Be aware of SMSF Trustee responsibilities you should be reviewing now

Be aware of SMSF Trustee responsibilities you should be reviewing now

Have you reviewed your superfund’s investment strategy and binding death nominations?

Choosing to establish and manage a self-managed super fund (SMSF) comes with trustee responsibilities which are important to not neglect. It may be as simple as not having an appropriate investment strategy or actually forgetting to legally document a non-lapsing binding death nomination or to consider a reversionary beneficiary when commencing an income stream with your super.

SMSF investment strategy

As a trustee of a superfund, you need to have an investment strategy. It’s more than simply providing a range of different asset classes your fund is allowed to invest in. The ATO, as the regulator of your SMSF, requires the trustee to consider:

  1. The fund’s investment objectives and how the investments link to these objectives.
  2. How the strategy provides benefits to the members at retirement.
  3. Diversification of the investments.
  4. Risks from the lack of diversification.
  5. Liquidity of the fund including cashflow requirements – particularly in the future when an income stream will commence.
  6. The ability for the fund to pay liabilities.
  7. Whether the trustees have considered insurance, and if not, why?

If you make changes to what is already documented in your strategy, then you must make the appropriate amendments and sign off the changes. Changes such as high fluctuations in markets causing your asset allocation to change dramatically, or investing in an asset outside what is included in your strategy.

The ATO has had concerns on the quality of information in fund investment strategies, and we are seeing auditors pay closer attention to what is included and if they actually reflect the investments made and held during the year.

We have seen the ATO more closely scrutinize the investments held with letters sent to ask trustees to justify their investments, particularly if there is a lack of diversification.

Estate planning considerations in an SMSF

An area we find there is a lack of attention from trustees is in estate planning. Superannuation doesn’t actually form part of the estate and needs to be dealt with specifically.

As the trustee, you are responsible to ensure this has been considered with the appropriate actions taken to reflect the wishes of each member.

While you are in the accumulation phase, each member can plan who they want their superannuation benefit (and any insurance owned by the superfund) paid out to by instructing the trustee through a binding death nomination. A ‘non-lapsing’ binding death nomination is an extension in that it doesn’t have an expiry date.

A ‘reversionary’ beneficiary is who you nominate at the time you commence your income stream. Upon death, the income stream automatically continues to be paid to the chosen beneficiary (such as your spouse) upon your death.

If you haven’t made a reversionary nomination, your benefit will be paid out as a lump sum. This can be an issue if your spouse is unable to make a contribution back into the super fund.

Making the decision to have a Self Managed Super Fund comes with trustee responsibilities. It’s important, as the trustee of your fund, you are fully aware of these to ensure your fund remains compliant. The ATO continues to review funds to make sure they are being run improperly. Making sure your fund has a comprehensive investment strategy, which is updated to consider the investments you are holding or expect to hold, is one area which the ATO has drawn their attention to. Also, the sooner you review your binding death nominations, the better. Make sure you actually have these and they continue to properly reflect your wishes. If commencing an income stream, consider whether you should have a reversionary beneficiary. Getting it right before it starts can save you headaches later on.

Want to learn more? Speak to a specialist about your SMSF today.

What you need to know about property investing in your self-managed super fund (SMSF)

What you need to know about property investing in your self-managed super fund (SMSF)

“We want to eventually retire to the coast so we will buy a property in our self-managed superfund and rent it out in the meantime. The value of the property will rise over time and when we’re ready to retire we’ll just move in.” 

We’ve heard this statement many times, but if only it was so easy. At a time when property markets are buoyant and interest rates so low, many people are considering property investment within their SMSF but the laws around what you can do, and can’t do, with the property are complex. 

Investing in residential property

Firstly, residential property purchased through an SMSF cannot be lived in or rented by you, any other trustee or anyone related to the trustees – no matter how distant the relationship. Buying a coastal property in your SMSF and moving in when you retire is therefore not allowed. When you retire you must first purchase the property from the SMSF, perhaps from the money you receive from selling your city residence. This is just like buying a regular property except you won’t have to deal with negotiations. The transaction must take place at a fair market value, based on objective and verifiable data, and will involve additional costs such as stamp duty and legal.

Investing in commercial property

Rules regarding related parties that apply to residential properties do not apply to commercial properties. They therefore can be sold to an SMSF by its members, as well as being leased to SMSF trustees or an individual or business related to them.

This exception makes SMSF commercial properties appealing to many small business owners such as barristers to buy their chambers or manufacturers who can purchase a warehouse/factory. This allows the business to pay rent to their superfund rather than ‘dead money’ to a landlord. Again, it’s important the lease agreement is at market rate and must be paid promptly and in full at each due date. 

Regardless of whether it’s a residential or commercial property, the investment must also satisfy the overarching function of the SMSF, which is to provide retirement benefits for its members (a concept known as the sole purpose test). You must consider the yield or potential capital appreciation when selecting the property and if neither makes good investment sense, you should reconsider.

The loan

Lending through your SMSF must be done by a limited recourse borrowing agreement (LRBA). The property must be owned by a separate ‘bare’ trust that sits outside of the SMSF structure and has its own trustee. All the property-related income and expenses are then made through the superfund’s bank account. These loans are specifically designed to ‘limit the recourse’ so that if the terms of the loan are breached the lender can only access the property and other superfund assets are protected. 

Given the unique characteristics of the loan, SMSF loans generally attract significant application fees and higher rates than standard home loans. The lending criteria are also much stricter and can involve things such as reduced loan to value ratios (LVR), shortened loan terms resulting in higher repayments, and often borrowers require a minimum percentage of liquid superfund assets available to make loan repayments if needed. There are also additional legal costs associated with the setup and ongoing compliance of both the SMSF and bare trust structure. These costs must be factored in to decide if purchasing in your SMSF is the right option for you.

Renovating

The idea of renovating a residential property within an SMSF to improve capital value is also more complicated than it first appears. Whilst general maintenance and repairs can be made, any significant renovations must be funded by available cash already held within the superfund and not by the loan or borrowed money. Even if funds are available, you are not allowed to make significant changes to the original property that was purchased using the limited recourse borrowing arrangement. Renovations that substantially change the asset will require a new LRBA.

Given the right opportunity, there is no doubt that buying property in your SMSF can be an excellent long-term strategy but there are clear complexities. The considerations presented in this article are by no means exhaustive and investing through your SMSF should always be done in consultation with your financial adviser and an experienced mortgage broker. 

Contact us today to discuss whether buying a property in your SMSF could work for you.

Steward Wealth’s Co-Founders named as ifa Excellence Award finalists 2021

Steward Wealth’s Co-Founders named as ifa Excellence Award finalists 2021

Anthony Picone and James Weir – Directors & Co-Founders of Steward Wealth have been named as finalists in the ifa Excellence Awards for SMSF Adviser of the Year & Industry Thought Leader of the Year.


The finalist list, which was announced on 24 August 2021, features over 210 high-achieving financial services professionals across 27 submission-based categories. 
 

The ifa Excellence Awards is the pinnacle event for recognising the outstanding achievements and excellence of exceptional professionals across Australia’s independent advice sector.  

The awards were created to acknowledge and reward the contributions of professionals leading the charge within the financial advice industry, noting their dedication to their profession. 

After the past year of uncertainty and challenges brought on by the pandemic, now more than ever, it’s important to stop and take a moment to celebrate both your accomplishments and those of your peers. 

 “At a time of change and upheaval for the industry, and after another year of business and family disruption as a result of COVID, it’s so important to take some time and recognise the achievements of the industry and the fantastic innovations that are going on inside advice businesses,” says ifa editor Sarah Kendell. 

“A huge congratulations to all of this year’s finalists for their outstanding dedication to client service through such a challenging time and the excellent examples they are setting for their peers around adaptation and success through adversity.”  

James Weir, Director and Co-Founder at Steward Wealth, said that he was extremely proud to be recognised and endorsed as a finalist in the ifa Excellence Awards 2021.  

“This recognition for our contribution to the financial planning industry reinforces the strength of our services and capabilities as we continue to grow. Highlighting our dedication to connecting with the community and engaging with clients,” Anthony Picone, Director and Co-Founder at Steward Wealth added. 

Looking for an industry endorsed SMSF advisor?

Find out more about our SMSF services below or call Steward Wealth today on (03) 9975 7070.

Guide to superannuation threshold changes

Guide to superannuation threshold changes

Changes to superannuation thresholds from 1 July 2021 to 30 June 2022

Transfer Balance Cap

The transfer balance cap rules commenced on 1 July 2017. It is a limit on the amount of superannuation a member may use to commence a tax free pension in retirement phase. It is also the level at which you may not make any further non-concessional superannuation contributions. From 1 July 2021, this transfer balance cap will increase from $1.6 million to $1.7 million.

Non-Concessional Contribution Cap

The non-concessional superannuation contribution cap will also be indexed up from $100,000pa to $110,000pa and so the 3 year bring forward rules will enable you to make a $330,000 non-concessional contribution.

Concessional Contribution Cap

The concessional superannuation contribution cap will also be index up from $25,000pa to $27,500pa. Concessional contributions include employer SG (super guarantee), salary sacrifice or deductible super contributions.

Superannuation Guarantee (SG)

The contributions you will receive from your employer will rise to 10%pa from 1 July 2021. Employers will need to pay this on salaries of up to $58,920 per quarter.

The increase in contribution limits is always a noteworthy event, given it tends to only occur every 4-5 years. For those considering utilising the 3 year bring forward provisions, it may be worth considering deferring these payments for 6 weeks. This also applies to those who were considering using their superannuation to purchase a retirement income stream prior to 1 July 2021. If you would like to discuss these changes and how to best take advantage of them, please feel free to contact us. We will be more than happy to assist.

What you need to know from the 2021-22 Federal Budget

What you need to know from the 2021-22 Federal Budget

As Scott Morrison kept reminding us this morning, ‘we are fighting the pandemic’ and so the Federal Budget focuses on key spending to drive Australia’s economic recovery.

This is a Budget promoting economic growth and employment. While you will have those who continue to have major concerns over government debt and the continued spending, could it be that we are seeing a ‘new’ way of thinking when it comes to debt? My colleague, James Weir, wrote a paper explaining this with Modern Monetary Theory (“MMT”), suggesting maybe the focus on debt is unwarranted?

So here are the simply the main features of the 2021-2022 Budget;

Personal Income Tax

Low and middle income tax offset

This will be extended to 2021-2022 providing a reduction in tax of up to $1,080 to low and middle income earners.

Superannuation

Federal Budget - Superannuation

Removing the work test

This is actually a significant change. Individuals aged 67 to 74 years will be able to make non-concessional super contributions, or salary sacrifice super contributions without meeting the work test.

However, in order to make personal deductible contributions, you will still need to meet the work test.

Downsizer contributions

The charges announced in the Budget from that article include reducing the eligibility age for 65 to 60 years of age. This scheme allows a one-off contribution of $300,000 per person from the proceeds of the sale of their home.

To learn more about downsizer contributions and how it can work for you check out my blog here.

SMSF residency restrictions

From 1 July 2022, the Government will extend the central control test from 2 years to 5 years and remove the active member test.

Super guarantee threshold

The $450 per month minimum income threshold under which employers are not required to make a super contribution for employees will be removed 1 July 2022.

First Home Buyer Scheme (FHBS)

From 1 July 2022, the Government will increase the amount of voluntary contributions to $50,000 which may be released for the purchase of a first home.

Family Support

Family Home Guarantee

The Government has introduced the Family Home Guarantee to support single parents with dependants buying a home. This is regardless of whether they are a first home buyer or a previous owner-occupier. From 1 July 2021, 10,000 guarantees will be made available over four years to eligible single parents with a deposit of as little as 2%, subject to an individual’s ability to service a loan.

The Government is also providing a further 10,000 places under the New Home Guarantee in 2021/22. This is specifically for first home buyers seeking to build a new home or purchase a newly built home with a deposit of as little as 5%.

Increasing childcare subsidy (CCS)

To ease the cost of childcare and encourage a return to the workforce, from 1 July 2022 the Government proposes to provide a higher level of CCS to families with more than one child under age 6 in childcare. The level of subsidy will increase by an extra 30% to a maximum subsidy of 95% for the second and subsequent children. For example, currently a family may receive a 50% subsidy on childcare costs for each child if family income is between $174,390 and $253,680. Under the proposal, the family would receive a CCS of 50% of costs for their first child and 80% for their second and subsequent children. The annual CCS cap of $10,560 for families earning between $189,390 and $353,660 will also be removed.

Social Security

Pension Loan Scheme

The Government has announced added flexibility by allowing up to two lump sum advances in any 12 month period up to 50% of the annual pension.

The Government will also not claim back any more than the sale price of the house used to guarantee the payment.

Aged Care

The Government has announced a $17.7b investment in aged care reform over the next 5 years which will cover:

  • Additional Home Care Packages
  • Greater access to respite care services
  • A new funding model for residential aged care
  • A new Refundable Accommodation Deposit (RAD) support loan program.

Business Support

COVID Package

The Government will extend until 30 June 2023 the instant write-off of depreciable assets as well as the ability for qualifying companies to claim back tax paid in prior years from 2018-2019 where tax losses occur until the end of the 2022-2023 financial year.

Listed property trusts: primed for a rebound

Listed property trusts: primed for a rebound

Property was possibly the worst affected sector when governments around the world pulled the plug on their economies in 2020. Not only did workers stop going into office buildings and shoppers stopped going to malls, but landlords were forced to shoulder the added burden of rent holidays and eviction moratoriums.

Little wonder real estate indices plunged. Locally the Australian Real Estate Investment Trust (AREIT) index fell 39% between the end of January and March last year, while the global benchmark, the FTSE EPRA Nareit Global index (GREIT), dropped 28% (in USD terms).

However, lingering concerns about both delays in returning to work combined with the effect the new paradigm of working from home will have on valuations for commercial property, as well as the impact of the accelerated migration to online shopping on retail values, have seen real estate indices lagging behind the broader share markets’ recoveries following the COVID crash.

The AREITs index is still 14% below its high of last year, while the ASX200 is only 1% away. Likewise, GREITs have managed to get square with last year’s high, but they’re a long way behind the 19% increase in global shares.

These differences offer smart investors the opportunity to buy what some strategists are describing as the only cheap sector left. Tim Farrelly, a highly regarded asset allocation consultant, recently wrote “Despite pretty severe assumptions on the outlook for rental growth, such as a fall in real office rents of 45% and a fall in real retail rents of 20% over the next decade, the overall impact on 10-year returns is not nearly as catastrophic as might be expected, as markets appear to have priced in these falls and more.”

Indeed, Farrelly’s 10-year return forecast for AREITs is 6.8% per year at current levels, while the forecast for Australian shares is 4.8%. Likewise, Heuristic Investment Systems, another asset allocation consultant, has a 10-year forecast return of 6.25% and an overweight recommendation.

While AREITs do offer compelling long-term value at current levels, our domestic market does suffer some limitations. It is highly concentrated, with the top 10 companies accounting for more than 80% of the ASX 300 AREIT index, and just three sectors, retail, industrial and office, making up more than 60%. The superstar of Australian property trusts, Goodman Group, alone is almost one quarter of the whole index.

By contrast, global REITs not only offer the compelling value, plus, at more than A$2.4 trillion, the total market is more than 19 times bigger than Australia’s. The top 10 companies account for less than 25% of the index and the biggest single company is only 5%.

Most importantly, there is abundant diversification, including to sectors that offer leverage to some of the most important structural themes in global markets. If you want to gain exposure to growing digitisation, 3% of the index is data centres; or e-commerce, 12%  is industrial; for demographics, healthcare is 7%, and for urbanisation, 18% is residential.

According to Vanguard, global property was the best returning asset class in the 20 years to 2020, with an annual return of 8.5%. Resolution Capital, an Australian GREIT manager, also points out the asset class enjoyed lower earnings volatility than global equities.

Despite that history of strong returns, 2020 was its worst year since the GFC at -17%. By contrast, however, this time the fall was not because of excessive debt or weak balance sheets, it was a classic exogenous shock. With the progressive relaxation of government restrictions, conditions are in place for a strong rebound.

An added attraction is that historically REITs have been a terrific hedge against inflation, since both rents and property values are typically tied to it. This may sound counterintuitive if you’ve come across the popular misconception that REIT valuations are inversely affected by bond yields, that is, when yields rise, values fall.

Chris Bedingfield, co-portfolio manager of the Quay Global Real Estate Fund, points out that, “Over the long-term, there is actually no correlation at all between REIT valuations and bond yields. However, over the short-term, it seems there are enough investors who believe it that it becomes a self-fulfilling prophecy.” Notably, over the March quarter, GREITs returned more than 7% despite bond yields rising sharply.

To gain exposure to GREITs, you can buy an index fund, such as the VanEck Vectors FTSE International Property ETF (REIT.ASX), or, if you’re wary about the potential for COVID risks, you can choose an actively managed fund from the likes of Quay Global Investors or Resolution Capital.