ATO embarks on new SMSF research survey

The ATO has embarked on a new survey for SMSFs aiming to further gain a better understanding of the SMSF audience and market.

The new self-managed super funds (SMSF) audience market research survey launched by the ATO aims to target SMSF trustees and advisers to gain a better understanding of the SMSF audience through a profiling and segmentation research study.

Conducted with researchers Whereto Research, the research includes undertaking an online survey, interviews with SMSF trustees and advisers along with further group discussions with SMSF trustees and advisers.

With over 1 million Australians having made the decision to take control over their superannuation and set up an SMSF, SMSF Association technical manager Mary Simmons said the Australian government has recognised the need to find out more about this population.

“To better understand what motivates and influences SMSF trustees, the government has embarked on a new survey, using information from the ATO to randomly select existing SMSF trustees to participate,” Ms Simmons said in the recent SMSFA update.

“The survey is being conducted by an external research provider, Whereto Research, and some of your clients may have already received an invitation to participate.

“Having discussed the survey with the ATO, the SMSF Association can confirm that the survey is legitimate and that trustees should not be concerned.”

Ms Simmons said the motive behind the survey is to get a better understanding of the SMSF community to assist the ATO to develop targeted communication strategies to ensure key messages reach their audience.

“The confidential survey provides the ATO with important information about the SMSF sector and the questions asked are designed to gauge trustees’ understanding of SMSFs and some of the rules and get insight into trustees’ choice of information sources used to manage SMSFs,” Ms Simmons said.

“The ATO also wants to determine trustees’ preferred communication channels to keep abreast of changes and understand who trustees primarily rely on to support them with ongoing investment decisions, advice needs as well as reporting and compliance obligations.”

If advisers have clients that have been invited to take part in the survey, Ms Simmons noted that participation in the survey is completely voluntary and the information collected remains anonymous.

“The survey will take your clients approximately 15 minutes to complete and participants can nominate to partake in subsequent feedback sessions (optional),” she said.

More information on the survey can be found here.

Source: SMSF Adviser

Federal Budget 2021: Necessary super changes welcomed

Superannuation measures in this year’s federal budget have been welcomed as being not too intrusive, but introducing necessary changes that were considered overdue by the sector.

The changes, announced by Treasurer Josh Frydenberg last night, include an extension of the downsizer contribution scheme, the removal of the work test for people aged 67 to 74, an amnesty to allow people to exit legacy pensions and relaxing residency requirements for SMSFs.

SMSF Association chief executive John Maroney said the measures were welcome after “a few quiet budgets for the SMSF sector” and reflected changes sought by the industry body.

“In our 2021 federal budget submission, we advocated for reforms to the residency rules for SMSFs and for an amnesty period to allow SMSF members stuck in legacy pensions to convert to more conventional-style pension products, and we are pleased both measures are included in this year’s budget,” Maroney said.

“Regarding residency rules, we argued in our submission that the existing two-year safe harbour exemption under the central management and control test is too short in the context of modern work arrangements, where executives and other staff are often expected to commit to an overseas placement for more than two years, and that this period should be increased to five years,” he said, adding the extension was in the budget alongside the removal of the active member test.

Financial Planning Association (FPA) chief executive Dante De Gori also welcomed the non-disruptive nature of the measures and supported the work test, downsizer contributions and legacy pension changes.

“The FPA welcomes the government’s decision to introduce flexibility, but not substantial changes to superannuation. Superannuation should not be constantly tinkered with, a position the FPA has consistently held,” De Gori said.

Financial Services Council (FSC) chief executive Sally Loane said the government’s commitment to addressing legacy products, also an area of FSC advocacy, was pleasing, but the move could create other issues for pension holders.

“The ability to move out of legacy pension products, many of which are outdated and expensive, is a welcome move. However, the tax and social security settings will be the key factor [for] consumers and their financial advisers in determining whether to take up the scheme,” Loane said.

Other changes introduced as part of the budget included abolishing the $450 a month earnings threshold for the payment of the superannuation guarantee (SG), which was noted by the SMSF Association, FPA and FSC as a benefit to low-income earners.

Association of Superannuation Funds of Australia chief executive Dr Martin Fahy said this change and the government’s implicit commitment to increasing the SG rate to 12 per cent were important steps in providing adequate retirement savings, particularly for women and younger Australians.

“Australia’s superannuation system enables Australians to retire with dignity. With the legislated increase of the superannuation guarantee to 12 per cent, and a maturing superannuation system, we expect to see a greater proportion of retirees relying less on the age pension and more on their retirement savings,” Fahy said.

He said the removal of the $450 threshold will be beneficial to low-income and casual employees, many of whom are women, and would give them an entitlement that others already had as a right.

The Actuaries Institute also welcomed the removal of the $450 a month threshold, but was critical of the government for not defining the role of superannuation.

“The government has not leveraged the Retirement Income Review to make more impactful changes to the retirement incomes system, such as measures to help non-homeowners (renters) in retirement, in particular some of the most at risk of poverty in retirement – single female renters,” Actuaries Institute president Jefferson Gibbs said.

“The system also still lacks an overall objective for superannuation and its role in supporting retirement incomes.

“The institute urges the government to provide clarity on the purpose of superannuation to enable more substantive reforms to be sensibly made to improve the system.”

Source: smsmagazine.com.au


Over the past few years, the SMSF industry has been heavily focused on the application of the new non arm’s length expenditure rules and working with the ATO to ensure the application of these rules to general expenses is pragmatic and does not result in a disproportionate tax outcome.

Yes, these are big issues for the industry and the SMSF Association continues to strongly advocate for more clarity, however they can overshadow other, equally important issues such as the interaction of the non-arm’s length income (NALI) rules with the capital gains tax (CGT) and exempt current pension income (ECPI) provisions.

Many just presume that a non-arm’s length capital gain is intended to cause NALI, even if the gain relates to an asset supporting a retirement phase income stream. This view is correct from 1 July 2021, however due to a technical deficiency in the law, the law does not currently operate this way for SMSFs with segregated pension assets (i.e. where specific assets of the fund are set aside to fund one or more retirement phase income streams).

Here’s where it starts to get technical so we will try to keep it as simple as possible.

The ordinary and statutory income an SMSF earns from assets held to support retirement phase income streams is exempt from income tax unless it is NALI.

The technical deficiency is that NALI only applies to ordinary income or statutory income and a capital gain per se, is neither ordinary income nor statutory income. However, a net capital gain is statutory income and so only a net capital gain can be NALI.

However, before a capital gain can become a net capital gain, a number of provisions operate. One such provision is s118‑320 of the ITAA97, which states that if the gain is made from a segregated current pension asset the gain is simply disregarded. Therefore, if the gain is disregarded, it cannot become a net capital gain and it cannot become statutory income. Ultimately, it cannot become NALI.

On 17 December 2020, Treasury Laws Amendment (2020 Measures No. 6) Act 2020 (Cth) received Royal Assent to amend this defect in the law. Subsection 118-320(2) was introduced to ensure that non-arm’s length capital gains in relation to segregated current pension assets are no longer disregarded and are treated as NALI.

Not only is the technical issue complex but there was also confusion relating to the date of effect of the new provision. If you are like many and rely on legislation websites such as https://www.austlii.edu.au/ or https://www.legislation.gov.au/, the amendment is already showing as being operative so you would think that a non-arm’s length capital gain made from a segregated current pension asset currently causes NALI. On the other hand, if you refer to the relevant explanatory material, you would conclude that the new provision only has effect from 1 July 2021.

So which one is it? In determining the date of effect, the SMSF Association sought clarification from the ATO and has received confirmation that s118-320(2) applies from the 2021-22 income year.

Effectively, this means that if a non-arm’s length capital gain is made by a segregated current pension asset before 1 July 2021, it does not cause NALI. If a non-arm’s length capital gain is made by a segregated current pension asset on or after 1 July 2021, it does cause NALI.

Let’s look at an example

A number of years ago, an SMSF acquired an asset on non-arm’s length terms. More specifically, the asset’s market value was $500,000 but the SMSF only paid $300,000.

The SMSF is fully being used to pay an account-based pension and the asset is a segregated current pension asset. On 22 April 2021, the SMSF signs a contract to sell the asset. The capital gain is disregarded and is not NALI.

However, if the SMSF signs a contract to sell the asset on or after 1 July 2021, the capital gain would not be disregarded and thus would cause NALI.

So, from 1 July 2021, where an asset has been impacted by the NALI provisions, any net capital gain will be taxed as part of the fund’s NALI component at the highest marginal rate. This includes, SMSFs that are paying a retirement phase income stream to one or more members, regardless of whether the fund is using the segregated or proportionate method to calculate their exempt income.

Naturally, in addition to non-arm’s length income, there are other issues that should still be considered, including:

  • general anti-avoidance provisions (ie, part IVA);
  • deemed contributions and excess contributions tax;
  • promoter penalty laws; and
  • SIS regulatory issues (eg, arm’s length rules etc).

Understanding the interaction of the NALI, CGT and ECPI provisions is complex at the best of times. Add a layer of uncertainty in relation to deficient law and it highlights the importance of seeking specialist advice to ensure other super and tax laws are not at risk of being breached.

Written by Mary Simmons, Technical Manager, SMSF Association 

SMSFs with collectables need to read the fine print

Got art, jewellery or cars in your collection? Watch out how they’re insured, where you store them and who uses them.

The rules around the holding of collectables and personal-use assets owned by self-managed super funds are quite straightforward – and have been for more than a decade. Yet confusion still reigns, especially with insurance.

Since July 1, 2011, the rules have required trustees of SMSFs to insure these assets within seven days of acquiring them in the name of the fund. The only exceptions are memberships of sporting or social clubs – and yes, these can be owned by SMSFs.

Unlike other forms of insurance, it’s not optional. The Australian Taxation Office wants the items to be insured to “protect” the fund’s assets and therefore the members’ retirement benefits. So, in case of a mishap where the asset is damaged, the fund is not financially exposed.

The ATO also insists the insurance is in the fund’s name to ensure assets are kept separately from the trustee’s other assets, thereby giving the process more transparency and greater integrity.

It all seems quite simple. Yet it’s surprising how much confusion still surrounds the insuring of collectables and personal-use assets, particularly from an audit perspective.

Written by John Maroney, CEO, SMSF Association

Super contribution and pension caps set to increase

For the first time in five years, the super contribution and pension caps are set to increase. Thanks to inflation and indexation, the cap on concessional contributions will increase from $25,000 a year to $27,500 for the 21/22 financial year.

Concessional contributions include the compulsory 9.5% super guarantee amount that your employer pays on your wages, plus any additional salary sacrifice contributions, plus any  amount you contribute and claim a tax deduction for. In 20/21, they are capped at $25,000 a year (you will pay tax at your marginal tax rate on any excess contributions).

The employer’s contribution rate of 9.5% is also set to increase, to 10.0% from 1 July, and then to 10.5% from 1/7/22, 11.0% from 1/7/23, 11.5% from 1/7/24 and finally to 12.0% from 1/7/25. The Government says that it is “reviewing its position” on the changes, but as they are already legislated and are LAW, it would need to introduce amending legislation into the parliament to stop the increases. With the ALP, Greens and some independent Senators vowing to oppose any Government action to stop the increases, there is considerable doubt it could get its amending legislation through the Senate. The most likely outcome is that it will decide that there are “better battles to fight” and the contribution rate will increase to 10% on 1 July.

The cap on non-concessional contributions will also increase, from $100,000 to $110,000 a year. Non-concessional contributions are amounts that you contribute to super from your own resources and for which you do not claim a tax deduction for. Unlike concessional contributions (which are taxed at 15% when they hit your super fund), there is no tax deducted on non-concessional contributions.

Persons who have high superannuation balances (currently defined as balances over $1.6m) are not entitled to make non-concessional contributions. With indexation, the ‘total superannuation balance’ limit, which governs this, will increase on July 1 from $1.6m to $1.7m.

This increase will also impact the ‘bring-forward’ rule. Under the ‘bring-forward rule’, if you are under 65 years of age (legislation has been introduced but not passed to increase this to 67 years) and your total superannuation balance is less than $1.7m, you can potentially make 3 years’ worth of non-concessional contributions in one year. With the non-concessional gap increasing to $110,000 from July 1, this means that you could contribute up to $330,000 into super in one hit. A couple could get $660,000 into super.

The increase in the ‘total superannuation balance’ limit from $1.6m to $1.7m will also increase eligibility for the government co-contribution and spouse tax offset.

On the pension side, the limit that controls how much of your super monies can be transferred to the “tax free” pension phase of super, the transfer balance cap, will be increased by $100,000 to $1.7m from 1 July. Persons who have already accessed their full cap of $1.6m won’t be eligible to contribute any more monies into the pension phase. Those who haven’t accessed any part of their cap (in other words, have never commenced a pension) will automatically get access to the higher limit of $1.7m. If you have started a pension but haven’t accessed the full amount of the cap, you will get a proportional increase. For example, if you started a pension of $800,000 under the old cap of $1.6m and had cap space of $800,000, post indexation, your cap space will increase proportionally to $850,000 (meaning that your transfer balance cap will now be $1,650,000).

For defined benefit pensioners, the income cap of $100,000 will increase to $106,250. As a result, some pensioners may see a small increase in their pension as the amount of tax being withheld by their super fund is reduced.

Unrelated to the indexation of monetary caps and limits is the end of a special Covid-19 relief measure. This saw the halving of the minimum annual pension payment that account based pension holders were required to take. From July 1, these will revert back to the pre-Covid levels: a minimum of 4% of your account balance if under 65 (for example, if the account based pension has a balance of $1,000,000, the minimum annual pension payment is $40,000); 5% of the balance if aged from 65 to 74; 6% if aged from 75 to 79; 7% if aged from 80 to 84; 9% if aged from 85 to 89; 11% if aged from 90 to 94; and 14% if 95 years or older.

Source: Switzer Daily

Downsizer contribution conditions clarified

SMSF members planning to make a downsizer contribution from the sale of their home will not be restricted as to the source of those funds and may instead transfer other assets of equal value into the superannuation, according to the SMSF Association.

In an update on the industry body’s website, SMSF Association technical manager Mary Simmons said the view that downsizer contributions could only be made from the proceeds of the sale of a home was incorrect and the organisation had sought clarity from the ATO on the issue of in-specie downsizer contributions.

Simmons said the association took that step after members expressed concerns about the regulator’s position on the matter stemming from statements in Law Companion Ruling 2018/9, which relates to contributing the proceeds of downsizing into superannuation.

“In particular, paragraph 62 suggests that if an individual is eligible to make a downsizer contribution, they can only make it as an in-specie contribution if they use the proceeds of downsizing to buy the asset they are contributing. This suggestion is incorrect,” Simmons said.

“The ATO recently confirmed to the SMSF Association that provided the downsizer eligibility criteria is met, there is no need to analyse how the contribution is funded, provided it does not exceed $300,000 or the total capital proceeds from the sale of the qualifying dwelling.

“This means that an individual can make a downsizer contribution as an in-specie contribution, provided the value of the asset is equal to all or part of the proceeds from the disposal of the qualifying dwelling.”

She gave the example of a couple in their 70s selling a home for $1.35 million and, having met the eligibility requirements to each make downsizer superannuation contributions of $300,000, they do so by transferring a portfolio of listed shares, which they already own individually, into their SMSF.

For the contribution to take place, the market value of the in-specie contribution of listed shares would be equal to $600,000 and an off-market share transfer form would be executed and given to the SMSF trustee within 90 days of receiving the proceeds from the sale of their home, she added.

“With the existing strict eligibility criteria that an individual must satisfy to be eligible to make a downsizer contribution, we are pleased that the ATO’s interpretation supports the intent of the law and does not see any mischief if the contribution is funded via an in-specie transfer of any asset(s) provided it is at arm’s length and permitted by section 66 of the Superannuation Industry (Supervision) Act.”

Source: smsmagazine.com.au

Running an SMSF is far from set and forget

The decision to set up an SMSF should not be taken lightly. 

Although it puts SMSF trustees on a journey towards financial self-funding in retirement, it also comes with a commitment to continually improve their knowledge about all aspects of their fund.

Running an SMSF requires a considerable amount of financial literacy.

Trustee responsibilities require a commitment of time, resources and knowledge, ranging from preparing and implementing an investment strategy, ensuring contributions are invested according to that strategy, making minimum payments when in pension phase and submitting annual tax returns and organising an annual audit.

These tasks can be undertaken with the assistance of specialist SMSF advisers. However, the ultimate responsibility for the fund sits with the trustee, who must sign off on every document.

If you get it wrong, there are consequences: falling foul of the Australian Taxation Office (ATO) could involve financial penalties as high as $50,000. If the non-compliance is serious enough, a trustee could be disqualified.

Trustees need to be on a financial self-improvement journey over the life of their SMSF.

Although much of the focus is on investment strategy, this is not the full story if the fund is to be fully compliant.

As the ATO has stated, common mistakes committed by SMSF trustees involve the sole purpose test, loans, in-house assets and the separation of assets and borrowings – better known as limited recourse borrowing arrangements.

So, how do trustees ensure they remain abreast of everything they need to know to run their SMSF?

For many, seeking out specialist advice is crucial. Significantly, most trustees do this, with 63 per cent of SMSFs established on the suggestion of a financial adviser and 81 per cent paying for advice in some form or another.

This highlights the fact trustees recognise the importance of quality advice to oversee their retirement income strategies, and, in many instances, are prepared to rely on it heavily.

Nowhere is this need for trustees to get specialist advice more crucial than in setting the fund’s investment strategy.

Over time circumstances change and trustees must respond accordingly.

The strategy must reflect the purpose and circumstances of a fund, such as the members’ retirement goals, liquidity (especially in the pension phase) or growth.
However, specialist advice about investment is just part of the equation. Trustees need to be aware of what is happening in financial markets, as the COVID-19 induced market sell-off early last year and subsequent rally highlighted.
There is no shortage of information available to help SMSF trustees. Aside from the financial media, there are specialist publications covering all asset classes and investment modes. There are also seminars, investment forums, videos and podcasts generating a wealth of information.
For trustees, the problem is not about getting news, it is about being able to separate the good from the very best information. This is why having a trusted adviser to bounce ideas off can be so crucial.

The SMSF Association hosts a SMSF Connect website that contains extensive educational material.

The ATO also offers an authoritive range of resources, tools and services to make managing the regulatory and tax aspects of an SMSF easier. It includes about 30 short videos that provide a comprehensive overview of the sector as well as links to free online education courses.

The ATO can direct a trustee to undertake an educational course if they have contravened superannuation law.

Running an SMSF can be fulfilling, as about 1.1 million Australians are discovering. It puts them in direct control of their retirement income strategy.

However, with that control comes responsibility and that can only be achieved if trustees continually improve their financial literacy. The information and specialist advisers to help do this are available – they just need to be accessed.

Written by John Maroney, CEO, SMSF Association

SMSFs looking to ride the crypto wave

Growing interest in cryptocurrency investment in Australia has spread to the SMSF sector, with funds drawn to the appeal of capital gains and the opportunity to add new asset classes to their portfolios, says a cryptocurrency investment provider.

Cointree CEO Shane Stevenson said there’s no doubt that bitcoin is now being seen as an alternative to gold as a store of value, reflected recently by the rising price of bitcoin — currently hovering around the $75,000 mark.

He noted additionally the fact that cash, term deposits and bonds have less appeal because of the historically low interest rates, causing cryptocurrencies to become more attractive to SMSFs.

“How they invest, however, depends on whether they are in the accumulation or retirement phase, the fund’s risk profile and where fund members are at in their superannuation journey,” Mr Stevenson said.

“For those in the accumulation phase, we are finding investors and SMSFs are more prepared to take a bigger risk, as their focus is on growing their funds under management, while for those in the retirement phase, it’s a far more cautious approach, with cryptocurrencies typically a smaller percentage of their portfolios.

“Either way, when investing in the accumulation or retirement phase, the key theme we’re seeing is that the investment dovetails with the goals of the fund and aligns with their investment strategy.”

Under ATO guidelines, SMSFs can invest in crypto but should consider it good practice to ensure it is under the fund’s trust deed, is in accordance with the fund’s investment strategy and complies with the Superannuation Industry (Supervision) Act (SISA) and the Superannuation Industry (Supervision) Regulations (SISR).

Previously, it was flagged that with super funds now identifying on their tax return whether they are investing in these assets, it could be an indication that the ATO is aware that it is a challenging asset to hold in a super fund and that it is concerned that some funds may be getting it wrong.

Speaking on the requirements and challenges to choosing crypto as an SMSF option, Mr Stevenson said there are still hurdles limiting SMSFs from investing in cryptocurrency.

“It’s a relatively new asset class and many financial advisers lack experience with this type of investing,” he said.

“But this is changing. Cryptocurrency is proving to be an attractive option for many SMSFs that have done their research and are comfortable with the risk.

“We are also finding a growing number of advisers are coming to Cointree’s account managers wanting to learn more about this asset and how it can be part of an SMSF portfolio. Consequently, we’ve seen 53 per cent more SMSF applications in the last three months than we did in the whole of last year, a trend we expect to continue as SMSFs look to diversify their portfolios.”

SMSFs are a significant pool of investment capital for the crypto market, according to Cointree. Total assets are about $750 billion, and they comprise about 26 per cent of the total superannuation pool of funds.

Source: SMSF Adviser

Deeper, specialised processes required to fully measure SMSF operating cost

Understanding the complete picture of the operating expenses of an SMSF will require research to dig deeper, as limitations can be seen due to the various complexities during the calculation.

In a report released last year, Costs of Operating SMSFs 2020, the SMSF Association and Rice Warner conducted research to determine the minimum cost-effective balance for SMSFs. The new research questioned previous statements by ASIC that SMSFs with balances lower than $500,000 are generally uncompetitive with APRA-regulated funds.

In a recent Topdocs webinar, SMSF Association deputy CEO Peter Burgess said there are several figures being quoted out there about how much it costs to run an SMSF, but there are limitations when it comes to understanding the complete picture.

“The source of all of these figures is the ATO’s statistical overview reports which they release every year,” Mr Burgess said.

“I think it’s important for advisers and also clients to understand the limitations of some of these figures, particularly if you’re using this information to compare the cost of an SMSF with other superannuation entities.

“From our research, what we do know is that average costs or the average expense calculations that the ATO undertakes or referred to by others is not really an appropriate measure of the operating cost of itself, it’s not fit for purpose and it includes many expense items that you don’t associate with most SMSFs.

“So, if you’re trying to compare costs with other super funds, then I wouldn’t be using the average expense calculations.”

Mr Burgess said average and median costs are probably closer to the mark, and while they’re useful, in many cases for smaller SMSFs, they will be paying a lot less than that, “so the figures don’t break it down, it just gives us a high-level average figure”.

“Now Rice Warner was given access to data on 100,000 funds, so that did enable them to do a comparison of actual costs versus potential costs because, of course, the fee schedules are just what service providers say they charge, whereas the data is telling us what was actually charged, and so we’re able to do a reconciliation between the two,” he said.

“I guess, some of the interesting points to note here is what Rice Warner found is that for some of the smaller SMSF balances (less than $150,000), the actual fees being charged by service providers were much lower than what their fee schedule suggested and, in some cases, only marginally off the statutory costs that will be charged by those funds.

“Also, what they have done in this research is they have looked at the 95th percentile, so they separate out the low, medium and high costs, and I think by separating it out this way and showing the 95th percentile, you can really see the impact of some of these one-off costs, these outliers such as establishment cost, wind-up costs and costs associated with having a real property in your fund.

“You can really see the impact of those outliers and the distortion that happens if you try to combine all these together and calculate an average operating expense for the SMSF. We also found that the figures were not entirely rigorous due to the inconsistent recording of transactions.”

Mr Burgess said this is a key reason as to why the SMSF Association has been doing some work with the major software providers in the industry, in order to come up with a set of rules on how to standardise all the expenses in future research.

“We can ensure going forward that you know expenses are coded and recorded the same way, and we think we’re pretty close now to having a set of rules that will apply across the industry,” he said.

“Now the next phase will be the software providers having to make a few changes to their software, and then there’ll be an education phase where we’ll be looking to educate users to make sure that they understand how certain expenses should be encoded.

“I guess, once we get to that stage, we can then really start to get some very accurate figures coming out of its research on the operating costs for this because the actual data, as I said, is a little difficult because there are some inconsistencies from how certain expenses will be coded.”

Digging deeper for investment data

In looking at some of the other findings from the research in regard to investment return, Mr Burgess said Rice Warner was able to pinpoint the investment performance of SMSFs, which they did by fund size.

“This was interesting in that it really did support the views that the position that ASIC has so clearly articulated in a lot of their regulatory materials, that funds with smaller balances tend to underperform when it comes to investment returns,” Mr Burgess said.

“So, while we found that from an expense point of view that $200,000 estimates can be cost-effective compared to APRA funds, at that level, they are typically underperforming from an investment perspective and around 22 per cent of all SMSF are in that $200,000–$500,000 range.

“That’s not overly surprising when you look at the asset allocation of these smaller funds, as they do have a large weighting towards cash and term deposits if these interests are so low, so it’s not surprising that we’re seeing funds with those smaller balances underperforming APRA funds.”

Looking ahead, Mr Burgess said the association has its eyes set on future research, with a primary goal set to focus on funds in the $200,000–$500,000 range and try to benchmark the performance of these funds against relevant benchmarks.

“What we’re trying to do there is strip out those clients who have made a conscious decision to invest in cash either because that’s their risk profile or because they’re waiting for more money to come into the fund so they can invest versus those funds of that size that have made a conscious decision to invest into the market,” he said.

“We think by comparing to relevant benchmarks, we can really drill down and really see if there is an underperformance issue here at these ranges, and that’s some research that we hopefully will release later in the year.”

Source: SMSF Adviser

Six-member fund ideal asset holding structure

The federal government has promoted six-member funds as a retirement income planning tool for families, but this overlooks the investment and borrowing opportunities they can create as asset holding structures for non-related members, an SMSF legal firm has noted.

Townsends Business and Corporate Lawyers said the creation of six-member SMSFs, which is awaiting the passing of legislation to increase the maximum number of members from four, would allow them to be used as asset holding structures as well as a family superannuation vehicle.

“The six-member fund may see more people view the SMSF as an appropriate structure for a wide range of investments, particularly those involving a group of people hoping to pool their resources,” the legal firm said in an update on its website.

“For example, an SMSF may be the structure business buddies use to purchase an asset, rather than being restricted to being a structure only for jumbo families. Provided there is no breach of the sole purpose test, such an approach could result in material benefits.”

Additionally, six-member SMSFs would also have advantages in regards to borrowing and tax that were unavailable to equivalent structures outside the superannuation environment, Townsends added.

“The limited ability to resource the SMSF due to contribution limits can be overcome by borrowing. The SMSF may enhance its capital base through limited recourse borrowing subject to appropriateness, the investment strategy and the LRBA (limited recourse borrowing arrangement) rules,” it said.

“This can provide the SMSF with greater flexibility to invest in more substantial projects or further diversify investments. Loan interest and borrowing expenses are generally tax deductible to the SMSF.

“The SMSF has immense advantages over other commercial structures when it comes to tax, both in terms of the applicable rate of tax and the use of franking credits. The lower tax rate potentially accentuates the compounding effect of earnings reinvestment in the fund.”

The firm noted that while the government first announced plans to create six-member funds in April 2018, claiming it would allow greater flexibility, it had provided little explanation as to how that would occur.

“The enthusiastic Explanatory Memorandum for the [Treasury Laws Amendment (Self-Managed Superannuation Funds)] Bill couldn’t point to any significant need or request for reform. Just 7 per cent of SMSFs in Australia have more than two members,” the legal firm noted, adding that despite the low level of government commentary, SMSF trustees should prepare for the change.

Townsends noted the benefits of a six-member fund would include reduced costs due to shared compliance and administration costs, higher contribution inflows from five or six members, and the sheltering of small super guarantee contributions for younger members from high public offer account fees.

At the same time, six-members SMSFs would have to handle the issues related to more member trustees, children knowing more about their parents’ financial affairs and vice versa, the creation and implementation of different investment strategies for different age groups, and who had control within the fund.

Source: smsmagazine.com.au