Self Managed Superannuation Fund - Coursework Example

Name: Tutor: Course: Date: Self Managed Superannuation Fund Self Managed Superannuation Fund (SMSF) refers superannuation fund whose regulation is under “Australian Taxation Office” or ATO. All fund members are typically the fund trustees . The maximum number of membership is four. The exceptions to the rule are; if the associate is a minor or if an individual is under the legal disability. The main difference that exists between SMSF and other types of superannuation, for instance the government, corporate fund, retail or industry is that SMSF trustees, who are also the members of the fund, are not allowed to pay themselves any form of fee for engaging on the duties of the trustee. This however, works the advantage of SMSF incase the trustees manage the activities of the fund, hence saving on the fees of the professional trusties. Nevertheless, it can also be disadvantageous as it can lead to a waste of time and assets when the trustees are not proficient and highly diligent in performing the required duties (Australia, Treasury 2) SMSF is a choice for investors who are looking forward to be fully in charge of their superannuation assets and are set to work at managing their investments and benefit from their undertakings. There are two different types of regulated SMSF. The most widespread type is usually known as non-corporate trustee SMSF. The other is corporate trustee SMSF. The former can either be single or multiple member funds. Trustee restrictions It is the responsibility of trustee to assure that SMSF assets are separated from personal assets or property that belongs to the business SMSF should not be used for individual gain or business reasons, this is in lieu of “sole purpose test” the funds that are found in SMSF are solely for retirement and therefore cannot be accessed till retirement period (Hull & Hull 41-8). Money from the fund can not, in any given circumstance be used for individual or business reasons. The assets of the fund should not be viewed as a form of credit or disaster reserve, incase the need arise. The major function of the superannuation investment is to generate and develop retirement benefits for the members (Doukas & Lang 78). The SIS Act puts a substantial restriction upon the investments which can be made by a particular trustee of an Australian superannuation fund. There are non-length investments that are highly restricted, the way it is for the powers of the trustee to borrow. Lending to members together with their relatives is bound by restrictions and lending to entities like the family companies and trusts is subject to 5% in-house asset limit of the current market value of the asset. The trustee of an SMSF makes a strategy of investment for every member, which is based on the current situation together with anticipated future changes to the present circumstances such as contingencies like ill health or death (Australia, Treasury 2). The investment done by the trustee should be consistent with the strategies. One essential concession which is available to SMSF is the ability of the trustee to; Acquire business real property Lease business to a close member. Self managed super funds are ranked the second in terms of growth in the category of superannuation after retail super. In June 2005, SMS had $166 billions in super assets. In the following 22 months, it had up to 24%. The assets that were in the custody of SMSF are increasing at a high rate in terms of percentage compared to any other superannuation category apart from industry funds. The level of growth in SMSF assets in the past moths has been influenced through an increased rate of establishment, the level of contribution of associates as well as strong appreciation (Stock Exchange of Australia 121-9). . SMSF investors cite a mean of 3.3 as the main reason for coming up with the fund. While it has been a belief that SMSF growth was driven by the level of cost, it is important to note that even among the 3.3 reasons, only 24%, which represent one in four people cite saving on fees as a crucial motivator. There are four different, though overlapping segments of motivation within the SMSF market. The groups are enhanced by: Control: This is by far the highly popular reason provided for setting up a self managed super funds, the desire of the investor to exercise more power over their super (55%). Poor level of performance from the existing super funds mainly drawing attention to the charged fund (33%) Suggestions made by financial planners (29%). It is indispensable to make a note of the accountants leading source in advice on SMSF. By December 2004, 62% of SMSFs said they were paying an account/tax agent to assist with their funds. About 28% said the made payment to financial planner. It has also been extensively noted that there has been a high level of underinsurance IN Australia with many people having insufficient or even no life insurance. The SMSF members, through the use of a financial planner or through the use of a bank had considerably high incident of life insurance by SMSF, compared to those using planner (32% and 35% respectively, compared to 24%, average for all SMSFs). The super system is regulated by three important government agencies which include; The tax office The Australian Securities and Investment Commission (ASIC) The Australian Prudential Regulation Authority (APRA). The office responsible for tax deals with the regulation of SMSFs Reasons for regulation of SMSF are for the attainment of the greatest level of compliance and to cooperate with trusties in order to realize the best. There exist two different types of trust deed. These are “band aid” and “strategic”. Most of SMSF deeds are mainly band-aid which has more than copies of the pieces of legislation. the Deed is usually written to give solutions such as; SMSF Voting power It provides every employee with one vote and a single value that enables the trustees who have small balances to exert substantial control over SMSF members who have large balances (Doukas & Lang 112). SMSF Pension account being taxable Most of the deeds state that SMSF members cease to be on death. it may be obvious, nevertheless, it means that where SMSF member was getting a pension, the account now reverts to an accumulation account which makes all unrealistic capital gains taxable on the sale of asset. SMSF Life Insurance proceeds The deeds need life insurance proceeds so that they are credited t the SMSF member account. This therefore restricts the use of reserves to have the ability to fund an anti detriment payment. The SMSF deed provides the trustee with discretion to have the ability to distribute the proceeds according to the specification (Investor Info Ltd.). SMSF Reserves Many deeds do not posses the ability to create reserves. This needs to be part of the most self managed super funds, mainly those which are entitled to create reserves. This needs to be part of the highly self-managed super funds. Kelvin and Ulrika are capable of starting SMSF. This is due to the fact that hey are old enough and therefore are eligible. They have the required amount to start SMSF. This is because they run a number of business ventures which will provide them with the necessary amount need for meeting the costs. Their total investment is $ 1,899,000; they only have a debt of $ 400000. This therefore puts them in a better position to start and progress efficiently with SMSF. The minimum amount require to start SMSF is $ 100,000. This compared to the amount owned by the couple is clear evidence that they have the capability to meet the requirements. The can meet the costs of factors such as Insurance cover, taxation fee, base administration charges, audit fee pension fee and the existing fund takeover (BGL software) Kelvin and Ulrika are also associates in their business. They are two in number which is the minimum number required to start SMSF. However, they will be required to nominate a beneficiary of their super account so that there effective and transparent management of the family funds. The maximum number of members required to start SMSF is 4 people and it is a requirement that all the members need to be trustees of the fund. The members should not be below 18 years. It is choice of both Ulrika and Kevin to include their son and daughter to be members of their SMSF because the members can either be a family member a business partner or a friend. Julia, who is now adults, is eligible to be a member of the SMSF. Julie is eight years old. What is not clear is their level of earnings. Julie has started a retail traineeship with her parent’s business and that means she is getting money which can be used for the accomplishment of the membership requirements such as insurance and taxation. Michael on the other hand is also eligible to become a member of SMSF. However, he is on an extended holiday in the United Kingdom and is not planning to return to Australia for at least three years. The Australian Law on membership of the SMSFs does not allow a person of that nature to be a member (Business review weekly). When contemplating transferring of the shareholding to an SMSF, various rules have to followed; a self managed super fund need to have a given investment strategy and the shared to be transferred should be consistent. The market value has to be favorable so that the determination of the listed shares is easily determined as it will generally be share value per the market. With regard to the capital gains of tax, the transfer from one person to SMSF is a disposal for the gains in capital tax to that individual. At the same time, this could be a significant amount; it has to be put into consideration in the light of the possible future tax. The transfer of “lumpy” for instance the real estate can easily cause cases of liquidity in case the net income from the property is considerably less compared to amount of the needed payment of pension. This greatly is less of an issue the shares (Mulder & Coppolillo 26-9). According to the Australian law, only business assets can be transferred to SMSF. Personal belongings can not be transferred. This aimed at protecting the privacy of individuals. The couple own personal assets such as a family home which is valued at $460,000, a family car and a house valued at $ 35,000 and $ 30,000 respectively. These assets can not be transferred to SMSF. Jointly owned assts include bank account, high growth rate, residential property and the business company. These too cannot be transferred to SMSF due to the fact that individuals’ contribution may not be certain and therefore it would be hard to evaluate the level of participation of the members. In the case of Kevin and Ulrika what they own individual and not as a personal property will be included. Under Kevin’s name, Rental superannuation, what is known as taxed fund, his commercial property and the shares will be transferred. On the part of Ulrika, her cash management and industry superannuation are to be transferred. A self-managed superannuation fund has to be made use of s as benefit the members or their beneficiaries during their age retirement, disablement or even death. It cannot be used to provide benefits outside these considerations such as loans to member Kevin and Ulrika, in certain circumstances can be able to claim for a deduction in tax for the value of shares transferred into SMSF. This is essentially useful when it come to offsetting of any form of capital gains in tax, and result in the deduction of tax for the value of shares that have been transferred into a super fund. The requirement is that the person should not have employment income which is greater than 10% of the total assessable income. Insurance Considerations There are various events that can lead to staid disruption to the lifestyle of an individual and these disruptions have both financial and emotional results. Disruption can easily take place when we least expect them and as a result, we develop emotional strain which is then followed quickly by financial strain (Mulder & Coppolillo 26-9) Kevin and Ulrika will put into consideration on insurance cover so as to protect their lives and property against the disruptions. Efficient lifestyle and property protection enhances the transfer of the risks to insurance company. Insurance cover by a self-managed superannuation fund can be essential for various reasons; Where a certain member is making contribution through salary sacrifice, he or she can efficiently pay the premiums by the use of pre-tax money and when the member is entitled personally to a deduction of tax, they can go ahead and make a tax deduction for the premiums. To add on that, the insurance premiums are normally tax deduction to the superannuation fund. Where a person has an existing life insurance procedure outside of superannuation and would like to transfer it to the SMSF, they can go ahead and ask the insurance provider to nullify the existing procedure and policy and reissue of the policy refers to the fact that the cover is efficiently transferred to the SMSF without against the requirements in the acquisition of asset provisions. It is therefore necessary that a careful consideration by both Kevin and Ulrika is give to ensure that they do not lose any of the benefits contained in the original policy and procedure during the time of making the policy reissued in the name of the fund. The clauses The fund: Clauses in the initial part give the purpose of the fund. Fast clause restricts the operation of the fund to the only or primary rationale of the Australian superannuation law, the only purpose test found in section 62 of the Superannuation Industry the specifically deals with supervision. Act 1993 is an important provision upon which Australian superannuation funds should strictly apply. The second clause entails the requirement of the fund to cooperate with various pieces of legislation which coalesce to form the laws that govern the superannuation funds together with self managed superannuation funds in particular. The third clause situates out the assets that can easily form part of MSMF, that is to say; Contribution made by or in respect to a member Cash as well as other property together with other assets that can easily be transferred or simply rolled over into the Fund through or on behalf of the member Proceeds of any procedure or policy of insurance that is held by the fund Earning, gains as well as the accumulation of the Fund Investments together with property of the Fund which represent entire or part of the various types of assets. Definitions and Interpretation Key terms for the functioning of the Deed are defined in the two clauses. Among the key definitions are; Binding benefits of death nomination; this means that there can be fewer restrictions for a given fund compared with most externally managed superannuation funds. Death benefits Dependant; in the Deed, the definition, like any other definition is area under discussion to the governing superannuation legislation. This means that different definitions will in case lump sum death benefits are paid when compared to various decisions regarding the payment of the death benefits. Disability Legal personal agent Pension is defined to entail any income such as an annuity. It is crucial that Deed consent the compensation of all revenue streams which is allowed too be remunerated by the SMSF trustee. The deed provided by the trustee continues to pay older forms of pension started before the their various cessations dates for the payment commencement, for instance the lifetime pension, which will them be allowed to start paying the following pensions; Account based pension paid at post retirement Transition to retirement pensions Certain lifetime as well as income streams that are fully funded from annuities bought as of life insurance office Extra pension or other income flow allowable under SIS Act occasionally. The Trustee The role as well as the responsibilities of the trustee is clearly defined in the clause. It needs to be either two to 4 individuals basing on the membership of the fund or more commonly and mainly, rather a company. The seventeen clauses also provide a definition of the rules that govern the possibilities of either leaving or replacement of a trustee. Within this, there is the description of how much a trustee can possibly be indemnified using financial resources from the fund assets. Worth noting is the fact that the trustee, whether individual or corporate is not in a position to claim payment for acting as a representative of the deceased party. Membership There is a clear setting out of the rules and procedures regarding the admission of members and governance of fund membership within the six clauses. a trustee is expected to give members adequate information to reach the requirements for disclosure as spelt out by superannuation laws. There is also the spelling out of possibilities of a member being pushed out of a superannuation fund. Unlike other past Deeds, the one provided here does not force the members to lose any of their entitlements once they are declared bankrupt. Because superannuation is usually an asset that cannot be claimed by creditors, the provision of such a clause would ordinarily be unattractive to any usual member and also possibly pose a challenge when it comes to compliance issues. Reserves and accounts The regulations that guide the management of reserves and maintenance of member accounts are covered by part five. It outlines the possibility of circumstances under which there may be the provision of access to existing reserves. Basing on this, the legal system through the Family Court is empowered to demand the splitting or flagging of members’ accounts and consequently facilitate the movement of any fraction of a member’s account to either a spouse or ex-spouse of a deceased member. Contributions In the recent decade or so, there has been a radical change in the regulations governing superannuation funds and such related contributions. There is a change in policy regarding qualifications of a person to make contributions. The Deed as a result allows the acceptance of contributions from members and employers and other groups of people who are periodically offered the chance to do so for instance in the case of some past Deeds which denied trustees the ability to accept contributions made by a member’s spouse. The clause covered by this part allows the acceptance of ‘in specie’ contribution to the fund. Transfers and Rollovers Members and their former or aggrieved spouses may at times need to transfer funds from other funds to the SMSFs. The five clauses offered by this part give provisions for conditions under which rollovers or transfers may be implemented. Trustee Powers The four clauses in part 8 provide the powers vested in the trustee as relates to the administration of the SMSF. These include the wider powers relating to such administration and also a variety of express powers granted in the course of this. The parties that engage in transactions relating to such Deeds tend to require provisions for direct powers that they seek in such a deed. Investments Although there has usually been the restriction of the kind of investments that an SMSF trustee may carry out in the past, the deeds that provided these tended to be either too restrictive or unmanageably wide. There is need for a Deed to ensure the conformance of SMSF investments with most or all of the investment strategies that may be possibly engaged in as relates to membership to such a fund. There is need to indicate changes in investment regulations that have been occurring over time. Within the three clauses provided by Part 9, there is the additional provision of regulations relating to possible investment ventures and duties of the trustee. Loans and other forms of borrowing that may be entered into by the trustees are also covered. Benefits Among the most crucial aspects for managers in any investment agency is the kind of benefit that may be availed to the beneficiary and the conditions for the provision of such benefits. The nine clauses in part 10 provide the kind of entitlements that the member may be entitled to, the kind of circumstances under which compulsory payments may be made for instance upon death and the times when voluntary payments should be made for instance upon the attainment of preservation age. Among the provisions for instance is that when the member dies, there may be the payment of income streams to dependants in lump sum, for instance in the case of children aged under 18. Variation of Deed In about thirty years, the government has implemented quite a number of changes in laws relating to superannuation. Consequently, there has been a noted inability of SMSF and other similar Deeds to keep up with the several changes that have thus been effected. Resettlement of issues that relate to family trusts is for instance seldom considered because the many amendments that have been made to superannuation laws have not had a significant effect on the beneficial ownership and entitlement by fund members. Most investors have been attracted to using their super fund property for the activities of running their business such as industries and retail shops. The fund is mainly a handy source of fund. Occasionally, the investments can actually produce greater returns that are always good for the purposes of retirement income and even more importantly, the superannuation tax dispensation are sometimes a powerful desirability. Naturally, most investors would want to structure the investments in three different ways. The superfund can be called in to run the certain business. On the other hand, the super fund is likely to own shares within a company or in a given unit or simply a discretionary trust. Alternatively, the superfund together with the other parties can easily enter into a joint venture arrangement either through an official arrangement. The three different structures characterize varied transactions and each has a unique issue which does not pertain to the rest of the two structures. Similarly, every single structure has got the pros and cons compared to the other arrangements. The majority people would prefer running their retail shops, farms, property development or simply engage in service enterprises through their SMSF. Other investors are interested in aquiring the knowledge whether their great activities of investment can successfully qualify their fund to be savings business like the share trader. A lot of controversy concerning the ability of a super fund to on and operate any form of business highly exists. Financiers who want to engage in this type of transaction are unable to see anything wrong with the structure. DIY Super was told asked by one reader why people could not do it. The reader suggested that it would be the best way of running the business until retirement when the owner could sell it for a reasonable profit. He went a head to not that if the business could be run through a company, the proceeds of sales would end in SMSF and in this way, and the structure would be made simpler and cheaper over a long period of time. According to the Australian Taxation Office (ATO), the super laws do not permit super funds to operate a business. In the Article, Roles and Responsibility of Trustees, ATO stated that if superannuation is carrying out business, the super fund is not administered for the sole cause of providing for the sole purpose of availing benefits for both the members as well as the beneficiaries of the stated fund. Financiers who would want their undersized super funds to own and run their enterprises also have the intension of employing the fund members together with their relatives. Structurally, it is a much more complicated arrangement than any that would take place within a company, the owners being active employees. In Interpretative pronouncement 2003/524, ATO states that a super fund cannot allege a tax inference for expenses acquired through starting a business structure mostly if the business is intended to receive income that is subject to tax.  Efficiently the ATO deem in case a super fund has the ability to operate a business, it can easily be denied tax concessions which is accessible to other taxpayers would be deprived of tax concessions accessible to new taxpayers (Koch 79) The super law forbids super fund from borrow apart from when the situation is limiting. It is only possible for a super fund to borrow when there is need to settle some of the share transactions or to make payment benefits to its members. A super fund is in a position to borrow to resolve some transactions of the share or to transact benefit disbursement to a member.  Furthermore, there are strict positions mandatory on these restricted circumstances. This is probably the most crucial point raised by the ATO; that all businesses need to borrow at some given point business ventures. And any borrowing carried out by a super fund to help with trading would be a violation of restrictions under borrowing. Dividends in the hands of SMSF If an individual owns shares in a given company, he or she is paid the shares of the company as dividends. In any income generating year, the person would receive an interim together with a final dividend. In most situations, the person will be liable to pay income tax for that particular income year on the dividends paid or credited It is a requirement that an assessable income dividends paid or endorsed to the person is included. The shareholder dividend statement needs to have the details about when the date of payment was made. A dividend can be paid to a client as money or simply as any other property, shares included Dividend reinvestment schemes Most dividends that are paid r credited are always in the form of money, either by a cheque or credited directly into a specified bank account. However, the company is likely to provide a choice of reinvesting the dividends inform of new shares within the company; this is referred to as dividend reinvestment scheme. By taking this option, tax payment should be done on the reinvested dividends (Business review weekly). The upper limit of the in-house assets that SMSF can hold is only 5% of the market value of the total asset. Nevertheless, assets which are covered by the transitional rule are exempted towards the cap. The intermediary rule relate to the current related party asset that are obtained on behalf of SMSF by the end 11 August, 1999, which were not yet in-house assets in the rules that existed before. The rule also allows one to come up with certain additional investments after 11 August 1999 and by 30 June, 2009. What Kevin and Ulrika did was a breach of the in-house asset test rule. By leasing the premises at 10 percent above the current market value, they are going against the rule which requires that the maximum value should be 5 percent of the market value of the total assets. The breach of the rule would probably lead to some of the assets being affected such as the party paid shares. The members may be discouraged to participate fully towards buying the shares due to the increased market value. Though the new investment of the same nature would be termed as in-house assets, pre-1999 assets would be quarantined from the in-house asset test. The situation can be put into place through ensuring that the company leases the premises at the rate which does not go beyond the normal value (5%) above the existing market value rents. The reduction of rate would then enable maximum participation of the shareholders in accessing the services of the premises. Works cited Australia, Treasury. Economic round-up Austria: Australian Govt Pub. Service, 2001. Business review weekly: BRW New York: Business Review Weekly, 2000 notes v. 22 30-33. Doukas, John & Lang, Larry. Research in international business and finance. Kansas: JAI Press, 1996. Investor Info Ltd. SMSF: for self managed super professionals. New York: InvestorInfo Ltd. 1999. Hull, Alan & Hull, D. Bryan. Active retirement. Wright books, 2005. Koch David. Kochie's Guide to Keeping it Real. New York: Murdoch Books, 2006. Mulder, M. B. & Coppolillo P. Self Managed Superannuation Fund. July 20, 2009 Stock Exchange of Australia. Securities journal. Capital Communications Corporation, 2008. Read More