Seven super tips for 2013

In recent years, it’s been rare that SMSF trustees have had so much to be pleased with when it comes to performance.

And returns in 2012 were something to put a smile on your dial. You’d have had to really been holding some dud investments, and be decidedly undiversified, to have gone backwards last year.

Domestic and international shares and property had a real zing – most sectors here did between 14% and 33%.

Fixed interest was performing particularly well until recent months. But it remains to be seen whether the stellar run for fixed interest – the best performing asset class over the past five years – will continue.

Returns from cash were dull, though positive. That said, the outlook for cash for 2013 is anaemic, with the consensus being that the Reserve Bank will cut rates further from here.

Performance is one thing – asset allocation is something SMSF trustees accept at their core. But it’s not the be-all and end-all of managing your fund. And while you’re making yourself various promises about what you’re going to achieve in the year ahead, here are some things you should be considering for 2013.

1. Diversify beyond cash and Australian shares

Cash investments may well cost you money this year – seriously. At best, cash is going to pretty much a zero return investment this year.

How’s that? Well, if term deposits are 4.6% for one year, take off inflation (currently 2%, but it could go higher) and tax (15% for super funds, but 0% for pension funds) and you’re sitting on a teensy weensy “real” return, if it’s positive at all.

Cash has a place in every investment strategy. You need to hold cash. But don’t expect it to produce much in the way of returns in calendar 2013.

Australian shares, on the other hand, could do anything. Shares returned 16.1% in the second half of last year and 19.74% for the year. And they have had a reasonable start to this year.

But were you holding any property in 2012? Australian property returned 32.88% and international property returned either 21.24% (unhedged) or 26.3% (hedged).

The relative security of fixed interest? Australian fixed interest returned 7.72% for the year, while international fixed interest (hedged) did 8.44%.

This is not to say “pile into property and fixed interest” now, but to point out that Australian SMSFs tend to be heavily overweighted to Australian shares and cash. And, again, such a narrow focus has had a cost in the way of returns in recent years. (That doesn’t mean it will happen again this year. The point is that diversification has benefits.)

2. Monitor your contributions

I’m sure that most SMSF trustees are aware of the drop in the limit for concessional contributions (CC) from $50,000 to $25,000 for the current financial year.

(The over-50s were supposed to have the ability to contribute $50,000 this financial year, but the 50-50-500 rule got pushed back by two years to 1 July, 2014 in last year’s federal budget.)

But it bears repeating. If you haven’t adjusted your salary sacrifice for FY13 from FY12, then you might be headed for massive over-contributions in FY13.

It is not up to super funds, or your employer, to tell you if you’re going over your limit (though I have seen one fund be proactive). It’s up to you. If you go over your CC limit, the extra contributions will be taxed at an extra 31.5% (making 46.5% total). If that causes you to go over your non-concessional contributions (NCC) limit, then you could be taxed at the equivalent of 93% (see Taxed at 93% That’s gotta hurt).

3. Be ready for 50-50-500’s reintroduction?

I doubt it, but it’s possible. If the government has ditched its “promise” for a budget surplus in FY13, then is it a case of all bets are off? If so, is it possible that we could see the 50-50-500 rule bought forward and introduced on July 1?

The government delayed the introduction of the 50-50-500 rule in a bid to balance the current budget (see Please explain, Mr Rudd). There is little doubt that Labor wants to introduce the 50-50-500 rule, which would allow those over age 50, with less than $500,000 in super, to be able to continue to put in $50,000 into their super fund.

So, what should you do, just in case it’s going to happen? Well, first you need to make sure that you make the most of this year’s universal $25,000 CC limit. But, in case it does happen, prepare as best you can, to be able to put in, potentially, $50,000 next financial year.

4. Consider NCCs

For those who have the ability to make the full CC contribution each year, you need to start thinking about making non-concessional contributions. The limits for NCCs are $150,000 a year, or $450,000 under the “pull-forward rule” (which covers three financial years).

Sure, the tax advantages of putting the money into super as NCCs are low, but the returns you should be thinking about are longer term, particularly when pensions are created.

5. LRBA inquiry

At the end of 2010, in response to the Cooper Super System Review, the government promised a review within two years into borrowing inside super, with a view to banning it if it had become a “focus” of SMSFs.

So far, no news is good news (see Gearing pains ahead?), but the review is due, roughly, now. While banning super gearing would be a drastic response, it is a possible outcome of any review of the limited recourse borrowing arrangements (LRBAs).

Those comfortable with property gearing outside super, who believe current property prices present reasonable value, might wish to investigate this option. But be careful as the Tax Office has been putting out warnings in this area, so making sure you get the investment set up correctly at the start is critical (see The ATO’s super property crackdown).

6. In-specie transfers are still available

Despite a much-hyped banning of in-specie transfers of, particularly, listed securities into SMSFs that was supposed to apply from 30 June, 2012, the rules have still not materialised and they have certainly been delayed until at least 1 July, 2013.

The two main share registries (Link Market Services and Computershare) have made it more difficult by introducing a charge for the service, but it can still make sense for those keen to minimise the risk of being out of the market for a period.

The rules are being tightened because the government believes SMSFs have been using in-specie transfers to cheat and defraud contribution strategies. But that doesn’t mean they can’t be used legitimately, without incurring the evil eye of the ATO.

7. Review death benefit nominations

This appears to be less of a problem for SMSFs, but a broader problem for super fund members of APRA-regulated funds.

Who are you leaving your super to? Is it a big sum? Does it contain large licks of insurance?

If you haven’t checked into this – whether inside a SMSF or APRA fund – then it’s time you did. Having the wrong non-binding or binding death benefit nomination (see Who’ll get your super?) can not only leave your super (and insurance benefits) going to the wrong people, but can also have disastrous tax consequences.

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 strongly advised to consult your adviser/s, as some of the strategies used in these columns are extremely complex and require high-level technical compliance.

Bruce Brammall is director of Castellan Financial Consulting and the author of Debt Man Walking. E: bruce@castellanfinancial.com.au

• Another organisation has weighed in to warn about the use of Limited Recourse Borrowing Arrangements (LRBAs) in self-managed super funds. The SMSF Professionals Association of Australia (SPAA) has said it “fully supports the federal government’s move to change the Corporations Regulations to have these borrowing arrangements designated a financial product” – although it does not agree they should be treated in the same way as a derivative. SPAA education and professional standard director Graeme Colley said there was a place for gearing strategies in growing retirement savings, but: “People have to understand that a limited recourse borrowing arrangement that doesn’t comply with government regulations can have serious financial consequences for trustees.”
• SMSF Academy head and popular SMSF blogger Aaron Dunn has released a list of three major points to watch for in 2013. Dunn writes that when it comes to superannuation this year, he expects the Australian Taxation Office to finalise its ruling on when pensions commence and cease, the Inspector General of Taxation’s review into excess contributions tax, and a consumer protection framework around LRBAs. Dunn also suggests the May budget could see some “superannuation sweeteners” thrown in now the surplus pledge is abandoned – or a less vote grabbing set of longer-term changes.
• Self-managed super fund performance appears to be linked to scale, according to recent research. Media reports quote a recent study that found 34% of SMSFs “significantly outperformed” in the years 2008 to 2011, but 42% “significantly underperformed” on average, while also finding larger funds outperformed smaller ones, and that the scale effect was greater for SMSFs than other funds.