Sometimes I feel as though I am living in a parallel universe. I look at SMSFs and see wonder, strategy, endless opportunity and family possibilities. Then of course I see the New Daily – which is the Industry super funds daily newsletter like the People’s Daily and there is a constant barrage of negatives about SMSFs. Like how the establishment of 27,000 SMSFs in 2019 was down a few percent so SMSFs are on the nose.
Then I travel out and about speaking to accountants, financial planners and mortgage brokers and they all tell me that a few years ago SMSFs were going gangbusters but they are doing many more. Seriously I shake my head.
Look I understand the funk we WERE all in with the possibility of Labor getting government. Family Trusts were going to be subject to a flat rate of 30% tax on adult distributions, the CGT discount (excluding superannuation funds and SMSFs) was to be reduced to 25%, negative gearing changes and for SMSFs the abolition of LRBAs. I was primed and readied to maximise the amounts going from discretionary trusts to SMSFs via contributions, renting business property and really, whatever was legally possible and signed off by the Commissioner of Taxation.
But despite all the negative polls against the government for the past five years, PM Morrison won office cleanly. Here’s the first thing I have learned – polls are rubbish. They got Brexit wrong, Clinton winning and Shorten winning all wrong.
Anyway, back to SMSFs. Labor lost, Morrison won, SMSFs have hit the 600,000 mark and $750 billion in assets and the momentum is back in SMSF land. It is time to start to get some SMSF focus. There is more than $700 billion sitting in retail and industry super fund accounts for members under age 50. Many in their 40’s has been working for 15+ years, which is a lot of SGC and if in a relationship their combined super tops $300,000 or more. That certainly wasn’t the case for my generation. They are prime targets for education on the benefits of a SMSF. If you don’t know them let me remind you to get you motivated! There are clients out there and their friends and families to be won.
HERE IS MY SUGGESTION FOR YOU TO IMPLEMENT STARIGHT AWAY: Copy and paste these and put in a newsletter to your clients with a call to action to make an appointment with you to discuss a SMSF or better still the biggest and best of all, the Family (and/or Leading Member) SMSF.
THERE ARE TEN BENEFITS TO A SMSF:
Benefit One: A SMSF lets you look after your Family
For most people, their family is the most important aspect in their lives. I don’t know about you, but I love my kids and it is great to see them grow and bloom in this marvelous world we live in. Stressful yes but filled with opportunity. And as their Dad I take my responsibilities, particularly financial very seriously. I have made sure that if something happens to me they are well looked after but more importantly protected from financial predators – parents if you get my drift. Bloodline protection the whole way down the line. Now that is a real Family SMSF Estate Plan and erupts from my Family SMSF if I die. Like I have done the SMSF provides members with an opportunity to lay down the foundations to provide a comfortable retirement income stream for their immediate family and possibly generations to come. This opportunity has been increased where a member of a SMSF can leave their superannuation benefits in the Fund until their death.
Benefit Two: Providing a Secure Income in Retirement
The major reason for establishing a SMSF is to ensure that, when an individual cease work or business they will have a stable, secure alternative to keep the lifestyle that they are accustomed to. That income stream, if it comes from super is called a pension and is a very popular strategy for SMSF members once they retire. The big benefit is, if the member is over age 60 when receiving the pension then the pension income is tax free in the hands of the member. Moreover, if this is a member’s only source of income, being tax free they will not have to lodge a personal tax return. Can you imagine that? Being out of the Commissioner of Taxation’s clutches for the first time in your life. Plus, the Trustee of the SMSF paying the pension will not pay tax on income or capital gains earned on pension assets in the Fund subject to a member’s TBAR.
Benefit Three: Offering a financial helping hand if your Health Deteriorates
Health is one of those things that can never be taken for granted. I know as 2016 was a bad year for my parents and myself. Old age and dementia hit my Dad, stress my mum and myself and well it was good to put it behind us. But knowing that when the chips are down we can use the SMSF along with health insurance is a blessing. So, if an individual’s health declines, he or she needs to have access to a safe, secure income that takes the financial worry out of becoming seriously ill or even incapacitated. A SMSF allows members access to a range of benefit options in times of sickness and ill-health. This is the case even though the sickness is of a temporary nature. Permanent disability is a time of great change and superannuation benefits can be accessed in these times of trouble.
Benefit Four: Investment Choice
The large majority of people or families who find their way into SMSFs want to have some say as to the fund’s investments. As Trustee of a SMSF, the power of choosing investments for the Fund resides with the Trustee; however, great care needs to be taken to ensure that the Trustee meets the relevant superannuation laws in terms of investment choice. These laws include the need to draft and successfully implement an investment strategy as well as ensure that, within confined limits, no asset of the Fund is used by a member of the Fund, their relatives or any entity related or closely associated with them or their family. But the choice of investments is broad – residential property, commercial property, shares, government bonds, gold, overseas investments, start-ups, Early Stage Investment companies, crowdfunding, property syndicates and the list goes on.
Benefit Five: Low Taxation fully sanctioned by the government
Taxation in Australia is significant, but the government has chosen to save on future welfare payments by providing tax incentives for its people to become self-funded retirees. And particularly given that employees are forced to transfer over 9.5% of their salary into their choice of superannuation – self funded retirement is a goal for most employees. Members of SMSFs have the best opportunity to simply reduce the taxation burden in their retirement lives. For example, the tax-free nature of private pension and lump sum arrangements for a member of a SMSF post age 60 is one of the key benefits to a secure lifestyle retirement income. Grant’s Note: Don’t expect the low tax ride to last forever. A member in a $3M SMSF who is living on tax free retirement income receives a huge amount of actual tax benefits to someone with $3M outside of super, let alone a person with $100,000 in a retail super fund. The government changed the pension limits in 2017 to claw back some tax from the wealthy SMSF members and this is just the start. So, expect on going tinkering with tax in superannuation but make sure that you are up to date and in front of any changes not left behind asking “What happened?”
Benefit Six: Looking after your Family when you Die
The SMSF is by far the most flexible, most targeted and most tax-effective vehicle to provide lump sums or income streams to a member’s spouse, children or grandchildren when the member dies — and it lets the member control the process without fear of legal challenge. Importantly where a member puts in place a strategic SMSF estate planning strategy, it resides outside the member’s will. This is not known to many SMSF members and Trustees who forget to put in place a SMSF estate plan, thereby missing out on highly valued taxation concessions and opening the deceased member’s benefits to the lawyers and in some case the Public Trustee. Benefit
Benefit Seven: Access to the Age Pension
The Aged Pension is available for persons over age pension age – currently age 65. However, it is subject to an Incomes and Assets test. A member’s benefits in a SMSF once a member reaches age pension age are included for Assets test purposes as is income withdrawn from the Fund. Changes to the Assets test have seen a drastic reduction in the Assets test limit, but for many SMSF members with less than $830,000 who have a family home (exempt from the Assets Test), they may be entitled to an age pension. In addition, they may be entitled to other important benefits including the Health Care Card but as this is a complex area, specialist financial planning advice should be sought.
Benefit Eight: Protection from Creditors
This is a sleeper and, for most people, is not used at all. However, where a person gets into serious financial difficulty, the government has provided rules in the bankruptcy laws that broadly protect a member’s benefits in the Fund from creditors except for any retirement income. This can be a relief when unfortunate financial events occur.
Benefit Nine: Transition to Retirement Income (“TRIS”)
The biggest bug bear for most people when it comes to compulsory superannuation is not having access to their super until they retire. There are several exceptions such as temporary and permanent incapacity, certain compassionate grounds and financial hardship. One important exception introduced in 2005 was the Transition to Retirement Income Stream. The TRIS enables a working member of a super fund, who has reached their preservation age to access their superannuation as an income stream. The TRIS requires the member to withdraw at least 4% of their TRIS account balance each year and no more than 10%. From a tax perspective if the TRIS is received when a member is under age 60, the TRIS income will form part of the member’s assessable income – however it will attract a 15% tax offset. From age 60 any TRIS income from a member of a SMSF will be tax free. So while working, an employee, small business owner, professional or other person with a SMSF may access pension income – much like salary – that is extremely tax effective. At the same time, they may contribute their pre-tax salary or business profits into their SMSF (subject to certain limits). This means that if they can set in place a “transition to retirement” pension as their key source of living expenses while contributing salary into a SMSF, a reduction in overall personal taxation may arise. Generally, income and capital gains earned on assets held for pension purposes is tax free, but this excludes a TRIS which is also not counted in the $1.6M limit.
Benefit Ten: Superannuation Contributions Splitting
Under the laws it is possible for a member of a superannuation fund to split their benefits with their spouse. Spouse includes a de facto spouse under the superannuation laws. The advantages of this, is where both spouse members of the Fund are between the ages of 55-60 and using the transition to retirement strategy, then the benefits of the 15% tax rebate is maximised. Further where one member is older than the other and will thus reach the tax-free pension and/or lump sum status before the other, then it makes strategic sense to split any contributions for the younger spouse to the older spouse. However, it is only the employer or deductible superannuation contributions that can be split and then to a maximum of 85%.
A Final Word
Now many industry and retail super funds will tell you all the above is achievable in their funds. And that is the case, but the members of these funds are completely disengaged. They sit in balanced funds, even late into retirement and if the market falls so does their security of income and also monies to pass onto the next generation. In a SMSF members are engaged and it is incumbent upon us, as advisers, to encourage that engagement. Tell them the risks but also the opportunities and the stories of your clients who have done it well. Get some SMSF focus back – it starts with you and builds with you.
Look what could have been. Don’t waste this opportunity!
Business Tip: Have a small seminar where experienced SMSF members tell their story to prospective SMSF members. You will be very surprised.