RETIREMENT & LIFESTYLE PLANNING      Baby boomers need to plan their transition into retirement for  Financial Security     Active Health Management  Emotional Wellbeing  Maximum Self Esteem ISSUE - 17 - APRIL 2003

The number of DIY super funds in Australia has grown by well over 200 per cent in the seven years to June 30, 2002. There are a number of reasons for the huge popularity of these funds.

One is that many superannuation investors are dissatisfied with the performance of their company super funds. Another reason is that they are not happy with the fees charged by retail managed funds, while others need the greater flexibility in tax and estate planning offered by DIY funds.

Others want more control over how their superannuation money is invested, and in some cases they want to transfer their key assets into their super fund, such as their business premises or a major family asset.

One thing is certain, a properly run DIY fund allows the greatest flexibility to manage your superannuation in a way that will maximise your benefits, both today while you are accumulating benefits, and in the future when you retire and start to draw benefits. Along the way your DIY fund can help you protect your family from life’s unexpected events such as death.

Now that you have reached the age of 45, you (or you and your partner/spouse) may have accumulated sufficient superannuation monies (at least $300,000) to make the switch to a DIY fund worthwhile. All those control, tax, performance and fee saving benefits are now attainable.

The following is a very brief summary of some of the benefits offered by having a DIY super fund in place. The list is nowhere near exhaustive, but it does show there are many advantages and the most important of these is flexibility – you are able to modify your strategies to deal with changing life circumstances (and changing legislation) within the one fund structure.

Benefits while accumulating superannuation

• Reduced costs in comparison to managed superannuation fund alternatives.
• The ability to reduce the effective tax rate on income and contributions within your fund.

You can transfer some existing assets (such as business real property or shares) into your DIY fund, either as a contribution or by purchasing from the member. This can help you better manage your personal tax position.

• If you hold assets within your DIY fund until after retirement (when you are drawing a pension from your fund), you may never be subject to Capital Gains Tax (CGT) on their sale.
• Potential to structure a DIY fund to maximise the benefits to your dependants if you die prematurely.

Benefits when you reach retirement

• A properly structured DIY fund will give you flexibility in the way you take your benefits, which allows you to properly manage your circumstances and the tax rules in force at your retirement.
• DIY funds paying pensions are not subject to tax on their earnings so you will not pay tax on the disposal of assets and you can receive the franking credits back into your fund as a tax rebate.
• A properly structured DIY fund allows you to pay benefits in the form of defined benefit pensions, which can reduce or eliminate most Reasonable Benefit Limit problems. (RBL — the amount of superannuation benefits you can receive in a concessionally taxed form).
• A properly structured family DIY fund can allow you to pass some assets through to your children without them ever leaving the DIY fund.

As you can see there are many benefits to a DIY fund. However, DIY funds are not without their disadvantages. Making mistakes along the way can reduce the benefits of the fund and they can also cost you half your superannuation fund’s income (and assets) as well as additional fines if you are the trustee of your fund.

For this and other reasons, it is absolutely critical that you obtain the right personal advice before and after you embark on a DIY super strategy.

The following information is very general but steps you through some of the main things you need to do and consider when using a DIY super strategy.

Trusteeship

The first consideration is who is going to be a trustee. This will determine what type of DIY Fund you will have.

There are two types of DIY superannuation funds. The first is regulated by the Australian Prudential Regulation Authority (APRA) and is known as a Small APRA Fund (SAF). The second is regulated by the Australian Taxation Office (ATO) and is known as a Self-Managed Super Fund (SMSF).

With the SMSF, every member of the fund must be a trustee and every trustee must be a member (there are special rules for single member funds). They are the most popular type of DIY fund, because in general they are a lower cost option. However, the risk here is that you may not have the time or the expertise to be a trustee and you may be exposed to the possibility of fines of up to $27,500 or even a jail sentence of up to 5 years for trustees who are proven to be reckless.

In contrast, the major advantage of an SAF (APRA regulated fund) is that the members of the fund have no legal risk, because the trustee must be an approved trustee such as a trustee company. However, the downside of a SAF is that you will need to pay additional fees to the trustee company.

There are many other pros and cons of each of these approaches, but your decision on this point will largely determine how much work you have to undertake in the future. In the case of the SAF, the bulk of the following compliance work will be the responsibility of the approved trustee. With a SMSF, you as trustee would need to arrange for the following issues to be addressed, initially and on a continual basis.

Trusteeship — custody and administration

On an ongoing basis, you must ensure assets are held securely and the administrative, record keeping and reporting requirements are met. These tasks are the less glamorous side of DIY funds.

Trustee tasks include:

• ensuring changes to the trust deed are made when required by legislation,
• setting and maintaining the investment strategy,
• ensuring all reporting obligations are met,
• lodging APRA and tax returns on time,
• payment of all levies and taxes as they fall due,
• approving the payment of member benefits, including lump sums, pensions, death and disablement benefits,
• preparing trustee minutes,
• preparing applications to become a group employer if commencing a member’s pension stream,
• preparing and distributing reports to members, and
• calculating minimum/maximum pension payments.

Compliance & reporting

Tasks relating to APRA/ATO compliance, tax, accounting and reporting are complex and you will need assistance in this area.

They include:

• collecting members’ tax file numbers to satisfy the Superannuation Contributions Tax Act,
• issuing reminders about tax installment payments and deadlines,
• maintaining capital gains tax history records,
• ensuring correct rollover of moneys,
• following up investment actions, including dividends, bonus and rights issues,
• ensuring preservation of members’ benefits,
• winding up accounts in the event of fund closure,
• calculating benefits in specie or cash,
• quarterly transaction and asset statements,
• member statements,
• financial statements,
• superannuation contributions

Tax reporting

• ATO and APRA returns,
• Trustee Certificate,
• S159 Notice (for tax return),
• ABN and GST registration,
• PAYG tax requirements,
• Business Activity Statements,
• pension and annuity declarations,
• meeting lodgement deadlines, and
• preparing minutes for new and retiring members.

Audit and actuarial

You must have your DIY super fund accounts independently audited and if you are paying pensions from your DIY fund you also need the appropriate actuarial certificates prepared.

As you can see, running your DIY fund is complex and making mistakes can be extremely costly so you should proceed down this road with caution.

You need to make sure the right plans, processes and structures are in place to cope with your initial and continuing legal obligations.

You also need to ensure you have the right contingency plans to deal with the three main threats to SMSFs —the death of a trustee/ member, the loss of legal capacity of a trustee/member and the growing issue of divorce.

Saving money the DIY way Transfer existing assets which carry losses This strategy requires you to have an existing investment that is currently valued at less than its purchase price. You could sell that asset to your super fund for its current value. This would crystalise the loss, which you can offset against any capital gains you make on personal investments in the future. And, of course, any gains you eventually make on the investment once it is in your super fund would benefit from concessional tax treatment. Let’s look at an example. Suppose you acquired some shares for $200,000, and they are now worth $150,000. If you sell the investment to your super fund, the $50,000 loss is crystalised and can be offset against future capital gains on other personal investments – resulting in a tax saving of up to $24,250, depending on the nature of the capital gain you offset the losses against. Meanwhile, if it is a quality investment, it will recover, and go on to reward you with good capital gains in the future ...gains that will ultimately be lightly taxed within the super system.

If you manage all of these issues properly a DIY fund can save you and your family thousands and even hundreds of thousands of dollars in unnecessary taxes.

Contact: Steve Davis,
National Manager,
Financial Planning,
Perpetual Private Clients.
Ph 1800 631 381
Web: www.perpetual.com.au

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