PORTFOLIO POINT: The temperature is rising in SMSF-land. Time to apply some protection. Here are 12 do’s and don’ts to get you prepared for 2012.
It’s looking like another daunting year for investors. If you’re shaking in your boots at the prospect for returns, you won’t be alone.
Europe’s sovereign debt woes are likely to hang around for a while, like a bad smell. Exactly how long is a question no one knows the answer to. I’ll leave that for others to discuss for now.
But investment returns are just one aspect of your overall financial health, particularly when it comes to super, where what you get at the end is as much about the strategies undertaken as the dollars being invested.
With that in mind, and with the new year under way, today I’m giving you 12 rules for your SMSF for this year. Each has the potential to improve the performance of your super, without necessarily having to “get an investment call right”. (All but one, anyway.)
These are my 12 do’s and don’ts for SMSFs for 2012. And so it’s largely about doing positive things: there are eight do’s and four don’ts.
Do: Make the most of the temporary higher concessional contribution limits
Definitely rule number one – it’s time-critical and a no-brainer for many. For many of those who are aged over 50, you have less than six months to make the most of being able to make concessional contributions (CC) limits of up to $50,000.
From July 1, the limit falls to $25,000 for everyone. Except '¦
In December, the government confirmed its commitment to the 50-50-500 rule, where those who are aged over 50 will be able to continue to contribute $50,000 a year, if they have less than $500,000 in super. But we haven’t seen the details yet, so it could be quite restrictive.
Start planning now for both this and next financial year. If you’re able, and it makes sense, make the most of this year’s higher limits. You don’t want to get halfway through the next financial year and wish that you’d done more, salary-sacrificed more, made more deductible contributions, but find that you can’t.
Do: Review your investment strategy
Your investment strategy is a key document that is the responsibility of the trustee/s. It is designed to show that you understand your responsibilities as a trustee and will be one of the first documents that an auditor or the ATO will look at to see if you are taking those responsibilities seriously.
The investment markets of recent years have, in general, seen trustees become more risk-averse. But does your current investment strategy reflect this?
If you fled to cash for the majority of your investments, all power to you. If you timed it right, you might have had significant outperformance as a result. But if your investment strategy says you should only have 10–30% sitting in defensive assets (cash and fixed interest), and you now have 50–70% there, then you are operating outside of the stated strategy of your super fund.
See a previous column, Time to review your strategy, for what’s required of an SMSF investment strategy.
Do: Read your trust deed
There are two main sets of rules for SMSFs. They are the Superannuation Industry (Supervision) Act, known as the SIS Act, and your trust deed. Your trust deed cannot overrule the SIS Act. But it can severely limit what you can do with your super fund.
Depending on who drafted your deed and when it was created, there is a very strong possibility that it will no longer do what you need it to. It’s also possible that you are currently doing several things that your trust deed specifically does not allow.
Believe it or not, some deeds won’t allow the payment of pensions! Others won’t allow gearing, reversionary pensions, binding death benefit nominations or the ability to operate reserves, or set out how benefits can be paid, to name a few of the cool tools SMSFs can be so useful for.
It will probably take a few hours, but sit down and READ your SMSF’s trust deed. If you find that it won’t allow you to do things you currently are doing, or want to do, then it’s time to update the deed itself. It’s the operating document for your super fund (to be read in conjunction with the SIS Act).
Updating your deed doesn’t need to be that expensive, although there will be a cost. But it is crucial if you’re operating outside its laws.
Do: Make the most of in specie transfers by June 30
Something that has been the subject of several of my columns has been the use of in specie transfers to get shares you own into your super fund. The government is about to close this loophole, largely because the opportunity for abuse of the process by which it’s done (see In specie transfers in the frame).
The government wants to close this by June 30 this year. So, if it’s something you’ve been thinking about doing, get your skates on.
The advantages can be significant. But the window is getting smaller.
Do: Review your contributions strategy
Separate to making the most of the final year of higher limits for the over-50s '¦ do you have a strategy for making your contributions?
If you’re an employee, you will have 9% of your salary going into super. How much more than that are you salary sacrificing? How much can you go without in order to meet your contributions cap ($50,000 or $25,000) this financial year, given there are only just over five months before June 30?
If you’re self-employed, are you going to leave it to the second half of June to make your contribution? Be alert to the fact that if you’re an opportunist, there might be some great opportunities to buy great assets in the next six months, if you have the money in super already.
And when it comes to non-concessional contributions, don’t forget that you only trip the bring-forward rule if you go over $150,000 of non-concessional contributions in a financial year. Therefore, if you are thinking of putting large sums into super, it might pay to put in up to $150,000 (potentially for each member) this financial year, leaving you the ability to put in up to $450,000 (again, for each member) on July 1 or after.
Do: Consider segregation strategies
If you’re running one or more pensions in your SMSF, there can be considerable advantages to running segregated accounts within your super fund for, potentially, each of the different fund types being managed.
Let’s say you have a $1 million, two-member, fund, where one member has a pension and a small accumulation account, but where the other member is all accumulation.
There could be significant benefits to having the high income-producing assets in the pension fund, while the assets being held for capital growth (and likely to be held for the long term) being held in the accumulation interests.
That’s because a pension is tax-free, while the accumulation funds are still paying tax. So, if the income-based assets are tax-free and the growth assets don’t have to pay tax until the asset is sold, then there can be huge tax advantages to having segregated accounts.
(Note: The decision behind segregated assets is complex. If you are considering this as an option for your super fund, speak to a knowledgeable financial adviser and/or your accountant.)
Do: Review your current death benefit nomination
Absolutely crucial. And the reasons should be plainly obvious. You might not have reviewed your death benefit nomination for a few years – or a decade or more.
What’s happened in your life since then? Have you remarried? Are your kids no longer dependents? Were you using the old-fashioned non-binding nominations when you could be using a binding nomination?
Nothing replaces holistic estate planning. But reviewing and fixing how your super fund (SMSF or non-SMSF) deals with what happens when you die can uncover myriad potentially unintended consequences.
Do: Consider returning to work to get more into super
Are you over 65 and “retired”? But you’re thinking that, maybe, you could be interested in doing a little work and, potentially, bumping up your super?
It is harder to get money into super once you turn 65. But one of the ways you can contribute to super (with restrictions) is that you meet the “work test” – roughly, that you need to work 40 hours during a 30-day period, which will give you the ability to contribute to super for the remainder of that financial year.
That could open up the ability to contribute up to $50,000 into super in concessional contributions and $150,000 of non-concessional contributions into super.
Again, speak to your adviser/accountant if you think you could benefit your super by returning to the workforce (at least temporarily).
Don’t: Take too little or too much pension
This relates to everyone taking a pension, but particularly those taking a transition to retirement (TTR) pension.
TTR pensions require that you take between 4% and 10% of your super balance at July 1 as a pension. In this financial year, the 4% lower limit has been reduced to 3% (while in previous years, during the height of the GFC, it was 2%).
Not taking the minimum pension can be a serious breach of the SIS Act rules and potentially have your fund deemed non-compliant by the ATO.
Don’t: Have all your eggs in the one basket
There is a significant propensity for SMSFs to have the vast majority of their assets invested in Australian shares and cash.
There are other asset classes out there and they can be important to improving your returns, or minimising losses. For most of the past four financial years, if you were overweight Australian shares, you have probably underperformed other investment options.
If I have a warning for Eureka Report readers, it is that you should look into diversifying your assets into international shares and property and some form of fixed interest. For more on some of the benefits of fixed interest in particular, spend some more time reading Elizabeth Moran’s columns in this publication. Fixed interest can be a wonderful asset class for those who want some sort of certainty on their returns.
Don’t: Blindly accept your SMSF accountant’s numbers
When I speak to top-notch financial SMSF accountants and advisers, one thing they constantly say is that they can’t believe the quantum of mistakes made in the books of SMSFs by the fund’s accountants.
This tends to be particularly the case when small accounting firms, who don’t have SMSFs as a specialty, are doing the books.
According to James Carson, principal adviser of Charlton Financial, the four most basic errors can be as simple as not having the correct eligible service date, messing up taxation components (they’d changed from one year to the next, when they should stay the same from a percentage perspective), recording pension payments and contributions incorrectly (particularly where contributions tax is charged when it shouldn’t be if the contribution was NCC), or TTR pensions being paid above the minimum of 10%.
While few of you will have accounting qualifications, you might well find that you spend more time looking at your personal tax return than you do your SMSF books. Don’t let that happen any more. Check over the books for your SMSF. If the numbers don’t make sense, quiz your accountant.
Don’t: Ignore the watered down government co-contribution
In December, the government watered down the benefits of the government co-contribution for next financial year. Not quite to the point of fluoride in water (a few parts per million), but it was a significant downgrade.
It has fallen, temporarily hopefully, from matching $1000 of contributions to only being $500 for a maximum of $1000 of contributions. The income level at which it caps out at is now $46,920.
However, it’s still a potential bonus of $500. And it will still make sense, particularly if you were going to make the contribution anyway.
The information contained in this column should be treated as general advice only. It has not taken anyone’s specific circumstances into account. If you are considering a strategy such as those mentioned here, you are advised to consult your financial adviser.