1. Chapter 12 Self-managed superannuation funds
PowerPoint presentation by
Fariba Ahmadi-Pirshahid
©2014 John Wiley & Sons Australia, Ltd

2. Learning objectives After studying this chapter you should be able to:
describe the history and growth of SMSFs
outline the major steps involved in setting up an SMSF
describe the contribution opportunities provided by SMSFs
outline the investment opportunities and constrains faced by SMSFs
explain the process by which SMSFs can pay tax-free benefits to members
explain the strategies that can be employed by a SMSF to improve estate planning outcomes
describe the role of the SMSF auditor and other SMSF professionals in delivering services to SMSFs
model a cost–benefit analysis to determine whether establishing a SMSF structure is warranted
explain compliance and penalties.

3. Introduction Small APRA funds have declined in size in the last decade
Funds with four or less members are small funds
There are two types of small funds:
small APRA funds — regulated by APRA
self-managed superannuation funds (SMSFs) — regulated by ATO.
Small APRA funds have declined in size in the last decade
SMSFs are similar in many ways to large funds in the way funds are contributed and invested but there are some significant differences

4. The history and growth of small superannuation funds
Referred to as ‘excluded funds’ within the Income Tax Assessment Act
The ATO was put in charge of the regulation of SMSFs in 1999 following recommendations of the Wallis Inquiry
Separation of the regulatory body has resulted in significant differences between the Small APRA funds and SMSFs
SMSFs have grown significantly in the last decade reaching $496 billion in assets in 2013

5. SMSF selected facts and figures

6. Setting up a SMSF
Getting right advice is important in setting up a SMSF
Establishing a SMSF involves:
establishment of a trust deed
determination of the trustee structure
determination of who can be a member
set up of investment objectives/strategies
establishment of an insurance plan.
Advice must be sought from advisers or accountants who have a Financial Services License (FSL)

7. Establishing the trust deed
A trust deed sets out the rules by which the SMSF will be conducted
Content of a trust deed includes:
objectives of the fund
how the trustees can be appointed and removed
description of who is eligible to be a member
how contributions can be made to the fund
how and when benefits can be paid from the fund.
To pay the concessional tax rate, a SMSF must be a complying fund
A complying fund is one that:
Is resident in Australia
Has made an irrevocable election to be regulated by the SIS Act
Must meet the conditions for compliance as outlined in the SIS Act

8. Trustee structure Trustee structure can take one of two forms:
members of the fund become trustees (all members must be trustees and all trustees must be members)
a corporation is established to act as the trustee (this is suitable when the fund has only one member).
Individual trustees must be over the age of 18 and must not be a disqualified person
A corporate trustee structure can protect the personal assets of individual members against any liabilities the fund may have
A person is disqualified if they:
Have been convicted of an offence involving dishonesty, or
Have been subject to civil penalty under the superannuation laws, or
Are an undischarged bankrupt, or
Have been disqualified by APRA or the ATO to act as a trustee

9. Who should be members
Anyone can be a member of a SMSF however majority of members are familial
Advantages of having a SMSF for family members:
more investment opportunities exist because funds are pooled
running one fund rather than a few reduces costs
assets can be transferred to members without incurring CGT.
Receiving benefits may be difficult due to the complexities of family relationships

10. Setting the investment objectives and strategies
Single member:
Single investment objective and strategy
Multiple members:
Difficult to have a single investment
objective
May result in forgoing of some of the
efficiencies associated with individual
investment
A clearly articulated and regularly reviewed investment plan which includes objectives, strategies and rules can help minimise disputes between members

11. Building an investment strategy
Building strategies from the ground up (bottom-up) is often the best way with objectives emerging at the end
The bottom-up process first captures data such as:
age
work status
superannuation rollovers to the SMSF
likely contributions to the SMSF
anticipated years to retirement.
The risk profile of the members is then determined
The risk profile is used to decide on the degree of exposure to growth assets
If the fund is to have a single investment pool for all members, the exposure to growth assets could be weighed by each member’s contribution to the investment pool to assist in determining an overall asset allocation for the fund

12. Historical performance of various asset classes

13. Establishing the insurance plan
Less than 15% of SMSF members are estimated to have life insurance
Trustee obligation to consider the insurance needs of each member
Each member will be individually assessed and insured by the insurance provider
Such considerations must be recorded either in the fund’s investment strategy or in the minutes of the trustee meetings

14. Establishing the insurance plan continued
Assets owned by the fund also need to be insured
SMSF investments must be kept separate from personal assets of each member
Shared ownership of assets should be as
‘tenants in common’ and not as ‘joint tenants’
Auditors have duty to report to the ATO any insufficient separation between the fund’s assets and the personal assets of a member

15. Contributions
To receive a contribution, members have to provide their tax file number (TFN)
SMSFs are bound by the same rules as larger funds
Some important differences are:
ability to make in-specie contributions such as shares, bonds and debentures, real business property and managed funds holdings
distinction between selling and contributing to a SMSF
tax concessions available to small business owners.

16. Contributions continued
In-specie contributions are subject to the same concessional and non-concessional contribution limits as cash contributions
Selling assets to the SMSF is not in-specie contribution so the limits do not apply
All transactions must be on an ‘arm’s length’ basis
Small business owners are able to access:
a 15 year active asset exemption
a small business retirement exemption.

17. 15 year active asset exemption
Example:

18. Small business retirement exemption
Example:

19. Investment restrictions
SMSF investments must meet the ‘sole purpose test’
i.e. solely for the purpose of providing retirement benefit
breach of this rule could result in criminal and civil penalties
The value of ‘in-house’ assets can not exceed 5% of all assets
‘in-house’ assets are those purchased from a ‘related party’
Long term borrowing for the purpose of gearing returns are not allowed
Trustees are not allowed to lend money to provide financial assistance to members or related parties

20. Investment choices Access to the same range of assets as larger funds
SMSFs can also invest in:
Collectables and personal use items such as artwork, jewellery, antiques, coins, stamps etc.
Leverage their investment portfolio through the use of investment warrants
Invest in business real property which is exempt from the 5% in-house asset rule

21. Investment trends

22. Resident status
To be a complying fund under the SIS Act, a SMSF must be ‘resident’ in Australia which means that:
the fund was established in Australia
the fund satisfies the active asset test having either:
no active members and therefore no active accounts, or
more than 50% of the fund’s assets held in ‘active’ accounts.
central management and control of the fund remains in Australia.

23. Bankruptcy
Funds held in superannuation including SMSFs are protected from creditors while in accumulation mode
Becoming undischarged bankrupt or entering into a personal insolvency agreement prohibits a person from being a trustee or a director of a corporate trustee of a SMSF
In the event of likely bankruptcy, the individual member has to plan for the relinquishment of their trustee status
In the absence of a plan, the member will be given 6 months to rectify the situation

24. Paying benefits to members
To receive benefits a member must have reached preservation age and stopped working
Consideration must be given to:
Pooling and segregation
Having a separate investment pool for each member eases the separation of assets to be paid as benefit to a member
Types of pension options available
Account-based pension
Non-account based pensions
Lifetime income stream
Transition to retirement

25. Estate planning Death benefit lump sum
Superannuation death benefits can be paid to a beneficiary or to multiple beneficiaries
In the absence of a binding death benefit nomination the death benefits will be distributed at the discretion of the trustees of the SMSF
Death benefit lump sums are tax free if received by dependants
Adult children are not dependants
Benefits are split into a tax-free and a taxable component
Taxable component will be taxed at their marginal tax rate

26. Death benefit lump sum example

27. Estate planning Death benefit income streams
Income streams cannot revert to non-dependants and must be converted into a lump sum
Where:
an income stream is funded by a tax-free and a taxable component, and
the deceased and the dependent beneficiary are both under the age of 60,
the income stream will be taxable at the dependant’s marginal tax rate but will be reduced by 15% rebate.
If both the deceased and the dependant beneficiary are over the age of 60, the income stream will be tax free.

28. SMSF estate planning strategies
Strategies to improve the estate planning outcome in the event of death of a member include:
ensuring where possible that superannuation is left to dependants and non-super assets are left to non-dependants
increasing the tax-free component through recontribution
regularly selling assets when in pension mode
using a corporate trustee to ensure trustee arrangements stay on the death of one member (e.g. a husband and wife fund)
determining how assets might be transferred between generations
maximising taxation entitlements.

29. Auditors, actuaries and other SMSF professionals
Certain functions of a SMSF are required by law to be done by professionals rather than trustees of the fund
All SMSFs must appoint an auditor
The auditor needs to:
provide the SMSF with an annual audit report
notify the trustees of any concerns raised through the audit process
notify the ATO of any serious contraventions of the relevant law.
Services of an actuary will be needed when one member goes into pension mode
Accounting, legal, investment and other professionals may also be appointed to provide support for DIY functions of a SMSF

30. The cost of establishing and running a SMSF
Establishment cost ranges between $1000–$4000
It is more expensive to establish a corporate trustee
Additional costs include annual running costs which may be variable, semi-variable or fixed
An example of a fixed cost is the annual supervisory ley of $250 per year payable to the ATO
Auditor fees are semi-variable cost as the fee changes with the level of services used
Costs associated with investment such as brokerage fees are variable costs

31. The cost of establishing and running a SMSF continued
Average operating expense ratios to assets by SMSF fund size

32. Compliance and penalties
ATO holds SMSF trustees liable for the actions of the fund and encourages SMSFs to:
self-manage
self-regulate
self-assess.
SMSFs are expected to keep detailed records including:
records of financial transactions
annual operating statements and statement of financial position
copies of audited annual returns lodged with the ATO
minutes of trustee meetings
copies of reports to members.

33. Summary Establishing a SMSF has many advantages including:
cost savings
control over the investments and assets of the fund
flexibility in terms of the type of contributions allowed
tax advantages for small business owners and as part of estate planning.
Some disadvantages include:
considerable responsibility on trustees for compliance
possibility of disagreement between members
possibility of getting bad investment advice and loss as a result.
It is believed that SMSFs continue to grow as they have been in recent times