STRATEGIC CONCEPTS: FAMILY SUPER FUNDS (SMSFs)

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1 FAMILY SUPER FUNDS (SELF MANAGED SUPER FUNDS) What is a Family Super Fund? Family Super Funds are a special subsection of the superannuation sector where individuals and families operate their own superannuation fund or in conjunction with their specialist SMSF professional adviser(s). This enables you to manage your super to suit your specific requirements, subject to remaining within the Governing Rules of the fund. Family Super Funds are also known as Self Managed Super Funds (SMSFs) and Do-It-Yourself (DIY) Super Funds. We prefer to use the name Family Super Funds as this refers to the true power of these vehicles which is to look after you and your family. In simple terms, a Family Super Fund is one that is operated by you for providing benefits for you and your family on your retirement, death or disablement. A Family Super Fund, like all super funds, is a type of trust that is operated within specific rules and regulations by Trustees for the benefit of the Members, and which receives significant taxation and other concessions. The key difference between Family Super Funds and other types of funds, such as retail and industry funds, is that the Members are the Trustee operating the fund for the benefit of themselves and their family. As shown below, SMSFs are now the largest part of the Australian superannuation investment pool and, according to Deloitte Actuaries & Consultants, this trend is set to continue as shown below: Acting as Trustee, or Director of the Corporate Trustee, carries significant responsibility. Trustees must comply with a wide range of laws and regulations. The Governing Rules include the Trust Deed which is specific to each fund, the Superannuation Industry (Supervision) Act (SISA) 1993 and Superannuation Information correct at July 2014 Page 1

2 Industry (Supervision) Regulations (SISR) 1994 however Trustees must also comply with the Income Tax Assessment Act 1997, Income Tax Assessment Act 1936 and many other laws & regulations. Family Super Funds (SMSFs) are regulated by the Australian Taxation Office. The Trust Deed is a very important document as it governs the specific operation of a given Family Super Fund within the bounds of the Superannuation Laws. It is therefore imperative that Trustees are familiar with their Trust Deed, ensure that the particular Trust Deed is appropriate for their circumstances and ensure that their Trust deed is regularly updated to ensure it meets all requirements and affords the ability to take advantage of all available opportunities. A Family Super Fund is a separate ownership entity that requires its own Australian Business Number (ABN) and Tax File Number (TFN). All assets must be kept separate from the Members other assets at all times. The Fund must have its own bank account or Cash Management Account and Trustees are responsible for communicating with Members (usually themselves) and for keeping all Fund records. It is also imperative that the Trustees ensure that the FSF complies with all Governing Rules. Of special importance however are the super Conditions of Release which govern when benefits can be paid to fund members, and that FSF assets are not used for any purpose other than paying the FSF s costs and paying benefits to members once a Condition of Release has been met. Fortunately, Alex Morris, principal of Mammoth Financial is recognised by the SMSF Association (SMSFA) SMSF Specialist Advisor TM. Founded on Alex s extensive experience with and passion for Family Super Funds, Mammoth has a well-developed Family Super Fund service package to assist you comply with your obligations as Trustee and, more importantly, to ensure the smooth operation of your Family Super Fund enabling you to make the most of these highly advantageous vehicles. We can work with your existing professionals or we can arrange for external providers to provide the required annual Financial Statements, tax return and audit of the Fund. It is important to note that Trustees retain ultimate responsibility for all aspects of the operation of the Fund even where professionals have been engaged. When considering whether a Family Super Fund/Self Managed Super Fund is right for you we encourage you to:» Seek specialist financial advice to consider whether a Family Super Fund is appropriate for you in light of your specific circumstances and objectives both now and in the future, as well as the alternate superannuation funds that may be appropriate for you. We would be happy to provide such advice, so please contact us if you haven t already» Read this Strategic Concept Summary Family Super Funds» Read our Strategic Concept Summary Asset Ownership» Read our Strategic Concept Summary Superannuation» Read the ATO s Guide for SMSF Trustees Thinking about SMSF» Read the ATO s Guide for SMSF Trustees Running a SMSF» Read the ATO s Legal Protection for SMSFs» Read the Product Disclosure Statement for the potential SMSF Trust Deed» Read the Trust Deed and any future Deeds of Variation (upgrades)» Read the Constitution of the Special Purpose Corporate Trustee company Information correct at July 2014 Page 2

3 » Consider whether you are willing to accept responsibility of acting as Trustee for your own and your family s superannuation» Consider whether you have the time to devote to the ongoing management of your Fund and/or to work with SMSF Professionals, such as Mammoth, that are on hand to assist Definition of a Self Managed Super Fund A self managed super fund is defined in section 17A of the SIS Act and is a fund that meets all of the following requirements:» It has fewer than 5 members;» If the trustees are individuals each individual trustee of the fund is a member of the fund ;» If the trustee is a body corporate each director of the body corporate is a member of the fund;» Each member of the fund: Is a trustee of the fund, or If the trustee of the fund is a body corporate is a director of the body corporate;» If a member has lost their legal mental capacity, is a minor or has passed away, and depending on the Fund s Governing Rules and the Constitution of the Corporate Trustee, that members Legal Personal Representative (Enduring Power of Attorney or Executor of their Estate) may be able to serve as their Replacement Director of the Corporate Trustee or Replacement Trustee. This is another key reason why the utmost care should be paid to the selection of the documents for your FSF and to your other related arrangements such as your Estate Planning documents.» No member of the fund is an employee of another member of the fund, unless the members concerned are relatives;» No trustee of the fund receives any remuneration from the fund or from any person for any duties or services performed by the trustee in their role as trustee in relation to the fund;» If the trustee of the fund is a body corporate no director of the body corporate receives any remuneration from the fund or from any person (including the body corporate) for any duties or services performed by the director in their role as trustee in relation to the fund» Special requirements apply to SMSFs with only one member. For this reason it is imperative to consider what happens to your SMSF if something happens to the other Trustee(s) Advantages of Family Super Funds Operating your own Family Super Fund (FSF) may deliver some major benefits relative to alternative super funds. However it should be noted that the specific benefits will depend on the Governing Rules including the Trust Deed of your particular FSF. This document is based on both the Mammoth Financial Family Super Fund advice and service program, and our preferred Governing Rules. If you have a FSF with a different SMSF professional adviser and/or a different set of Governing Rules, some or all of the advantages discussed below may not apply. Information correct at July 2014 Page 3

4 Some of the key benefits of FSFs include:» Financial Strategies & Implementation you are able to implement a wider array of super, pension and Estate Planning strategies within a FSF than within any other type of super fund.» Pensions & Pension Rollbacks a FSF is a vehicle via which you may be able to create the ideal super fund (in our opinion) under the Simpler Super rules effective from This is a super fund where there is minimal leakage from the superannuation ownership structure to personal ownership by managing the balance held in accumulation phase and pension phase such that the pension income your super fund must pay to you aligns with, but doesn t exceed, your requirements each year. Within a FSF this strategy is able to be implemented via the accounting records of the FSF itself without necessarily needing to change the underlying investments of the super fund.» Taxation super funds pay tax at a maximum of 15% on investment earnings however within a FSF you generally have greater flexibility than with most other types of super funds to reduce this concessional tax rate even further via smart investment strategies and strategic planning. We have found that many of our FSFs with accumulation balances often pay an effective tax rate below the standard 15% rate, sometimes quite markedly below. Furthermore, any tax benefits obtained by you are retained within your fund to benefit you and your family. This differs from most other super funds where such tax benefits are dispersed across all members because those super funds are one single entity from a tax perspective and they are therefore not able to identify which tax benefit belongs to which member.» Insurance you have greater control over the types of insurance and policies you may take out, whereas in many industry/retail/corporate super funds you are limited in choice of type and standard of policy. Furthermore as the FSF is the policy owner, it will receive any claim payments made from any insurance policies placing those funds within the control of your FSF rather than a third party super fund Trustee. This provides greater control over the use of those insurance proceeds for your benefit or the benefit of your beneficiaries.» Investments either managed by you or via our Investment Management program. You will have access to a wider array of investments via an FSF than almost all other types of super funds.» Direct Property further to the above, specifically an FSF is the only type of super fund within which an individual member or members are able to invest directly in real property at their own direction. Furthermore, a FSF may borrow to acquire property.» Borrowing a FSF provides access to the widest array of borrowing alternatives that a super fund is able to implement» Estate Planning a carefully formulated and managed FSF Estate Plan can provide a greater degree of control over the distribution of your assets upon your death potentially keeping the control of your estate within your family increasing the chances that your wishes will be met Information correct at July 2014 Page 4

5 » Family Cross-Generation planning a FSF provides a unique vehicle to manage family wealth across multiple generations in a highly tax efficient framework. By managing the membership of the fund and directorship of the corporate trustee it is possible to ensure that this FSF may well be able to last past the original members life times.» Contributions a FSF generally provides a greater degree of flexibility with regards to the acceptance of contributions including the form the contribution takes and the asset contributed which may be able to be made as in specie contributions of existing assets as well as via cash» Reserving a FSF may be able to create and maintain various reserve accounts for a variety of purposes including General Reserves, Income Stream Reserves to assist with meeting pension payments, Lump Sum Death Benefit Bonus (anti-detriment) Reserve and a Contributions Reserve, amongst others. Disadvantages of Family Super Funds The major disadvantages of operating your own FSF are:» Responsibility for Compliance as Trustee of the FSF you must make all decisions and bear ultimate responsibility for compliance with all the Governing Rules and the Investment Strategy of the Fund, and all decisions made and actions taken within the FSF. The Trustee may engage the service of professionals such as a FSF Professional (Mammoth Financial), Accountant and Auditor or others to provide advice and guidance however the Trustee retains responsibility for all decisions made and actions taken.» Consequences of Non-Compliance if a FSF fails to comply with its Governing Rules including the super laws and the Trust Deed, the consequences can be significant and may include the fund being made non-complying and taxed at the highest marginal tax rate, plus applicable levies, on the total fund balance, as well as disqualification of Trustees, prosecution by third parties or other members of the fund, and potential civil and criminal penalties. Other consequences potentially include compulsory Trustee education, rectification directions and administrative penalties.» Responsibility for Administration as Trustee of the FSF you must ensure you maintain appropriate administration systems to enable the completion of the financial statements, tax returns and audit functions, and to provide a paper trail for maintaining the complying status of the fund. Trustees must also retain the records for various periods defined in the Legislation of up to 10 years. Trustees must also provide Members with certain information and are required to comply with certain requests from Members. As above, you may engage the services of other parties however you maintain ultimate responsibility.» Exposure to Litigation as with any asset owner, the Trustee of a FSF may be exposed to litigation from a variety of sources relating to events concerning assets of the fund. For example, if the FSF owned a real property and a tradesman, tenant or guest were to be injured on the property, the owner of the property (i.e. the FSF Trustee) may be exposed to litigation in the same manner as any other owner of such an asset. Appropriate insurance and careful consideration of the appropriate Trustee for your FSF is therefore imperative please see the Corporate Trustee section below» Insurance Trustees are responsible for formulating, implementing and monitoring an insurance plan for the Fund including relating to insurance for fund Assets, such as property and other physical assets, and for Fund Members. We note that this is not really a disadvantage because in Information correct at July 2014 Page 5

6 other types of super funds, no one is responsible for considering your specific insurance requirements, however other types of super funds may include standard cover for all members» Legal Protection most publicly available super funds other than FSFs are regulated by the Australian Prudential Regulation Authority (APRA); FSFs are regulated by the ATO. APRA-regulated funds are subject to prudential regulation (similar to Banks) and can apply to the government for financial assistance in the event of fraudulent activity or theft. Whereas FSFs are subject to compliance based regulation by the ATO. That is, the ATO regulates compliance with the law. This is on the basis that FSF Trustees are also the members and therefore are able to protect their own interests whereas the Trustees of APRA-regulated funds are third parties to the members. It also doesn t mean that FSFs do not have any legal protection. Many of the investments that FSFs typically own will be subject to government supervision and may be prudentially regulated (for example bank accounts, term deposits, managed investments and more). Furthermore, FSF Trustees can take action against third parties that defraud them or against other Trustees if one member is defrauded by another.» Anti-Detriment while there is nothing to stop a FSF from paying an anti-detriment payment to do so would require that the FSF had funds in a reserve, insurance proceeds able to be directed to a reserve rather than to a members interest, or earnings which had not yet been allocated to a member interest to make the additional payment. Without prior planning it is less likely that a FSF would have the additional funds available for this than it is for a large super fund with many members. However we note that there are strategies we can certainly implement to make provision for an anti-detriment payment. Alternately if there is no provision for making an antidetriment payment from your FSF and a fund member is diagnosed with a terminal illness you should contact us immediately as there could be strategies we could put in place prior to passing away or there may advantages to transferring benefits to a fund which is able to make an antidetriment payment. However should your FSF be in a position to make an anti-detriment payment there could be significant benefits for your beneficiaries both in terms of the additional Death Benefit that is able to be paid, however also as a result of the tax deduction the FSF is able to claim which may provide benefits in both the current year as well as potentially for many future years which will benefit the remaining members of the fund (i.e. your family!)» Trustee Education as Trustee you must ensure that you remain up-to-date with the rules and regulations relating to superannuation. We will work with you to assist you with meeting this requirement.» Establishment & Ongoing Costs depending on the total balance of your FSF these costs can be higher than you would pay in other types of super funds; however for higher balances they can also be lower. However over the intended timeframe of your FSF, which can realistically be across multiple generations, we consider the establishment costs to provide good value for money. Whenever considering a FSF for our clients we will always account for the ongoing costs relating to the ongoing operation and compliance of the fund» Wind Up Costs it is possible that this FSF will need to be wound up in the future which will incur expenses which we roughly expect to be in the general vicinity of the costs incurred to establish the FSF originally. Please note that as we expect the FSF to last for many years and potentially generations we do not consider the potential to incur wind up costs to be a major disadvantage. Information correct at July 2014 Page 6

7 Corporate v Individual Trustees We believe that there are some significant benefits to having a Corporate Trustee for your FSF rather than Individual Trustees. In most circumstances, we also believe that the company that acts as Trustee should be a special purpose company that was specifically designed to act as the Trustee of a FSF and does not perform any other function, especially not carrying on any business. We believe that the initial costs of establishing a special purpose company to act as Corporate Trustee are far outweighed by the benefits delivered. The main advantages of having a special purpose Corporate Trustee for your FSF include:» Cross-generational planning unlike non-super trusts which are limited to lasting no more than 80 years in most states, there is a specific exemption in the law that allows a super fund (which is a type of trust) to last indefinitely. As this carries major benefits for you and your family, the Trustee of your FSF therefore also needs to have the capacity to last indefinitely and only a Corporate Trustee meets this requirement.» Estate Planning the most significant strategic implication of the Simpler Super laws which became effective in 2007 resulted from the removal of the compulsory cashing requirements which required a member of a super fund to commence accessing their accumulated benefits from age 65 by either accessing a lump sum or commencing a pension, unless they were able to meet a work test. The removal of this requirement means that those who do not require income from some or all of their accumulated super to meet their living expenses can now maintain their accumulated super indefinitely which allows these benefits to continue to receive concessional tax treatment and potentially pass seamlessly to future generations. This is the retirement accumulation interest which can be maintained to benefit from tax concessions as well as to provide a high degree of control over the Estate Planning for this interest. Furthermore this can allow a member to maintain their benefits as an accumulated super balance (rather than a pension) and access lump sums at any time as required, or to start a pension at any time in the future if required. A super fund with individual trustees must have as its primary purpose the payment of old age pensions. An FSF with a Corporate Trustee can last across multiple generations.» Ease of Administration it is important that all assets and other interests of a FSF are owned in the name of the Trustees of the fund. Where a FSF has a Corporate Trustee any changes to the membership and therefore the persons performing the Trustee duties are made to the records of the Corporate Trustee (i.e. one change). Whereas if a FSF has individual Trustees the change needs to be made to the record of each and every account, investment, insurance and Estate Planning arrangement or document relating to the Fund. As well as reducing time and effort required to effect such a change, having a Corporate Trustee reduces the costs associated with doing so.» Protection against Litigation Trustees of FSFs are exposed to potential litigation from a variety of sources, including events relating to assets of the fund, as outlined earlier. In the case where a Corporate Trustee is in place the company structure may provide protection for the Trustee s personal assets whereas Individual Trustees receive no such protection. The threat of litigation is a major reason why the company that is acting as Trustee should be a special purpose company that performs no functions other than acting as Trustee. In our view, it should not be a shelf company or a company used for any other purpose as any such company carries the threat of litigation from, and may expose the accumulated super balance to, external sources such as business creditors Information correct at July 2014 Page 7

8 Mammoth Financial Family Super Fund Service Program Mammoth s Principal, Alex Morris is a SMSF SPECIALIST ADVISOR TM., SMSF SPECIALIST ADVISOR TM, SSA TM are marks owned by the SMSF Association Limited (SMSFA) and are awarded to individuals who successfully comply with all the initial and ongoing accreditation requirements of the SMSFA Specialist Accreditation Program. At Mammoth Financial we are specialists in the provision of advice and ongoing services to Self Managed Super Funds and we recognise the specific benefits provided to our clients via FSFs. Our FSF service program assists you with the establishment, structuring and maintenance of your FSF. As the largest component of the superannuation, it is reasonable to expect that the regulators will take a less accommodative position with regards to complying with the super laws than they have in the past. It is therefore imperative that trustees are aware of their obligations under super laws and we have developed our FSF service program specifically to assist FSF trustees realise the benefits of operating their own super fund while making it simple to comply with the super laws. We will work with your existing accountant or equally with an aligned outsource partner to ensure the highest level of service in relation to your FSF. empowering your financial evolution TM Information correct at July 2014 Page 8

9 Need more information? If you wish to discuss how this strategic concept summary could benefit you, please feel welcome to contact Mammoth Financial on: p e alex@mammothfinancial.com.au General Advice Warning: The advice may not be suitable to you because it contains general advice that has not been tailored to your personal circumstances. Please seek personal financial advice prior to acting on the information. Tax Agent Warning: We are not registered tax agents under the Tax Agent Services Act If you intend to rely on the advice to satisfy liabilities or obligations or claim entitlements that arise, or could arise, under a taxation law, you should request advice from a registered tax agent. Opt Out Clause: Mammoth Financial respects your privacy. Should you wish not to receive further publications please contact our office. Information correct at July 2014 Page 9