An alternative to SMSFs
My daughter (under 25) is looking at using the member direct option that her superannuation fund offers. She wants the flexibility to be able to invest in shares but has nowhere near enough funds in super (under $50K) to start an SMSF. We talk about my SMSF and the shares I hold and why I hold them, and she is learning from others of her own generation as well and she is keen to be an investor. As all her savings are tied up in the new house she has just bought, her super is the only area where she can invest. I think it is the perfect option for Gen Ys to develop their portfolio management skills before they take on the challenge of managing an SMSF later in life if they choose to.
CFDs and SMSFs
Regarding Tony Rumble’s article, Derivatives and your DIY fund, my advice and understanding of the SIS Act is that CFDs are only not allowed when assets of the fund are used as collateral for margin calls. Cash is not considered an asset for this purpose. Good article anyway and raises the issue of whether CFDs are too risky for SMSFs.
Tony’s response: The reason stated in ATO rulings regarding the eligibility of CFDs in super, (in which the ATO states that CFDs may not be used by SMSFs unless they are run through an approved exchange) is that the margining requirements of these “over the counter” CFDs is such that it breaches the SIS Act prohibition on a fund charging its assets.
The ATO rulings also state that these OTC CFDs are also “synthetic” financial instruments – although there is no prohibition in the SIS Act on SMSFs buying a “synthetic” product (i.e. one based on derivatives).
So presumably if a CFD user could convince a CFD provider to replace the margining requirements (as against the SMSF) with an undertaking to make margin calls from a different source, this could nullify the SIS Act prohibition. To be effective there must be no security provided by the SMSF nor any margining obligation assumed by the SMSF.
However such an arrangement would likely be treated by the ATO as a contribution (since the member of the SMSF has provided a financial benefit to the SMSF). That could breach contribution cap limits.
It could be possible to structure the arrangement as a complying loan e.g. where the member lends the money to the SMSF. The money could be placed into a margin account on behalf of the SMSF, but the SMSF would still have to avoid providing direct security to the CFD provider.
Care should be taken with such arrangements and if in doubt seek an ATO ruling on the proposed arrangement.
Living in a fool’s paradise
In his article, Why markets will keep booming, Robert Gottliebsen stated that ‘party poopers’ like him have to remain silent as share and property prices rise beyond reasonable value. Robert, make your voice heard.
We are living in a fool’s paradise where low interest rates are fuelling speculation, aided and abetted by banks which cannot lose. We are told that two thirds of households have no debt and of the one third that do, most are well ahead in repayments. This sounds comforting but if you scratch
beneath the surface a different picture emerges. What if a large percentage of the two thirds that have no debt are in this situation because they have used their super to pay off the loan? How do they fund their living expenses later on when their super has run out and the age pension isn’t enough? I have many clients in this situation because they lost their job several years before their age pension age.
What if the one third that is comfortably ahead in mortgage repayments have 30-year terms, which stretch until they are in their 80s? I have a number of clients in this situation as well, particularly if they are in second marriages. Yes, these people are well ahead with their repayments, but can they keep it up for 30 years, or when interest rates rise, or one of them loses their job, or gets sick?
The banks don’t care. As one broker told me, the average tenure of a home loan is four years so it’s likely to be another bank’s problem. And if all else fails, they can simply repossess the property.
This is all going to end very badly.
Armistice for super troopers
Regarding Robert Gottliebsen’s article, Armistice day for super troopers, I agree that the proposed tax on super funds income over $100,000 was an administrative nightmare. However, I fail to see the equality in Hockey’s axing of that tax and helping to pay for it by also axing the government super contribution to low income workers.
As SMSF pension beneficiaries, my wife and I have benefited from the Howard government’s very generous decision to make super pensions tax-free. Our pensions provide us with what the ASFA classes as a ‘comfortable lifestyle – couple’ amount, although in order to maintain that we have had to manage our fund on a daily basis, particularly since the GFC.
I agree that the Federal Government’s first priority is to manage outgoings as carefully as possible. Their next challenge is: how do they increase their revenue in the future when all predictions point to higher costs, for various reasons, as the number of retirees grows and the PAYG tax base numbers fall?
The conservative approach of low taxes to allow those who are capable to do so create wealth and then rely on the market to distribute that wealth has not worked; just look at the state the USA is now in! But nor has communism or socialism, except perhaps in the Scandinavian countries?
One simple and much fairer way to raise some taxes is to remove the ‘no tax’ status of super pensions, whilst retaining the existing tax rates and older persons tax concessions. Under the tax regime prior to the Howard windfall, because of the tax concessions and a small amount of franking credits we paid little or no tax on our quite generous pensions.