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RUNNING YOUR SMSFTHE ESSENTIAL GUIDE TO

TABLE OF CONTENTS

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INTRODUCTION & SETTING UP YOUR FUND ................................................................................................................ THE BENEFITS OF DIY SUPER .......................................................................................................................... HOW TO SET YP YOUR SMSF ........................................................................................................................... TRUSTEE OBLIGATIONS ....................................................................................................................................

RUNNING YOUR FUND ..................................................................................................................................................... ADMINISTERING YOUR SUPERFUND .............................................................................................................. CREATING A DIY SUPER INVESTMENT STRATEGY ........................................................................................ A SAMPLE INVESTMENT STRATEGY ................................................................................................................ PAYING MEMBER BENEFITS ............................................................................................................................. PAYING PENSIONS .............................................................................................................................................

SMSF STRATEGIES .......................................................................................................................................................... CONTRIBUTIONS AND RECONTRIBUTIONS .................................................................................................... OWNING BUSINESS PROPERTY ....................................................................................................................... TRANSITION TO RETIREMENT ..........................................................................................................................

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THE FOUR LIFE STAGES OF AN SMSFThe life cycle of an SMSF cn be represented as follows:

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CHAPTER 1: INTRODUCTION AND SETTING UP YOUR FUND

Self-managed super funds are the fastest growing part of Australia’s superannuation industry and are the preferred vehicle for professionals and business entrepreneurs. This is due to four key reasons:

• Control• Tax effectiveness• Potential cost savings• Flexibility

TAKE CONTROL OF YOUR SUPERLet’s start with control – and in particular, control over the investments your fund makes. As the trustees, you will determine the investment strategy of the fund and select which investments the fund will acquire. Subject to some further rules, you can invest in direct property or alternative investments, such as artwork and collectables, in addition to the normal investment classes such as shares and fixed income.

For many business owners, one of the unique aspects of an SMSF is the potential ability of the SMSF to purchase the business’s property and then lease that property back to the business.

Improved control also extends to how superannuation death benefits will be distributed. While super laws govern who can receive a death benefit, SMSFs have some flexibility over how the benefit is paid and you can exercise discretion if a binding death nomination has not been lodged. Moreover, you can ensure the death benefits are paid in accordance with the wishes of your fund’s members as well as make sure the benefit is paid in the most tax effective way.

SMSFS CAN BE MORE TAX EFFECTIVEWhile all super funds are subject to the same taxation arrangements, as an SMSF allows you to control the investment selection and the timing of any investment, you can potentially exercise greater control over taxation outcomes. For example, if it doesn’t suit the members to crystalise capital gains in the portfolio and for the

THE BENEFITS OF DIY SUPER

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SMSF to pay tax, then you don’t initiate those transactions. In a retail or industry fund, these decisions are being made to optimise the position for all members, which may not always be the best outcome for your personal situation.

To take advantage of the taxation benefits of dividend imputation, you may elect to implement an investment strategy that favours the selection of shares in companies that pay a high level of franked dividends. These franking or imputation credits can then be used to offset the tax payable on other investment income (such as interest on a term deposit), and potentially the tax payable on concessional contributions. In some cases, SMSFs end up paying no tax – and in a few cases, the SMSF ends up getting a tax refund from the ATO.

The tax treatment on the transfer of assets in the accumulation phase to assets supporting the payment of a pension is also a consideration. When this occurs, there is no capital gains tax payable on the transfer of the asset, as there is no change of legal or beneficial ownership. When the asset is subsequently sold in the pension phase to fund the payment of the pension, the asset is also exempt from capital gains tax.

Let’s look at the example of Bob, who is in his 60s. His SMSF has owned a property for the past 15 years. Bob now wishes to sell the property, and as he is eligible to take a pension, he commences a pension and transfers the property over to the pension phase of his SMSF. When he later goes on to sell the property, it will be classified as a segregated current pension asset and Bob’s fund will not pay capital gains tax.

While the tax treatment above is not unique to SMSFs, not all retail or industry funds facilitate the tax free transfer of assets from the accumulation phase to the pension phase. Some funds require the member to redeem from the accumulation pool of assets and to reinvest in the

pension pool of assets, and then charge the member an ‘assessed’ capital gains tax impost.

SMSFS MAY SAVE YOU MONEYMany trustees save money by running their own SMSF. There are, potentially, no investment manager fees, no entry or exit fees, no financial adviser fees, and no weekly administration fees. There are, of course, costs involved in running your own SMSF and not all trustees will save money. If you are thinking of setting up an SMSF, read Is an SMSF right for me?

FLEXIBILITYAs you might expect from something you “run yourself”, SMSFs can potentially be more flexible than other super funds. The flexibility may extend to the implementation of more complex strategies, for example maintaining both accumulation and pension accounts for the same member, or running multiple pension accounts.

Further, should there be any legislative or taxation changes, your SMSF may be able to adapt to these changes earlier and more specifically than a large retail or industry fund, which needs to consider the interests of potentially thousands of members.

INTRO/SETTING UP

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It’s not difficult or time consuming to set up a self-managed super fund. However, as the trustee of your fund, you’ll need to make sure your SMSF complies with laws and regulations and therefore you’ll likely need some expert assistance. The good news is there are many organisations that can help you through each of the following steps. See our directory of service providers for a list of these firms.

STEP 1: ESTABLISH A TRUST STRUCTURESMSFs operate under a ‘trust’ structure. There are two basic structures for a trust: a trust with individual trustee(s); and a trust with a corporate trustee. The merits of the two structures are set out in The trustee.

If you plan to use a corporate trustee, you will need to form a special purpose company to run the fund (usually a ‘proprietary limited’ company), develop the company’s constitution, and register the company with the Australian Securities and Investment Commission. The constitution of the company should be drafted so that its sole purpose is to be the trustee of the SMSF. It will usually contain a clause along the following lines:

“The sole purpose of the Company is that of being the Trustee of a Self Managed Superannuation Fund and if any provisions of this Constitution is in conflict with a provision of the Superannuation Industry (Supervision) Act or a regulation made pursuant to that Act, the provision of that Act prevails. The Company must not be the trustee of any other superannuation fund or engage in any business.”

STEP 2: OBTAIN A TRUST DEEDThe trust deed sets out the rules and conditions under which the fund will operate. The deed should be prepared by qualified legal practitioners and signed and dated by you and any other trustee. The trust deed deals with issues such as:

• Who can be a member of the fund• Trustee’s right to amend the trust deed

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HOW TO SET UP YOUR SMSF

• Who can make contributions to the fund, and what types of contributions

• Ability of members to split concessional contributions with their spouse

• The types of assets the fund can acquire

• When and how benefits can be paid• Acceptance of binding death benefit

nominations• To whom death benefits can be paid• Rules (if applicable) to establish and

administer fund reserves• When and how the fund should be

wound up.

STEP 3: SIGN A TRUSTEE DECLARATIONThe law requires each trustee or director of a corporate trustee to sign a trustee declaration within 21 days of becoming an SMSF trustee or a director of an SMSF corporate trustee. The completed declaration must be held for at least 10 years and made available to the Australian Taxation Office on request.

The declaration affirms the trustee’s understanding of their duties and responsibilities, the ‘sole purpose’ of the fund, the investment restrictions, acceptance of contributions and paying benefits, and their administrative and compliance obligations. A trustee declaration can be obtained from the ATO by clicking here.

STEP 4: ELECT FOR THE FUND TO BE REGULATEDYou must elect for the fund to be regulated within 60 days of the fund being legally established. This notice is non-revocable and advises the ATO that the fund will be entitled to concessional taxation treatment.

This step also involves:• Obtaining a Tax File Number (TFN)• Obtaining an Australian Business

Number (ABN)• Optionally, registering for GST. Most

SMSFs will not need to register for GST

This step is easy to complete and can be done by either of the following two ways:

• Going online to the Australian Business Register at www.abr.gov.au; or

• Completing the ‘ABN registration for superannuation entities’ form NAT 2944 available from the ATO by clicking here.

An SMSF must register for GST if the fund has taxable supplies greater than $75,000. The most common situation where this occurs is where the fund leases a commercial property (that is, the fund owns the property and leases it to another party). Due to the additional compliance costs in recording, reporting and paying GST, the vast majority of SMSFs do not register for GST. Your accountant can tell you whether or not you should register.

STEP 5: NOMINATE MEMBERS AND RECORD EACH MEMBER’S TFNWhen you create an SMSF, you become the trustee responsible for the care of the fund. But a fund also needs a member to receive the benefits. Therefore you need to nominate yourself as a member. If you share your fund with another trustee, such as your spouse, this person also needs to become a member. In the case of SMSFs, trustees and members are essentially the same people, but the roles are vastly different and referred to separately.

For a corporate trustee, the members will be made up of the directors of the company. Members should complete an application to join the newly created fund.

You must also obtain and record tax file numbers for each member. If the member has not quoted their TFN, the fund can’t accept certain contributions paid on their behalf (personal and spouse contributions), and the fund will pay extra tax on concessional contributions made to the member’s account (like employer contributions, salary sacrifice and personal contributions where the member claims a tax deduction).

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INTRO/SETTING UP

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STEP 6: OPEN A BANK ACCOUNTYour SMSF will need a bank account to accept contributions, rollovers of super benefits and investment earnings. The fund’s assets must be kept separate from those of the trustees – for example, your personal bank account – so opening a separate bank account for the fund is non-negotiable. The account can be with a bank, a building society, credit union or even a cash management trust, provided it meets the requirements set out in the fund’s investment strategy.

STEP 7: PREPARE AN INVESTMENT STRATEGYSection 52 of the SIS Act requires trustees to ‘formulate and give effect to’ an investment strategy for the fund, which takes into account all the fund’s circumstances, including, but not limited to:

• Risk and return• Diversification• Liquidity• The ability of the fund to discharge

its liabilities

An investment strategy is a written plan that sets out the fund’s investment objectives and how you plan to achieve them. There is no prescribed format for an investment strategy. However, it’s important that the strategy reflects your circumstances and accordingly takes on the appropriate level of risk. Have a look at our sample investment strategy on page 14 or have a financial planner help you prepare one.

STEP 8: SELECT AND APPOINT SERVICE PROVIDERSEstablishing and maintaining an SMSF requires you to carry out a range of duties for which you’ll need the help of service providers. Some of these will be on a one-off basis when the fund is set up, while others will be on a regular or annual basis. Service providers include:

• Accountants and auditors• SMSF administration providers

• Financial advisers and planners• Qualified valuers (for niche and

specialised assets)• Software providers

There is some overlap in roles between the service providers, so it’s not always possible to categorise the tasks by provider group. For example, many accountants will help with the administration of the fund, such as preparing annual member statements, while many administration providers will prepare the fund’s tax return. The key functions you or a service provider will have to manage include:

• Preparation and review of the investment strategy

• Asset class selection, review and advice

• Investment selection, review and advice

• Establishment and maintenance of fund records

• Account for contributions, rollovers and benefit payments

• Account for asset purchases, sales, investment income and expenses

• Prepare the financial accounts of the fund

• Prepare annual tax return• Remit tax payable, including any PAYG

instalments,• Prepare member statements• Arrange for an annual compliance and

financial audit• Update and amend trust deed

(if required).

STEP 9: APPOINT AN AUDITORYou can do everything in the above list to fulfil your requirements as a trustee, except carry out your own audit. For this, you must appoint an approved SMSF Auditor who is registered with ASIC.

You are required to appoint an approved auditor at least 30 days before the due date of the SMSF’s annual return. This is October 31 for existing funds and February 28 for new funds, although tax agents may have later dates. Your auditor has obligations, which include:

• To provide you with an audit report before the due date of the SMSF’s annual return

• To raise with you and the ATO any concerns about your fund’s financial position or its compliance with the super laws

• To report to the ATO directly on certain contraventions of the super laws

As you can’t lodge the annual return to the ATO without completing the audit, it’s important that the preparation of the financial accounts and the appointment of the auditor are completed within 90 days of the end of the financial year.

TIPYour investment strategy should be in writing so you can prove that your investment decisions comply with it and the super laws. It should also be reviewed on a regular basis – preferably at least once every 12 months.

ACCEPTING MEMBER CONTRIBUTIONSThe SIS Act requires trustees to determine whether a member has met the criteria to be able to contribute to super. The criteria for a member to contribute, or for a contribution to be made on their behalf, generally depend on the member’s age, their employment status, and the type of contribution to be made.

Further, there is a cap on the amount of contributions that a member can make in any one financial year (or that can be made on their behalf). If the cap is exceeded, the member will be liable to pay additional tax. Known as the ‘concessional cap’ and the ‘non-concessional cap’, these caps work as per the table below.

Trustees are required to allocate super contributions to members’ accounts within 28 days after the end of the month in which they were received. For more on types of contributions and contribution caps, please read Making Contributions.

MANAGING YOUR INVESTMENTSTrustees must formulate an investment strategy. Although there is no regulatory requirement for the strategy to be written, a written document will make it much easier to demonstrate to both the fund’s auditor and the ATO that you have considered all the relevant issues.

The issues that the strategy needs to address include:

TRUSTEE OBLIGATIONS

As a trustee, you must comply with the minimum requirements set out in the Superannuation Industry (Supervision) Act and include these requirements in your SMSF’s trust deed. The rules require you to:

• Act honestly in all matters concerning the fund;

• Exercise the same degree of care, skill and diligence as an ordinary prudent person in managing the fund;

• Act in the best interest of all fund beneficiaries;

• Keep the money and assets of the fund separate from other assets (such as the trustees’ personal or business assets);

• Retain control over the fund;• Develop and implement an

investment strategy;• Not enter into contracts or behave

in a way that hinders trustees from performing or exercising their functions or powers; and

• Allow members access to certain information

In addition to these general requirements, there are a number of specific requirements that we’ll now discuss in detail.

COMPLY WITH THE SOLE PURPOSE TESTThe ‘sole purpose test’ requires super funds to be maintained for the sole purpose of providing its members with retirement benefits. Read more in Key rules.

• INVESTMENT OBJECTIVES – what is the investment objective which is going to meet members’ retirement needs? Is it, for example, to exceed inflation by a certain amount, or to accumulate a certain level of assets? It is important to set the investment objective of the fund as it will provide guidance and direction for the investment strategy.

• RISK AND RETURN – what level of risk is each member comfortable with having their benefits exposed to? Is the fund targeting a ‘high growth’ strategy? Or does it want a more ‘balanced’ portfolio?

• INVESTMENT TIME FRAME – investment time frames will differ for each member and will affect the types of investments that are appropriate. Factors such as the member’s age, years to retirement, and the type of benefit to be paid will all have an impact on the investment time frame.

• DIVERSIFICATION – how should investments be spread across the various asset classes? Is there a limit on the size of any one investment to no more than a certain proportion of the fund’s overall assets?

• LIQUIDITY – how quickly can the fund access cash to, for example, pay a pension? What other liabilities or expenses may fall due? What is the appropriate level of cash to have on

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INTRO/SETTING UP

CONTRIBUTION DEFINITION EXAMPLES CAP

CONCESSIONAL Contributions where the person making the contribution has already claimed a tax deduction, and will thus be taxable in the fund.

• Employer• Salary Sacrifice• Self-employed (where tax deduction claimed)

$30,000 if under 50; $35,000 if 50 or over

NON-CONCESSIONAL Contributions where the person making the contribution has not claimed a tax deduction, and will thus not be taxable in the fund.

• Personal contributions• Spouse

$180,000 ($540,000 over a rolling 3 year period if under 65)

* If the member is over 65, he/she will need to meet the employment tests.

on a regular basis. Triggers for a review would include the departure or death of a member, the addition of a new member, or the retirement of a member. In any event, the strategy should be reviewed at least once a year.

You need to stick to your investment strategy. Asset performance should be monitored and measured and a formal investment review should be conducted at least every six months. If the circumstances of the members change, or the investment objectives change, the investment strategy can be easily changed at any time. The only requirement is that the new strategy reflects the changed investments of the fund, and that the changes are recorded (preferably in a trustee minute).

You are now also required to consider whether the fund should arrange insurance for one or more members. For

hand? And how long would it take to sell the fund’s assets?

It should be noted that consideration of the issues above may lead the trustees to decide that they need to formulate separate investment strategies for different members of the fund, and then hold the assets in different pools for the different members. For example, if one member is in the accumulation phase with some years to go before reaching retirement age, and another member is in the pension phase and requires more income-oriented investments, it is quite normal to have different investment strategies and run individual pools of assets.

When an investment strategy has been established, the trustees need to ensure that they review the investment strategy

more about investment strategies, please read Creating an investment strategy on page 12.

PAYING BENEFITSPaying benefits is an important part of your duties as a trustee. Benefits can generally be paid in two ways: as a lump sum or as an income stream.

The only compulsory cashing out of benefits is the requirement to pay a member’s death benefit as soon as practicable after the member’s death. The payment of all other benefits is voluntary – that is, at the member’s discretion, subject to the member meeting a ‘condition of release’.

There are a range of rules relating to when a member can and can’t access their super. For more on this, read Paying benefits.

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CHAPTER 2: RUNNING YOUR FUND

When you become an SMSF trustee, you take on the administrative responsibilities designed to make sure your fund complies with the law. These responsibilities include arranging an annual return and audit, valuing the fund’s assets, record keeping and withholding tax.

LODGING YOUR ANNUAL RETURNAll SMSFs must lodge an annual return with the Australian Tax Office. If you’re not using a tax agent, your lodgement date will be October 31 for existing funds and February 28 for funds that commenced in the preceding financial year. If you use a tax agent, you should contact the agent to find out your submission date.

Annual returns prepared by a tax agent are generally due by 15 May.

The annual return comprises:• The annual financial and

compliance audit• Member contributions information

To complete the fund’s tax return, you, your accountant or tax agent will need all your investment records, contribution receipts, contract notes, dividend notices, receipts and other documents to calculate the fund’s taxable income.

You will need to appoint an approved auditor for the annual financial and compliance audit. You should appoint an auditor early, preferably before the end of the financial year, because you can’t lodge your tax return until the auditor has given your fund’s financial statements the all clear. Your auditor must be an approved SMSF Auditor registered with ASIC.

The audit involves a financial audit and a compliance audit. With the former, the auditor will check that the SMSF’s financial statements and accounts represent an accurate description of the fund’s financial position. To do this, your auditor may ask to see valuation reports, bank statements, title deeds and dividend receipts. With the compliance audit, your auditor will verify that the SMSF has complied with the SIS

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Act at all times during the year.The ATO nominates different sections

of the act that auditors must specifically address each year. If your auditor detects a breach, they are required to report that breach to you in writing so that it can be rectified. Importantly, if the breach is material, your auditor is required by law to report it directly to the ATO.

Your auditor will provide you and any other trustees with a written audit report.

The annual return also includes reports on member contributions. You’re required to report on the total amount of, and types of, contributions for each member, including any contributions rolled into the SMSF during the year. The ATO uses this information to see if any members are entitled to a government super co-contribution, have exceeded their contributions caps, and to check employer compliance with the super guarantee.

Finally, your annual return includes the ATO’s Supervisory Levy, which, for the 2013/14 Return is $388 and for the 2014/15 Return, $259. For more

information about completing your annual return, the ATO’s NAT 71606 Self Managed Superannuation Fund Annual Return Instructions’ is available on the ATO’s website.

VALUING YOUR SMSF’S ASSETS AT MARKET VALUEYour SMSF’s assets must be valued at market value on an annual basis on the fund’s reporting date, which will generally be June 30. This ensures that the members’ benefits, as reported in their annual statements, reflect all market value movements over the period. It also allows you to monitor and review investment performance and asset allocation, confirm that the fund is not in breach of the ‘in-house assets’ rule, and make sure the fund has sufficient resources for the payment of any benefits.

Determining the market value is straightforward for many assets like listed securities (shares and fixed income securities), managed funds, and term deposits and cash. These assets are

RUNNING YOUR FUND

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valued at their last traded price on the last business day of the financial year. If the asset is a managed fund, the net asset value is supplied by the manager. For business real property or exotic assets such as collectables, establishing the market value can be more difficult and a qualified valuer may be required.

The ATO has published a guide entitled ‘Valuation guidelines for self-managed superannuation funds’, which outlines their position. The ATO does not intend that obtaining a market valuation should be onerous or expensive, however a qualified external valuer may be required where the value of the asset represents a significant proportion of the fund’s value or the nature of the asset indicates that the valuation is likely to be complex.

When valuing property assets, the ATO suggests that relevant considerations may include the value of similar properties, the

amount paid for the property in an arm’s length market, independent appraisals and for commercial properties, net income yields. If the fund owns an investment property, valuations could be obtained from local real estate agents, whereas if it’s a commercial property, you may require the services of a qualified property valuer.

KEEPING ACCURATE RECORDSThe ATO requires that trustees keep accurate records for prescribed periods. The following records must be kept for a minimum of five years:

• Accounting records that detail the transactions and financial position of the SMSF

• Annual returns• Copies of any other returns or

statements provided to the ATO or other super funds (eg. Rollover Benefits Statement)

These records must be kept for a minimum of 10 years:

• Minutes of trustee meetings• Trustee declarations• Members’ written consent to act as

trustees• Copies of all statement or reports

given to members

You are also required to notify the ATO within 28 days if there is any change in the SMSF’s details, including:

• Contact details (contact person and phone number)

• Address• Change in the trustees, members, or

directors of the corporate trustee

You can notify the ATO by using the online service at www.abr.gov.au if you have a primary digital certificate, or by downloading and lodging NAT 3036 form ‘Change of details for superannuation entities’.

WITHHOLDING TAXIf you pay a pension or lump sum benefit to a member under 60 years old, then you’ll need to withhold tax. If the member is over 60 years old and the benefit is paid from an untaxed source, you’ll also need to withhold tax. Lump sum death benefits that are paid to non-dependents are also subject to withholding tax.

If the above scenarios apply, the first step is for the fund to register for pay as you go withholding tax (PAYG). This needs to be done as soon as you know that you will be making a payment that requires you to withhold tax. If your fund has an Australian Business Number (ABN), you can register for PAYG at www.abr.gov.au. Make sure to include the member’s Tax File Number (TFN), otherwise you may have to withhold tax at a higher rate.

As trustees, you will need to issue payment summaries to the members who had withholding tax deducted from their benefits. In the case of pension payments, the payment summary needs to be issued by July 14 following the end of the financial year in which payment is made. For a superannuation lump sum, the payment summary is required to be issued within 14 days of making the lump sum payment. Finally, a ‘PAYG withholding payment summary statement’ (NAT 3447) should be forwarded to the ATO by August 14.

CREATING A DIY SUPER INVESTMENT STRATEGY

Once you’ve set up your self-managed super fund, you’ll need to work out an investment strategy that fits with the retirement goals and circumstances of you and anyone else in the fund. The investment strategy will not only help you manage your investments, but it can also serve as a useful document if the investment decisions of the fund are ever called into question by an auditor. It should include:

• Investment objectives• Risk and return• Investment timeframe• Diversification• Liquidity

You will also need to consider whether one or more members should take out insurance cover.

An investment adviser or financial planner can help you prepare an investment strategy.

Alternatively, you can prepare your own by following these steps:

STEP 1: SET INVESTMENT OBJECTIVESWhat’s your investment objective and how will it support your retirement plans? Start by answering some key questions, such as:

• How old are the SMSF’s members? Are they in accumulation or pension phase? If the former, how many years until they retire?

• What assets do the fund’s members have both inside and outside the fund?

• How much income will you need in retirement?

• What level of investment risk are the members prepared to accept?

The answers to these questions should help you determine the investment objectives, which should be measurable, achievable and able to be communicated to the members of the fund. Examples of these objectives could be a simple statement, such as: “The fund will outperform inflation by 3% per annum

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RUNNING YOUR FUND

over the long term,” or a more complex statement, such as: “The fund will keep pace with inflation while avoiding a negative return in any one year.”

STEP 2: DEFINE ASSET WEIGHTINGSAs a trustee, you’ll need to decide where to invest your assets in the same way professional fund managers carefully determine how to allocate funds across the various asset classes. The investment plan should clearly state the types of asset classes you want to invest in – like equities, cash, fixed interest and property – as well as the percentage weightings (that is, the percentage of the fund that will be invested in that asset) and benchmarks for each asset class.

Different SMSFs will choose different asset class weightings based on their member’s investment timeframe, their level of risk, their need to protect capital, and potentially, their medium-term investment perspective. A fund that is prepared to take on more risk and has a longer investment timeframe is more likely to have a higher proportion of ‘growth’ oriented assets, such as equities and property, while a fund where capital protection is important will most likely have a higher proportion of ‘income’ oriented assets such as cash and fixed interest securities.

The percentage ranges for the various asset classes should be set wide enough to allow for day to day market variation, although not so wide as to render them useless as a monitoring tool.

STEP 3: DETAIL ANY OTHER SPECIFIC RULESAfter the asset allocation has been set in a way that will best meet your investment objectives, the final step is to detail any other investment rules or restrictions you wish to impose on the fund. These rules can be used to foster diversification, maintain adequate liquidity, or strengthen the probability of delivering

strong after-tax returns.Examples of these rules could be:• “For the Australian equities portfolio,

the trustees must ensure that there are at least five different securities from different sectors in the portfolio.” (Diversification)

• “No single asset or security in the Fund will represent more than 25% of the fund’s total assets.” (Single asset risk)

• “The Fund will ensure that, at all times, it has at least $5,000 in a cash deposit with an ADI available within 24 hours notice.” (Liquidity)

• “The Fund will look to take advantage of dividend imputation by having a preference for companies that pay fully-franked dividends.” (Tax efficiency)

• “The Fund will not invest in collectibles such as works of art, rare coins, stamps etc. or other assets where a market value cannot be readily established.” (Defining what assets the Fund can’t invest in)

See our sample investment strategy on page 14.

WHAT ELSE SHOULD I CONSIDER?Your investment strategy should be properly documented, as a written document will make it much easier to demonstrate to the fund’s auditor (and potentially the ATO) that the trustees have considered all the relevant issues. Moreover, where the trustees have invested in a single (or very material) asset such as business real property, or in “exotic” assets such as artworks or collectibles, a written strategy will assist in demonstrating that the relevant issues have been considered and that the investment is not ad hoc or reckless.

If the SMSF is to invest in a single asset or predominately a single asset (such as business real property), it is advisable for the trustees to formally record in the minutes of a meeting that they reached

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the decision after having considered the relevant issues. These would include:

• The investment objectives of the fund;• The expected return from the asset;• The need for diversification given the

investment timeframe and level of risk of the asset;

• The need for liquidity given the age of the members and the expected time when benefits would start to be paid; and

• The fund’s ability to meet ongoing operating expenses from the investment income on the asset

Notwithstanding what is written in the investment strategy, trustees must always comply with the SIS Act investment rules. These rules are lengthy and sometimes

quite complex, and a breach of one of these rules could lead to your SMSF being deemed ‘non-complying’ by the ATO. An intentional or reckless breach could further leave the trustees being liable to both civil and criminal penalties. To avoid problems, trustees should pay particular attention to the ‘in-house assets’ rule.

INSURANCESTrustees are now required to consider whether the fund should take out insurance cover for one or more of its members. Insurances could be life cover, trauma cover, TPD (temporary or permanent disability) or income protection.

This requirement doesn’t mean that your fund needs to take out insurance – it just means that you need to consider

whether to do so, or not. If you decide not to take out any insurance covers, it is probably a good idea to formally record this decision in a trustee minute every year, the same minute you make after reviewing the adequacy of your investment strategy.

KEEP YOUR STRATEGY UP-TO-DATEFinally, your investment strategy should not be a static document – it needs to be reviewed at least once a year, and certainly when the personal circumstances of any of the members change to ensure that it is still appropriate. These circumstances will include the death or departure of a member, the addition of a new member and the retirement of an existing member.

INVESTMENT STRATEGY FOR THE ABC SUPER FUND, 15 JULY 2014The ABC Super Fund has the following members:

A SAMPLE INVESTMENT STRATEGY

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MEMBER AGEEXPECTED

RETIREMENT AGE

YEARS TO RETIREMENT

HEALTH

John Smith 50 65 15 Excellent

Mary Smith 51 65 14 Excellent

John and Mary are both in the accumulation phase and are seeking long-term growth from their superannuation investments.

INVESTMENT OBJECTIVESMedium term (three to five years)

• To maximise the value of the members’ savings;• To achieve a medium-term return of inflation (as measured by the Consumer Price Index) plus 3.0%pa over a rolling five-

year period, that historically equates to the rate of return that may be expected from a blended ‘balanced’/’growth’ portfolio (approximately 70% growth assets); and

• Where desirable and prudent, take advantage of dividend imputation to minimise any tax payable by the Fund.

Short term (two years or less)• To ensure sufficient liquidity to meet operating expenses and taxation liabilities as they fall due.

INVESTMENT STRATEGYThe investment strategy is the method to be implemented in order for the Trustee to achieve the investment objectives. The investment strategy of the Trustee is to invest the fund’s assets in the following products:

PORTFOLIO RANGE BENCHMARK

Australian shares 40% - 60% 50%

International shares 0% - 20% 10%

Property 0% - 15% 10%

These ranges are purely indicative and the Trustee may vary the allocations at any time if satisfied that conditions warrant such a change.

RUNNING YOUR FUND

In arriving at the investment strategy, the Trustee considered the following:

1. RISKBank Account/Term Deposit/Bank BillsThe Trustee invests in a variety of short-term money market securities and deposits. These are either Commonwealth Government Guaranteed, or issued by an Authorised Deposit Taking Institution. With the latter, deposits up to $250,000 (on a per name/per institution basis) are guaranteed under the Financial Claims Scheme. Accordingly, the Trustee considers that these investments are reasonably risk free.

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SharesThe main risk in shares is the volatility in the share price. With respect to risk, the Trustee will ensure that the portfolio is reasonably well diversified (both across industry sectors and in the number of securities), which should help to reduce the overall volatility in the portfolio. The Trustee also intends to hold the shares for the medium term (> 5 years) and should not be required to sell in the short term.

Managed fundsExposure to other asset classes such as fixed interest, international shares, property and international fixed interest will generally be accessed through the use of professional fund managers (and managed funds or exchange traded funds). The main risk with investing in managed funds is the volatility in the unit price. With respect to the risk, the Trustee may select, where appropriate, a range of professional investment managers and funds to diversify the Fund’s portfolio. In some asset classes, the Trustee may invest in an “index style” fund, to minimise the risk of ‘investment manager selection’. The Trustee also intends to hold the investments in the various funds for the medium term (>5 years) and should not be required to sell (redeem) in the short term.

2. RETURNBank Account/ Term Deposit/Bank BillsGenerally, less than $25,000 will be kept in the ‘high yield’ bank account in order to maximise returns in the other asset accounts.

The Fund should achieve returns of approximately the 90-day bank bill rate from these investments.

SharesThe exposure to shares should provide an effective hedge against inflation over rolling five-year periods. The average dividend yield is around 4%, which is enhanced through the benefits of dividend imputation and capital growth.

Managed fundsExposure to other asset classes such as fixed interest, international shares, property and international fixed interest will generally be accessed through the use of professional fund managers (and managed funds). While these investments should provide an effective hedge against inflation, the average return will vary according to the level of growth assets in the various managed funds. The Trustee expects distributions from the managed funds to be around 4.0%, which may be enhanced through capital growth, occasional distributions of capital gains and some dividend imputation.

3. DIVERSIFICATION OF INVESTMENT STRATEGYThe Trustee has considered the diversification of the Fund’s investments and is of the opinion that the strategy is appropriate given the size of the Fund in terms of both investments and the number of members.

4. LIQUIDITY OF INVESTMENT STRATEGYThe Trustee is of the opinion that the investment strategy is structured in such a manner that the Fund is sufficiently liquid to discharge its current and future liabilities.

Short term liabilities include tax liabilities, annual return fees, audit fees and investment adviser fees.The Trustee does not expect membership of the Fund to fall in the short term, as a consequence of the small number of members

and the close relationship between members. If, however, a member terminates his or her membership, the Fund can choose to liquidate assets if necessary, or pay benefits ‘in-specie’.

Your SMSF can begin to pay benefits once you or another member meets a ‘condition of release’, which for most people is when you reach retirement age and permanently retire from the workforce. Most benefits are paid voluntarily. However, in the event of a member’s death, a compulsory payment must be made as soon as possible.

THREE TYPES OF MEMBER BENEFITSPreserved Benefits: Since July 1, 1999, all contributions made to a fund by or on behalf of a member and all investment earnings derived by a fund in the accumulation phase are preserved benefits. These benefits can only be accessed (cashed out through a lump sum or payment of a pension) when a condition of release is satisfied.

Restricted non-preserved benefits: These types of benefits were most often created by a member making a contribution to an employer-sponsored super fund prior to 1 July 1999. These benefits can be withdrawn in the same circumstances as preserved benefits (that is, when a condition of release is met), but they can also be withdrawn when the member terminates their employment with the employer, which can be before preservation age.

Unrestricted non-preserved benefits: When a member has met a condition of release and elects to keep all, or part, of the benefits in the fund, these benefits are classified as unrestricted non-preserved benefits. Investment earnings while in the pension phase are allocated to this category. As the member has previously met a condition of release, these benefits can be paid to the member on demand.

When processing a rollover from another fund to your SMSF, the preservation status of the benefits is maintained.

CONDITIONS OF RELEASETo access your SMSF’s preserved benefits or

restricted non-preserved benefits, a member must meet at least one of the conditions of release. These are:

• Retires (SIS definition) and has reached preservation age

• Reaches age 65• Terminates employment on, or after, age

60, irrespective of future work intentions• Commences a ‘transition to retirement

pension’• Suffers a terminal medical condition• Suffers permanent incapacity• Suffers temporary incapacity• Faces severe financial hardship• Has compassionate grounds• Is a temporary resident who is

permanently departing Australia

AGE AND RETIREMENTRetirement depends on a member’s age, and for members under 60, their future employment intents. A retired member cannot access their preserved benefits before they reach their preservation age. Your preservation age depends on when you were born: (see bottom right chart).

Under age 60If a member has reached their preservationage and is under age 60, ‘retirement’ occurs when an arrangement under which they were gainfully employed has come to an end (this can have occurred at any time, including prior to their preservation age). As the trustee, you must also be reasonably satisfied that the member does not intend to be gainfully employed in the future for more than 10 hours a week. A signed statement from the member confirming their “intent” not to be gainfully employed should be obtained and retained by the trustee.

After age 60When a member has reached 60, ‘retirement’ can occur when the member ceases an employment arrangement, irrespective of their intention to continue working. This means that from age 60, a member simply needs to leave a job to gain access to the accumulated superannuation benefit.

If a member aged 60 or older gives up one employment arrangement but takes up another, the member may cash all preserved and restricted non-preserved benefits up until the end of the former employment arrangement. Benefits relating to the new job remain preserved until a further condition of release is satisfied.

Reaching age 65When a member reaches 65 years old, they may cash their benefits at any time. There are no restrictions and all benefits are automatically converted to unrestricted non-preserved benefits.

USING A TRANSITION TO RETIREMENT PENSIONA member who is aged under 65 and who has reached their preservation age can access their super benefits through a transition to retirement pension without having to retire from the workforce. Transition to retirement pensions are

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PAYING MEMBER BENEFITSRUNNING YOUR FUND

DATE OF BIRTH PRESERVATION AGE

Before 1 July 1960 55 years

1 July 1960 – 30 June 1961 56 years

1 July 1961 – 30 June 1962 57 years

1 July 1962 – 30 June 1963 58 years

1 July 1962 – 30 June 1963 59 years

After 30 June 1964 60 years

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account based pensions and subject to the following rules:

• You must take out at least the minimum pension payment of 4.0%;

• You can’t take out more than 10.0% of the account balance (as measured at commencement and each 1 July); and

• Benefits cannot be commuted (converted to a lump sum) unless another condition of release (eg. retirement) is satisfied.

TERMINAL MEDICAL CONDITIONA member may access benefits as a lump sum if two doctors certify that the member is suffering from a medical condition that will likely result in death within 12 months.

TERMINATING GAINFUL EMPLOYMENTWhen a member of your SMSF terminates paid employment with a standard employer of the fund, they can access their super benefits in certain circumstances. These are:

• If the member’s preserved benefits are less than $200 in total (no cashing restrictions); or

• The member can access their restricted non-preserved benefits; or

• The member can access their preserved benefits but only if taken as a non-commutable lifetime pension or annuity; or

• They retire (see above).

PERMANENT INCAPACITYPermanent incapacity means that the member is unlikely, because of ill-health (whether physical or mental), to ever engage in gainful employment of the type for which the member is reasonably qualified by education, training or experience. At least two medical practitioners will need to certify this.

TEMPORARY INCAPACITYSubject to the governing rules of the fund, a member may access their benefits where you are satisfied that the member has temporarily ceased work due to physical or mental ill-health that does not constitute permanent incapacity. The benefit can only be accessed by the member as a non-commutable income stream for the period of the incapacity.

SEVERE FINANCIAL HARDSHIPSubject to the governing rules of the fund, benefits may be released on the grounds of severe financial hardship. Different conditions apply depending on the age of the member. If the member is under their preservation age plus 39 weeks (eg. less than 55 years and 39 weeks old), the member could potentially access a single lump sum payment of up to $10,000 in a financial year. The member would have to have received government income support payments for a continuous period of 26 weeks, and the trustee would need to be satisfied that the member is unable to meet reasonable and immediate family living expenses.

If the member is over their preservation age by at least 39 weeks, the member could potentially access all their benefits. The member would have to have been in receipt of government income support payments for a cumulative period of at least 39 weeks since reaching their preservation age and additionally was not gainfully employed (for at least 10 hours per week) on the date of the application.

Applications to receive benefits on severe financial hardship grounds must be made directly to the trustees. You, as the trustee, should ensure that the member has documentary evidence such as bank statements and bills to support their claim that they are unable to meet immediate family living expenses.

COMPASSIONATE GROUNDSIn very limited circumstances, benefits may be released on specified compassionate grounds when the member does not have the financial capacity to meet an expense, such as to pay for medical treatment for a life-threatening illness, or to make a payment on a loan to prevent foreclosure of the member’s family home. Applications for approval of release on compassionate grounds must be made directly to the Department of Human Services. Your fund cannot release any benefits without the approval of the Department.

PAYG TAX ON BENEFITSWhen a member takes a benefit, you may be required to withhold tax from the payment under the PAYG system. Typically, this will occur when the member is under 60 years old and receiving a pension. You will need to register for PAYG and remain

registered until either the pension payment stops, or the member turns 60 (at which point PAYG reporting is not required). If a member under 60 takes a one-off lump sum benefit, trustees can register for PAYG and pay the benefit, and then de-register to avoid the ongoing PAYG reporting obligations.

TRUSTEES MAY BE LIABLE IF PRESERVATION RULES ARE BREACHEDOne final note of caution: there are severe penalties that can be applied if you allow a member to improperly access their super benefits in contravention of the preservation standards. Trustees may be fined up to 100 penalty units ($17,000) and the fund could lose its complying status.

PAYING PENSIONS

The purpose of paying a pension is to provide an income. In order for a super fund to pay that income it must earn an income. Without this income, the fund would have to sell assets.

Technically, there is nothing wrong with selling assets to pay an income except that you might find that having to sell assets at a certain time might force you to accept a lower price for the asset than you would prefer. The process of earning an income to make pension payments means that the asset allocation should probably be different than that used to accumulate money for retirement.

In retirement you should generally focus on investments that will pay the super fund sufficient income to cover fund expenses and pension payments. In an ideal world your assets would hopefully be generating some excess income above the cashflow requirements of the fund. This means you need to carefully prepare a budget for your super fund’s cash flow requirements each year before that year begins. While you need to focus carefully on cash flow, your pension’s asset allocation also needs to generate capital growth. Without this capital growth, your pension will not last long.

TYPES OF SUPER INCOME STREAMSSince 20 September 2007, two forms of complying super income streams are allowed: account-based income streams, and non-account based income streams.

Account-based income streams (which are mainly pensions or allocated pensions) are covered in this section. The assets supporting the pension are directly attributable to the member, and the member’s account balance rises/falls as the market value of the assets change.

Non-account based income streams do not have an account balance attributable to the member. They include immediate annuities which are payable for a fixed term or for life (read All about annuities).

WHAT PENSIONS CAN BE PAID FROM AN SMSF?Generally, all new account-based income streams paid by SMSFs have to be account-based pensions (ABP). These were previously known as ‘allocated pensions’. It is possible to begin paying another type of pension called a Term-Allocated Pension, however this will only apply in some rare cases where a person has an old defined benefit pension that has a financial status deemed unsatisfactory by an actuary requiring the defined benefit pension to be commuted and a new pension commenced. This is a complex area and seeking good advice is essential.

FEATURES OF AN ACCOUNT-BASED PENSIONThe major feature of ABPs is that each financial year a minimum income has to be paid based on the pensioner’s age (see table at left).

This is the minimum that can be paid and is worked out each July 1. The percentage is a percentage of the member’s account balance with assets valued at net market value. Note: the minimum payment usually differs in the first year that a pension commenced because it is adjusted to reflect the part

of the year for which payments were made. For example, suppose a pension commenced on January 1, 2014 for a super fund member who was aged 65 at the time. This means that the pension period covered 180 days of the financial year and the minimum pension payment would therefore be:

(180 DAYS÷ 365 DAYS) X 5%= 2.47%

So, in the first year, the pension payments have to be at least 2.47% of the member’s initial pension account balance. If they’re not made, the super fund is deemed to have breached an important super law. These pension payments must be made at least once a year, however they can also be paid more frequently, such as on a monthly or weekly basis.

DEATH BENEFIT OPTIONSDepending on the wording of your super fund’s trust deed and the rules governing your pension, you may be eligible to nominate a reversionary pensioner. If you nominate a reversionary (who must be your spouse) then your pension will continue to be paid to them. Often the nominated reversionary takes precedence over any binding nomination that you complete.

Another alternative is to complete a binding nomination which pays your survivors a new pension which begins to be paid out of your remaining pension assets.

STEPS TO STARTING A PENSION1. Deal with all members at arm’s length2. Check your fund’s trust deed – make

sure you can pay a pension (don’t rely on your fund’s general compliance or catch-all clause)

3. Why is the pension being paid?4. Prepare a Product Disclosure

Statement5. The member must formally accept the

pension’s terms and conditions

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PENSIONER’S AGE

MINIMUM INCOME

PAYMENT

Under 65 4%

65 – 74 5%

75 – 79 6%

80 – 84 7%

85 – 89 9%

90 – 94 11%

95 –> + 14%

RUNNING YOUR FUND

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6. The trustee confirms in writing the nature of the pension

7. The trustee needs to fully document the pension for its own records including deciding to segregate assets (for record keeping and tax purposes)

8. If necessary, the super fund applies to become a PAYG withholder – this will be relevant if the pensioner is under 60 at the date income is paid

9. Pay all pension income payments on time.

TAX EXEMPTION ON PENSION ASSETSOne of the main attractions in paying a pension is that the assets backing the pension are tax free (except for defined benefit and other special circumstances).However, any franking credits earned on pension assets are still paid.

KEEPING PACE WITH INFLATIONIf you pay yourself the minimum income payments from an account-based pension then your pension payments will nearly always not keep pace with inflation. You should factor this into your forward planning.

CAPITAL CAN’T BE ADDEDOnce a pension has been commenced, capital can’t be added to it. The only effective way to add capital to a pension is to stop it (called a commutation), bring it back to the accumulation part of a fund, combine it with other money and then commence a new pension. You’re often best to take advice on this option.

IF POSSIBLE HOLD SOME MONEY BACKSuppose you have $700,000 in super assets and want to take a pension with that

money. In this case your fund would pay you a minimum pension of $35,000 (5.0% of $700,000) if you’re aged at least 65 but under 75. Let’s assume that you need at least this income amount on which to live.

One option to consider is to keep between 5% and 15% of your super assets aside for a “rainy day”. That is between $35,000 and $105,000 still in the accumulation phase. The purpose here is to invest these assets for the longer term, thereby trying to ensure that your assets last a bit longer.

Suppose you put to one side $70,000 and left this in the accumulation phase. On this amount, the earnings and realised capital gains would be taxed at 15%. $630,000 would be the revised purchase price of the pension, and a withdrawal at a rate of 5.5% would give the same pension income of $35,000 per annum.

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CHAPTER 3: SMSF STRATEGIES

CONTRIBUTIONS AND RE-CONTRIBUTIONS

A common investment strategy aimed at reducing tax is to withdraw money from an SMSF then contribute it back into a tax-exempt segment of the same fund.

This strategy was particularly common before July 1, 2007 when changes made it impossible to selectively withdraw the taxable components of a super fund. However, the re-contributions strategy is still useful for those who are able to take a pension under 60 years of age. For those over the age of 60, pension withdrawals are tax-free.

MEET TOM, AGE 56Let’s look at an example. Suppose Tom Smith, age 56, is fully retired and has $1.5 million in super assets. Let’s assume this entire amount is a ‘taxable component’. (In general terms, all super benefits are split between tax-free and taxable components. Super fund trustees have to calculate these components for each benefit that is paid. For more on this, please read our segment on How your SMSF is taxed.)

Tom’s pension would be $60,000 a year based on a minimum payment of 4% per annum (see Paying pensions on page 18). Assuming Tom has no other income, this pension would be taxed $3,147, which is arrived at by taking income tax (including Medicare Levy and Low Income Tax Offset) of $12,147 and subtracting a 15% rebate of $9,000.

Tom could reduce his tax by using the re-contribution strategy. Under current tax rules, you can take up to $185,000 of the taxable component out of your SMSF as a tax-free lump sum. This figure is called the ‘low rate cap’ and it is indexed each July 1. The figure shown applies in the 2014/15 financial year.

Assume Tom withdraws $185,000, or 12.33% of his fund’s value, from his SMSF and a short time later contributes it back into his fund. He still has $1.5 million in assets but 12.33% of his SMSF is now a tax-free component while 87.77% is a taxable component.

If he now took an Account-based pension of $60,000, his taxable income would only be $52,602 because the income that is part of his tax-free component is exempt from income tax. He would only pay $1,594 tax, representing a saving of $1,553 ($3,147 - $1,594). Over the next four financial years Tom will save $6,212 in tax.

Some warnings: The proposed contribution of $185,000 is in excess of the general non-concessional contributions cap of $180,000, so you will need to access the ‘bring forward rule’ to make this contribution. Also, you must be fully retired to access your super under age 60. If your super fund has to sell assets to pay you the benefit, make sure you factor in any capital gains tax payable by the super fund into your assessment of this strategy.

RE-CONTRIBUTION TAX SAVINGS ON DEATH BENEFITSThere is another reason to withdraw a lump sum and re-contribute it back into super and that’s to reduce the amount of tax potentially payable on death.

The taxable component of a super fund death benefit paid to non-dependants (which includes adult children) is taxed at a rate (including medicare levy) of 17.0%. (Note: non-dependants may only be paid a lump sum death benefit – a pension cannot be paid). Therefore moving money from the taxable component to a tax-free component can have a very significant impact.

If we take the example of Tom, we see that he now has 12.33% of his benefit as a tax-free component. Once his pension starts, this percentage is locked in and doesn’t change. Suppose that when he dies his pension’s account balance is worth $1.2 million. This means his tax-free component is $147,960. The effective tax saving when the lump sum is paid to the non-dependant is $25,153.

The ideal time to initiate the withdrawal and re-contribution transactions (in

connection with death benefits to non-dependants) is when withdrawals from super are tax-free. That is, after age 60.

Some warnings: It’s important to consider your ability to make super contributions while avoiding the excess contributions tax. Make sure that if your SMSF has to sell assets to make a benefit payment that you factor in capital gains tax.

SUMMARY• The withdrawal and re-contribution

strategy delivers potential tax benefits for retirees under age 60 and provides tax benefits for non-dependant death benefits.

• Before you embark on this strategy, make sure you check all its costs such as CGT, advice and administration fees.

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SMSF STRATEGIES

One popular investment strategy employed by many small business owners is to have their business premises owned by their self-managed super fund.

There are three principal benefits of this strategy:

• An important business asset is held in a tax-effective structure.

• In the event of financial difficulty, creditors often find it more difficult to attack super fund investments (however, there are mechanisms for creditors to unwind transactions involving super funds).

• By using the capital held in a super fund a business can more efficiently make use of its own balance sheet.

When an SMSF owns real estate it is common to want to lease it to a ‘related party’ of the fund. When this occurs, then the property must be considered ‘business real property’ (BRP).

In general, BRP is real property used wholly and exclusively in the running of a business. The definition of business real property is quite complex, and in

2009 the Australian Tax Office released a 70 page ruling – SMSFR 2009/1 – on this topic which contains 37 examples. If business real property is being acquired by the SMSF from a related party, then all the rules relating to related party transactions apply.

If the property is not BRP, then the asset will be considered an ‘in-house asset’. As discussed elsewhere, super funds with in-house assets need to make sure their fund’s total in house assets do not exceed 5% of the market value of its assets. Corrective action must be taken if there is a breach.

When business premises are leased by an SMSF to a business, it is important the transaction occurs at ‘arm’s length’. To make matters simple, the fund should have a formal lease between it and the tenant. The terms of the lease should be independently verified by a recognised person, such as real estate agent involved in real estate in the property’s area.

As the trustee, you must be prepared to enforce the terms of the lease. Lease payments must be paid on time or the various penalty clauses must be enforced

as they would for a third party lease.

EXAMPLE:Jim the Hardwareman is your local store specialising in hard to find heritage items for renovators of older homes.

The business is run by Jim and Mary, who have their eye on new, larger premises that have recently come on the market for $1 million. The problem is the business can only raise $500,000 for the purchase and therefore doesn’t quite have the financial muscle to buy the property.

Jim and Mary have their own SMSF, which has $600,000 in the fund. They decide that the business and the super fund should purchase the property as tenants in common.

To do this, the super fund must make sure the business does not use the property as security when borrowing to pay for its share of the asset. Once purchased, the business will need to pay rent to the SMSF, at arm’s length.

A benefit here is that a portion of the property is held in a more tax-effective vehicle.

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OWNING BUSINESS PROPERTY

SMSF STRATEGIES

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A popular strategy used to increase your superannuation balance is to commence a Transition to Retirement (TTR) pension while working, allowing you to take a pension and salary sacrifice into super at the same time. Also known as the ‘income swap strategy’, this tax efficient way of improving your financial position is available to anyone who has reached 55 years and is not permanently retired.

Essentially, the strategy works because on commencing the pension, your existing super balance is transferred out

of ‘accumulation’ mode into ‘pension’ mode. This is important because you don’t pay tax on your fund’s investment earnings in pension mode. Meanwhile, the amount salary sacrificed into super is taxed at the lowest concessional rate available to super funds.

The pension income you receive substitutes the cash salary forgone by salary sacrificing, and the re-contribution of the salary sacrifice amount back into your super fund compensates for the pension payment.

How it worksLet’s look at an example where we

assume that the member is 56 years old, earning a cash salary of $100,000 and their employer contributes an additional $9,500 into their super account (the compulsory 9.50%). The member also salary sacrifices to the maximum ($25,500) into super and their super account balance is $300,000 at the start of the year.

Let’s compare the numbers with and without using the TTR income swap strategy:

TRANSITION TO RETIREMENT STRATEGY

WITHOUT A TTR INCOME SWAP STRATEFY

WITH A TTR (salary sacrifice and TTR pension)

Salary $100,000 $100,00

Less: Salary Sacrifice Nil $25,500

Cash Salary $100,000 $74,500

Plus: TTR pension Nil $20,467

Taxable income $100,000 $94,967

Less: PAYG tax + medicare $26,947 $24,984

Plus: pension tax offset Nil $3,070

Net Income $73,053 $73,053

Super balance (start of year) $300,000 $300,000

Plus: Investment earnings* $21,000 $21,000

Plus: Employer contribution $9,500 $9,500

Plus: Salary sacrifice contribution Nil $25,500

Less: Tax on contributions $1,425 $5,250

Less: Tax on earnings $3,150 Nil

Less: TTR pension Nil $20,467

Net Super balance $325,925 $330,283

Amount of super in Accumulation mode (end year) $325,925 $29,750

Amount of super in Pension mode (end year) Nil $300,533

* Assumes 7% net earnings. For simplicity, assumes all contributions and pension payment are made at the end of the year.

SMSF STRATEGIES

WITH AND WITHOUT A TTR STRATEGY

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Breaking it downIn both cases, the member has the same after tax income of $73,053. However, by using the Transition to Retirement income swap strategy, the member’s superannuation balance has grown by an additional $4,358. This is the impact over just one year – if the strategy is commenced at age 55, the total increase in the member’s account balance over 10 years would be in excess of $50,000.

Further, the strategy becomes even more tax effective at age 60 because the pension payment ceases to be taxable. Between ages 55 and 60, the pension is included in the member’s taxable income. Although a tax offset of 15% is available, most members will pay some tax during this period.

Some points to noteFirstly, there are rules that govern maximum and minimum TTR pension payments. On the maximum side, the pension can’t be more than 10% of the member’s start of year balance. The minimum pension payment is 4%. Also, once a TTR pension is commenced, it can’t be commuted (back to a lump sum cash withdrawal) unless a condition of release such as permanent retirement is met.

Most importantly, the other limitation to this strategy is the concessional contributions cap limit, which in 2014/15 for those aged 50 or more is $35,000. Tax at your marginal tax rate is payable on any excess contributions, so don’t go over it. The cap includes employer contributions, salary sacrifice contributions and for the self employed, contributions for which a tax deduction is claimed.

The TTR income swap strategy is one of the simplest ways to increase your superannuation account balance. And in case you are worried, the ATO has stated (admittedly in a press release only) that this strategy doesn’t breach the Part IV A general anti-avoidance rules.

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