We’ve had a number of calls and emails from people asking us questions about the SMSF Which Property Event on Sunday 4th December.  Just in case you have similar thoughts running through your head we have included the most common questions and answers here for you.

Q.  How much do I need to have in Super before I can benefit from an SMSF?

A.  Well there is no maximum amount specified in the legislation that you must have before you can establish a SMSF. So it really depends on your objectives for the fund.  For example if you plan to be actively investing through the super fund with good yields, together with a commitment to regular contributions, then a SMSF could be for you.  However if you only have a few thousand dollars and are not confident in managing your own money then leave it until you are more financially confident.

Q.  I don’t have enough money in Super to afford a property so how can I benefit from this?

A.  Well provided you have enough for a deposit of 20-30% and regularly contribute to super, then a SMSF could borrow to acquire a property, pay the interest and outgoings and receive the rent. You will also learn from the strategies outlined how you can use the SMSF to acquire property in the future as the fund grows.

Q.  What if I want to buy, renovate and sell property?  Can I do that through a Self-Managed Super Fund?

A.  Depending on an investor’s objectives a SMSF can buy a property, and can even borrow to buy a property; use a manufactured growth strategy and renovate and hold, or renovate and sell.  This can be an active strategy that grows the fund quite quickly.

Q.  Can I use a Self-Managed Super Fund to invest in shares?

A.  Yes certainly the fund can buy and sell shares, CFDs ETFs currency, whatever you are interested in.

Q.  Is my attendance fee tax-deductible?

A.  For trustees who already have a SMSF the fund could reimburse you for the attendance fee.  However often investment advice is considered capital, so although the fund can pay the fee, it may not be deductible.  For people who do not have a SMSF yet but are already investing in property,  may be able to claim the fee as a tax deduction.

Q.  I already have a Self-Managed Super Fund, how will attending your event benefit me?

A.  We are continually training to bring advanced strategies to trustees.  Being investors as well as SMSF trustees ourselves we understand the pitfalls that trustees experience and work with them to actively manage their fund.

Q.  I already own property in my own personal name, is there a way I can transfer it into a self-managed Super Fund and how will that make me financially better off?

A. It depends on the type of property that you own.  If it is a commercial property that is being used for a business then yes the good news is that there are different ways in which we can transfer it into your SMSF.  Depending on the circumstances the rental can be taxed in the fund at a lower rate ie 15% and there is a possibility of no capital gains taxes when the fund sells it in the future.  However if it is a residential property unfortunately the SMSF cannot acquire it from you.

Q.  I don’t earn enough to be able to afford to invest in property right now so how can I afford it through a Super Fund?

A.  At the seminar we will be illustrating an example of how to achieve this without having to access money outside of super.

All of these question and more will be answered in full on the day.  You’ll also see real life examples of the enormous tax savings that people have made using a Self-Managed Super Fund with property.

At just $97 for one person or $117 for two it’s a very affordable investment when you consider how many thousands you can save each year in tax…not to mention how much more quickly you’ll be able to accumulate assets through a Self-Managed Super Fund.  Not only that, your investment in the days comes with a money back guarantee.  Simply, if you’re not delighted with the value of the information we’ll refund your investment in full.

Make sure you join us.

Just go  here.

With all the promotion of self-managed superannuation, many people are seeing it as a “magic pill” that will solve their investment challenges and set themselves up for a wealth retirement.

Yes it can be a “magic pill” but as with anything that has a potentially large upside, there is a downside.

The wrong set-up, the wrong structuring and the wrong advice can cause a lot of legal and financial headaches.

The key is to get the right advice from the outset.

As specialist SMSF advisors we often get asked to clean up some of the mistakes people have made by following the wrong advice.

I thought I’d share some of these horror stories with you so you can make sure they don’t happen to you.

Horror Story #1

Bob age 58 and Mary aged 55 were keen to invest in property. They attended a property investment seminar where the speaker also talked about how they could buy a property through a Super Fund. They decided to buy the property and arrange for an SMSF to be set up, through advisors recommended by the property marketers.

The problem was the advisors did not consider the objectives of the trustees of the fund, the ages of the members of the fund and how this impacted on the choice of investments they put into the fund.

The property acquired was not a good investment for the fund as it was highly negatively geared requiring the members to increase the amount of contributions they were putting into the fund.  This was also the worst timing!!  Bob was planning to retire at 60 and now the fund has used its cash to acquire a totally inappropriate property investment.  His retirement funds are gone and he must continue working to fund the expenses of the property!!

Solution: The types of properties that work well with SMSF will depend on the circumstances in each case.  The criteria for selecting a powerful property investment are different for an SMSF.  A property that may seem like a good investment (eg. Right location, great capital growth opportunities etc.) may not be right for an SMSF.

We recommended that Bob and Mary sell the property and purchase a different type of property that was in line with their SMSF goals.  As a result, they saved $10,000 a year in contributions and Bob was able to take a Transition to Retirement Pension.

Horror Story #2

Tom and Monica were members of their SMSF but although he was 60 he very little funds in his members balance.  Monica at only 54 had the largest balance but she could not access it.

They had been to a property seminar in which the presenter spoke of using the SMSF in a Joint Venture with their Family Trust.  They acquired the appropriate JV agreement but their accountant erroneously recorded the Joint Venture contribution to the trust as an In-House-Asset (ie a loan rather than a Joint Venture contribution) with the result the auditor reported to the ATO a contravention of the legislation by the fund.

Rectifying the breach cost Tom and Monica their Principle Place of Residence; they had to sell it to pay the SMSF back for the “loan”.

A better solution would have been to seek an advisor who understands the advanced strategies available to the trustees.  There were many solutions to their problems.  Monica could split 85% of her contributions into the fund annually with Tom such that he could commence an income stream from the fund.  They also had commercial property held in a trust which would be beneficial to be owned by the SMSF.  Because it was business real property it could be acquired by the SMSF.

There are more horror stories like this one.  But there are also many success stories too.

Like the builder who used a contributions reserve strategy to claim an extra $100,000 of concessional contributions in a year of high profits saving $45,000 in taxes in that year!!

Also a client, who was short of cash in one financial year but wanted to contribute the $100,000 that she and her husband were able to contribute annually, called us to see what she could do.  We recommended that one of the warehouses that they owned could be contributed “in specie” instead of cash.  This had two fold benefits:

• They were able to attain a tax deduction for the $100,000 they contributed
• The rents from the warehouse provided an income stream for a retired member and when sold in the future would be capital gains tax free as the property supported a retiree’s income stream.

The point is, getting the right advice is paramount.  Select your advisors wisely and educate yourself.  When you do these two things you’ll find that Self Managed Super really can be a “magic pill” in escalating your wealth.

As well as great food we shared some interesting statistics of what is taking place in the industry.  There are greater than 480,000 Self Managed Superfunds and growing.  By 2028 for every $1 earned in fees in retail super an equivalent $5 will be earned in SMSF advising.  Given the demographics, the statistics and on-going challenges faced by advisers and trustees alike SMSF advising is rewarding both financially and professionally.

We looked at the effect the FOFA (future of financial advice) reforms will have on unlicensed accountants with the removal of the current “carve out” which ends on 30 June 2012.   Tips were provided that accountants should do to enhance their SMSF business offering and traps to avoid.   As we indicate on our website at Advising Accountants, accountants should:

• Decide whether to provide super advice or limit activities to administration only
• If advising and not financial planning then only look to provide superannuation and SMSF advice only
• Whether to hold a superannuation license directly or become an authorised representative of a licensee
• If doing the latter ensure that the licensee charges a flat fee model
• Complete relevant training that provides requisite specialist skills

Over coffee and fruit kebabs  we shared some strategies accountants who are mainly in administrative activities with their SMSF clients can increase revenue from those clients without:

• Any costs to themselves
• Any further study or training
• Expensive licensing and costs of compliance
• Joining firms offering “limited licensing facilities” for a fee
• Selling product under a dealer group

By working with Specialist SMSF advisers at AFA Wealth who provide the advanced strategies to their clients while they retain the existing tax and compliance work.

We illustrated some great advanced strategies that we could assist the trustees of their SMSF’s with,  including Limited Recourse Borrowing to acquire assets used in their clients business; acquiring property in a Joint venture arrangement with another trust they might have, using their Self Managed Superfund to acquire property internationally; borrowing to buy an investment property, improving the property under the borrowing rules, not to mention the use of reserves to deduct business profits as concessional contributions in excess of the contribution caps.

We had a tremendous couple of hours with the accountants saying many ideas were provided and they are looking forward to implementing them.

For accountants that missed out on this Breakfast Briefing (numbers are limited) don’t hesitate to contact us for the next Breakfast in your area!!

A couple of days ago we received an email that shared results of a poll taken by the Australian SMSF Members Association asking about their view on the performance of their Superannuation Funds.

The results were interesting.  Another important fact is the membership of ASMA are genuine investors for their own retirement not large fund trustees investing for millions of superannuation fund members. The views expressed by members of ASMA are a broader and important insight into the current market.

 We thought we would share these finds with you and also give you some helpful pointers on how to address these issues.

65% of respondents said that with recent share market volatility it has impacted their SMSF.

66% of people are “holding shares” in this current volatile share environment and 36% are buying. 

In today’s market it indicates that it is a buyer’s market and there are opportunities presenting themselves for the astute investor/trustee.

When it comes to cash or fixed interest style investments it seems that responses are spread fairly evenly with:

•    29%     holding 0-20%  in cash or fixed interest style investments
•   29%      holding 20% -40%
•   19%      holding  40%-60% and
•   23%      holding  >60%

Having a diverse portfolio is important for the overall performance of the portfolio and it makes sense that trustees are changing the mix of the assets that their funds hold.  Trustees should always review their written investment strategy but in times like these it is important that when making investment decisions trustees are mindful of their investment strategy.  In the past auditors have pointed out to trustees that if their holding in cash and fixed interest style investments has changed then it should match up with their strategy.  Some trustees had their in strategy to hold 5% in cash but the balance in cash was 95%!!

  And what does the future hold?

28% of people were positive about the future, 28% negative, 38% were neutral and 11% pessimistic.

At AFA Wealth we are always positive about the future but realise that the mix within SMSF may be different when times are volatile.

Regardless of whether you favour shares, property or fixed/cash investments for your portfolio what is vital is that you choose the style of investments that are likely to perform solidly within each sector.

One of the key reasons that people run into trouble is because of the advice they are given from their Self-Managed Superannuation advisors.

They have often arranged through their accountant or financial planner to have the fund set up and while these providers are great at managing the compliance activities of the fund it takes advanced, specialist training to be able to confidently advice on specific investment solutions.  Most advisors simply haven’t had the time to undertake that kind of training.

Here are some of the biggest challenges we find:

• Trustees are told by their advisor that investing in property through Super is a good thing.  The trouble is they may not have told them that the SMSF could not acquire that great rental property from their trust because it is not an asset that the SMSF can acquire from a related party.  We’ve mentioned more of the things to look out for in our article SMSF & Residential Property: The Top 7 FAQ’s
• Then with shares there are measures that trustees can do to protect their capital and even strategies they can implement when markets are going down.

As you may know, here at AFA Wealth we work directly with investors but we are also advisors to Self Managed Superannuation accountants and show them how to recommend advanced strategies to their clients.

If you’d like to find out more about how to enjoy better performance and some advice on your SMSF investment strategy or you’d like to know more about a SMSF setup here are some resources on our site that may help.

Complimentary Ebook-The Self Managed Superannuation Guide “Everything You Need to Know But Were Afraid to Ask”

The Top 7 Mistakes that SMSF Trustees Make and How To Avoid Them

Investing in US Property: What You Need to Know

The July 2010 amendments introduced sections 67A and 67B into the SIS act with effect from 7 July 2010 with s 67 (4A) being repealed.

Section 67A (1) allows a trustee to enter into a borrowing arrangement where the following conditions are satisfied:

(a)  the borrowed funds are used to acquire a single acquirable asset, including:

• expenses incurred in connection with the borrowing or acquisition, or in maintaining or repairing the acquirable asset (but not expenses incurred in improving the asset), and
• money applied to refinance a borrowing in relation to the single acquirable asset.

(b)  the acquirable asset is held on trust so that the trustee acquires a beneficial interest in the acquirable asset

(c)  the trustee has a right to acquire legal ownership of the acquirable asset by making at least one payment after acquiring the beneficial interest

(d)  in the case of default by the trustee, the rights of the lender (or any other party) are limited to rights relating to the acquirable asset

(e)  if the trustee has a right relating to the acquirable asset (other than the right to acquire legal ownership) – the rights of the lender (or any other party) against the trustee in connection with, or as a result of, the trustee’s exercise of their right are limited to rights relating to the acquirable asset, and

(f)  the acquirable asset is not subject to any charged by (d) or (e) above.

Issues have arisen from the new provisions which the new draft ruling SMSF 2011/D1 addresses including:

• what is an acquirable asset and a single acquirable asset;
• when is maintaining or repairing an aacquirable asset distinguished from improving it; and
• when is a single acquirable asset changed to such an extent that it is a different (replacement) asset.

Examples:

Q. What happens if a trustee acquires a vacant block of land on a single title and it is subsequently subdivided?

        A.  One asset has been replaced by several different assets as a result of the subdivision-SMSF would no longer comply with the borrowing rules

Q.  Apartment with separate car park on separate legal title-is this a single acquirable asset?

        A.  Provided the laws of the State in which the apartment is located does not allow the two titles to be disposed of separately, the two will be a single asset

Q.   When a cyclone damages the roof a house, would the replacement of the roof  be a repair or replacement?

A.  It would be a repair. However the addition of a second storey to the house at the time of also replacing the roof would be an improvement.

Q.  Can a SMSF purchase land and construct a house using borrowings?

A.  The arrangement would not satisfy the requirements of sec 67A if money borrowed under the LRBA is used to construct the house as it is improving      the acquirable asset (the land).  Also building a house on the land would result in it no longer being the same acquirable asset.

Owning the right properties through Superwith the right structuring can be a very wise investment decision.  The challenge is, there is a lot to know to ensure you conform to SMSF regulations and also ensure the property is a match for your investment goals.  If you would like some advice on what’s the right fit for your situation, feel free to call us on 1800 WEALTH (932 854)

• the top 3 challenges people have experienced that prevent them achieving their goals
• the top asset protection techniques and methods people are using
• the top 3  wealth mentoring program components
• the preferred methods of delivering such a program

The Top 3 Challenges Preventing You Achieving Your Goals:

• 35% felt that access to equity, borrowing and money were challenges to achieving their goals
• 25% put a lack of knowledge and knowing how to begin as preventing them from getting started
• 24% identified their mindset, limiting beliefs and fears were preventing them from having a dynamic life
• 17% listed amongst other things; a lack of time and confidence in their own ability

The Top Asset Protection Techniques

• 82%  of participants are using the best method–asset protection and with company and trust structures
• 12-20% were using Debt  Coverage as an asset protection strategy
• There was also a blend of  the use of Wills, Life Insurance and Estate Planning; all very much required in asset protection and succession planning.

The Top Wealth Mentoring Program Components

• 82% would like a customised wealth plan for their goals
• 58% would like ongoing feedback/support of your progress through the program
• 32% would like to learn more about how to invest through a SMSF

The  Preferred  Methods of Delivery

• 75% were interested in One-on-One wealth consulting
• 57% would like a combination of teleseminars, audios, group coaching and written content
• 42% would attend Face-to-Face Events
• 30% appreciated DVDs/audios

Some other areas of interest identified were people considering direct property, investing in USA property,  shares and business.

In subsequent posts we’ll be delving into each area in more detail so stay tuned!

With the crazy low prices of real estate in the US, many people are thinking about investing in US property. And – considering that self-Managed Superannuation funds can now borrow to invest in property, we’ve received many enquiries from clients asking about the best way to go about this.

Here are some tips and traps:

Asset protection is even more imperative when acquiring property in the United States of America. A US Attorney says on his website “Every three seconds another American is sued”. This litigation risk, coupled with Environmental problems “following the chain of title” if you own properties as an individual you are vulnerable.

Lessons From An Oil Tank

We always remember a story out of the US when a tenant was running low on oil for the furnace and tipped the tank slightly to encourage the oil to run down “hill”.

When the external oil tank was filled, the weight of the oil caused the tank to fall over spilling oil throughout the property grounds.

Unfortunately for the owner whose personal name was on title, there was also a stream of water on the property which took the oil much further a field.  The resulting clean up costs was far greater than what the property was worth.

Dealing with US Attorneys

Since 2005 we have been advising Australian investors how to structure for asset protection should they wish to invest directly into real estate in the United States (US). What we have found is the US attorneys are very good with dealing with the investor in the US but have no idea how to connect it Australia.  This is exacerbated with their lack of knowledge of Australian taxes and the interaction between the two.

In reviewing how long we have been advising in this area we looked back to the first US “master tax guide” that is in our office and it was 2005. (Naturally we are using the most up-to-date guide now!)  Seven years of research and working with the US attorneys we feel has provided us with a very grounded knowledge in this area and we see many errors being made by advisors who are not as familiar with the issues.

Which US Entities Can Acquire Property?

US entities which are suitable to acquire properties include Limited Liability Companies, C-Corporations, Limited Partnerships and Land Trusts.  Each has their respective idiosyncrasies which the investor needs to be aware of when determining which entity is most suited for their needs both in the US and in Australia.

As a summary an LLC is a disregarded entity with the member receiving the income and lodging US returns that are required.  However a member can go to the IRS and say,” well I know I’m an LLC but I’d prefer that you treat me as a C-Corp.”  The IRS will continue to treat the LLC as a C-Corp for five years or unless more than 50% of the membership of the LLC is changed.  The US although it treats the LLC as a “flow through” entity still regards it as a company.

A C-Corporation is very much like an Australian private company and has federal tax lodgment obligations.  Shares are issued to the owners of the company.  Once a C-Corp always a C-Corp, unlike the chameleon characteristic of the LLC.

Generally we incorporate in Wyoming or Nevada because those two states have no state taxes and enjoy the strongest company laws.  It can be more expensive doing it that way but the case law supporting the company laws is also more comprehensive.

The Structures That Protect Your US Asset

A normal Australian investor will usually set up a discretionary trust which will act as the member or shareholder of the LLC or C-Corp.  Depending on how many US properties the investor acquires will dictate how many LLC’s they will incorporate.  This is influenced by the particular investor’s risk profile.  Some people will use a separate LLC for each property so that the litigation risk is isolated from other properties.  You can end up with a tier of LLC’s wholly owned by a single LLC’s whose sole member is the Australian Trust.

Be Careful: Do This And You’ll Breach SIS Legislation

However for an Australian SMSF there is a potential trap here should the SMSF become the sole member of an LLC.  The problem is that the LLC will fall under the definition of a “related entity” because the key people in the LLC are the same as the members of the SMSF and will be regarded as an In-House Asset.  As the SMSF can only hold 5% of its total assets in In-House Assets unless the value held in the LLC is less than 5% the super fund will breach the SIS legislation.

There is an exception to the In-house asset rules under SIS reg 13.22C.  Trustees relying on this exception need to heed the requirements of the section to ensure they don’t fall foul of the rules hence making the fund non- complying.  We highly recommend you seek the advice of a SMSF specialist advisor before embarking on this path.

Will Aussie Lenders Lend on US Property?

Trustees have asked whether the SMSF can borrow to buy a US property.  Although a detailed description of the limited recourse borrowing rules is beyond the scope of this article, see Guide to Borrowing for SMSFS, suffice to say it is unlikely that an Australian lender would lend on a US property and the borrowing must be to acquire a single asset under trust.  These rules are strict and easy to get wrong.

Investing In Line With Your Investment Strategy

When investing in any asset class the trustees must invest according to their investment strategy.  Trustees should review their deed to ensure it allows them to buy foreign property and to buy it directly.  Also review the investment strategy to ensure the property will yield the required profits to meet the funds objectives.

Trustees are able to invest in property, shares, managed funds, cash, fixed interest deposits, precious gems, commodities to name just a few.  When deciding on the percentage of the fund balance will be allocated to any class they should determine how much will be allocated to particular jurisdictions i.e. Australia, USA, and Europe etc.  It should be stipulated in the investment strategy and minutes kept to illustrate how that investment is in accordance with their strategy.

Evaluation a real estate acquisition should be more stringently scrutinized with an offshore property than an Australian property.  Property Manager’s are different, trust or escrow accounts are treated differently and distance can be a mitigating factor.  Often we have received complaints from clients who have never seen any rent, they have sent over money for renovations which have never been carried out, county taxes have not been paid and properties have been foreclosed.

Here at AFA Wealth we have been advising clients on investing in US property since 2005. And – if you’re considering  using your Super Fund to buy US property, we are specialists in that as well. Just call us on 1800 WEALTH (932 584) for more details.

For the convenience of readers we have compiled a list of some of the most popular Q&A on the topic of property. From the exhaustive number of questions we receive
we intend to answer all of them but certainly strive to cover most issues raised in broader articles.

1. Can my SMSF invest in property directly?
2. Can my SMSF buy my residential investment property
3. Can a SMSF buy overseas property?
4. Can a SMSF buy commercial property from a fund member?
5. Can we sell an investment property owned by a SMSF, to a fund member?
6. What are the tax implications when we sell an investment property owned by a SMSF?
7. How do we calculate the CGT payable by the SMSF when we sell a property, or other investment?

Q. Can my SMSF invest in property directly?

A self-managed SMSF super fund can invest in all types of property, including residential, commercial, industrial and listed and unlisted property trusts. There are some special rules peculiar to super that may affect how you use the property bought via a SMSF.

A residential property must not be rented to any member of the fund or any of the member’s family or businesses. This would be regarded as an in-house asset. Provided it was rented out at market rent that is fine.

Q. Can my SMSF buy my resident investment property?

Unfortunately there are only limited assets which a SMSF can acquire from a member in any manner, shares listed on a recognized stock exchange at the market value or business real property. Even though the property may be a really good investment for the fund because the member owned it first it cannot be transferred to the fund.

Q. Can my SMSF buy overseas property?

A SMSF can directly buy a property anywhere but certain countries are very litigious and how the fund acquires them can be quite tricky. Remembering the trustees must organize independent audits of the fund each year and this could increase the costs of audit for the following reasons:

The fund auditor would expect documentation evidence of ownership

The fund auditor would require documentation evidence of the value of the property as assets are to be recorded at the market value at the end of the financial year. The trustees of the SMSF would have to ensure that the trust deed allowed the trustees to acquire overseas property as well as acquiring property directly.

Otherwise there are no special rules for a SMSF acquiring residential or commercial property overseas. Certainly the residential property could not be rented or leased to a member or a relative of a member as it could cause a contravention.

Q. Can a SMSF buy commercial property from a fund member?

“ Business real property’, such as commercial or industrial property, or a shop, or even a farm, can be a legitimate SMSF investment in the same way that residential property can be. In terms of superannuation investments, the key difference is that, unlike residential property, a SMSF can buy business real property from fund members and fund members (or relatives of fund members) can use that asset if they choose to do so. Any lease in place must be at market rent and in line with the terms and conditions of a typical commercial lease.

Business real property can also be transferred as an in specie (non-cash) contribution, subject to contributions caps, and any small business retirement exemptions available (if applicable).

In some states stamp duty will be payable on such a transaction. You need to check with your State Revenue Office whether stamp duty is applicable.

Note that any property a SMSF purchases must be in the name of the SMSF (if corporate trustee), or the name of the individuals “as trustees of” the SMSF. If the relevant state laws don’t permit property be held by individuals “as trustees” then the SMSF must ensure a declaration of trust is made or other type of legal instrument is in place to recognize the SMSF’s interest in the property.

Q. Can we sell an investment property owned by a SMSF to a fund member?

Fund members/trustees can purchase assets owned by the SMSF (although the SMSF cannot purchase assets from members, except in limited circumstances).

According to the super rules, investments by SMSs must be made and maintained on a strict commercial basis. A fund trustee must ensure the asset valuation is robust, and the purchase or sale price of SMSF assets must reflect true market value.

The ATO states that you must obtain an independent valuation report to determine market value before purchasing the asset from the super fund. You must ensure there is a written contract in place and that the terms of the contract are on commercial basis.

Taxes will depend on the phase the superfund is in. If the SMSF is in the accumulation phase and it makes a profit on the sale it will be subject to pay CGT on that gain. If the SMSF is in pension phase, tax is not payable on fund earnings, including capital gains.

Q. What are the tax implications when we sell an investment property owned by a SMSF?

In order to answer this question let us assume the initial property was acquired by the SMSF for $200,000 more than twelve months ago. The SMSF sells the property to a third party for $300,000 resulting in a $100, 0000 gain.

If the SMSF is in the accumulation phase 2/3 of the gain is included in the assessable income of the fund and taxed at 15%. The discount of 1/3 of the gain effectively makes the rate on a capital gain of 10%.

However if the fund is in the pension phase at the time of the disposal there would be not tax on the capital gain.

Some of the horror stories clients have shared with us involve non compliant issues that the auditor has identified. This article seeks to illustrate how some simple mistakes can run into costly penalties.

1. Using Super Fund monies for a private purpose

In this story the trustee of the fund grabbed the wrong cheque book when paying an expense for a related entity. The transaction amount was really small about $200.00 but it wasn’t noticed until the auditor asked what it was for. He reported them for not keeping their assets separate from their other entities. The trustee had $600 in penalties to rectify the account.

2. Selling related party assets to the SMSF

While the SMSF can directly buy collectibles like art, precious gems, residential property or even shares in a private company, frequently the trustee will already own these assets and thinking they would be a suitable investment for the SMSF sell the artwork to the Super fund.

This would cause the SMSF to become non compliant as s66 of the SIS Act prohibits a complying superannuation fund from acquiring most assets from related parties of the fund including members and members’ spouse.

3. Allowing the fund to borrow

Some trustees are not aware that overdrawing the bank account by $10 could cause the auditor to report the fund to the regulator as a SMSF is not allowed to borrow unless it strictly follows s67A of the SIS legislation. It also means that the trustee cannot allow the fund to put a “charge” over an asset of the fund.

The new change to this legislation means that a SMSF can now borrow to buy a single asset under trust. While this is a great new opportunity for SMSF trustees care must be taken to ensure it meets with section 67(4A) and that it is a true SMSF loan.

4. Investing in assets in which a relative receives a “current benefit”

The trustees must comply with the sole purpose test set out in SISA s62. Frequently this test is breached when the trust invests in say artwork which they hang on their living room wall. The ATO would consider this is breach of the sole purpose test. 5. Holding greater than 5% in “in-house assets”

An in-house asset is:

• An assets of the fund that is a loan to, or an investment in a “related party of the fund,
• OR An asset of the fund subject to a lease or lease arrangement between the fund and a related party of the fund.

For example the XYZ Pty Ltd Company is trustee of the Blog  Superfund and it buys a residential property and leases it to the member’s son. Firstly it would be an in-house asset by definition and as the market value of the property is greater than 5% of the total assets of the fund the lease to a relative of a member would cause a contravention of the SIS legislation.

6. Not investing according to their written Investment Strategy

Trustees are required to formulate an investment strategy in writing and to invest according to their strategy. The auditor then looks in the minutes which the trustee is required to keep for 10 years to see how an investment is in accordance with the strategy.

A trap for trustees was during the GFC; trustees sold off investments and held the majority of the assets in cash but their investment strategy said 5% of the funds assets would be in cash. The auditor then commented that 95% of the funds assets were actually held in cash.

7. Having Individuals as Trustees instead of a corporate trustee

All members of a fund must be trustees or the trustee must be a company of which all members are directors. Often to save costs at setup members will decide to be trustees in their individual capacity.

This can be false economy as all assets must be held in the name of the trustee as trustee of the SMSF. When new members are admitted to the fund all the assets of the fund must be changed when the new trustees are added.

Can you imagine the difficulties with a large portfolio of shares??

Asset protection is better provided if the fund directly invests in property. A property owned by a SMSF can still cause a problem and the fund is sued. Not being a legal entity the trustee would be held liable as the legal person of the fund. Having a corporate trustee could prevent this effect.

Well, it’s out.

“Future of Financial Advice” reforms that Accountants and Financial Planners have been nervously expecting was released on 29th August, 2011.

But what does it mean to these industries really?

First – some background:

The Assistant Treasurer and Minister for Financial Services and Superannuation, Bill Shorten, released the first tranche of draft legislation of the FOFA reforms for public consultation.

“It is a concern that only one in five Australians access financial advice. These reforms will restore trust and confidence in the sector following collapses such as Storm, WestPoint and Trio. They also remove the red tape that has prevented low-cost, good quality advice being delivered to millions of Australians.”

“These reforms are in fact a growth strategy for the financial planning industry,” Mr. Shorten said.

The first tranche of the draft bill covers a number of key components of the FOFA reforms, including opt-in, the best interest duty and the increase in ASIC’s powers to enforce the new elements of these reforms.

Of importance to the accounting profession however, is the second tranche..

“The second tranche, which I expect to release for public consultation shortly, will include the ban on conflicted remuneration (covering commissions and volume payments), the ban on ‘soft dollar’ benefits, the ban on asset-based fees (where there is gearing), and the definition of intra-fund advice. I will also be announcing at that time my decision on the replacement of the accountants’ exemption,” (emphasis added) Mr. Shorten said.

What will replace the accountants’ licensing exemption?

The Government announced that the existing exemption permitting accountants to provide advice on the establishment and closing of self-managed superannuation funds without holding an Australian Financial Services License (AFSL) would be removed and the Government would consult on an appropriate replacement.

Treasury, ASIC and the accounting bodies are now working together on various initiatives that maintain a level playing field for what is needed to provide financial advice but at the same time will assist accountants to obtain a License.

While Treasury assures the industry that they will be assisting accountants in the licensing process, already we are hearing within the industry that a license won’t be so easy to get as the accountant will have to provide relevant experience requirements.

There are a number of facilities being offered to accountant, advisers to offer limited advice. A number of providers are offering the ability to operate under a limited license that will allow them to provide strategic advice. However those advisers and accountants looking to take advantage of these services will still need to gain a specialist qualification in the superannuation area itself.

Reading, understanding and applying the SMSF laws are the core skills necessary for any person advising on SMSF’s.

What accountants should do to enhance their SMSF business

For unlicensed accountants the removal of the current exemption will occur on 1 July 2012 and accountants should decide:

• Whether to provide super advice or limit activities to administration only
• If advising and not financial planning then only look to provide superannuation and SMSF advice only
• Whether to hold superannuation license directly or become an authorized representative of a licensee.
• If the latter ensure that the licensee charges a flat fee model or work with a team of SMSF Specialist Advisers who are already licensed
• Complete relevant training that provides requisite specialist skills.

AFA Super under the AFA Wealth umbrella has held an AFSL since 2004 when the Coalition’s Financial Services Reform Act in 2001 sought to reform the Financial Services. Consultants have continued training to attain the SMSF Specialist Adviser qualifications and skill set.

We provide specialist SMSF support and advice to help Accounting Firms offer a higher level of service to their clients. If your firm would like to expand your SMSF offering without jumping through the training and accreditation hoops yourselves, feel free to call us on 1800 WEALTH (932 854).