January 2009
In This Issue
With the self managed super fund (“SMSF”) sector now the single largest sector in the superannuation industry, according to figures released by the ATO and accounting for about $358 billion of Australian’s retirement and pension assets, it’s now more important than ever that trustees and member’s of these funds have access to information to assist them in managing their own nest eggs.
Whilst for many the decision to establish their own fund has come about through their desire to manage their own investments and for others to gain access to investments otherwise inaccessible, there are many other advantages to maintaining a self managed fund.
It’s our aim to build awareness of strategies that may improve the overall investment returns of the fund, minimise the immediate and long term tax liabilities and raise awareness of issues to assist you in better managing your fund.
A self managed super fund can be a powerful tool for accumulating assets for retirement, minimising tax and passing assets onto the next generation. We trust through our newsletters and the continuing development of our web site that you will be able to harness the many benefits of this sector and these translate into larger asset pools for retirement and more efficient retirement income streams for you and your family.
In this edition we review the importance of tax planning in super, review the present market situation leading into the next reporting period and look at the ATO’s draft ruling on in-house assets. If you would like more information on any of the articles please contact the office of Aspley Jandera Super Specialists on 1300 79 10 69.
Investment returns can always recover but taxes are lost forever ... or are they??
Last year saw one of the worst investment years in history with Australian shares down over 50%, international share markets down around 40% and cash returns steadily declining toward the back end of last year. As a result of these losses investment portfolios took an absolute beating with billions being wiped off the value of Australian’s retirement nest eggs.
Whilst these losses have been quite marked and difficult to bear, we must not forget the stellar run investments have had in the preceding years. Looking back through history and we see that all investment declines have been righted and the recovery has over time moved us forward to fresh highs. Thus it is important to understand and accept that the losses of last year will eventually be made up, it is just a question of time.
Consider losses suffered through the application of certain taxes, for example the 15% contribution tax applied to most superannuation contributions. Once this tax is paid, are the proceeds ever recovered? For the majority the answer is NO, for those keen to tax plan their superannuation savings and implement various strategies the answer may be yes.
Curiously, most individuals too easily give in to the taxes paid in super. Why? Most people lodging tax returns are keen to minimise their personal tax liability, but these same people are quite happy to accept the erosion of their retirement savings without question.
Simple strategies can be implemented to minimise the tax burden in super, many similar to those used to minimise an individual’s personal tax liability. Unlike the investment markets, tax liabilities will not simply be refunded over time, individuals need to take an interest to minimise the tax paid by their super fund.
The media enjoys shining the spot light on the massive falls in value that have resulted from the credit crisis but assets lost to taxes in an environment few understand receives little attention. Fortunately though investment losses are generally recouped over time, tax liabilities are generally lost forever.
Consider your interest in a strategy that would refund all the personal tax you ever paid?
Well, unfortunately no such strategy exists, but a strategy does exist to recoup the contribution taxes paid by your super fund. If you don’t think this amounts to much you may want to think again.
Call us for more information on how you can tax plan your super and possibly qualify for a refund of all your contribution taxes.
Strategies for self managed funds to plan their tax liabilities
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Consider the use of investment strategies which distribute high levels of imputation credits which can be used to offset taxes in the fund;
- Consider holding your life and total & permanent disability insurance in the fund as the premiums may be deductible in the fund, personal tax benefits may also apply;
- Superannuation advice and investment management may be deductible in the fund;
- Consider the use of instalment warrants to generate higher levels of imputation credits and interest deductions; and
- Maintain super statements and other tax records to assist with the possibility of having your contribution taxes refunded.
SMSF Technical – In-house assets
One of the unintended consequences of the Family Law superannuation splitting regulations has been the unearthing of many non-complying transactions in self managed super funds, which would have otherwise gone unreported. At the heart of many of these non-complying arrangements is an 'in-house' asset.
So what is an 'in-house' asset?
An 'in-house' asset is simply defined as:
An asset of the fund that is:
- A loan to, or an investment in, a related party or trust of the fund; and
- An asset subject to a lease or lease arrangement between a trustee of the fund and a related party of the fund.
An example of an ‘in-house’ asset would be:
- An investment in a company owned by one or all of the members of the fund; or
- An investment in artwork which is then subsequently hung in the home of one of the member’s.
Self managed funds are prohibited from owning assets which can be classified as ‘in-house’ assets. The holding of such assets unless covered by one of the exemptions or where they account for less than 5% of the fund could result in the fund and trustees succumbing to both civil and criminal penalties. The complying status of the fund would also be at risk.
With the ability of trustees to enter into quite complex and sophisticated transactions it is imperative that trustees confirm, prior to undertaking the transaction that it will not result in the creation of an ‘in-house’ asset and if it does that it will not account for more than 5% of the value of the fund. Consideration should be made of the transaction itself including the entity with whom the fund will be transacting with.
Example 1 – Property asset
A self managed fund purchased a beach house and leased the property to a member, who is a related party, for three months of the year.
As the property has been leased to a member of the fund, a related party of the fund, the asset is classified as an in-house asset. To determine whether or not a compliance issue exists, the market value of the property needs to be assessed against the market value of the entire fund. Where the property represents less than 5% of the entire fund, the trustees will be able to maintain the property. However, if the property represents more than 5% then a contravention will be deemed to have occurred and this will need to be reported to the ATO.
Were a contravention has occurred the trustees will need to consider strategies to resolve the contravention. This may involve immediately terminating the lease and possibly selling or transferring the property out of the fund. The ATO may also consider imposing sanctions including those provided under the civil penalty provisions.
Example 2 – Artwork asset
A self managed super fund purchase a work of art which is displayed in the member’s home.
Artwork maintained in this way would be classified as an in-house asset. The trustees would need to ensure that the value did not represent more than 5% of the value of the fund. Should it represent more than 5% than the trustees would need to deal with the asset in much the same way as the property was dealt with in example 1.
Market Update
At the end of November the gut wrenching Bear market of 2008 appeared to have run its course; however we now find the markets 100 points off these lows.
The Australian economy is yet to feel the full effects of the downturn in the world Economies. The question is whether our economy will follow suit and have a hard landing and deep recession or skim across the surface.
Australia’s major concern is the prosperity of South East Asia, Japan, India and in paticular China. Japan are in a recession, India is unlikely to go there, China is slowing down and South East Asia will have a fairly ordinary time, as about 45 percent of its exports are to the West. In the case of China and India it is pleasing to see that the authorities are willing to spend. This will have the impact of restoring the demand for our metals.
Australia may fall into a recession however there might not be consecutive quarters of negative real GDP growth. Real income will decline, and unemployment will rise.
Equity investors need to be cautious. In order to outperform the market in 2009 investors need to take a more active approach. Investors will also need to stick to the quality end of the market, favouring large cap companies with robust balance sheets.
The upcoming reporting period will be a very important in deciding which companies are suitable for your portfolio. You should be looking for companies with manageable debt able to hold their dividend or reduce slightly and have high quality defensive earnings.
Contributed by Troy McGeachie of E L & C Baillieu Stockbroking Ltd
We hope that you will find this information interesting and informative.
The Team at Superannuation Centre
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