on Linkedin NextGen Wealth on Facebook   

Verante Financial Planning

Tel: 02　98941844, Mobile: 0413 936 299

PO Box 6002 BHBC, Baulkham Hills NSW 2153

5/15 Terminus St. Castle Hill NSW 2154

Corporate Authorised Representative of  Viridian Advisory Pty Ltd (ABN 34 605 438 042) (AFSL 476223)

This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs. This website provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such.

76 Comments
by Liam Shorte - SMSF Coach on March 26, 2012  •  Permalink
Posted in Asset Allocation, Financial Planning, Franking Credits, Pensions, SMSF, Superannuation, Tax Planning, Term Deposits, Trustee
Tagged , , , , , , , , , , , , , ,

Posted by Liam Shorte - SMSF Coach on March 26, 2012

https://smsfcoach.com.au/2012/03/26/what-can-my-smsf-invest-in/

Understanding transition to retirement pensions

If you have reached your preservation age you can use a transition to retirement pension to access your superannuation as a non-commutable income stream while you are still working. This may be particularly attractive if you have reduced your working hours and need to top-up your income to maintain your standard of living or clear debt before full retirement..

The strategy still remains effective for those needing a boost in income, reduce debt or those who can combine the pension with salary sacrifice.

What is a transition to retirement pension?

Transition to retirement pensions allow you to access your superannuation as a non-commutable income stream, after reaching preservation age (see below), but while you are still working.

The aim of these income streams is to provide you with flexibility in the lead up to retirement. For example, you may choose to reduce your working hours and at the same time access your superannuation as a transition to retirement pension that can supplement your other income. It may also allow you to salary sacrifice to give your retirement savings a boost.

Not all superannuation funds offer the transition to retirement pensions, so you need to check with your own fund to see if they do. You can also start one in a self-managed superannuation fund.

Are there any special characteristics?

These pensions are essentially like a normal account-based pension, but with two important differences.

Firstly, they are non-commutable, which means they cannot be converted into a lump sum until you satisfy a condition of release, such as retirement or age 65.

Secondly, you have a minimum pension amount you must withdraw each year (4% between 60-65) but you can only withdraw up to 10% of the account balance (at 1 July). No lump sum withdrawals are allowed.

What is my preservation age?

Your preservation age is generally 60 and generally the date from which you can access your superannuation benefits.

How are transition to retirement pensions taxed?

Transition to retirement pensions are taxed the same as regular superannuation income streams.

Your pension is tax-free if paid from a taxed source*.

  • Most people belong to a taxed superannuation fund. Some government superannuation funds may be untaxed and you will pay higher tax on pensions.

Can you still contribute to superannuation?

As long as you are eligible to contribute, you and your employer can still contribute to superannuation for your benefit. In any case, your employer’s usual superannuation guarantee obligations would still apply. You need to have an accumulation account to pay these amounts into.

Is a transition to retirement pension right for you?

Transition to retirement pensions can provide you with flexibility in the years leading up to your retirement and can help to boost your retirement savings in some circumstances.

People who might find the transition to retirement pensions attractive include those who:


  • have reduced working hours from full-time to part-time, eg down to three days per week. The reduced salary can be topped up with income from the transition to retirement pension


  • are able to salary sacrifice to your superannuation or your spouse’s super for tax savings – the outcome of combining the transition to retirement pension with salary sacrifice can be a greater build-up of superannuation savings by the time you reach actual retirement

The transition to retirement rules and associated strategies can be very complicated. It is recommended that you seek expert advice from your financial adviser before deciding if this type of income stream and strategy is right for you.

Want a Superannuation Review or are you just looking for an adviser that will keep you up to date and provide guidance and tips like in this blog? Then why now contact me at our Castle Hill or Windsor office in Northwest Sydney to arrange a one on one consultation. Just click the Schedule Now button up on the left to find the appointment options. Do it! make this year the year to get organised or it will be 2030 before you know it.

Please consider passing on this article to family or friends. Pay it forward!

Liam Shorte B.Bus FSSA™ AFP

Financial Planner & SMSF Specialist Advisor™

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Tel: 02　9899 3693, Mobile: 0413 936 299

PO Box 6002, NORWEST NSW 2153

40/8 Victoria Ave , CASTLE HILL NSW 2154

Suite 4/1 Dight St, Windsor NSW 2765

Corporate Authorised Representative of Viridian Advisory Pty Ltd (ABN 34 605 438 042) (AFSL 476223)

This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs. This website provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such.

11 Comments
by Liam Shorte - SMSF Coach on March 14, 2012  •  Permalink
Posted in Asset Allocation, Binding Death Nominations, Financial Planning, Franking Credits, Pensions, Reversionary Pension, SMSF, Superannuation, Tax Planning, Term Deposits, Trustee
Tagged , , , , , , , , , , , ,

Posted by Liam Shorte - SMSF Coach on March 14, 2012

https://smsfcoach.com.au/2012/03/14/understanding-transition-to-retirement-pensions/

Understanding bonds – Guidance for SMSF Trustees

What is a bond?

A bond is simply a loan between two parties.

A person who buys a bond is the lender of money at a fixed rate of interest. The borrower is the organisation, which issues the bonds. Issuers are usually government bodies or large corporations.

Organisations issue bonds as one way of financing operations – the Australian government has used bonds to fund road projects.

Like any loan, the borrower must attract investment by offering interest on money lent. Bonds are issued with a guaranteed fixed interest rate for a set period of time.

When that period expires, the investor’s original capital investment is returned. The original investment is known as the “face value” of the bond. The interest rate is known as the “coupon”.

The date of expiry is known as the “maturity date”.

For example, on 1 July 2010, the Australian Government issues a 10-year bond with a face value of $1000 and a coupon of 5 per cent.

The bond owner will receive an interest payment – paid by the Australian Government – of $50 per year (5 per cent of $1000) for the next 10 years.

On 1 July 2020 the investor will be paid back the bond’s face value of $1000.

Once issued, bonds are traded on an exchange and purchased or sold by individual investors, fund managers and other institutions. The price of the bond may change depending on demand and supply of buyers and sellers in the market.

How do bonds work?

A bond’s price may change when it’s traded on an exchange but its face value, coupon and maturity always remain the same.

Any change in price will also change a bond’s yield – or the return on the bond based on its current price.

For example, a bond with a face value of $1000 and a coupon of 6 per cent (or $60) has a yield of 6 per cent. This is determined by dividing $60 by $1000.

But if the price of the bond rose to $1200 investors would still receive a coupon of $60 – pushing its yield back to 5 per cent ($60 / $1200). If the bond was to fall to $600, the yield would rise to 10 per cent ($60 / $600).

This explains why a bond’s yield falls when its price rises, and why its yield rises when its price falls. It also explains why a bond investor who sells prior to the maturity of the bond may experience a loss on the capital value of their investment if long term interest rates rise. Conversely they may sell at a gain if long term interest rates fall.

Are you looking for an advisor that will keep you up to date and provide guidance and tips like in this blog? Then why now contact me at our Castle Hill or Windsor office in Northwest Sydney to arrange a one on one consultation. Just click the Schedule Now button up on the left to find the appointment options.

Liam Shorte B.Bus SSA™ AFP

Financial Planner & SMSF Specialist Advisor™

SMSF Specialist Adviser 

 Follow SMSFCoach on Twitter Liam Shorte on Linkedin NextGen Wealth on Facebook   

Verante Financial Planning

Tel: 02　98941844, Mobile: 0413 936 299

PO Box 6002 BHBC, Baulkham Hills NSW 2153

5/15 Terminus St. Castle Hill NSW 2154

Corporate Authorised Representative of Viridian Select Pty Ltd ABN 41 621 447 345, AFSL 51572

This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs. This website provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such.

1 Comment
by Liam Shorte - SMSF Coach on March 11, 2012  •  Permalink
Posted in Bonds, Hybrids, Investment Strategies, SMSF
Tagged , , , , , , , ,

Posted by Liam Shorte - SMSF Coach on March 11, 2012

https://smsfcoach.com.au/2012/03/11/understanding-bonds-guidance-for-smsf-trustees/

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