Financial protection for your loved ones – Binding Death Nomination

February 2, 2012

Nowadays people tend to buy life insurance from a young age as it provides financial protection for their loved ones in case of an unexpected sickness or accident. A “binding death nomination” (BDN) serves a similar purpose by ensuring that your super benefits are paid to your nominated beneficiaries as you desire and gives you peace of mind that adequate financial support will be given to your loved ones. The beneficiaries of a life insurance policy are nominated when you purchase the policy however when you establish a SMSF you may not have considered how your super will be distributed when you die?

The trustees of a SMSF have absolute discretion in distributing death benefits under the current superannuation legislation for a SMSF without a “binding death nomination”. The decision of the remaining trustee/s may not be as per the wishes of the deceased. In many cases, trustees and other dependants or relatives of the deceased are caught in disputes, leading to expensive proceedings to resolve the issues.

To remove any uncertainty about who will receive your super and to minimise the possibility of any sort of legal dispute you may wish to make a “binding death nomination”. It means you can nominate exactly who gets what. For example you can nominate your dependants or legal personal representative (to be paid in accordance with your will) in any proportion you wish. It is also worth mentioning that a binding death nomination remains valid for 3 years and you can change or revoke it if you wish.  Another significant advantage of the binding death nomination is that it makes estate planning more precise and tax effective.

You probably think that it is too early to think about this but with an early decision regarding a binding death nomination your super, which you will accumulate over your working life, will be distributed according to your wishes. 

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Contribution Limits

January 19, 2012

Contributions to a Superannuation Fund are divided into two types—Concessional (before tax) and Non-concessional (after tax).  This appears simple enough however there are other important issues that need to be considered. Each type of super contribution is subject to a contributions cap. If you exceed the cap, your excess contributions are likely to be subject to penalty tax! To avoid paying extra tax, let’s look at the contribution limits in detail.

 Concessional contributions:

Before-tax contributions, such as salary sacrificed contributions and personal tax-deductible contributions, are known as concessional contributions. If you are making such contributions, please see the limits set out in the table below.

Concessional (before-tax) contributions cap*

Income year

Cap

Cap for over-50’s

2012/2013

$25,000

$25,000

2011/2012

$25,000

$50,000

Non-concessional contributions:

Contributions that are made from after-tax dollars are called non-concessional contributions. The limits for such contributions are as follows.

Non-concessional (after-tax) contributions cap*

Income year

Cap

Bring-forward rule

2012/2013

$150,000

$450,000

2011/2012

$150,000

$450,000

* If you are aged 65 or over, you must satisfy a work test to make contributions. You cannot make super contribution beyond the age of 74.

The annual cap for this type of contribution is $150,000 however you can boost your non-concessional contribution for a particular year by taking advantage of the “bring forward” rules. Under this rule, you can stretch the $150,000 annual limit over three years. That is, the gross amount for three consecutive years cannot exceed $450,000. However, the “bring forward” option is only available for those under the age of 65. The following table provides examples of how the “bring forward” rule works:

Non-concessional contribution limit* (bring-forward) examples

Contributions in:

Year 1

Year 2

Year 3

Year 4

Example 1

$450,000

Limit Reached

Limit Reached

$150,000

Example 2

$450,000

Limit Reached

Limit Reached

$450,000

Example 3

$200,000

$100,000

$150,000

$150,000

Example 4

$200,000

$200,000

$50,000

$450,000

Example 5

$150,001

$299,999

Limit Reached

$150,000

 Importantly when you make more than a $150,000 non-  concessional contribution in Year 1, you automatically trigger the “bring forward” rule for the following two years. For example, if you make a $200,000 after tax contributions in Year 1, you can’t then start the process again in Year 3, with say, a $450,000 contribution regardless of how much you contribute in Year 2 (see Example 3-5 in the table). Your contributions for Year 3 are linked with what you contributed in previous two years. You can then only restart the process in Year 4 (see Example 4).

 Also note that concessional (before-tax) contributions in excess of the age-based limit will also count towards your non-concessional limit, while the government co-contribution does not count toward your non-concessional (after-tax) contribution limit.

 

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Annual Compliance – Investment Strategy

January 12, 2012

It is common knowledge that the preparation and lodgement of an annual tax return is part of your SMSF’s annual compliance requirements. However there are some other compliance requirements which are also important for you to understand as a trustee of your SMSF.

One example would be the preparation of Trustee minutes to document the key investment decisions you have made.

As a Trustee you must ensure all investment decisions are made in accordance with the documented Investment Strategy of the SMSF. It is recommended that investment decisions are documented detailing how they conform to the Investment Strategy of the SMSF. For example you may be acquiring blue chip shares for capital growth and tax effective fully franked dividends. In this case, one investment minute should be prepared detailing the rationale for this investment. It is not necessary for you to prepare a separate minute for every blue chip shares purchased.

Furthermore, the SMSF Trustees must review the Investment Strategy of the SMSF annually and at such other times as a significant event occurs which affects the SMSF.

This does NOT mean that each individual Investment must be reviewed. Individual Investments can be made on a daily basis (i.e. the share market can change rapidly). The Investment Review relates to reviewing the overall Investment Strategy of the SMSF. For example the SMSF Trustee may decide, over time, to change the SMSF asset allocation when moving from working to retirement. We recommend a minute be prepared detailing the results of the Annual Investment Review of the SMSF. In many cases there will be no change to the Investment Strategy and the underlying Investments making up that strategy. In this case a Minute will typically state that there has been no material change in the Investment Strategy or the Investments of the SMSF. Alternatively if there has been a material change in the Investments of the SMSF this should be minuted as part of the Annual Investment Review. For example you may be moving from an aggressive investment theme that invests predominantly in speculative and blue chip shares as you were working and required capital growth to a more capital stable income generating investment theme as you were approaching retirement or had retired.

There may be other compliance issues that relate to specific investments that you need to pay attention to when you invest your super benefit, these include: investing in the name of your SMSF not in your personal name,   ensuring that funds are not lent to members and avoiding contravening the 5% in-house asset (IHA) limit etc.

It is strongly recommended that the trustees of a SMSF conduct careful planning and review all the compliance requirements prior to making any investment decisions.

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Rollover – Transferring your super benefit between funds

December 22, 2011

A rollover is the term given to transferring your existing superannuation benefit from your current super account to your new Self Managed Superfund.

Many people currently have one or multiple existing super accounts in other superfunds with the investment choices being made by that superfund. By rolling over your benefits into your Self Managed Super Fund, you are able to hold the existing super benefits under your own control and make your own decisions about the investment choices.

Some benefits of rolling over your current super benefit are as follows.

A rollover from one complying fund to another is not considered a withdrawal therefore in the majority of cases no tax is payable.

You can utilise your existing super benefit to invest in assets of your choice through your SMSF without making additional contributions.

If you currently have multiple superannuation accounts then rolling over your superannuation into an SMSF could help increase your retirement savings by saving the fees you paid to the multiple funds.  By combining all your super accounts, you instantly stop paying unnecessary audit fees, administration fees, and accountancy fees. Over the years, this can add up to thousands of dollars!

So if you have a SMSF or are considering establishing a SMSF then think about rolling over your existing super benefits now to start to save more money!

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SMSF: Get Franking Credit Benefits

December 14, 2011

Australian shareholders are no strangers to franking credits and how they work; however, did you know that SMSFs can actually take advantage of franking credits to reduce tax liabilities?

The simple reason is:

-       SMSFs are taxed at a 15% concessional rate.

-       Company dividends are taxed at the 30% company tax rate.

SMSFs investing in traditional dividend-paying shares may earn franking credits which could be used to offset contribution and earnings tax liabilities.

It is very easy to understand by looking at this simple example.

Suppose a company earned $100 this financial year, then the net profit will be $70 after 30% company tax. If the company decides to distribute all of the profit to shareholders as a 100% franked dividend then the net cash distributed is $70 and franking credit is $30. 

Situation 1

Tom is a shareholder and he purchased all the shares of this company. If his personal tax rate is 45%, he will be liable for $15 tax. (45%*$100-$30)

Situation 2

Tom is a member of his SMSF which owns all the shares from this company. Since SMSFs are taxed at 15% concessional rate, Tom’s SMSF would receive a refund $15. (15%* $100-$30)

The above example shows that fully franked dividends have the potential to help SMSF members save a lot on tax liabilities. Therefore, as long as your personal tax rate is higher than 15%, you can start thinking about using a SMSF to take advantage of franking credits J.

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Why not purchase insurance using your super fund’s money?

December 1, 2011

One of the key purposes of super is the provision of financial benefits to your dependants in the event of your death, or benefits to you and your dependants in the event of your disability because death and disability also satisfy the “conditions of release” for your SMSF account. By taking out Insurance, you can afford to concentrate on living, knowing that if the worst happens, you and your family will be protected.

You may already have insurance however did you know that your SMSF can purchase an Insurance policy and that the Insurance premium can be paid using your SMSF’s money?

You can hold a number of types of personal insurance within your SMSF:

  • Life
  • Total and Permanent Disability (TPD)
  • Income protection
  • Trauma.

Funding insurance premiums through SMSFs can actually add more benefits to you. Firstly, some insurance premiums can be claimed as tax deductions to the super fund, providing up to an effective 15% reduction on the annual premium. If you obtain insurance using personal funds, Life and TPD (total and permanent disability) insurance is not tax deductable. You can only claim tax deduction for income protection insurance. Secondly, the premiums are paid by the super fund, rather than the member having to pay for them out of their personal funds, alleviating any cash flow concerns about how to fund the Insurance Premiums.

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SMSF Investments. What should I know?

November 24, 2011

There are many reasons why investors can be attracted to a Self Managed Superannuation Fund, such as tax efficiency, estate planning benefits, the general flexibility and control of a SMSF. Regardless of the other benefits of a SMSF, how you invest your money in your SMSF is the most crucial element determining how you are going to end up financially in retirement.  A key feature of SMSFs is the enormous range of investment choice on offer.  Almost anything you can invest in as an individual, you can also invest in within a SMSF. However, there are five steps in the Investment Process which should be followed when making investments for your SMSF in order to ensure that your SMSF complies with all the Super Laws.

Step 1: Review Investments Allowed

Prior to making an investment for your SMSF, you must ensure that the investment selected is allowed. 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 property and other collectables. It is important to understand that there are certain regulatory limitations placed on SMSF; for example, a fund cannot acquire assets from related parties of the fund or invest in in-house assets. The fund could not purchase your assets (such as your house) 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.

Step 2: Consider Investment Strategy

All SMSFs and superannuation funds in general need to have an investment strategy. Generally, this will mean having a clear objective that takes into account the risks of investments, diversification of assets, the liquidity of investments, as well as the ability of the fund to meet running costs and make payments to members once they qualify for benefits. Overall, before any investment is made you must ensure that the investment complies with your Fund’s Investment Strategy.

Step 3: Make Investments from SMSF Bank Account

Personal funds must be kept separate from the assets of the SMSF. Generally, money and assets should be clearly recorded as an asset of the SMSF. This means SMSF assets need to be registered in the name of the SMSF.

  • Cash should be kept in a separate bank account
  • Assets should be purchased with SMSF money
  • Costs should be paid out of the SMSF account
  • Any income should be paid directly to the SMSF account

Step 4: Document Investments

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 super laws. Documenting investments can be based on investment themes, which means you don’t have to document every investment. For example, you should not prepare a separate minute for every blue chip share purchased.

Step 5: Document Annual Investment Review

Trustees are required to review the fund’s investment strategy on an annual basis. A minute can be prepared detailing the results of the Annual Investment Review of the SMSF, which typically state that there has been no material change in the Investment Strategy or there has been a material change in the investments of the SMSF.

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SMSFs are cheaper than other super fund options

November 19, 2011

When superannuation funds are offering attractive returns, you don’t see much written     about the costs of investments, including the fees charged to member accounts by super  funds. Or you may think “Only 1.0% or 2.0% is charged as fee, does it make any difference?”  In fact, it does make a big difference. Fees can be a significant factor in determining the size for your final retirement benefit. Let’s consider an example.

 Example: Assume a couple, Tom and Mary, have $200,000 in combined super at present and are 40 years of age.  They earn $50,000 per annum each (increasing at 5% pa) and receive 9% superannuation contributions per annum.  Their Fund returns on average 7% per annum.  At age 65 their combined Super Benefit will be as follows:

Assuming a 1.0% pa fee:   $850,000

Assuming a 1.5% pa fee:   $750,000

Assuming a 2.0% pa fee:   $670,000

Each half a percentage point rise in fees is reducing this couple’s combined Super Benefit by almost $100,000 at retirement.  Fees count.  Let’s now assume the same couple acted early and moved to a fixed rate fee by establishing their own SMSF with ESUPERFUND.  Based on our current fee, the cost of operating the SMSF would be a fee of $699.  Assuming this fee is indexed for inflation the same client’s Super Benefit will have grown to in excess of $1,000,000.  Almost 50% or $330,000 more than the average Retail Fund that charges an average 2.0% per annum.  Fees do count.

It’s Never Too Late

It’s never too late to move to a fixed fee SMSF option.  In fact it makes just as much sense for older Australians to establish a SMSF as it does for younger Australians who act early.  This is because older Australians tend to have accumulated more in super (in many cases $1.0 million plus) when they retire.  Based on this level of Super these clients are paying between $10,000 to $20,000 each year in annual fees (assuming a percentage based fee between 1% pa and 2% pa).  We think any logical person would agree that ESUPERFUND’S fixed fee of $699 is certainly a better proposition.  Our clients use the extra $10,000 to $20,000 each year they save in fees to fund their own holiday, not the holidays of their advisors or Fund Managers!

The above example clearly demonstrates that from a fee perspective a SMSF can be an amazing vehicle to maximise your Super Benefit and your wealth in retirement.  In fact more than 2,000 Australians each month are now coming to realise this.  This is the amount of new SMSFs being created each and every month in Australia.  It’s easy to understand why.

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