Build your own tax haven

THE global fi nancial crisis is once again prompting Australians to reconsider their super.

Comparisons between industry, retail and self-managed funds centre on fees and performance but other aspects, including the ability to start pensions and make binding death nominations, can be important.

Self-managed super funds have a competitive advantage, especially when seeking high safe returns for an extended period, thanks to their flexibility. They can invest in a wide range of direct investments such as cash, term deposits, bonds, listed shares and real property.

These funds offer control and fl exibility of their own destiny because all members must also be trustees.

Like all other trustees, SMSF members must comply with superannuation legislation, behaving as prudent people implementing investment and retirement strategies suited to their own needs.

But SMSF members are not left alone to operate their funds. Professional administration services, accountants and investment advisers can provide assistance.

The trustees, not a nominee company or intermediary, are the owners of their retirement assets with titles registered in their names.

Direct ownership of investments also helps avoid the multiple fee layers that are often associated with managed investments.

SMSFs can also invest in managed investments to achieve a well-diversified portfolio.

An attractive, low-cost way of buying quality long-term sharemarket exposure is through ASX listed investment companies (LICs).

Many of these sell at a discount to their net tangible asset backing, with the larger LICs having lower management expenses (in the range of 0.1 per cent to 0.4 per cent of total assets annually) than managed and industry funds.

Running an SMSF can also open valuable tax-planning opportunities.

These include transferring certain assets such as listed shares and business premises from individual names into super.

This allows continued ownership of the assets while maximising the available superannuation tax benefits.

These tax concessions can also help manage any capital gains tax liabilities triggered by these in-specie transfers.

But even if capital gains tax is payable, the lower tax on earnings and growth within the concessionally taxed super environment will recoup the cost over a relatively short period.

SMSF trustees can tailor their investment decisions to the member's particular circumstances and reduce tax payable in the process.

Shares paying fully franked dividends are particularly useful in this context to offset tax payable on fund earnings and taxable member-employer contributions.

SMSF members can commence pensions as soon as they are eligible.

Once the fund is in full pension phase and paying no tax, franking credits are fully refundable, providing additional cash flow to the fund.

Starting pensions will also reduce the fund's capital gains tax liability because no tax is payable when growth assets are redeemed after the fund has entered the pension phase.

Starting a pension is a simple and immediate process within the structure of an SMSF without any need to the fund investments. The fund administrator only has to change the fund accounting procedures to pay the pensions as requested by the member.

The one fund can support multiple pensions for each member started at different dates.

By contrast, when retail-industry fund members wish to commence a pension they often must redeem their accumulation fund's investments and transfer their money to a separate pension fund.

This changes the fund's underlying investment assets, incurring buy-sell spreads and crystallising gains tax on assets transferred to the new fund.

Starting pensions in retail-industry fund structures also often involves the market risk that arises due to a time lag between selling assets in the retail-industry fund's accumulation plan and repurchasing assets in their pension plan.

Starting pensions in an SMSF facilitates tax-effective recontributions to the fund because, unlike for retail or industry funds, there is no limit on the number of pension accounts any member can have within their SMSF.

A well-drafted trust deed ensures SMSF members can take immediate advantage of the latest developments in superannuation legislation.

Even on death an SMSF is valuable. A binding death-benefit nomination can last indefinitely (or until revoked) and offers superior flexibility in the nomination of beneficiaries and the form of benefit payments.

This can also assist with minimising tax on death-benefit payments from both super investments and life-insurance payouts.

The level of fees incurred by SMSFs is a point of much debate.

Small SMSFs are costly, especially compared with industry funds, because of the fixed costs for accounting, auditing and investment management, but the cost as a percentage of fund assets falls quickly as assets increase. The larger the fund the less expensive it is to run on a percentage fee basis and many SMSF administration services use a capped-fee structure. Even with smaller funds in excess of $100,000, the cost is comparable to most retail funds.

HOW TO SET UP YOUR OWN FUND

You will need:

? An understanding of the sole-purpose rule

? A trust deed set up by an accountant

? A tax file number for the fund

? A written investment strategy

? An accountant to prepare annual accounts

? To complete an annual tax return

? To be audited annually by an independent auditor