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DISCLAIMER
This e-booklet contains general information only This information has been prepared as a general guideline, and is not intended to be an exhaustive or a complete analysis of the topics in question or issues raised in this e booklet. There are many particular legal, taxation and accounting matters which have not been dealt with in this e booklet and readers are urged to discuss any aspect of the operation of any of these matters discussed herein with their professional advisers. In particular asset protection, estate planning and superannuation are potentially very litigious areas of law and you will need specific advice before you take any actions if you want your wishes complied with. Before taking any action or implementing any strategy you should seek professional advice from your lawyer, accountant and or financial planner who will take into account your specific circumstances and objectives. Whilst reasonable care has been taken in preparation of this information, subsequent changes in circumstances (including legislative changes) may occur at any time and may impact on the accuracy of this information. Chan & Naylor Australia Pty Ltd nor its directors, officers or associated and related entities including the author take no responsibility for any omissions or inaccuracies in this information and will not be held liable for any losses or damages that may result in the use of this information.
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Table of Contents: General Overview of Superannuation ..................................................................................................................4 1.
Superannuation Contributions .....................................................................................................................5
2.
Why Self Managed Superannuation .............................................................................................................5
3.
Setting Up a SMSF.........................................................................................................................................6
4.
The Enduring family Superannuation FundTM Deed .....................................................................................6
5.
The Enduring Family Superannuation FundTM Benefits ...............................................................................7
6.
Back to Basics .............................................................................................................................................10
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General Overview of Superannuation In today’s aging population and ever increasing demands on the public purse, it is becoming increasingly necessary for individuals to prepare themselves for their own financial security in retirement. Superannuation has become a growing component of people’s retirement and with the introduction on 1 July 1992 of the super guarantee system, over 86% of people now have a compulsory method of superannuation according to ABS. The rate of the superannuation guarantee now stands at 9% (Government proposal on hand to increase this to 12% between 2012 and 2020), and together with the recent abolition of tax for super funds in pension stage (Yes you read correctly, in today’s taxation environment zero tax and you do not go to jail) the benefits of superannuation are significant. Given the above generous taxation benefits of superannuation, in pension stage and concessional tax rates in accumulation stage (15% on income and 10% on capital), many Australians have increased their superannuation balances. The superannuation industry is governed by APRA for the retail, industry and masterfunds and by the ATO from 8 October 1999 for SMSF. The SMSF industry has increased significantly over recent time as people seek to gain a greater control over their investments or are seeking to contain costs. The current assets per member in a SMSF now stands at over $417,000 according to ATO and compares to just over $26,000 per member in a non SMSF according to APRA. On 24th September 2007 the Federal Government introduced new legislation to allow superannuation funds to borrow under certain conditions. Commonly this borrowing structure is referred to as an instalment warrant, but it can be called anything. Its name is of less importance than what it is doing. For many, the ability to leverage in the SMSF to purchase assets i.e. a property, may have major benefits especially when coupled with the favourable taxation situation for superannuation. It is now possible to use your SMSF to purchase residential property with debt. The ability to leverage is for many a great benefit when looking at increasing superannuation balances. The types of assets that your superfund can acquire using debt are any asset that the super fund could normally acquire. Obviously the SMSF needs access to sufficient funds for any repayments. Funding for any loan repayments come from three principal sources: 1. The 9% superannuation guarantee 2. Income generated within the superannuation fund 3. Additional contributions by the member
Superannuation for many Australians: •
Is the second largest asset they will have
•
It is arguably the largest income producing asset most will have
•
Like any asset it should be nurtured, cared for, grown, protected and jealously guarded
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1. Superannuation Contributions With this in mind many people have sought to increase their superannuation balances but were constrained by the limits on contributions.
$25k/$50k concessional contributions. i.e. those amounts which are taxed at 15% going in super. $150k per year (note 3 year average payment in advance potential) non concessional contributions i.e. after tax monies into super.
Given these restrictions the real benefits of a SMSF can be distilled down to leverage and the ability to influence profits.
Contributions are capped, profits are not.
As members maybe we should increase our focus on profits which are in part underpinned with contributions.
This can only be achieved if you have control over your superannuation i.e. a Self Managed Superannuation Fund. You cannot go to the trustee of a retail or masterfund and tell them to buy XYZ and certainly not if you also ask for a leverage strategy for a specific asset such as property.
2. Why Self Managed Superannuation Therefore a self managed superfund as opposed to a retail, industry or master fund gives a member greater ability to increase their wealth.
With a SMSF you have the ability to:
Control
Leverage
Purchase direct Property
Manage life and disability insurance
Increase asset protection
Manage the asset for the family while minimising their taxes
Property Development
Ownership of part of your profitable business
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3. Setting Up a SMSF Setting up a SMSF has certain legislative requirements and should only be contemplated after understanding these.
Within a SMSF there are four (4) basic requirements 1. Establish your own deed and update it periodically 2. There is a maximum of no more than 4 members 3. All members must be trustees and if a company (Special purpose company) is used as the trustee all members must be directors 4. SMSF’s are regulated by the ATO and the SIS Act and so as trustees you must operate within these rules.
As a SMSF is just a trust, it’s capacity to maximise its potential is derived through the rules and authority written up in the deed. At Chan & Naylor we have found that in too many instances the drawing up of this document is primarily dictated by legislation with little or no emphasis given to its practical use or the ability to maximise the benefits to a member. Needless to say we found no deeds that came even close to what was required. We therefore sought to build our own deed with the assistance of lawyers, financial planners and the input of many SMSF trustees who understand the legal requirements and those in the profession and those users who understand the practical benefits that are available within a SMSF. The Enduring Family Superannuation TrustTM was born and is now trademarked under Chan & Naylor and only available through the Chan & Naylor network. This SMSF deed brings together all the legislation and practical requirements users should be demanding. Super should be an asset which is nurtured and jealously guarded not only for the member but for their family. Like any asset it should be capable of being passed on after death and the fruits of the members’ work should then be passed on and taxed in the same favourable rate enjoyed by the member as much as possible.
4. The Enduring family Superannuation FundTM Deed The Enduring family Superannuation FundTM Deed was developed with these objectives in mind. It is a flexible SMSF for the family, controlled by the family for their long term financial care with significant tax and estate planning advantages. It was set up to more easily increase and leverage its practical benefits with the help of a family superannuation fund advisor.
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It incorporates all the legislative requirements which our experience shows are absent from traditional retail, industry and master funds as the rules in these funds must be written to cater for all members not just for the benefit of a few. Therefore they exclude many practical benefits not because they are not allowed but because some members may not wish these rules to apply. Within the family environment this should not be an issue as you are controlling your own funds and no external parties are involved.
5. The Enduring Family Superannuation FundTM Benefits 1. Proportional voting. Each trustee/director can only vote in proportion to their members funds. This ensures members with lower balances cannot out vote the majority dollar members. Normally one vote per trustee. 2. Retain funds in the SMSF for the family after member’s death. Payments to family members can have taxation consequences as well as asset protection issues and so retention of monies within the fund can prove beneficial. a. Reserve Account. These are funds not specifically allocated to a member but rather are kept in the funds for future requirements. Creation of reserves comes from the profits of the fund and not from any member’s contributions. Their use include: i.
Evening out annual fund returns
ii. Payment of pension and top ups iii. Payment of insurances 3. Anti Detriment Deduction. This deduction compensates the fund for contributions tax paid by the deceased i.e. the 15% tax paid over their service plus time to age 65 but only if paid from a reserve. Payment of these amounts creates carried forward losses within the fund. This means that future concessional contributions which would have been taxed at 15% eat into the losses and therefore do not have the 15% tax applied. This means 100% of the concessional contribution is available for investment until the losses are fully used. As an example a SMSF whose member died at age 40 and paid about $45k in concessional tax would be entitled to over $300k tax deduction in the year of the member’s death. 4. Termination Payment on Death and Disability. A deduction based on the future service of the member if they had passed away up to age 65. Similar to and in addition to the Anti Detriment. This component in essence allows the superfund to claim as a tax deduction the amount it paid, to a member’s estate or nominated person/s as a death benefit, from monies the SMSF received via a life insurance policy (premiums must have been paid out of a reserve).
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5. Ability to define financial dependents. Look at who you can classify as an interdependent who get tax benefits. Prepare a Tax Dependent Survey each year to make it easier to determine after your death. a. Minimise exposure to taxation when funds paid out to non tax dependents
6. The ability to incorporate a SMSF Will. Remember your super does not form part of your estate and must be treated accordingly as it is not part of your normal will. a. Ensures your wishes for distribution are carried out
7. Allows for an easier creation of a valid Binding Death Nomination. Note divorce or marriage changes your will but a binding death nomination survives these changes.
Most BDN are not valid as either SMSF does not allow or is required in approved form
If no a valid instruction then the trustees decide who gets what. What happens if you have two children in SMSF who gang up against remaining spouse (proportional voting would assist in this)
Caution if using a BDN. Ask how these funds will be brought back into super once paid out. Given the limitations on contributions it may not be possible to bring them back quickly into super thereby maybe affecting what would be a tax free income.
8. Use of lump sum payment strategy in transition to retirement 9. Auto Reversionary Pensions. This strategy allows a member to nominate who will continue receiving a pension on their death. This ensures that the superfund balance is not paid out of the superannuation environment. The recipient can normally nominate at any stage the payment as a lump sum if and when they desire. 10. Improved Asset protection. On 19th August 2003 the High Court of Australia determined that payments made as arms length contributions to superannuation are not available to a bankrupt’s creditors. 11. Ability to include children under 18 years of age.
12. Self Insured Life Cover. A SMSF can claim a tax deduction for a deemed premium for life cover it creates for a member. a. This annual premium value must be supported by an actuarial certificate and is particularly useful if a member has a condition or is of an age where third party cover is too expensive. It is in essence non cash expenditure. b. This strategy requires use of a reserve and is particularly powerful if the reserves have larger balances.
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c. Can be used to fund children’s cover if they are playing potentially high impact sports or are elite sportspeople and normal cover is either too expensive or not available. This would allow for either a lump sum or pension payment in the event of an accident where superfund reserves would be used for the payout. d. As per the anti detriment and disability strategy monies paid out will have a proportion that can be claimed as a tax deduction by the superfund.
13. Allows for multiple pensions etc to reduce impact of proportional allocations to better utilise the taxable and non taxable components of your pension. 14. Allows for transition to retirement pensions and withdrawal and re-contributions. 15. Inject non concessional contributions into new super account which has no taxable balances to ensure this injection generates a pension which is primarily all non taxable. 16. Segregate your assets each 1 July so that the better performing assets are allocated into pension stage with the higher non taxable proportion when other members are in accumulation. 17. Ability to cancel pension payments and restart when fund values fall as any reduction in fund values are first allocated to taxable balances. This will assist in increasing the percentage of the non taxable amount which in turn will increase the earnings as non taxable. 18. Capacity to allow for borrowings to purchase residential property and business real property.
19. Ability to terminate members who may not be in agreement with majority members.
20. Designed to continue via your legal representative or your enduring power of attorney. While some of the above strategies will not be used by all (maybe longer term) there are many which will have a profound impact on a member’s wealth creation and retirement income and so should be maximised where possible.
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6. Back to Basics To go back to basics most people are wanting: 1. To create wealth and retirement income a. Use of debt to secure residential property 2. To Minimise taxation legally 3. Robust asset protection 4. Improved estate planning to pass assets on to the next generation. Superannuation has not traditionally materially helped achieve these goals but the Chan & Naylor Enduring Family Superannuation FundTM is a significant weapon to have to achieve all four of the above as it incorporates many inclusions not normally associated with traditional SMSF to achieve our client’s objectives of growing and protecting assets from generation to generation.
Not sure if this strategy is right for you? We provide a free 10-15 minute phone consultation with a Senior Partner of Chan & Naylor – they can answer your general questions and discuss what’s possible and what’s right for you.
www.chan-naylor.com.au/free-call
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Chan & Naylor is Australia’s leading property accounting group, ranked in the BRW Top 100 Accounting Firms Australia. At Chan & Naylor you can count on our knowledge and expertise in the following areas:
Property Small Business Asset Protection Self Managed Superannuation Funds, Taxation Wealth Creation Estate Planning
Our motto is: “To help our clients increase and protect their net worth from generation to generation”
If you want to arrange a specific consultation to discuss any of the strategies please contact Chan & Naylor via www.chan-naylor.com.au or on 1300 250 122 where you will be able to arrange a suitable time to meet with one of our team.
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