Tag Archives: SMSF

Expanding SMSFs for the expanding family?

By Robert Wright /May 19,2023/

It has finally happened. Recommended by the Cooper Super System review in 2010, put forward in the Federal Budget four years ago by then Treasurer Scott Morrison and finally passed on 17 June 2021, the maximum amount of members allowed in a Self Managed Super Fund (SMSF) has expanded from four to six.

Despite the previous maximum of four members, the vast majority of SMSFs had only one or two members therefore this increase did not exactly stop the press. Yet the question remains, why would an SMSF want six members and what are the disadvantages?

The most logical reason for a fund to grow to six members is to gather a larger pool of assets to invest. A larger amount to invest could open up residential and commercial property investment, or other nonstandard assets that require a large capital outlay, such as fishing licenses or marina berths.

Greater diversification for what many would consider standard assets, such as shares and managed funds, could be better achieved with six members.

Additionally, if the SMSF is paying fixed accounting and administration costs, having six members would also result in a lower cost per member.

If a large family is running two funds currently due to the previous four member limit, the funds can now be consolidated. However, it would be a capital gains tax event for the fund that is being closed down. Therefore consideration should be given to the unrealised tax position for each fund when deciding which to keep and which to close.

The main disadvantage of a six member fund is just that, the six members. The larger the fund, the greater number of people who are involved in the decision making process and the greater number of people who have to agree. With a greater number of members there is also the greater likelihood that there will be a falling out or there will be a marriage breakdown that could result in the division of superannuation. This would be particularly detrimental if the six member fund was established to invest in one large illiquid asset.

The chances of one of these unfortunate events occurring magnifies with each additional member, so it goes without saying that six member funds and the accountants and advisers that assist them will see their fair share of grief and the financial consequences that result.

For current SMSF trustees who are considering taking advantage of this legislation change, a review of the trust deed should be completed and a corporate trustee should be appointed if one is not already in place.

The SMSF member limit increase to six is good. It provides more choice in a superannuation environment which is known for restrictions and adverse government legislation changes. Opening up self managed superannuation funds to six members does increase additional investment opportunities, however serious consideration should be given to potential ramifications prior to proceeding down this path.

If you would like to discuss establishing an SMSF with six members, or adding members to an existing SMSF, please contact your financial adviser.

Source: Bell Potter

Downsizer contributions: what are the rules?

By visual /May 13,2020/

In the first year since older Australians have been allowed to make downsizer contributions, 4,246 people have contributed a total of $1 billion in downsizer contributions to their super funds (1 July 2018 – 1 July 2019).

This not only allows retired people to have access to more money to fund their retirement, it’s also likely to have freed up new property for sale for first home buyers and young investors.

Although this is good news for people who have benefited from this scheme, some people have reportedly missed out because they didn’t understand the eligibility criteria.

Here’s a summary of the rules around making downsizer contributions:

• You need to be 65 or over at the time of making the contribution.
• You or your spouse need to have owned your home for more than 10 years prior to the sale.
• You don’t need to be working.
• Both you and your spouse can make a concessional downsizer contribution of $300,000 each if you both lived in the property at some point in time and the proceeds of the sale are exempt or partially exempt from capital gains tax (CGT) under the main residence exemption or because you bought the property before 20 September 1985. If only you lived in the property at some point in time then only you, not your spouse, can make a downsizer contribution (as long as you meet all other conditions).An investment property that you haven’t lived in is not eligible.
• Houseboats, caravans or mobile homes are not eligible.
• The total super balance test of $1.6 million and the $100,000 non-concessional contributions cap restrictions don’t apply.
• You need to make all downsizer contributions within 90 days of receiving the proceeds of sale, usually the date of settlement.
• You can only downsize once.
• You don’t need to buy another property to use the scheme.

If you sell your home and put some of the proceeds into super, you need to consider how this will affect your Centrelink benefits. Your super balance is counted towards the means test so you could potentially lose some, or all, of your Centrelink benefit if your super balance goes up.

Source: IOOF

Incorporating alternative investments in self-managed super funds

By Robert Wright /May 17,2019/

It’s no secret a diversified portfolio may help to protect your wealth from market ups and downs.

Including investment alternatives in your self-managed super fund, may therefore provide additional diversification.

But what exactly are alternatives and what can they do for your portfolio? We take a closer look under the hood to find out more.

How alternatives could fit within your self-managed super fund

Alternatives cover a very wide range of asset classes that could be incorporated within your self-managed super fund, should you choose to. Their performance, as well as associated risks, can differ greatly.

As the name suggests, alternative investments fall outside of the traditional asset class sectors of shares, listed property, fixed income and cash. Broadly, the different types of alternative investments include:

• Commodities – which cover a wide range of assets such as live cattle, wheat, corn, soybeans, gold bullion, copper, aluminium, oil and coffee.
• Infrastructure – covers services essential for communities such as airports, roads, power, hospitals and telecommunications.
• Private equity – investments in unlisted companies that offer the prospect for increases in shareholder value. Also known as “venture capital”, which is an early stage private equity investment.
• Hedge funds – which aim to protect investment portfolios from market uncertainty, while providing positive returns during both upward and downward trends in the market.
• Real assets – Direct property such as retail or commercial premises or facilities.
• Other direct investments, such as artwork and antiques.

The benefits of alternatives in a self-managed super fund

The main attraction of alternatives is that they tend to be less correlated to the major asset classes of equities, bonds, property and cash.

Correlation refers to the relationship between the returns of two different investments. For example, if two different assets move in the same direction at the same time, they are considered to be highly correlated. On the other hand, if one asset tends to move up when another moves down, the two assets are considered to be uncorrelated.

So in periods when traditional markets trend downwards, allocations to alternatives may not move in the same direction, or may even move in the opposite direction which can potentially provide an extra layer of diversification for your self-managed super fund.

Importance of diversification in a self-managed super fund

The importance of diversification for self-managed super investors was highlighted in research conducted by Investment Trends and the Self-Managed Super Fund Association, where just one in five advisers considered their self-managed super fund client portfolios to be well diversified.

In addition, 64 per cent of self-managed super fund advisers acknowledged even a portfolio of 30 individual stocks many not provide sufficient diversification – particularly when combined with a strong bias of investing domestically.

And the drawbacks

While alternatives can be an attractive diversification method, they also carry some risks. In addition, as they’re often not traded on an open market such as the ASX, it may be more difficult for investors to sell these investments and cash out. But just like any investment, the potential for a higher return or complexity of the investment strategy generally carries a higher level of risk.

Getting access to alternatives for your self-managed super fund

While alternatives have been historically used by institutional investors such as super funds, pension funds and government sovereign funds (e.g. our own government’s Future Fund) their higher initial investment served as a barrier for many self-managed super fund investors. For example, investing in an infrastructure project such as a new airport could cost hundreds of thousands, or even millions of dollars.

But gaining exposure to different markets and asset classes, including alternatives within your self-managed super fund has now become easier. Thanks to managed investments and exchange-traded funds, you can gain diversification across asset classes, locally and globally.

In summary

Alternatives may be a useful diversification tool in a broader self-managed super fund due to their lower correlation to traditional sectors. But like all investments, they’re not risk free so you may find it worthwhile to speak to your financial adviser about your current portfolio to determine if investing in alternatives is suitable for you.

Source: BT