Tax with Max: SMSF software systems

Software for managing SMSF income

I have a super fund with the usual shares, hybrids, property trusts and term deposits. Currently I’m using spreadsheets. Is there a relatively inexpensive software to manage my investment income?

Answer: There are a number of general computer accounting packages that can be used to handle the accounting requirements for an SMSF. These include QuickBooks, MYOB, and Xero. Unless you are very familiar with accounting principles and computer packages it would be best if you paid someone to set up the package for you.

There are other accounting packages specifically designed for SMSFs, but in most cases these are released only to accountants and not to trustees. I do know that BGL does offer an SMSF package to trustees but, as the computer accounting package is specifically designed for SMSFs, it is more expensive than the more general-purpose packages. Before making a decision you should speak with either the accountant for your SMSF or its auditor and ask their advice.

Cascading binding death benefit nominations

My wife and I both hold life insurance within our SMSF and, as the fund owns those policies, I presume that in the unfortunate event of death, the payout goes to the fund. I don’t wish this to be the outcome. If I make a BDBN (binding death benefit nomination) to go to my wife, for example, do all the fund’s assets have to go to her or the estate if I nominate it?

My intent is that only the life insurance payout is to be distributed to my wife. The way that the BDBN is worded is that all proceeds of the fund will go to her. I don’t wish to actually destroy or wind up the fund. I wish the current assets, unencumbered property, shares and cash, to remain in the fund as a legacy and only life insurance payout to come out as cash so she can retire my personal investment property debt and make life easier for her and my daughter. Can a BDBN specify that all life proceeds be released to her as a dependant and that the remaining fund assets remain in the SMSF into her account?

Answer: I have heard that there are such things as cascading binding death benefit nominations that can deal with a number of different people receiving a member’s benefits upon their death. This type of BDBN is a fairly sophisticated legal document and you would need to consult with a lawyer that specialises in this area to get it drawn up.

In actual fact, what you want to achieve does not depend on the drawing up of a BDBN. If you currently have a company acting as trustee for your SMSF, with both of you being the directors of that company, upon your death your wife would effectively take control of your SMSF. In this situation, if you made clear to her what you want to do to secure her financial security in the event of your death, she can achieve this.

As she and your daughter are your dependants she could have the life insurance proceeds paid to her as a lump sum death benefit to pay off any loans that you have. With the balance of the superannuation fund she could commence a death benefit pension. If your daughter was under the age of 25 at the time of your death, a death benefit pension could also be commenced for her. You would have to be careful in using this last strategy because once she turned 25 the funds would need to be paid out to her. Before taking any further action you should seek advice from an SMSF specialist.

Buying a farm through an SMSF

My wife and I live on a rural property and until recently operated an intensive livestock business, which provided a good source of funds to raise and educate our family. Of late we have closed the business and both work off farm, however we now have the opportunity to purchase an adjoining farm and operate a much less intensive but still viable business with a lifestyle that appeals to us both. We have an SMSF with $1.7 million in it and the property will cost $375,000. Can our super fund purchase the property, and what things should we be mindful of when considering this course of action.

Answer: The only property that an SMSF can buy is business real property. If the adjoining farm has been used as a business, rather than as a hobby farm and therefore used more for residential purposes, I believe your SMSF could purchase the property. The problem as I see it is that a super fund can only be used for retirement purposes and what you are proposing is the super fund provide you with an improvement in your lifestyle now.

Before doing anything you should speak to the auditor of your fund to see whether they believe the purchase would be within the rules. Before approaching them you would need to make sure that the investment strategy for your fund includes the purchase of a property, and that the purpose of buying the property is for retirement purposes and makes sense from an investment perspective.

Interestingly, a retirement purpose could be that the adjoining land is purchased as the members in retirement would like to be more self-sufficient from a farming point of view. You would also need to get a market appraisal for the rent that would need to be paid to your SMSF. The most important thing you should do though, as I stated earlier, is speak to the auditor of your fund.

Allocating income to members of an SMSF

I was of the understanding that an SMSF deed allows the trustees have the discretion as to who is assigned the earnings of the fund. Aren’t the franking credits tax-paid monies, so therefore irrelevant from a tax point of view as to who receives them? If that is so, and especially if the two members accounts are segregated and clear in their separation, then why do the credits have to be assigned to the person in pension phase and not to whoever the trustee wishes?

Answer: As an SMSF is effectively a trust, there is a duty on the trustees of the fund to be fair and equitable when it comes to dealing with the members of fund. When all members are in accumulation phase the earnings of a fund, including the franking credits, are usually distributed on the basis of the value of each member’s account at the start of the year and how much is contributed over a year.

When an SMSF is in pension phase the income of the fund is either distributed in accordance with an actuarial certificate, or in accordance to the superannuation fund assets that each member holds when the investments have been segregated. Where the assets have been segregated it would be unfair to a member who has been allocated shares for them not to receive the benefit of the franking credits. The fund gets the benefit of claiming the franking credits to reduce its overall tax payable but the member who has been allocated those shares has their balance increased for effectively the refund that they should have got.

Max Newnham is a partner with TaxBiz Australia, a chartered accounting firm specialising in small businesses and SMSFs. Also go to www.smsfsurvivalcentre.com.au.

Note: We make every attempt to provide answers to readers’ questions, however, answers are of a general nature only. Subscribers should seek independent professional advice for more in-depth information that is specific to their situation.

Do you have a question for Max? Send an email to askmax@eurekareport.com.au