SMSF trust deeds

Trustees of SMSFs are governed by the rules and regulations set out in the Superannuation Industry (Supervision) Act 1993 (SIS Act) and the fund’s trust deed. Trustees need to regularly review the trust deed, as a transaction that is permittable through the SIS Act, may be prohibited according to the trust deed.

Superannuation laws are constantly changing and the trust deed must adequately reflect these laws. To ensure the SMSF is allowed to access strategies permitted by the SIS Act, the trust deed should be reviewed and updated regularly.

If a trustee wishes to use the SMSF for activities such as an investment strategy or pension income stream, the activity will need to be included in the trust deed.

For example, the SIS Act allows a transition to retirement strategy for members over 55, however, the trust deed may only permit a payment when the member reaches the retirement age resulting in the member not being able to access to transition to retirement strategy.

A regular review and update of the SMSF trust deed will ensure the SMSF trustees have access to a range of strategies and activities, whilst also remaining a compliant fund.

Making tax-deductible super contributions

There are two types of super contributions individuals can make: non-concessional (after-tax) and concessional (before-tax).

From 1 July 2015 to 30 June 2016, eligible individuals can make concessional contributions of up to $30,000 per year if they are 48 years of age or under on 30 June 2015. Eligible individuals who are 49 years of age or over on 30 June 2015 can make concessional contributions of up to $35,000 for the year.

Those who are self-employed or not employed can claim a tax deduction for their super contributions as they are treated as concessional contributions.

Individuals who are under the age of 18 can only claim a tax deduction for super contributions when their income comes from gainful employment, such as carrying on a business.

In most circumstances, those who are classified as employees cannot claim a tax deduction for making a super contribution. However, they can receive a similar tax benefit through salary sacrifice contributions.

Although the rules for claiming tax deductions on super contributions can be complex depending on the type of work an individual does, generally speaking, an individual can claim a tax deduction for super contributions if they:

• are self-employed and not working under a contract principally for your labour.

• are not employed

• can satisfy the 10% income test rule. To satisfy this test, individuals need to prove that they receive part of their income as an employee but less than 10% per cent of their assessable income (including salary sacrifice contributions and reportable fringe benefits) are attributable to employment as an employee.

Nominating a beneficiary

Superannuation can often form a significant part of an individual’s wealth. Therefore, the transfer of such an asset upon their death can potentially cause dispute among the deceased’s family and potentially others.

Unlike assets owned in an individual’s personal name, superannuation does not form a part of their estate when they pass away. Instead, it can pass directly to a beneficiary rather than via a Will. However, this depends on who the beneficiary is and how the nomination was made.

Under superannuation laws, a nominated beneficiary must fall within at least one of the following categories of dependants:

• Spouse (includes defacto or same sex but not former)

• Financial dependant

• Child of any age (includes step or adopted)

• Legal Personal Representative of the deceased member

• Interdependent person

Broadly speaking, beneficiary nominations can be binding or non-binding.

Binding nominations compel the trustee to act on the deceased member’s instructions (provided the nomination is valid). While the trustee must pay the beneficiaries nominated in such a manner, the form of the payment is still left to the discretion of the trustee.

If a deceased individual’s family is blended or has a history of conflict, a binding nomination may be the most appropriate option, as it ensures that the designated beneficiary is provided for according to the deceased member’s specific wishes.

A non-binding nomination is not compulsory for the trustee to follow, and the trustee would use this nomination as a guide in paying out the member’s balance upon their death. Non-binding nominations can provide more flexibility for planning to achieve the most tax effective outcome, especially when the beneficiaries receive different tax treatment.

What is a transition to retirement strategy?

A transition to retirement (TTR) strategy is ideal for those Australians looking to ease into retirement by slowly reducing their working hours.

It is the kind of pre-retirement strategy that allows individuals to continue working while drawing down some of their superannuation benefits at the same time.

TTR uses a portion of an individual’s super to create an additional income stream (a retirement income account) while they are still working. The super account continues to receive contributions from the individual’s employer and any before-tax (salary sacrifice) contributions. The retirement income account uses some of the super savings to provide regular payments that top up the individual’s income.

Prior to the government introducing the TTR strategy, an individual could only access their super fund once they turned 65 or retired. Under the new TTR rules, an individual must be over the age of 55 and under the age of 65 to access the strategy.

The benefit of a TTR strategy is the fact that an individual can boost their superannuation savings while easing into retirement and pay less tax at the same time.

The investments in the super fund are free of CGT and earnings tax while an individual draws on their super, so a transition to retirement income stream provides some benefits beyond saving income tax.

Shares vs property in SMSFs

Shares and property are two very good investment options for those with a self-managed super fund. However, since they both have very different attributes, choosing the one that will achieve the best outcome for an SMSF depends on what the trustee wants to achieve.

The advantages of investing in property include:

• property prices are negotiable

• undercapitalised properties can be renovated for profit

• property prices are less volatile since it can take months to advertise, sell and settle a property purchase in Australia.

However, returns from property rentals are usually low due to factors such as land tax, utilities and rates, maintenance and tenancy vacancies.

Shares are more liquid, dynamic and volatile than property. Maintaining a portfolio of quality shares that pay tax-effective dividends may be a good way to fund retirement. With the right portfolio allocation, shares also have the potential to provide a better, stronger income than property rentals, as long as that income is sustainable and increasing.

Property can generally be used as a wealth-creation tool, while shares can create a reliable retirement income. For those who can afford it, it may be a good idea to invest and diversify in both. For those who remain unsure about which investment option to pick, seeking financial advice may the best option.

SMSFs: Getting SuperStream right

Although the new SuperStream standard for superannuation payments can provide SMSF trustees with a number of benefits, around five per cent of SMSFs fail to comply with the SuperStream requirements.

Under the new SuperStream system, a non-related employer must send superannuation contributions to an SMSF electronically, using an electronic service address (ESA). For this to happen, an SMSF must first be registered with a messaging provider to obtain an ESA.

One an SMSF has been registered, the messaging provider will link the SMSF to an ESA. The employer cannot send SuperStream contributions electronically to the SMSF until this is done.

It is important that SMSF trustees check with the service provider that their ESA is active and is linked to their SMSF. If the ESA is inactive, the super contributions submitted by the employer will be rejected. SMSF trustees must also ensure that their employer has their Australian Business Number and bank account details. Employers who do not have this mandatory information may accidentally direct the employee’s super contributions to a default super fund, instead of to the employee’s SMSF.

The new SuperStream system helps ensure that employer contributions are paid in a consistent, timely and efficient manner to member accounts. It also provides a reliable flow of payments and information on contributions and achieves fewer data and payment errors due to the better integration of employers’ payroll systems.

Reducing tax in your SMSF

There are some effective, and often quite simple, strategies to reduce the tax payable in an SMSF that many fail to take advantage of.

Nomination of beneficiary
Those who nominate a spouse, child or financial dependent as a beneficiary may avoid paying tax on a lump sum death benefit.

Delaying TTR commencement
Members looking to begin a transition to retirement pension in their late 50s may delay this decision until age 60. The benefit of waiting is that members avoid being taxed on super fund pension payments. This strategy may be particularly useful for members who are still working or have other taxable income outside super.

Re-contributing
This strategy involves taking lump sums or pension payments with a high taxable component out of a fund and replacing them with tax-free non-concessional contributions. It is important that the non-concessional contribution is separated from the taxable components in the accumulation balance to avoid losing the benefit of the re-contribution.

Lump sum withdrawals
This solution is suited to members who have a short time to live. They can withdraw all assets from their super fund and their children can avoid any tax upon death. The catch is that if they live longer than expected, they may not be able to transfer the money back into their super account.

Diversified growth strategies

Australians looking to increase their super fund’s annual returns may benefit from shifting to a diversified growth strategy.

A diversified growth strategy is a multi-asset program that invests in a range of traditional and non-traditional return sources to achieve a defined outcome.

A recent study has shown that including a 15% allocation to a diversified growth strategy in a typical super portfolio could increase the fund’s realised returns, lower its overall volatility and improve its risk-adjusted returns.

The role that a diversified growth strategy could play within a fund depends on the nature of the investor. For example, super funds with a high level of control may not necessarily need for the strategy as a portfolio diversifier. However, these kinds of super funds may benefit from idea sharing with an investment manager to facilitate more agile management of the portfolio.

Some investors have recognised the role that diversified growth strategies can play in helping to meet their objectives, with the market now attracting around $230 billion of funds globally.

Diversified growth strategies have sparked some interest from some Australian super funds and could be well placed to meet growth return objectives while also providing investors with the confidence that they can achieve desired outcomes.

Transitioning to retirement pension in an SMSF

The transition to retirement income pension is quite straight forward, however whether there are clear benefits depends on an individual’s personal circumstances.

When an individual starts the transition to retirement income pension (TRIP) once they reach preservation age and are still working, they receive an income stream from their SMSF.

Their existing account balance in their SMSF simply becomes a pension account, and any future contributions will go to a new accumulation fund in the same SMSF.

The minimum income an individual is required to receive each year is 4 per cent of the balance of their pension account. The maximum income stream they can receive is 10 per cent of the balance of their pension account.

When an individual starts their TRIP, they must instruct their employer to reduce the amount of salary received, and instead salary sacrifice this amount into their SMSF. The maximum salary sacrifice that can be made is $35,000 a year. This includes any employer contributions, such as the compulsory 9.5 per cent employer contribution.

The main benefit of a TRIP is to do with reducing tax. Reducing take home salary means reducing assessable income (which is taxed at an individual’s marginal tax rate). Converting to a TRIP and changing your SMSF to a pension account also means tax on any income your pension account earns, including CGT, will be reduced to zero.

In a lot of cases, implementing a TRIP can mean a significantly higher retirement balance, so it is something everyone should investigate.

Customising your super strategy

Adjusting your super fund strategy so you can have a more active role in managing your retirement savings can often result in a number of rewards and benefits.

However, it is important for those who opt to take more control of their super fund’s asset allocation to consider aspects in the long-term, rather than react to any short-term financial changes.

The typical investment strategy options for super accounts are cash, conservative, balanced, growth and high growth. Most default funds combine members who are still saving for retirement into the same balanced option. But while conservative and growth assets tend to deliver the best long-terms returns for most members, it is worth considering if these investment options suit a member’s personal wants and needs.

Key life events, such as marriage, starting a family, or approaching retirement, are often good opportunities to consider and review superannuation investment strategies.  Fund members should also take into consideration what stage of life they are at when deciding the kind of investment strategy they want their super in.

Changing the level of risk in a super fund can be as easy as selecting a new option online or over the phone. And while most funds don’t charge members for changing their investment strategy option, it is always a good idea to check with your super fund if this is the case. There can also be a slight difference in investment fees between strategies. While higher growth and more active strategies can be more expensive, these costs can become inconsequential when compared to the value of being in the right strategy.