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.

Superannuation Guarantee Age Limit to be Abolished in 2013


This change last November has gone under the radar but its needs to be highlighted as it will be especially important to Self Managed Super Fund members who run their own businesses as it will enhance their ability to tax plan and continue contributing to Super tax effectively.

The Government has announced that the 70 year age limit for superannuation contributions required to be made by an employer under the Superannuation Guarantee (Administration) Act, 1992 will be abolished.  Currently, employers are not required to make any SG contributions in respect of employees once they attain age 70.

The Government had originally aimed to increase the age limit to 75 but has subsequently decided to remove the age limit entirely.

This is a win for older working Australians with the House of Representatives passing amendments to the Superannuation Guarantee (Administration) Amendment Bill 2011 that abolish the superannuation guarantee age limit.

From 1 July 2013, eligible employees aged 70 and over will receive the superannuation guarantee for the first time. This increases the coverage of the superannuation guarantee scheme to an additional 51,000 Australians aged 70 and over, who will get the benefit of the superannuation guarantee if they continue working.

“Making superannuation contributions compulsory for these mature-age employees will improve the adequacy and equity of the retirement income system, and provide an incentive to older Australians to remain in the workforce for longer,” Mr Shorten said.

A 1 July 2013 commencement date provides time for employers and older Australians to adjust to the new superannuation arrangements.

The changes will also ensure that employers will be able to claim income tax deductions for superannuation guarantee contributions made to employees aged 70 and over from 1 July 2013.

It ensures employers will not bear a higher cost in employing workers 70 and over compared with other workers.

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.

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.

How an SMSF purchases investments. 6 Steps to follow?


In a recent blog entry I spoke about what investments a SMSF can invest in and went through some of the options in detail. This article is more on the process of “How you invest through your SMSF”.  There are steps to follow in guiding you through the process of investing in any asset within Superannuation. Almost anything you can invest in as an individual, you can also invest in within a SMSF. However, here are six steps in the Investment Process which should be followed when making investments for your SMSF in order to ensure that your SMSF remains compliant with all the Superannuation Rules and Regulations.

Step 1: Read the Deed! Review Investments Allowed by your Trust Deed

Prior to making an investment for your SMSF, you should make sure that the intended investment is permitted. The range of investments that a fund can invest in is quite broad including listed shares, cash and fixed interest securities, managed investments, private unit trusts, direct residential and commercial property and other collectibles. It is important to understand that there are certain regulatory limitations placed on SMSFs; for example, a fund cannot acquire assets from related parties of the fund or invest more than 5% in in-house assets. The fund cannot purchase your assets, such as your holiday home, from you or a related party such as your parents, spouse or children. Other restrictions placed on the fund include the prohibition on lending funds to members or their relatives or to provide the assets of the fund as security for personal borrowing.

Step 2: Review and possibly amend your SMSF Investment Strategy

The regulations require that all SMSFs and superannuation funds in general need to have an investment strategy in place that is reviewed regularly. Generally, this will mean having a clear objective that takes into account the desired target rate of return, risk tolerance of the members and of investments, diversification needs, the liquidity of the funds’ investments, as well as the ability of the fund to meet accounting, tax and audit fees. Most importantly the ability to make payments to members or their beneficiaries should the need arise via pensions, disability or death. Overall, before any investment is made you must ensure that the investment complies with your Fund’s Investment Strategy and if it doesn’t then consider why you really want to engage in that investment and the risks involved. If you still wish to proceed then the trustees need to amend the current strategy to allow the new investments and should minute why the change has been considered and approved.

Step 3: Second Opinion / Lifetime Value of Investment

Check the accounting and tax implications of any investment with your Accountant / SMSF Specialist Advisor™. It is always a good idea to have a second opinion as you may be looking at the investment with a narrow focus and your advisors may be able to identify other factors to be considered which affect the viability of the investment from a pre or post tax viewpoint both at the purchase and sale point of the investment . An example would the current spate of bank hybrid issues which seem attractive at 7.5 – 8% yield, however with franking credits and growth potential you advisor may suggest that you buy the share rather than the hybrid especially while rates are under pressure and looking at going lower which reduces the return on a floating rate hybrid.

Step 4: Use your SMSF Bank Account for all investment transactions

Your personal funds must be kept separate from the assets of the SMSF. The ATO used to have a booklet called ”It’s your money…but not yet!” All investment holdings, money and title deeds should be clearly recorded as an asset of the SMSF or in the name of the SMSF Trustee (with exception for assets under a Limited Recourse Borrowing Arrangement). This means SMSF assets need to be registered in the name of the SMSF Trustee(s).

  • Cash should be kept in a separate bank account and we recommend a different bank to your day to day personal banking to avoid mistakes especially in online banking or use of cheque books.
  • Any income including, interest, dividends, distributions and contributions should be paid directly to the SMSF bank account.
  • Assets should be purchased with SMSF money. Trustees often pay deposits personally and if they do so should seek reimbursement immediately from the fund or document the funds as contributions on behalf of a member. Simpler to just keep everything separate.
  • Costs should be paid directly out of the SMSF account. Again in reality people often use personal funds to meet expenses like Accounting Fees or repair bills. Do yourself a favour and lose the bad habit! Use a decent Cash Management Account and you can do Bpay, Pay Anyone or use cheques to meet costs quickly and record them efficiently.

Step 5: Minute your Investment Decisions

Under superannuation laws, all trustees must draft and implement an investment strategy. An investment strategy must also comply with the fund’s trust deed and all other investment restrictions and obligations contained in the superannuation rules and regulations. Documenting investments can be based on investment sector allocations within your SMSF Investment Strategy. This means you don’t have to minute every investment as long as it fits within the strategy.  E.G. , you don’t need to prepare a separate minute for each term deposit renewal during a year if it is within your chosen limit in the investment strategy..

Step 6:  Review you portfolio and investment strategy regularly

Trustees are required to review the fund’s investment strategy regularly and we recommend that this be at least annually. We normally get the Trustees to sign off an updated copy of the investment strategy annually or whenever a major new investment is made for the fund or a change in circumstances like pension drawdown occurs. On moving to pension phase the Trustees may find that the asset allocation needs to change to ensure the fund can meet its ongoing pension payments and this should be noted in a revised strategy.

I hope these tips  have been helpful and please take the time to comment if you know of other steps to consider as I know this is not an exhaustive list. Feedback always appreciated. Why not contact our Castle Hill or Windsor offices for an appointment.

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.

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 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.

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.

There was another great benefit of setting up the pension which was that all the funds supporting the pension move in to a tax exempt status. Yes that means those funds paid no earnings tax and in fact they received a full refund of any franking credits on your investments. For the average investor this can increase your returns by 0.5% to 1% a year risk free every year! However that tax free status will be removed as of 1 July 2017.

The strategy still remains effective for those needing a boost in income 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 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 the date from which you can access your superannuation benefits and depends upon your date of birth.

Date of birth Preservation Age
Before 1 July 1960 55
1 July 1960 – 30 June 1961 56
1 July 1961 – 30 June 1962 57
1 July 1962 – 30 June 1963 58
1 July 1963 – 30 June 1964 59
After 30 June 1964 60

How are transition to retirement pensions taxed?

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

If you are under age 60, the taxable part of your pension will be taxed at your marginal rate, but you receive a 15% tax offset if your pension is paid from a taxed source*.

However, once you reach 60, 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 superannuation – 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 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.

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.

SMSFs – allocation to international shares


According to the Self-Managed Super Fund (SMSF) statistical report March 2019 published by the Australian Tax Office, Australian listed shares made up approximately 30% ($224 Billion approx) of total SMSF assets while overseas shares and managed funds only made up approximately 1% ($7.6 Billion approx). Well to be honest that statistic is rubbish and the true figure is nearer 10-15%.

Graham Hand on the Cuffelinks website delved deeper in to these figures and found the $1.8 Billion in International shares only represented  direct shares listed on Overseas exchanges and did not include the multitude of managed funds, listed investments like ETFs and LICs and other managed investments.

Why do we stay so close to home and what do we miss out on by doing so:

SMSF investors do seem to have a home bias for a number of reasons

Ease of access

Their preference for direct investing rather than investing   through managed funds tends to mean they favour Australian shares because   investing directly into international shares is complex and harder to access.   Issues may include whether or not to hedge, the type of hedging strategy and   implementation.

Performance history

Australian shares have historically outperformed   international shares over the long term which has influenced many SMSF   investors to be underweight international shares in favour of the better   performing and higher yielding Australian shares.

Quasi global exposure

Some SMSF investors believe that investing in   Australian companies that have a global presence, such as BHP and Rio Tinto,   provide adequate exposure to international economies and investment themes.

High yielding shares with franking credits

Australian shares tend to provide relatively   higher levels of income with franking credits.  This can be an important   source of tax effective income for retirees and pre-retirees. The franking   credits can be used to offset other tax within the SMSF (in the accumulation   phase).

Investor understanding and awareness

A SMSF investor will typically have   a deeper knowledge and understanding of the Australian share market and   companies that make up the market than overseas companies. As a result they   may feel more comfortable investing domestically.

 An excessive home bias has its downside which needs to be considered

Some of these considerations are discussed below:

Concentration of the   domestic market

It is well-known that the Australian share market represents a   small portion of the global universe (around 3% as measured by the MSCI   index). Our share market is highly concentrated in a few sectors and a   handful of companies. The resource and banking sectors comprise over 60% of   our market and the top 10 stocks represent 52% of the index (S&P/ASX 200   Index). The biggest company BHP alone makes up 13% of the index. This is   illustrated in the graph below which shows the extent of over-exposure and   under-exposure of Australian shares in various sectors relative to   international shares.This high level of concentration in Australian shares means   that investors are prone to shocks or underperformance affecting these key   sectors and companies. This may derive from such things as legislative   changes and/or events such as a sharp slowdown in China’s economy.

Impact of currency on   returns

SMSF investors should take into account that a   significant amount of the long-term underperformance of international shares   has been due to the appreciation of the Australian dollar. A rise in the   Australian dollar translates to currency losses which detract from the overall   returns from international assets. To rely on the historical performance of   international shares relative to Australian shares as a guide to future   performance assumes that our Australian dollar will continue to appreciate   over the next few years.

Other domestic investments

SMSF investors that operate a small business and/or own   investment property (either within or outside of their SMSF) already have a   heavy exposure to the direction of the Australian economy. An excessive home   bias to Australian shares in their SMSF exacerbates the extent of their   reliance on the performance of the Australian economy. According to the SMSF   statistical report, 46% of total SMSF assets are either domestic listed   shares or real estate assets.This sort of weighting means SMSF investors are likely to have   a lower level of diversification in their portfolio due to limited exposure   to countries, economies, industries and companies that are either not   available or well represented in Australia. Also, by not investing offshore   the investor has little access to countries with stronger economic growth   prospects than Australia, such as the emerging markets with their rapidly   expanding population and development prospects. It is important to keep in   mind that Australia represents less than 3% of the total world share market.

What is the best way to go about diversifying into international shares?

There are a number of ways of accessing international shares including through the use of managed funds, ETFs, LICs and direct equities with an international focus including those listed on offshore share markets. There are different types of international share funds such as global diversified funds, sector specific funds, market capitalisation funds, country funds and specialist funds.

The best way to access international shares will depend on the investment strategy of the SMSF fund and the amount of money to be placed in international shares. Some guidelines include:

  • SMSF investors with a preference for direct investments may consider buying international ETFs which track an international index or new listed option like MGE which is a close sibling to Magellan’s unlisted Magellan Global Equities fund
  • Investors with a small amount to invest in international shares may prefer a global diversified managed fund that provides broader diversification
  • Investors with a higher risk tolerance and larger amounts of funds may consider a combination of global, diversified funds supplemented with specialist and regional/country funds

Here is a good short video that explains the Home Country Bias well

 

How investors can deal with currency risk when investing offshore

Currency can pose a significant risk for international investors but it can also provide benefits. When the Australian dollar depreciates, currency gains can be made from the international asset when it is converted back to Australian dollars. Any currency gains will boost returns from the international investment.

Hedging the currency exposure will mean that investors miss out on this gain if the Australian dollar falls. The currency exposure can also add to the diversification benefits of investing overseas. However, if the Australian dollar appreciates the investor will experience currency losses that detract from returns.

Predicting currency movements has proven to be very difficult and is fraught with risk. Nonetheless, if SMSF investors are concerned about the risk of a continued rise in the Australian dollar, they can hedge some or all of their currency risk by the following methods:

  • Investing in a managed fund that actively manages the currency exposure, thereby leaving the hedging decision to the fund manager
  • Investing in a managed fund that has a set amount of hedging in place at all times such as 50% and 100% hedged international share funds
  • Investing in currency ETFs that effectively increase in value if the Australian dollar appreciates, thereby offsetting some or all of the losses made in the international share portfolio.

I hope these thoughts  have been helpful and please take the time to comment.

We can help you determine the right asset allocation for you!

Would love some feedback as well or arrange a meeting by clicking on the Schedule Now

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.

7 Common SMSF Pension Errors


Having set up over 120 pensions and taken over many other clients we know that having the right documentation and following the guidelines set down for accessing pensions is essential to remain compliant and access tax exempt status. Here are some of the common mistakes we see on documentation of pensions that clients bring to us from other sources.

1.  Pension entitlement – don’t bend the rules

You must be over the preservation age to commence a pension. This means that you must have reached the preservation age at the time the pension documents say the pension starts.  A common mistake is to assume this means at the time the first pension payment is made, which is wrong. For example, you may be turning  which is your preservation age on the 1st of October and think that you can start the pension on the 1st of July but not pay any pension payments until after the 1st of October and get the full year of tax exempt  income. This is not possible; in order to start the pension you must have reached the preservation age at the 1st of October. the income for that year will be split pro-rata across the period in accumulation phase pre- 1st of October and in pension phase after that date.

2. Market valuation of assets funding the pension

SMSF Advisors, Accountants and trustees must make sure the assets of the fund are valued at market rates before the pension is calculated. Further they should ensure the assets are revalued at the end of financial year. This is important in determining the level of pension in the coming year is correct and reflects the true value of the assets in the fund. There used to be some leeway especially with property but auditors now seem to be implementing a more rigorous checking system to ensure property values are updated annually.

3. Use a Comprehensive Pension Kit

Timely documentation is essential to ensure that the pension actually commences when you want it to commence. Typically, a pension may start well before an actual pension payment is made as often the financials for the SMSF are not completed yet. Often the pension start date will be 1st July and the actual pension payment may be made quarterly or half-yearly later in the year. The pension kit should reflect this and include at a bare minimum such things as a pension request form from the member to the trustee(s), minutes of the trustee acknowledging and agreeing to the request, notification from the trustee to the member with a draft pension agreement stating the type of pension, start date, frequency of payments and if a reversionary pension is to be applied.  Importantly, it should also include a Product Disclosure Statement which is a legal requirement. The initial pension documentation does not have to have the exact figure of the pension amount but should refer to the fact that this figure will be clarified once the financials are completed. We update the initial kit with a set of minutes after the financials are provided which shows the exact amount in the pension and the relevant minimum and maximums or selected pension payment for that year and the Tax free component of the pension.

Your SMSF advisor of accountant should be able to help with this documentation.

4. Minimum Pension Payments (don’t ignore letters from your advisor!)

Pension payments are only tax-free if you met the conditions required to take advantage of the Tax Exempt Pension Income within the fund (0% tax on the income from the assets supporting the pension). The minimum pension amount must be paid within the financial year. This means that the pension payment must physically leave the SMSF bank account by the 30th June. That is a benefit is paid when the member accepts the money, banks the cheque which is subsequently honoured or receives a credit by way of electronic transfer from the SMSF. As an example, if at the 30th June you have made $6,000 worth of pension payments but your minimum pension payment for the year is $10,000, the $4,000 cannot be carried over and paid at a later date.  In this instance the fund has failed to meet its pension requirements and the pension would be invalid and the entire pension account subject to tax for the full year.

During the financial year all pensions paid must be paid in “cash”;. That is a benefit is cashed when the member accepts the money, banks the cheque which is subsequently honoured or receives a credit by way of electronic transfer from the SMSF. Therefore if a member receives a cheque dated 30/6 and banks it after 30/6, this amount cannot be classed as “cash” for the year ending 30/6 on the cheque. Also a member cannot receive a pension via an in-species transfer from the SMSF to the member.

Our process is to remind clients in April/May each year by advising them in writing the minimum amount payable by the 30th June. We ask clients to confirm they have taken these payments by ticking a questionnaire and returning it to us. If you are receiving a Transition to Retirement Pension the advice also indicates the maximum amount of pension and requests confirmation that this has not been exceeded.

Some strategies are in place for correcting errors before the 30th of June but once that clock ticks over to 1st of July there is little that can be done to amend strategies.

5. Tax and Estate Planning -Tracking the Tax Free Component Amount/Percentage

On commencing a pension the Tax Free and Taxable Components need to be calculated. This percentage split remains the same for the life of the pension. The tax free percentage is calculated by dividing the Tax Free Components by the total starting balance of the pension. The Tax free component should be shown in your Pension Kit (once financials completed) and then reaffirmed in your members account statement annually.

Why is this important if Pension payments are tax free?

The tax free component does not refer to the annual pension payments. The Tax Free Component percentage becomes relevant upon death of the last member without a reversionary beneficiary and can make significant difference to the tax paid by your dependents (particular adult children). Good pension planning may see more than one pension being set up for a member with each Pension allocated towards the most tax efficient recipient beneficiary. i.e. spouse may receive pension with low tax free % while adult children receive the pension with a higher Tax free %.

Some smaller accountants or those who do not have the relevant software may not be tracking your Tax Free component and this may cause a problem later when your remainder pension needs to be distributed.  Check your last statement and If in any doubt you should discuss with your accountant or SMSF Advisor.

6. Ongoing Contributions

A member’s pension account cannot receive new contributions during the year. You can make contributions but these contributions must be credited to a separate accumulation account. A SMSF a member may have more than one pension account but cannot have more than one accumulation account. As an aside this is necessary for a Transition to Retirement Strategy combined with Salary Sacrifice to work properly.

You can rollback (stop) a pension and add the accumulation account balance and then start a new pension.  We term this as RCR (Rollback, Consolidation and Recommencement). Before stopping a pension you must ensure that you first pay the minimum pension to keep the fund tax exempt for the year to that date. For this reason we often rollback the pension at the end of the financial year and recommence on 01st July.

7. Actuarial Certificate

If you have a pension account and accumulation account during the year (i.e you have made contributions) and the fund’s assets have not been segregated you will need to obtain an actuarial certificate to identify the tax exempt percentage of the investment income. The Actuarial Certificates are normally outsourced by the Accountant to an Actuary but you should ensure that they do take responsibility for arranging it for you annually.

As you can see these pension rules can be a minefield to negotiate and advice from a SMSF Specialist Advisor is highly recommended. Through Verante’s SMSF Coaching Service we remind our clients that when it comes to “their money” that there is no such thing as a silly question. With pensions it is essential to get it right up front and double-check before June 30th!

I hope these thoughts  have been helpful and please take the time to comment if you know of other common mistakes 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 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.

10 common mistakes made by many SMSF Trustees


I run regular sessions educating Trustees in small groups on how to utilise their SMSF and to avoid common mistakes so I thought I should share the more common ones. Self managed superannuation funds can be kept simple or they can involve very complex strategies. The superannuation system has many rules and regulations that members need to adhere to.  To ensure that you avoid the traps when it comes to self managed superannuation read on! Errors happen

1.    Jumping in too early with a low balance.

Unless you expect to make regular large contributions in the coming years or expect to put a large lump sum (e.g. inheritance) in soon, the administration fees of maintaining a Self Managed Superannuation Fund will erode away any profits and may also eat into your contributions.  The general agreed rule of thumb among honest SMSF professionals for a minimum balance for a Self Managed Superannuation Fund would be $200k. This would only be on the proviso you would be making contributions at or near your concessional cap depending on your age and that you may also be adding some non-concessional funds on a regular basis so that your fund has $400-$500K within 3-5 years.

If there are 2-4 members that are contributing to the fund with frequently largely sized contributions this can justify the use of a self managed superannuation fund earlier.  Just remember that generally it costs around $2,200.00 per annum in auditing, accounting, tax agents fees and ASIC fees for the fund as well as a general 1% investment fee.

2.    Failing to educate yourself first, before you open your fund so you know the basic SMSF rules.

Self managed superannuation funds can be very complex, if you do not know the basic rules of a fund and you are not using a fund administrator like an Accountant or a specialised service, you are asking for trouble! As the number of self managed superannuation funds increase rapidly the ATO as regulators will begin to take a stronger position.  Currently non compliant funds can lose up to 46.5% of the funds assets to tax plus fines for the Trustees!

There is jargon like concessional and non=concessional contributions and tax free and taxable components so take the time to understand them.

The main reasons of funds losing their compliance status is due to providing loans members. Anyone who has just started a self managed superannuation fund whether they have a manager or not that controls the funds should know the basic rules.

Here are some places to start:

ATO central access point for information on SMSFs  http://www.ato.gov.au/super/self-managed-super-funds/

The SMSF Association is pleased to provide you with this ATO SMSF Trustee online resource. ATO approved SMSF Trustee Education Program

By the end of this course, you will have learnt;

  • The basic facts about Superannuation and Self-Managed Superannuation Funds
  • How an SMSF works
  • The investment rules for SMSFs
  • The administration process to keep your SMSF healthy.

http://www.smsftrustee.com/ The Self Managed Superannuation Fund Trustee Education Program has been released by the Joint Accounting Bodies

We run regular seminars on educational topics for SMSF Trustees in groups of 6-10 people. Contact us for more details liam@verante.com.au 

 3.    Drawing on your SMSF for business or personal needs – Read and learn to stick by the Sole Purpose Test

Always remember it is your money but not yet! You are receiving generous tax concessions for providing for your retirement. Break the rules and you will lose those concessions! Self managed superannuation funds are not to be used to fund personal or business needs of the members of the fund or their relatives.  While many may be able to justify a small loan for a short period of time there is a total restriction on lending to members of the fund or related parties which may be extended family members or entities such as Family Trusts, Companies or partnerships.

Another example would be if you invested in a holiday resort unit managed independently by a management company and as part of the arrangement, you are entitled to private use of the apartment, 2 weeks per year. This arrangement would breach of the sole purpose test if used by your or any related party.

4.    Arranging for your SMSF to own your business premises without thinking the strategy through to the end

I actually love this strategy but there are positives and negatives to this situation and you will need guidance from your legal, accounting and SMSF Specialist Advisor. Many owners of small to medium enterprises use this as an effective strategy but others do a half-baked job and leave themselves exposed.

Pros:

  • Direct control of your super investments and a real understanding of where your money is invested.
  • The fund will pay only 15% tax on commercial rent paid
  • If the premises is sold no capital gains tax may be applicable once you are in pension phase and 15% or less if earlier.
  • You can be your own landlord with secured tenancy which allows you greater certainty when fitting out or installing equipment.
  • Keeps liquidity in the business to fund other costs.

Cons:

  • There are thousands of dollars in set-up costs and there are sometimes higher fees involved in getting a loan through your SMSF.
  • If a member of the fund dies without the proper insurance in place the fund may have to pay out death benefits leading to a rushed sale of the commercial premises.
  • If sold to a third-party then there is a possible loss of tenancy to the business which could destroy it.
  • There are strategies that can be built to avoid the cons, it is best to speak to an advisor so that they can see what is best for your personal situation.

5.    Choosing the wrong type of Trustee for the job

 76% of funds in this country still have Individual Trustees or a Trading company as trustee when a Sole Purpose Corporate Trustee would be much more suitable for long-term planning.

With individuals as trustees you need to change the name on all investments if one person leaves (divorce, death, Incapacity to act) or you add a new member (bring in a child, business partner or second spouse!). The paperwork involved is time-consuming and expensive just when it usually most inconvenient.

Please see my previous blog on this subject for more detailed discussion on this topic https://smsfcoach.com.au/2012/08/09/trading-company-as-smsf-trustee-or-sole-purpose-smsf-trustee-company/

 

6.    Failing to plan for death or serious illness of a member

If the fund is run by a husband and wife or run predominantly by one member, if that member passes it could have devastating impact on the remaining member and the self managed superannuation fund.  Strategies should be put in place so that all members involved in the fund understand the rules and regulations as well as the funds investment strategy.

Effort should be made to ensure the “silent” member is aware of and has met the Accountant, Auditor, and Financial Advisor and is comfortable that they could deal with them in the event of needing them. What’s the use in having a city based advisor if your spouse does not feel comfortable driving into the CBD. Choose a local Advisor for your later years.

All shares should be properly Chess sponsored and all members should have access to account numbers and passwords.

Binding Death Nominations and Reversionary Pensions should be reviewed regularly to ensure they still meet your wishes. The idea of leaving 20% to a son or daughter may have been fine when the fund was doing well but is it still a good idea in 2017? Make sure you do not leave your spouse short!

7.     Rolling to a SMSF without maintaining or transferring Insurance First.

One of the most important factors is to undergo a review of current insurances and to have life insurance integrated into your self managed superannuation fund.  When transferring from retail, employer or industry superannuation fund look to get “Transfer Terms” from insurers to open a new policy in the name of the SMSF without extensive underwriting. DO NOT LEAVE THIS UNTIL AFTER YOU HAVE ROLLED OVER! Despite your own perception of your health and vigour, you may find it hard to find new cover on the same terms or any terms so preserve what you have. Often we keep a small balance in a retail or industry fund just to continue the insurances in there at the group or discounted rates available.

8.    Getting behind on paperwork

More than just filing statements, trustees are required to document every decision that is made whether this is to make an investment, take out insurance, or change bank accounts. This should come in the form of minutes with details regarding who made the decision, on what day and where the decision was made.

The record keeping requirements of an SMSF can be quite onerous and failing to meet them is an easy way to fall foul of the ATO. Business owners usually have enough paperwork as it is, so paying professionals who can look after your record keeping may make sense for you.

9.    Exceeding the contributions cap

The cap on concessional contributions has changed so often in the last decade that confusion reigns each year.

The cap on concessional contributions for 2018/19  is $25,000. The after tax contributions (non-concessional) is capped at $100,000 per annum

There are a number of ways members can get caught out and exceed the cap. For example,

  • if you are paying for life insurance held in another super fund, the insurance premium can be deemed as a contribution. This premium would then be levied at penalty tax rates.
  • If your employer made last year’s June Super contribution in July of this year.

We can show you strategies for a couple to get up to $800,000 to $1,200,000 into super in one year by using a mix of contributions and a holding account strategy.

10.  Not having a proper Cash Hub and losing interest and paying unnecessary fees

If you go to your normal bank to set up a bank account for your SMSF, they will most likely suggest that you use a business bank account. These accounts generally have high monthly fees, transaction fees and provide little to no interest.

We estimated the average cash balance of SMSFs to be between $50,000 and $80,000. Based on these figures, by using business bank accounts, trustees may be costing themselves approximately $3,000 per annum in fees and lost interest.

There are better options out there. Look at Macquarie’s Cash Management Account almost matching the RBA cash rate (noting for first $5K). Link these to an ING Direct Savings Maximiser for the Fund or a RaboDirect Notice Saver Account paying up to 1.8 to 2.35% higher for cash. Use 6, 9 and 12 month Term Deposits where funds are not needed short-term.

Make sure all accounts are opened correctly in the name of all trustees. Get it wrong and it can cost a lot to rectify.

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

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.

Managing the Government Guarantee on Term Deposits as an SMSF Trustee


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SMSF trustees are able to take advantage of cash accounts backed by the Federal Government’s Financial Claims Scheme (FCS), commonly known as the government guarantee, to improve the security of their capital and achieve good levels of interest.

In 2012 the Government announced the guarantee on deposits was to be reduced to a $250,000 cap, down from $1m cap in place since 2008. The lower limit is a concern to many SMSF Trustees given that it reduces competitiveness between the Big 4 banks and smaller the regional banks and the building societies.

The initial reaction especially for the risk averse was for Term Deposits larger than the cap to drift back to the CBA, ANZ, Westpac and NAB, given their much higher credit ratings. They have capitalised on the move and as a consequence we see lower term deposit rates from the Big 4 for amounts more than $250,000 since February 2012.

So what strategies are available to retain the government guarantee and to secure the higher interest rates.  Here are some ideas for the SMSF Trustees and Self funded Retirees to consider:

  1. Do your research on your target providers and consider if the guarantee is really needed. If you are willing to take the risk on the solid backing of many of Australia’s financial institutions. If you are happy with them then you may just opt for the highest interest rate paying one and don’t be afraid to ask them to get you a better deal than advertised as you can get 0.05 to 0.2% by asking! It all adds to your bottom line so don’t be shy.
  2. If you have more than $250,000 to invest, you could split your investment between a number of providers. At www.ratecity.com.au and www.mozo.com.au  they give you details of a number of different institutions such as ING DIRECT, ME Bank, Greater Building Society and Rabobank. Don’t be afraid of these names not being too familiar, they have the guarantee! You could split deposits across 3-4 institutions as well as your current Big 4 favourite and maintain the guarantee on your portfolio.  It does involve a bit of work to set up initially but if you’re wanting a government guarantee, then it’s worth the initial effort, think of it as an Insurance policy application!
  3. The added benefit is that should you need access to some funds urgently then you may only have to break one of the Term Deposits instead of previously breaking the one large one and incurring Break Fee, which we all hate. You may stagger the terms to ensure even more flexibility.
  4. Now you may not be comfortable with this one as the level of knowledge about this sector is not great among individual trustees but you might consider buying some bonds for a higher return. By investing lower in the capital structure in those well-known banks where you are confident that they will continue to trade, you can pick up a higher return. While senior bonds are higher risk than term deposits, the main benefit they have is that they are liquid and can be sold very quickly.
  5. Yields on Australian dollar bonds are not great at the moment as market expectations for a low growth world economy spreads with the IMF this week reducing forecasts even further. Your adviser or fixed interest broker can guide you towards the better risk and decent yielding bonds and you can expect 2.5 to 5.5% for what I would consider suitable risk for a moderately conservative investor if well diversified.
  6. Don’t chase a guarantee or safety to far and limit exposure to underpaying securities like the 10-year government bond, 2.58 per cent. For $50,000, some of the best-paying, three-year term deposits with the deposit guarantee are paying in excess of 3.2 per cent.
  7. If you want diversity without the extra paperwork think about outsourcing this sector to a professional fund manager like Macquarie Income Opportunities Fund. Schroders or Henderson also have decent offerings in this conservative end of the sector. Look for a mindset in a Fund Manager that sees Capital Preservation as a core to their strategy.
  8. Instead of lending to the bank, buy the bank or at least blue chip shares that provide decent dividends. Buy no more than a handful of reliable blue-chip stocks that pay a regular dividend and are forecast to continue to do so through thick and thin. These should be “bottom drawer” stocks. If you have only got a small part of your wealth invested in them then you can afford to let them ride the volatility but you still need to watch their sector for any major changes (think Blockbuster video demise after online streaming). I am talking about the 1 or 2 banks, the consumer staples like Wesfarmers and inflation linked income companies like APA Group which owns Australia’s largest natural gas distribution and storage infrastructure network, constituting mainly gas transmission and distribution, mostly servicing power generation, industrial, and commercial customers.

All to0 hard? Well at Verante Financial Planning we have access to a facility that can access over 20 Term Deposit providers in one place with a one-off application form and easy transfer from institution to institution at maturity for the best rates.Have a look at Australian Money Market

In summary it appears most people are unsure about the future and want guarantees on their investments while on the other side younger people don’t want to take on additional debt at this time. This means we’re likely to see rates remain low for some time. By doing some research and comparing what’s available in the market and maybe seeking advice for a second opinion you can find the Term Deposit that suits your needs.

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

Five pointers to consider when looking at dividend investing


Ok so you are looking to get back in to the market or use the current dip to add to your portfolio and everyone in every article is saying look for Yield! Well how do you do that or how  do you explain it to a client? I found this article on Morning Star and it was very easy to read and understand so I thought it would be appropriate to pass it on. It discuss 5 points to consider when looking a Dividend Investing:

  1. Look at the past and future – where have dividends come from in the past and can the company sustain them into the future.
  2. Look behind the yield – why is the yield high. Is it because the capital value has fallen or because dividends increasing over time. Capacity to grow its dividends is essential.
  3. Look closer at cyclical stocks – Cyclical companies like Newcrest Mining (NCM) may also have a tendency to pay sporadic dividends and you do not want to be buying into a story that will change in the short-medium term. Again consistency and future capacity are the core.
  4. Look beyond banks – don’t get overexposed to one sector . Look at consumer staples (MTS, WOW, WES), Healthcare, Infrastructure all defensive high yielding sectors. Because the Global financial Crisis revolved around banking, this sector has been more volatile in the recent past and looks to continue in this vein for years to come.
  5. Look for tax implications – what is useful for one type of investor is not for another. Franking Credits are the “CREAM” for a SMSF Pension Investor but of little or no use to someone on a higher Tax Bracket. Look at the after tax implications of an investment for your particular circumstances

So as I said some good points to consider and if you want to read the article in full please go to Click here

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.

How to react to this volatility as a SMSF Trustee / Investor.


The volatility over the last 6 months has been staggering but it is not unusual in historical terms as it has happened many times before. The difference now is that we are bombarded through all the forms of media with the daily movements of our investments and you just cannot ignore that weight of news. Also many people are now able to take more control of their investments via their own Self Managed Super fund or retail Master Trust / Wrap account.

It’s enough to make an anxious investor abandon shares entirely. But if you jettison equities from your portfolio in favour of cash, bonds and term deposits, it will take you much longer to reach your savings goals, and you may not get there at all.

When you look at current interest rates as being a pretty good predictor of what bonds/fixed interest will return in the future, the outlook isn’t particularly good with the 3yr bond yield hovering around 3.87% and inflation tickling the 3% band.

Likewise, interest rates from term deposits and high interest cash accounts have been dropping sharply in the last 2 weeks with 4s and 5s now in front of 6 month rates where 6s were common last month and forecasters now looking at rate cuts in October.

While short-term fluctuations in the market can be unnerving, they rarely affect long-term returns, for example investors who moved their savings into cash at the end of 2008 and stopped contributing to their superannuation accounts now have an account balance worth 20% less than investors who remained in the market.

With no end to volatility in sight, how do you keep your head while all around you are losing theirs? Here are some coping strategies:

Rebalance, Rebalance, Rebalance. Volatile markets can distort your portfolio. For example, if your goal is to have 35% of your savings in Australian equities, 20% in International Equities, 10% in property, 25% in Fixed Interest and 10% in cash, a big market meltdown could increase the amount you have in Fixed Interest and lower your allocation in equities and property.

To rebalance, you should sell some of your best-performing funds (fixed Interest, bond and cash funds) and put the money in your worst performers, something many investors lack the fortitude or commitment to do. We all know in theory what we’re supposed to do, but in reality do the opposite and flee to the best performer or cash. I know it hurts but you have to understand market cycles as opposed to “herd mentaility”. Look at Warren Buffet this week investing $5 Billion in Bank of America when most were fleeing the stock. He has a strong track record of buying when stocks are out of favour with the mainstream.

Don’t be blind to significant changes in markets like the rise of Asia or the risk of sovereign debt. Look out for changing trends like the move towards income orientated stocks. Your adviser should be pointing these matters out to you and identifying strategic asset allocations to allow for them.

How often should you rebalance? We recommend conducting regular portfolio reviews every six months, but only rebalancing when your allocation is at least 5 percentage points way from your benchmark.

Revisit you long term strategy and stick to it.  If the thought of rebalancing makes your palms sweat, consider investing your savings a “life cycle” strategy. This name for the common strategy, which has become much more popular in the last decade, invests in a mix of shares, bonds and cash and gradually become more conservative as you approach retirement. It is nothing new and most advisers will adjust your portfolio this way as part of your overall strategy but maybe you have not discussed this with them for awhile and the volatility may have led to inaction. Well now is the time to consider your future strategy and get that down in writing so you and your adviser are clear on your objectives, timelines and changing strategy over time.

Resist chasing this year’s ‘winner’ is just as likely to be next year’s ‘loser’. Even during the darkest days, some investments will shine. Lately, the flavour of the day has been gold, which is up considerably this year vs. a decline of almost 9% for the All Ordinaries.

The rise of exchange traded funds and similar products in the past few years has made it easier for small investors to invest in “hard” assets, such as gold and other commodities. In small doses, such investments can diversify your portfolio, but they’re easily abused. For example, while gold has been a winner this year, it’s not for the fainthearted. Factoring in inflation, it would have to reach $2,113 an ounce to reach its 1981 high of $850. That was a long time in the doldrums in between its peaks!

Have a look at the Russell Long Term Investment Returns report for more insight in to this subject. http://www.russell.com/AU/_pdfs/market-reports/asx/ASX_Report_2011.pdf

Save more. In this uncertain world, the amount you save is one of the few things you can control. If your employer matches super contributions or you take advantage of the Government co-contribution fro you or your spouse, you’re guaranteed an investment return — something even gold can’t deliver.

If you look back at just how complicated and volatile the last 10 years have been, people who diversified and rebalanced and kept contributing are well ahead of where they were a decade ago.

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.

Are we crazy to invest overseas?


Unless you have been in limbo for the last 10 years, you would have noticed that the Australian share market has outperformed international markets over the past decade. Australian shares have outperformed while the US and Europe have been like a quagmire slowly sucking up and depleting our investment funds. SMSF funds have traditionally had a low exposure to this sector and that has paid off in the last 10 years but prior to 2000 it meant they were underperfoming. Has the time come to look at this sector again with potential for another significant drop in the Aussie dollar over the next few years and stellar returns on international funds  as well as improved outlook for the US and Europe as our economy slows? International Investing

The  question for investors is “why should we invest our savings anywhere else other than Australia?  Time to look deeper into an explanation of why Australia has done so well and can it continue or do we need to be looking ahead of the pack for likely changes.

I read recently on the Motley Fool website a warning about false statements like “Diversification is the monster that needs stabbing, because world markets are actually becoming more closely correlated to our home markets, not less”. If this was true then why would we take on currency risk and invest internationally?

Fund managers, asset consultants and financial advisers maintain that good asset allocation is the biggest key to long-term investment returns. However, looking at the ASX200, we realise immediately that our Banking(financial services) and Mining & Resources(20%) sector account for 52% of our index. In comparison, the commonly used benchmark S&P500 only has 30% in these two sectors.

This huge bias is the key reason for the outperformance over the past decade as both of these sectors have had strong returns. The banks prospered through low international borrowing costs and massive consumer driven spending financed through increased household debt while the Chindia (China & India ) story was and still maybe the basis for resources growth here in the “lucky country”. This bias also provides greater risks and when the resources/commodities boom ends and/or our residential housing sector slows down, investors will truly need to think twice about having their money so heavily invested in these two sectors. Now don’t kill the messenger or rush to argue, I am not saying its imminent or that these are poor investments but the markets do go in cycles and better to be ready than blind. Even for a long-term investor you need to choose your entry and exit points in to any investment and while I don’t recommend trying to time markets, neither do I recommend ignoring historical trends and experiences of past cyclical highs and lows!

This is one of the big reasons why it is still important to allocate a certain percentage to international markets. I look for funds and investments that are easy to explain and one of those for example is the Magellan Global fund that invests in global household names like Ebay, Microsoft, Yum Brands (owner of KFC and Pizza Hut) and Novartis (global drug company owns brands like Voltaren and Ritalin). These are brands we all know and use and what is more important, the emerging middle classes in China, India and South America will aspire to obtain their products , so I can see where their current income and future earnings growth will come from.

I wish I knew the exact time when Australian markets would start to underperform and when international investments would pay off  but no one can be certain and by the time it becomes “blatantly obvious” we probably will have missed the boat, so I continue a strategy of diversification with a allocation into international funds with a proven record of  investing in companies with consistent earnings and potential for income growth over the long-term.

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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