If your SMSF has a property and a tenant in financial distress, you may be able to provide your tenant with rental relief under an agreed commercial arrangement. This may even be the case when the tenant is a related party or yourself.

Ordinarily, charging a tenant a price that is less than market value in an SMSF is usually a breach of superannuation laws. However, the ATO have provided guidance which allows SMSF landlords to provide for a reduction in or waiver of rent because of the financial impacts of the COVID-19.

For the 2019–20 and 2020–21 financial years, the ATO will not take action where an SMSF gives a tenant – who may also be a related party – a temporary rent reduction during this period.

What do you need to do?

There are some important things you should ensure are in place when you are providing a rent reduction to a tenant, especially when this is a related party.

• Ensure the relief only applies to rent.
  • Any relief offered to a tenant can only relate to the rent component of the lease agreement. The ATO concession does not extend to other lease incentives.

• Ensure that the reduction in rent is only temporary.
  • This means it should have an agreed period of time or agreed date where the rent is reviewed in light of the economic circumstances.

• The financial difficulty faced by the tenant is linked to the financial impacts of COVID-19.
  • Any negotiated rent relief will need to be measured against the COVID-19 financial impact suffered by your tenant.

• Clear arrangements which detail the amount of discount, waiver or deferral of the rent.
  • In evidencing that the rent relief is reasonable, it would be best practice if it is consistent with an approach taken by an arm’s length landlord.

• Ensure you have proper documentation which allows your independent auditor to be satisfied that the temporary rent relief satisfies all of the above.
  • This may take the form of a signed minute, renewed lease agreement or anything deemed appropriate to amend the terms of the lease temporarily.
  • Even if you are both the tenant and landlord, the above should all be documented.

These are extraordinary times and the ATO is providing this guidance to allow SMSF trustees to be flexible and agile.

If trustees act in good faith in implementing a reasonable and measured reduction in rent because of the impacts of COVID-19 they should not fall foul of the law.

How can we help?

If you need assistance providing rental relief or whether this is the right action for you and your specific circumstances, please feel free to give me a call so that we can discuss in more detail. Alternatively, you can refer to the SMSF Association’s trustee education platform, SMSF Connect.

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One of the longest-term decisions many investors will make is whether to setup a self-managed super (SMSF) fund with individual trustees or a corporate trustee.

It is a decision that could have financial and personal implications for as long as the SMSF remains in existence including when a member leaves the fund and/or a new member joins.
 
Indeed, some SMSF members would not fully recognise the key differences between having individual trustees or a corporate trustee until a member dies. Of course, this consideration is particularly pertinent given the ageing of the population.

Under superannuation law, all members of an SMSF must be either individual trustees or directors of a corporate trustee of the fund. An SMSF with individual trustees must have at least two individual trustees yet a corporate trustee can have only one director.

The tax office’s latest-available SMSF annual statistical review records that 92 per cent of the SMSFs established in 2013/14 had individual trustees – a rise of two per cent over three years.

As the tax office observes, ‘there has been a consistent shift away from corporate trustees’. This could partly be attributable to some investors focusing on what may seem the easiest and most hassle-free way to setup an SMSF – perhaps without weighing-up the long-term differences between the two types of trusteeships.

Others planning an SMSF would no doubt carefully compare the features of each type of trustee – perhaps in consultation with their financial planners – and then choose the best perceived course for their circumstances.

Interestingly, 77 per cent of SMSFs in existence on 30 June 2014 had individual trustees. In other words, 33 per cent have corporate trustees against 8 per cent for new SMSFs.

A proportion of SMSFs would have begun with individual trustees and later switched to a corporate trustee, perhaps after the death of a member.

The tax office, as regulator of self-managed super, urges would-be SMSF members to understand the differences between the two types of trustees. It could be worthwhile gaining advice about the issue from an SMSF specialist.

On one hand, individual trustees – with each member acting as a trustee – can cost less to establish because a company is not setup to act as a trustee. However, the ATO points out that there are other considerations apart from initial cost.

An SMSF with individual trustees must hold its assets in the name of all those individuals as trustees of the fund. If an individual trustee is replaced, the names on the funds’ ownership documents must also change. ‘This can be costly and time consuming,’ the tax office warns.

By contrast with a corporate trustee, assets are held in the name of a company as trustee. If trustee directors change, the assets remain in the name of the same company.

If a fund has two individual trustees and one dies, the fund must appoint another trustee to continue as an SMSF. (This is because of the requirement that a fund must have at least two individual trustees.) Yet if an SMSF has a corporate trustee, a deceased trustee director may not have to be replaced because a corporate trustee can have a single director.

In other words, a corporate trustee will continue to control an SMSF and its assets after the death or incapacity of a member.

To find out more about establishing an SMSF or to discuss your current SMSF trusteeship, speak with your Leenane Templeton financial planner on 02 4926 2300

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With a growing trend towards individuals managing their own superannuation through Self-Managed Super Funds (SMSFs), the estate planning aspect of SMSFs is becoming an increasingly important issue. For example, what happens if the trustees or members of the fund are no longer able to fulfil their roles through mental incapacity or sickness?

If you are getting on in years, here are some options to consider for your SMSF:

1. Appoint a professional trustee. Giving up full responsibility for the operation can be a good idea but it will involve extra cost. Also, your lifestyle may be affected due to delays in accessing funds. A retiree running his or her own SMSF can access money immediately, while a professional trustee may take several days to release cash.

2. Draw up a power of attorney (POA). It is necessary to exercise care when appointing someone as your attorney as they will have full control of the SMSF and must act in the best interests of the trustees. This person should also have a sound understanding of business and financial management. The POA may also be the executor of your estate.

3. Rollover to a public offer or industry fund. This involves selling or redeeming the SMSF’s assets, so capital gains tax implications need to be considered. Loss of control over the fund’s investment decisions and the investment options available within the new fund also need to be taken into account.

4. Include your children. Once your children are sufficiently mature they may be added as members or trustees of your SMSF. They should then attend all relevant meetings and be involved in the decision-making. Families with more than two children may find this option tricky as SMSFs are currently allowed only four members.

Talk to your licensed financial adviser about the most appropriate option for you to ensure the smooth operation of your SMSF should something happen to you.

Sources:
Murden, M and Gandolfo, P ‘The trouble with ageing trustees’ National Accountant, February/March 2010
www.ato.gov.au   Self managed super funds – key messages for trustees

We are here to help with your SMSF 
Call (02) 4926 2300 or email us. 

To discuss your super through SMSFs or your super in general call the team at Leenane Templeton. 

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Self-managed super funds (SMSFs) are the largest and fastest growing super sector in Australia and for many good reasons. But before you start an SMSF, it’s important to weigh up both the advantages and disadvantages and consider seeking advice to determine whether an SMSF is right for you.

The advantages

SMSFs can offer a number of features and benefits generally not available with other super options.

More investment control

You can establish your own investment strategy and directly control where and how your super is invested.

More investment choice

You can select from a wider range of investments including all listed shares, some unlisted shares, residential and business property, and collectables such as artwork, stamps and coins.

One fund for the family

You can set up a fund for yourself and up to three other people and consolidate your super balances. This could enable you to invest in assets of higher value than if you set up a fund with fewer members, achieve greater estate planning flexibility, and reduce fund costs.

Borrow to make larger investments

Your SMSF could make a larger investment in assets such as shares and property by using cash in your fund and borrow the rest.

Tax savings

With SMSFs you can take greater control over the timing of tax events, such as, starting a pension without triggering capital gains tax when your superannuation assets move into pension phase. You may also have the option of transferring assets that you own into your SMSF.

Greater estate planning certainty and flexibility 

You can nominate who you would like to receive your super when you pass away, without having to meet some of the constraints that apply to other super funds.

The disadvantages

While an SMSF can offer greater opportunities to take control of your retirement savings, there are some potential disadvantages you should also consider.

Higher costs for lower balances

SMSFs generally only become cost-effective if the fund has $200,000 or more invested. This is particularly true where you outsource and pay for most or all of the fund administration.

Greater responsibility

When you set up an SMSF, you and any other fund members will generally need to be trustees (or directors of the corporate trustee) and will be responsible for meeting a range of legal and other obligations.

Harsh penalties for breaches

The Australian Tax Office has the authority to impose various treatments to deal with SMSF trustees who have breached super laws. These include:

• requiring trustees to complete certain educational requirements within certain timeframes
• disqualifying an individual from acting as a trustee or director of a corporate trustee
• imposing significant administrative penalties on individual trustees and directors of corporate trustees of up to $10,200 per breach
• applying through the courts to impose civil and criminal penalties, and
• giving notice to a trustee to freeze the SMSFs assets where it appears that their conduct is likely to adversely affect the interests of beneficiaries.

Time consuming

You will need to have enough time, knowledge and skills to manage your own super and meet your legal and other obligations.

You should seek professional advice or guidance from your financial planner when deciding on the best superannuation solution for you. It is recommended that you also seek advice from a registered tax agent to determine the tax implications before setting up an SMSF.

Call (02) 4926 2300 or email us. 

To speak to our expert SMSF team about whether an SMSF is right for you, please call Leenane Templeton today! 

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Knowing exactly what needs to be considered before getting your asset allocation right inside (or outside!) a Self-Managed Super Fund (SMSF) is not just a smart move in terms of obeying strict SMSF regulations. It is also a fantastic exercise in developing a broader investment discipline.

No matter your age, gender, risk profile, objective or income, for every investor there is a single golden rule–diversify. It is a truth universally acknowledged that a diversified investment portfolio is likely a safer one, as it will potentially weather storms in a more balanced fashion than a portfolio that is heavy with one specific asset or asset class.

Members of SMSFs are required by regulation to consider the diversification of their fund’s portfolio. The law insists that SMSF members put in place an investment strategy that considers diversification (among other factors) and review it on a regular basis. Then members must ensure their fund’s asset mix matches their investment strategy document.

But what should this consideration involve before such a document is written? How does an SMSF member, or anybody with an interest in the responsible and reasoned diversification of their portfolio, ensure they are asking the right questions of their own risk appetites and resulting asset class percentages?

Each SMSF member or investor will have different reasons for diversifying. For some it will be for greater chances of balancing risk and return in turbulent markets. For others it will be to take advantage of opportunities in various geographical locations. Some will diversify because of the varying time requirements of particular asset classes, holding some asset classes for longer than others and constantly re-balancing.

How do you figure out your own risk profile? Seek professional advice for an in-depth analysis, but it has a great deal to do with your stage of life, and therefore how much time you can afford to wait out the various ups and downs of the market. It also involves other considerations. How much do you have to invest and how regularly? How do you feel about seeing your portfolio fluctuating in value? What are your individual tax circumstances?

Regulations specific to SMSFs outline the fact that you must show consideration to five essential points before writing your investment strategy. These are:

1 Consider the risk and likely return from the fund’s investments taking into account the member’s needs and circumstances.
2 Consider the solvency of your fund. In other words, can it afford to pay benefits to members when required, and pay its own bills such as auditing, accounting and legal?
3 Analyse the role and level of diversification in your fund. What is its purpose? What are the risks if there is inadequate diversification?
4 Analyse the level of liquidity of the fund’s assets, and the role and purpose of this liquidity.
5 Is there insurance for members within the fund? You must be able to prove that you have at least considered whether the fund should hold insurance for SMSF members.

In the world of Australian SMSFs, cash and shares are the front runners, with both typically making up around 30% each of an average fund’s total assets.1 Property, including commercial and residential, takes third place with an average of less than 20% of each fund’s value.

There are several other asset classes that can be considered for ownership within SMSFs, and it is a good idea to seek professional advice on exactly what is and is not allowed. Listed property trusts, foreign property and managed funds tend to be accepted. Artworks, precious metals and vintage cars etc may also be allowed, but professional advice should be sought before purchase. More complicated financial vehicles such as warrants and derivatives also require special advice.

Interestingly, in certain situations if you currently own your business’s commercial property, then the SMSF can buy the property from you under a Limited Recourse Borrowing Arrangement at market value, then you rent it back from the fund. This may mean lower tax on rental income and eventual capital gains tax on sale, compared with holding the property outside of super.

There are many very specific rules and regulations for assets held within an SMSF. For instance, if an investment benefits you at all now, instead of after retirement, then it is unlikely to be allowed in your SMSF. Please seek professional advice as penalties can be serious. Don’t just assume you can make your holiday house a part of your SMSF.

Examples where you may breach superannuation investment rules include:

1. Expensive artworks that are held as an investment inside your SMSF cannot be kept hanging on your walls at home, but instead must be stored in a reputable art storage facility and must also be insured.
2. Staying in an investment property, or allowing friends or relatives to stay in the property, is also a big no-no if that property is held within an SMSF.
3. Market value must be paid for everything held within an SMSF, meaning all transactions must occur at arm’s length. You can’t make a purchase from a family member at mate’s rates. If it is difficult to avoid such a clash, please seek professional advice.

If you wish to discuss SMSF diversification further, please contact our expert and award winning SMSF advisors. 

Call (02) 4926 2300 or email us here at Leenane Templeton.

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In this article, we look at the liquidity risk associated with holding fixed property in SMSFs, as well as some of the factors to consider when investing in these types of assets.

Fixed property holdings in SMSFs can have distinct advantages:

– Capital appreciation of the property is taxed at an effective rate of 10 per cent, with a reduction to zero if the realisation occurs during the pension phase.
– Over recent years, the progressive relaxation of borrowing restrictions inside SMSFs also means that SMSF fixed property investments can be geared in certain circumstances – an attractive prospect for many investors.

Potential liquidity risk – and solution

The fallout from holding illiquid assets in an SMSF can be severe if a member dies or becomes totally and permanently disabled. This is because, in many cases, the property assets may need to be liquidated in order to pay the required benefit to the member or their family from the fund – which could not only take time to resolve, leaving the member and their family in limbo, but a ‘fire sale’ could result in a lower than market price for the property.  

Liquidity protection insurance enables a benefit to be paid to the member, or their beneficiary in the case of death, while enabling the SMSF to retain the property.

However, the question often arises about why conventionally structured life insurance would not be appropriate. In this situation, life insurance payouts are simply provided to policy holders or their estate – no provision is made for other members of the SMSF. 

Thinking about compliance

Liquidity protection insurance is often an attractive option for SMSFs holding property. However, this is a relatively new area, and there is uncertainty about the best way of structuring these arrangements – particularly around the compliance and tax requirements.

It’s important to understand how liquidity protection insurance is seen under the Superannuation Industry Supervision Act (1993), best known as SISA.

When considering liquidity protection insurance, the following compliance issues should be considered:

– Does it meet the sole purpose test? Liquidity protection insurance lies within the parameters of both the core and ancillary purposes, and therefore should meet the sole purpose test requirements.
– Does it meet investment strategy requirements? Liquidity protection insurance will usually contribute to satisfying these requirements, which obligate trustees to address liquidity issues when setting investment strategies.
– Does it meet the requirement to allocate premium expense on a fair and reasonable basis?  While this can be a grey area, age and health issues of the members need to be discussed openly and objectively up-front.

Equally, in the event of a claim, payments must be allocated on a fair and reasonable basis. To avoid possible dispute, the allocation methodology should be agreed and documented.

Tax considerations

It is necessary to consider tax deductibility of the premiums, the tax treatment of the claim proceeds, and whether or not the strategy could create reserves which may be treated as taxable contributions when appropriated for the benefit of members.

Action plan

This 10 step guide may help SMSF trustees deal with liquidity risks:

1. Complete an asset and liability review.
2. Consider other strategies to eliminate liquidity risk – e.g. payment of benefits in pension form only.
3. Identify the cover required if the insurance option is chosen to mitigate liquidity risk.
4. Select the methodology for allocating premiums and claims proceeds.
5. Review the SMSF trust deed to ensure that insurance in the proposed format is permitted.
6. Brief the SMSF auditor on your proposal.
7. Hold the trustee meeting to approve the strategy. Ensure that the outcome of this meeting is minuted.
8. Ensure that the statement of advice (SOA) prepared by your planner is consistent with other documentation.
9. Once agreed, ensure that the insurance is properly disclosed in annual member statements.
10. Review the insurance annually and update it where necessary.

Source: TAL, October 2014

For more information call Leenane Templeton on (02) 4926 2300 or email us.

If you wish to discuss SMSF liquidity and liquidity risk in SMSF please contact our specialist advisors.

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