SMSF jargon buster!

A quick guide to some technical SMSF terms

Self-managed super funds (SMSFs) have become extremely popular in Australia, with more than half a million SMSFs now in existence, and they’re still growing.* You probably already know that superannuation terminology can be convoluted at times; SMSFs are no different. Here are some terms you may come across if you decide to join the million people already operating as SMSF trustees. Of course your adviser can also
assist if you happen to run into a wall of jargon!

Trustee: An SMSF trustee is one of up to four people who can be members of an SMSF. Trustees can be individuals or companies (where fund members are company directors, again with a maximum of four). A trustee is responsible for ensuring the SMSF is maintained for the sole purpose of providing retirement benefits to members. They are also responsible for dra”ing and reviewing the fund’s investment strategy and making investments, accepting contributions and paying benefits, appointing an approved auditor, keeping fund records and lodging annual returns with the Australian Taxation Office (ATO).

Investment strategy: As a trustee, you’ll need to design and implement an investment strategy that:

• protects members’ retirement benefits;
• minimises the risk of irresponsible/incompetent investments; and
• meets your stated SMSF investment objective.

By law, all SMSFs, whether they have individual or corporate
trustees, must have a written investment strategy. The
strategy should also consider issues like risk, diversification,
liquidity, solvency and the insurance of members.

Arms-length provision: Any investments or leasing arrangements with related parties (see below) must be entered into under normal commercial terms.

In-house assets: Loans to, investments in, and leases with a related party. These are restricted to 5% of your self-managed super fund’s assets. For example, if your SMSF invests in a related company or unit trust, it can only do so if its value is less than 5% of the total value of the fund’s assets. There are exceptions to the in-house rule, such as business real
property owned by the SMSF and leased to a related party.

Related parties: A member of the SMSF or a person somehow related to a member, including other members, family, business associates, related companies and related trusts. Generally a fund is not allowed to buy assets from related parties. Exceptions are assets such as listed securities (e.g. shares or bonds, traded at market price), managed funds (traded at market price), a business real property bought at market value or ‘in-house assets’ (see explanation above).

Sole purpose test: This must be met in order for your SMSF to receive concessional tax treatment. The SMSF (and its assets) must be seen to have as its ‘core purpose’ paying benefits when members retire, or to their beneficiaries a”er their death. Generally, you can’t receive any other benefit from the assets owned by the fund. For example, if the fund owns
shares, you wouldn’t be allowed to receive any shareholder discounts you’d receive if you owned them personally.

Binding Death Benefit Nomination: A Binding Death Benefit Nomination is a notice given by a member of the SMSF to the trustee of their SMSF (even though this is generally the same person) requiring a death benefit to be paid to the member’s nominated dependant(s) and/or legal personal representative. Without a valid nomination, when you pass away, the remaining trustee(s) will, for better or worse, determine what happens to the assets in your SMSF in accordance with the Superannuation legislation and your fund trust deed. So in short, if you want to be sure who inherits your super (and any insurance), it is generally
recommended that you put a binding death benefit nomination in place.

Trust Deed: The SMSF is governed by the Trust Deed, which makes it an important document. It sets out the rules of the Fund. The Investment strategy will be in alignment with the Trust Deed, setting out specific investments that the SMSF can make. Information that may be documented in the trust deed includes the powers of the trustee and any restrictions on investment vehicles.

Cash-Management Account (CMA): A CMA allows you to earn higher interest than you would from your regular debit or savings account. There are hundreds of cash management accounts available for SMSF investors. CMAs will vary in the interest rates they offer and will also have different fees and features. Unlike an online savings account, where it can take days to access your funds, CMAs generally have faster or immediate accessibility. However, they may not offer the highest rates of online accounts.

Investor Directed Portfolio Services (IDPS): An IDPS is a custodial, transactional and consolidated reporting service that is often referred to as a wrap account. A wrap account allows you to manage and retain control of your investment portfolio, plus have access to a wide range of managed funds, shares and term deposits through one service provider, with the advantage of consolidated tax, transaction and performance reporting.

A limited recourse borrowing arrangement (LRBA): If an SMSF borrows money to purchase a single asset (usually property), or a collection of identical assets that have the same market value, the trustees receive the beneficial interest in the purchased asset, but the legal ownership of the asset is held on trust (the holding trust). The SMSF trustees have the right to acquire the legal ownership of the asset by making one or more payments. Any recourse that the lender (or other party) has under the LRBA against the SMSF trustee is limited to the single fund asset (including rights to income). In summary, the only
way that you can borrow money to buy an asset such as an investment property through your self-managed super fund, is by using an LRBA.

In-specie transfer: This is the process of transferring the ownership of managed funds or shares from one owner to another or from one wrap account to another. For instance, as a member of a SMSF you can make a member contribution by ‘in-specie’ shares or managed funds that you hold
personally into your SMSF. Also some wrap accounts allow you to ‘in-specie’ transfer shares and managed funds to/from a wrap account you hold with another provider. Benefits of in-specie transfers include potential savings on buy and sell costs, and being able to remain in the market while the transfer is going through. Many retail super funds do not offer in-specie transfer, whereas it’s generally possible with self-managed super funds.

Listed Investment Companies (LICs): LICs are a subset of what the Australian Stock Exchange calls listed managed investments. They enable you to invest in a diverse and professionally managed portfolio of assets, including shares, property and interest bearing deposits. In Australia, LICs primarily invest in Australian or international shares and they are bought and sold on the market just like an ordinary share. You can decide whether the investment style and underlying investment portfolio of a particular LIC suits your own investment objectives.

Exchange Traded Funds (ETFs): ETFs are a simple way to create a diversified portfolio. They are traded on the Australian Stock Exchange (ASX) in the same way as shares. ETFs allow you to diversify your portfolio without having a large amount of money to invest. The broad
investment exposure helps you to avoid concentration risk which can occur if you don’t diversify across and within asset classes. An ETF generally invests in a basket of shares that represents a particular index. You can also choose to invest in ETFs that focus on currency or commodities.

Franking credits: Shareholders receive ‘franked’ dividends paid from company profits that have been taxed at the Australian company tax rate. Franked dividends have a franking credit attached to them which represents the amount of tax the company has already paid on those
profits. Franking credits are also known as imputation credits. Where an SMSF receives ‘franked’ dividends the SMSF is entitled to receive a credit for any tax the company has paid on those profits. As the tax rate of the SMSF is generally less than the company’s tax rate, the ATO will refund the difference to the SMSF.

We are ready to help. We are equipped with the knowledge and expertise to help you get the most out of your SMSF, by showing you how to set up and develop a sound investment strategy that reflects your needs. We can work with other professional services to create and manage a super fund that puts you on a clear route.

Contact BlueRocke on 1 300 71 71 36 today.

A self-managed super fund (SMSF) allows up to four people to pool their super and take full control and responsibility for managing it as trustees. The sole purpose of the SMSF is to provide benefits to its members on their retirement.

Super popular!
Today, SMSFs represent about a third of all the money invested in all Australian superannuation funds. And there are more than half a million SMSFs in Australia, representing more than one million individual members.*

Why are they so popular?
The popularity of SMSFs can generally be put down to the greater control and flexibility they offer. Here are some key advantages:

• Investment control: the members/trustees can choose their own fund investments, including shares, property, cash and many others (within legislative limits).
• Flexibility: trustees can make their own decisions as a result of changing market movements and options for retirement income streams.
• Family first: a SMSF is a true inter-generational wealth accumulation and wealth transfer vehicle. There is no legal time limit on how long a SMSF can last – it can keep going for generations.
• Fee savings: the SMSF fee structure may deliver substantial savings when compared to other retail super funds.
• Creditor protection: a member’s fund assets are normally protected from creditors in the event of bankruptcy.
• Tax effective: generally super lump sums are tax-free to members who are over 60, which is a huge benefit during their retirement, especially compared to other non-super investment structures.

Will an SMSF suit you?
Running an SMSF is not for everyone. There are trustee responsibility and time commitment factors you should consider.As a trustee, you’ll need to design, implement and actively monitor an investment strategy that:

• protects members’ retirement benefits;
• minimises the risk of irresponsible/incompetent investments; and
• meets your stated SMSF investment objective.

Your financial adviser can help you with this part, but you’ll need to be ready and able to take on board the following things by yourself:

• Time commitment: Running an SMSF can be time-consuming for trustees; this can be aided if you choose to use a specialist, daily-managed administration service.
• Risk of penalties: Non-compliance with legislation and rules can mean significant tax penalties on the fund and potential prosecution, for extreme breaches.
• Balancing act: Ongoing costs to operate an SMSF e.g. mandatory annual audit costs, can be uneconomic for members with balances less than $200,000 (refer to page 2 for more).
• More responsibility: The ultimate legal responsibility rests with you and any other trustees in your fund, even if assistance has been sought from other professionals e.g. auditors or registered tax agents.
• No ‘captain’s calls’: All members need to agree on investment decisions; if you take action outside of that agreed by all parties, you risk being sued by your fellow trustees.
• For love, not money: As a trustee you can’t be paid for running your SMSF, nor can you be an employee of another trustee (unless they’re family).

What does it cost to run?
It is important you take the time to understand the cost incurred to operating your SMSF in order to ensure it is economically viable to run. There are generally two types of costs – set-up costs and ongoing operating expenses (including your personal time).

1. Set-up costs
These can vary quite a bit, depending upon how you go about it. You’ll pay a bit more to set-up an SMSF if you also seek financial advice and/or a financial plan, but this is a smart move, especially if you’re a relatively inexperienced investor.

2. Operating expenses
According to the ATO, around two-thirds of SMSFs have an estimated operating expense ratio of 1% of fund assets or less.*

So on a $500,000 account balance, an expense ratio of 1% equates to $5,000 in annual fees. Many operating expenses are fixed – and mandatory – for example, annual audits, preparation of accounts and the ATO supervisory levy.

Of course, as a fund balance grows, these fixed expenses become a lesser percentage with less impact.

Personal time commitment
Of course you’ll also need to factor in the cost of your personal time in managing the fund. This can vary, depending upon how much of the management you outsource to professionals and how much investment research and active investment management you want to do.

Time commitment can vary from a few hours per month, up to a number of days per month, depending on how involved you want to be with investment and other decisions that need to be made for your fund.

What can an SMSF invest in?
The three most popular investment classes for SMSF trustees are direct shares, cash and direct property.

As at December 2014, these three asset categories represented 76% of all SMSF assets.* 32% of fund assets in direct Australian shares, 28% in cash and term deposits, and 16% in direct property.

The rules
SMSF investments must be for the ‘sole purpose’ of providing retirement benefits for the members of the fund. Members, relatives or associates of the trustees must not gain any immediate benefit from the fund’s assets or activities.

For example, any property owned by the fund cannot be used by the members or their families, even if rented out at market rental.

Other rules include:

• SMSFs can only borrow money in limited circumstances;
• SMSFs must limit investments in, or loans to, ‘related parties’ to 5% of the market value of the fund; and
• Generally, SMSFs cannot buy assets from a member, or a relative or associate of a member, except in limited circumstances such as with business real property, listed securities and managed funds.

However, SMSFs have the added benefit of being able to invest in all the major asset classes offered by regular super funds – with the addition of direct real property and personal collectibles.

How can a financial adviser help?
Setting up your SMSF properly is critical. If you get this wrong, it can create a lot of issues down the track that can be expensive to fix.

An SMSF-accredited financial adviser can help you chart the most appropriate course of action with your SMSF; from how to best structure your SMSF to the most appropriate investment and wealth protection strategies for you and your fellow SMSF members.

Want more information
There are lots of advantages to managing your super and retirement savings via a self-managed super fund, but there can be complicated areas and considerations that are best addressed with SMSF-specialist advice. So please talk to your SMSF financial adviser for specific information related to your SMSF needs.

* Self-managed super funds: A statistical overview 2012-13,
Australian Taxation Office.

We are ready to help. We are equipped with the knowledge and expertise to help you get the most out of your SMSF, by showing you how to set up and develop a sound investment strategy that reflects your needs. We can work with other professional services to create and manage a super fund that puts you on a clear route.

Contact BlueRocke on 1 300 71 71 36 today.

SMSFs – What you can and can’t invest in
SMSFs have become very popular, with more than one million members now representing the fastest growing segment of Australia’s superannuation market.*

The main reason for the popularity of SMSFs is the unrivalled
investment flexibility and control they offer members. However, there are various compliance requirements to running an SMSF and some common pitfalls to avoid, especially when it comes to what you can and can’t invest in.

As with all superannuation members, SMSF trustees should regularly review their asset allocations to ensure their portfolio remains appropriately diversified in line with the fund’s investment strategy. Trustees should also consider how much is held in cash (or other liquid assets) so the fund can meet its liquidity obligations, e.g. fees and pension payments.

The investment basics
SMSF investments must be for the ‘sole purpose’ of providing retirement benefits for the members of the fund.

This means that members, relatives or associates of the trustees must not gain any immediate benefit from the fund’s assets or activities. For example, any property owned by the fund cannot be used by the members or their families, even if rented out at market rates, unless the property is less than 5% of the total fund assets.

Other rules dictate that SMSFs:

• can only borrow money where the loan is on a limited recourse basis;
• must limit investments in, or loans to, ‘related parties’ to 5% of the market value of the fund; and
• generally cannot buy assets from a member, or a relative or associate of a member, except for business real property, listed securities and managed funds.

What can SMSFs invest in?
In Australia, the three most popular investment classes for SMSFs are direct shares, cash and direct property.

As at December 2014, these three asset categories represented ~76% of all SMSF assets.*

At this point in time, SMSFs held around 32% of fund assets in direct Australian shares, 28% in cash and term deposits, and 16% in direct property.*

Here’s a quick overview of some of the assets SMSFs can invest in:

• Cash management accounts
•  Term deposits
• Managed funds (Australian and international)
• Listed Australian shares
• Listed unit trusts
• Listed investment companies
• Overseas listed shares
• Residential property
• Commercial property
• Industrial property
• Property purchased with borrowed fund (limited recourse borrowing)
• Property partnerships with non-related parties
• Shares in unrelated private
• Artwork and collectables.

What can’t SMSFs invest in?
Although SMSFs offer more investment flexibility than any other superannuation fund structure, there are investments that are considered ‘out of bounds’. If you are considering anything out of the ordinary for your self-managed super fund, please speak to your SMSF financial adviser first.

About property investing
SMSFs can investment in the following types of property:

• Commercial property (known as ‘business real property’), this may include a factory, warehouse, business leased premises, a doctor’s surgery; and
• Residential property or real estate, such as units, semis and houses
• Real Estate Investment Trusts (REITs), provide access to various commercial and residential investments through a managed fund.

You can only buy property through your SMSF if you comply with some rules. So the property must:

• meet the ‘sole purpose test’ of solely providing retirement benefits to fund members;
• not be acquired from a related party of a member (unless it is a business real property);
• not be lived in by a fund member or any fund members’ related parties; and
• not be rented by a fund member or any fund members’ related parties, unless it is business real property or residential property valued at less than 5% of the total fund assets.

For instance, as a business owner your SMSF could potentially purchase your own business premises (also known as business real property), allowing you to pay rent directly to your SMSF at the market rate. 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. Note: For more information on property investing in an SMSF, see our ‘SMSFs – Investing in property’ flyer.

More information
There are lots of advantages to managing your super and retirement savings via a self-managed super fund, but there can be complicated areas and considerations that are best addressed with SMSF-specialist advice. So please talk to your SMSF financial adviser for specific information related
to your SMSF needs.

* Self-managed super funds: A statistical overview 2012-13, Australian Taxation Office.

We are ready to help. We are equipped with the knowledge and expertise to help you get the most out of your SMSF, by showing you how to set up and develop a sound investment strategy that reflects your needs. We can work with other professional services to create and manage a super fund that puts you on a clear route.

Contact BlueRocke 1 300 71 71 36 today.

Insurance and your SMSF

You can purchase insurance within your SMSF, and more importantly, the super laws require trustees to consider the insurance needs of members when draing and reviewing the fund’s investment strategy.

Considering the insurance needs of SMSF members doesn’t mean you must purchase insurance within your SMSF. Also it’s important to note that life insurance policies held outside of a super fund cannot be transferred into an SMSF.

Although, some providers will allow you to cancel your existing policy and then reestablish it again in your SMSF without impacting your level of cover.

Recent insurance rule changes

On 1 July 2014, regulations were introduced requiring all new insurance policies issued to SMSFs be consistent with the Superannuation Industry (Supervision) regulations conditions of release. The upshot of this is that you can hold insurance policies within your SMSF for:

• Life insurance;
• TPD insurance with an Any Occupation definition; and
• Standard Income Protection insurance policies.

It also means your SMSF can’t purchase or hold the following insurance policies (unless you are increasing or decreasing cover that was already held prior to 1 July 2014):

• Own Occupation TPD;
• Trauma cover; and
• Comprehensive Income Protection.

Although Life, Any Occupation TPD and Standard Income Protection policies can be purchased by SMSFs, the cover will have some restrictions compared to the same cover purchased outside super.

SMSF Life insurance

Life insurance policies can be purchased by an SMSF for the members of the fund and the premiums will be deductible expenses to the fund.

Key things to consider

• The SMSF version of the life insurance policy will only cover the core benefits of death and terminal illness.
• The insurance company will pay the proceeds of the policy directly to the fund and the trustees then have the discretion to decide on the distribution of the funds in accordance with the trust deed.
• Payouts from SMSFs may be subject to tax under certain circumstances, unlike policies outside super where payouts are generally tax-free.

SMSF TPD insurance (Any Occupation)

Any Occupation TPD policies can be purchased by an SMSF for the members of the fund and the premiums will usually be deductible expenses to the fund.

Key things to consider

• There is an overriding requirement for the policy to satisfy the definition of ‘Permanent Incapacity’ in the Super Act. Claims for lesser disabilities, such as a partial payment for loss of one limb or sight in one eye, aren’t allowed.
• Members who are highly paid or perform highly specialised occupations may prefer to have ‘Own Occupation’ TPD cover where the insurer pays a benefit if they are permanently unable to perform their own occupation, even though they may be able to perform the duties of another lower paid job.
• Unlike a TPD policy held outside super where the insurance payout is tax-free, a TPD payout from an SMSF may be subject to tax if the member is under 60 years of age.

SMSF Income protection insurance

Income protection insurance can provide your SMSF members with a monthly payment if they are unable to work temporarily due to sickness or accident.

Key things to consider

• The tax implications of holding an Income Protection policy through an SMSF or directly are the same. The only advantage might be using the accumulated funds in the SMSF to pay the premium, as opposed to a member’s private cashflow.
• While policies purchased by a SMSF will provide cover where a member is unable to work at all due to sickness or injury, they will not be able to offer the additional features and benefits as policies outside of super, e.g. trauma benefit or nursing care, etc.
• A member may not be able to claim under their policy while unemployed, unlike under policies held outside super. Benefit payments may also be offset for any sick leave payments received.
• Most insurers don’t offer Agreed Value for SMSF income protection policies, only Indemnity cover. Agreed Value Most insurers don’t offer Agreed Value for SMSF income policies are attractive to professionals and self-employed individuals who have income which can fluctuate from year to year

Insurance advice is recommended

SMSF trustees should consider the personal circumstances of each of the members of the fund when considering insurance.

This includes members’ income, assets and liabilities, any existing insurance cover they have and how they or their family would be impacted by their death and disability. Insurance is a complicated area where exceptions exist, and one worth exploring your personal situation with a financial adviser.

More information

There are lots of advantages to managing your super and retirement savings via a self-managed super fund, but there can be complicated areas and considerations that are best addressed with SMSF-specialist advice.

We are ready to help. We are equipped with the knowledge and expertise to help you get the most out of your SMSF, by showing you how to set up and develop a sound investment strategy that reflects your needs. We can work with other professional services to create and manage a super fund that puts you on a clear route.

Contact BlueRocke on 1 300 71 71 36 today.