Tapping into super wraps

Super wrap accounts can be a viable option to a SMSF.

PORTFOLIO POINT: Considering a SMSF? Would you like to “try before you buy”? Consider a “wrap” test drive.

There was a big hoo-ha in superannuation industry circles last week about accountants’ role in the setting up of self-managed super funds.

The facts show that accountants often have an instrumental role in setting up the SMSFs. However, the criticism suggests that some accountants do so because they are then guaranteed a long-term (maybe lifetime) income stream of work in accounting and audit fees.

(Sometimes, accountants “sell” the SMSF as a good way of “reducing tax”. However, for many of those wrongly tipped into a SMSF, any old super fund would offer the same tax benefits.)

Whenever the accusation is made, there are howls of protest from the numbers profession. Accountants wouldn’t do that, we are told. Accountants, more so than financial advisers, have their clients’ interests at heart, we are told.

Well, I’m sorry, but the first of those statements is rubbish and the second is highly questionable. And I know that from personal experience.

I have seen way too many people who have been recommended to set up SMSFs who don’t know the first thing about investing, who have no interest in running a SMSF, and who don’t have enough money in super to really justify a SMSF, because they end up paying between 5% and 10% of their fund’s balance out in fees each year.

Their accountants set them up and then leave them to it. Once a year, they do their return. But for the other 364 days in a year, they are completely floundering.

I have helped close down many inappropriately recommended SMSFs because the clients eventually realised that they didn’t know really why they’d opened it and, upon opening, realised they didn’t care for the workload of being a trustee, or couldn’t believe the amount of fees that they had to pay. And on every single occasion (that I have been involved with helping to close down a fund, plus many others who have decided to battle on despite it not being right for them), it has been a SMSF inappropriately recommended by an accountant. Every single one.

However, that is, without doubt, the minority of SMSFs. Accountants usually only recommend a SMSF to those who really could, or should, benefit from having one.

Control – but what sort are you after?

The lure of SMSFs is unquestionable. They are de rigueur. But not just in a fashion sense. Australians are drawn to SMSFs because of the many wondrous benefits of SMSFs, which are largely vehicles about control, on many different levels, including investment, estate planning, asset protection, contributions, combining two people’s super and insurance.

If you’re considering a SMSF, and you’re doing so because of the control potential, what sort of control are you seeking to exert?

I ask this because the answer for so many people is actually “investment control”. They want to choose exactly what they’re invested in. They want to make decisions such as choosing Westpac over ANZ (just an example), not wanting to be involved in resources companies, not wanting to be invested in foreign markets, wanting to choose their own Australian shares and not be lumped into a managed fund whose investments are not discernible.

Sometimes, it’s wanting to be invested solely in cash and being able to invest purely in term deposits. At other times, it’s the belief that they know enough about Australia’s stockmarkets to choose their own investments.

Others still want to be directly invested in property, potentially with gearing.

Try an investment-control test drive

If, like so many, what you’re really interested in when it comes to a SMSF is the ability to choose your own investments, then there are good alternatives to SMSFs.

You can have your cake and eat it to. You want investment control? Easy. Without the cost? No problem.

The criticism, all too often, is that super funds are all the same. That, in any given super fund you have a choice of fund managers, which is sort of like being stuck between a rock and a hard place. But that’s simply not true.

Many Eureka Report readers do so because they are interested in shares, or particular investment themes.

If what you really want to do is to choose your own investments, then there are plenty of good options around.

Investment control via wraps

Increasingly, super funds ain’t super funds. Or, rather, super platforms ain’t super platforms.

For the vast majority of Australians who have no interest, or time, inclination or expertise, to be actively involved in the necessary tasks of being a SMSF trustee, then many of the myriad of APRA-regulated funds actually offer exactly what they need.

If you’re considering a SMSF, but aren’t quite sure you have what it takes, then consider your other options.

More and more super fund platforms – and I include all major super sectors, including industry, corporate, government and retail funds – are providing increasing diversity of investment choice.

While a few industry funds allow you to choose direct investments in (generally) Australia’s top 200 shares, an increasing number of retail funds will allow you to have massive investment choice across the major investment asset classes – cash, fixed interest, property and shares.

Wrap accounts – predominantly offered by the major retail funds – will often allow you to choose from Australia’s top 200 companies (often even further down the list), plus a huge list of other individual assets in every class, from loads of different fund managers or index fund managers.

What’s does a wrap cost?

If you’ve got a sum of less than $200,000, it’s likely to be a lot less than a SMSF.

Wrap accounts usually charge holistic base fees of between 0.4% and 1% (if no adviser is involved). From there, you will also pay trading fees, but you would pay these in any case if you had a SMSF.

If you have less than $200,000 and all you are interested in doing is trading Australian shares, this is probably going to be your cheapest option.

For that price, they will, essentially, do your accounting and audit, cover your ongoing government fees and pull together all of your statements into one, (generally) easy-to-read annual statement that will allow you to understand exactly where everything is.

Many industry funds will also let you choose to invest directly in the top 100 or 200 Australian shares (with some restrictions) to sit alongside any other investments. In essence, you would be able to take investment control – one of the reasons you read Eureka Report – and make the decisions you want to make.

Why would you?

Because you don’t think you have enough money to justify starting a SMSF. Because you’re not sure whether you’d have the long-term interest to keep on top of your investments.

Because you can’t justify the cost, and because you have some time to make investment decisions, but aren’t sure you have enough time to make all the other decisions involved with being a SMSF trustee.

Wraps have a cost. But, for many, who want to see if they’ve got what it takes to take active management control over their super, a wrap account will allow them to take an active interest in their super, without being shoe-horned into a SMSF, which might be a terrible solution for them.

The costs of running a SMSF are somewhat dependent on how much you do yourself. The inescapable costs include accounting and audit, government fees (which were increased in the mini-budget) and trading fees. Outside of that, SMSF fees, particularly if you require the services of a financial or investment adviser, can be significant.

If what you really want is investment control, a wrap might be your answer.

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.

Graph for Tapping into super wraps

  • There may still be value in having an auto-reversionary pensions, or ARP, in place – despite the federal government’s MYEFO announcement that the law on pension exemptions and death would be amended – according to DBA Laywers. The SMSF specialists say while the capital gains tax hit that could have come with the death of a member will now be avoided, there can still be significant advantages to ensuring each pension is an ARP. “The proportioning rule prevents ‘cherry picking’ of the tax free or taxable component when paying out a benefit,” DBA Lawyers says. “Given the ATO’s views in TR 2011/D3, the death of a pensioner with two or more interests may result in the merging of interests. This could result in mixed taxable and tax free components, which cannot be separated or untangled again.”
  • The majority of SMSF investors reportedly consider property to be the most overvalued asset class, and the sector is maintaining billions of dollars in ‘excess’ cash. Those are the findings of the Investor Trends SMSF Investor Intentions Index Report for September, and note that cash is not 28% of SMSF holdings. Media reports quote Investment Trends COO, Eric Blewitt, saying 18% of self-managed super investors planned to increase cash allocations in coming months, and just 5% would decrease, in spite of the falling cash rate.
  • Some people may still be able to qualify as an SMSF trustee, despite having “youthful indiscretions” where charges were proven against them but no conviction was recorded, according to Townsends principal Peter Townsend. A disqualified person cannot ordinarily be an SMSF trustee, and is disqualified if an offence of dishonest conduct is found proven against them regardless of whether a conviction is actually recorded or not. However, Townsend says if the charge was not proven, or if the penalty requirements are less than two years and 120 penalty units, then you can apply to the Australian Taxation Office for a waiver.
  • The SMSF Professionals Association of Australia (SPAA) has appointed Richard Magney as sales and business development manager and Liz Ward as education manager. SPAA CEO Andrea Slattery says the SMSF sector is growing exponentially, and the organisation was growing its resources as well.

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