Sometimes it seems that financial advisers speak a different language.
Sometimes it seems that financial advisers speak a different language: caps, rollovers, CGT events, reversionary and non reversionary pensions, annuities and in specie contributions – what does it all mean?
It can be enough of a challenge to get to grips with superannuation rules and regulations, without having to struggle to understand the jargon. In his book, How to Invest in Property Through Your Self Managed Super Fund, superannuation expert Martin Murden meets this challenge by providing a useful glossary of terms to ‘translate’ superannuation-speak into plain English.
Accumulation phase – this is when a SMSF is ‘accumulating’ (or saving) money and assets for the purposes of providing an income in retirement.
Actuary – a professional who specialises in the mathematics of risk as it relates to insurance calculations and annuity rates.
Assets – property, cash and other valuables that are of some value and/or generate wealth in the form of income or capital gains.
Associate – A simple test to determine association is as follows:
- Two people would be deemed associated, if they are related (family members such as brothers and sisters), or if they are involved in a business venture together.
- A person and a company would be associated, if the person is a director of the company and is actively involved in the day to day operations of the company or if the person has over 50 per cent of the shares or voting rights for the company.
- A person and a trust would be associated if the person was a beneficiary of the trust and the trust was a discretionary trust (such as a family trust) or if the person had over 50 per cent of the units or voting rights for a unit trust.
Auditor – a professional engaged to study the financial affairs of the SMSF and that your fund has complied with the requirements of superannuation legislation.
Australian Business Number (ABN) – identification number allocated to businesses registered inAustralia
Australian Tax Office (ATO) – national tax regulator.
Bare trust – please see security trust.
Beneficiaries – a person entitled to receive or already in receipt of a benefit from a fund or a trust.
Benefits – in the context of superannuation these are the monies paid out (or distributed) from a superannuation fund to members and/or beneficiaries.
Business real property – property used wholly and solely for business purposes at the time of purchase. It can be a shop, factory, office or farmland. It can even be a house used for business purposes, such as a doctor’s surgery or an accountant’s office.
CBD – Commercial business district
Capital gains tax (CGT) – tax payable on the profits from the sale of investment property.
CGT discounts – reduction in tax payable on capital gains. Individuals are generally entitled to a 50 per cent discount on capital gains; SMSF are entitled to a 30 per cent discount.
CGT event – this is a sale (disposal) or purchase of investment property, that can trigger capital gains tax obligations.
Commercial property – property used for running a business.
Concessional contributions – contributions made to superannuation using pre-tax dollars, such as the compulsory 9 per cent of salary which employers have to pay into employees’ superannuation funds.
Contribution caps - caps on the amount you can contribute to superannuation each year. You should beware of exceeding contribution caps as stiff penalties apply. The current contribution cap for someone under 50 is $25,000 p.a.; for someone aged between 50 and 74, it is $50,000 per annum. From 2012-13, the cap for those aged 50 or over will fall to $25,000 per annum.
Corporate trustee – A separate company that is set up for the specific purpose of the managing a SMSF. All fund members must be directors of the corporate trustee.
Dependant – includes a spouse (current or former), a bona fide de facto, a child under age 18, and people in an ‘interdependency’ relationship.
Disqualified person – someone disqualified from being a trustee of a fund who has prior convictions involving dishonest conduct, and/or is insolvent, bankrupt or has entered into an arrangement with creditors under Part X of the Bankruptcy Act 1996 or someone who has a civil penalty order under the Superannuation Industry (Supervision) Act 1993.
DIY – do it yourself, SMSFs are sometimes referred to as DIY funds.
Eligible Termination Payment (ETP) - tax may be payable on lump sum benefits that go to a non-tax dependant.
Family trust – a discretionary trust often formed to operate a business or to be used as an investment vehicle. The trustees of a family trust determine how the capital and income will from the trust be distributed among beneficiaries.
Franked dividends – dividends paid by a company to its shareholders from after-tax profits. A franked dividend carries with it an ‘imputation credit’ that shareholders can claim at the end of the tax year. Dividends can be ‘fully franked’ or ‘partially franked’.
Goods and services tax (GST) – a broad-based, consumption tax levied at 10% on most Australian goods and services.
Income stream – in the context of superannuation this is a pension or annuity paid during retirement. It could also be a TRIS – a transition to retirement income stream – paid to people while their fund is still in the ‘accumulation’ phase.
In specie contributions – these are contributions in property made to a SMSF, where no money changes hands. The value of in specie contributions is considered part of overall contributions and therefore consideration should be given to the contribution caps.
Industrial property – examples are factories or warehouses.
Interdependency relationship – is defined as a close personal relationship between two people who live together, where one or both provides financial and domestic support and personal care for the other. Two examples are a same sex couple and an adult child living with his or her widowed parent.
Interest-only loan – loan agreement whereby only the interest payments are repaid over the life of the loan with the principal being paid out when the asset bought using borrowings is sold.
Investment income – income generated by investments, for example, rent from a tenanted investment property, dividends from shares, distributions from unit trusts and proceeds from the sale of assets.
Investment strategy – A SMSF must have (usually a written) investment strategy outlining how the fund’s assets will be invested. The fund must follow this strategy or it may be deemed ‘non-complying’. The strategy must be reviewed by the trustees of the fund periodically to ensure that it best serves the fund.
Leverage – the use of borrowing to finance an investment, with the rise or fall of the value of the investment proportionally greater than comparable investments. Leverage is used to increase the potential return of an investment.
Legal personal representative – executor of your estate.
Limited recourse loan – a loan that limits the lender’s recovery to the property only, leaving other assets in the super fund intact.
Listed investments – shares or unit trusts traded on the stock exchange.
Lump sum – an amount of money that can be paid out upon or during retirement. Often used to pay off a mortgage, fund a big trip or purchase a new car.
Medicare levy – a 1.5 per cent levied on income that pays forAustralia’s public health system. It is usually quoted along with the marginal tax rate. For example the highest marginal rate of tax is 46.5 per cent (including Medicare levy).
Preservation age – funds are ‘preserved’ in a superannuation fund until preservation age, when they can be accessed. Preservation age is currently 55, with later ages being phased in according to your date of birth as follows:
Date of birth Preservation age
Before 1 July 1960 55
1 July 1960- 30 June 1961 56
1 July 1961- 30 June 1962 57
1 July 1962- 30 June 1963 58
1 July 1963- 30 June 1964 59
After 30 June 1964 60
Negative gearing – a common strategy used by high income earners to save money on tax and benefit from capital appreciation of property. The way it works is investors buy a property and the rental income it generates is LESS than the outgoings (e.g. loan repayments, ongoing management and maintenance costs). This loss is offset against other taxable income.
Non concessional contributions – contributions to super funds using after-tax dollars. These can only be made by fund members (not employers).
Non lapsing binding death nomination – a formal document which enables you to determine who will receive your death benefit (provided they are dependants and/or your legal personal representative). This document effectively binds the trustee into following your instructions in paying your benefits.
Off the plan – a purchase agreement whereby people buy a property before it has been completed for a price determined before the development has been completed.
Real estate investment trusts (REITs) (formerly known as property trusts) – a collective investment vehicle that either owns a portfolio of real property, such as shopping centres or office buildings or is established to acquire a single property. Investors buy units in the REIT and can buy and sell these (as they would listed company shares) in the case of listed REITs or redeem these from the fund in the case of unlisted REITs. Units in unlisted REITs are issued by the fund manager based on the asset value of the trust and are redeemed rather than sold to another buyer.
Regulated fund – a fund is regulated by the Superannuation Industry (Supervision) (SIS) Act and is therefore eligible for favourable tax treatment.
Retail property – property used to run a retail business, for example a shop or cafe.
Retirement age – currently 55 years of age if you stop working, otherwise 65 (phasing in to 67) when you are entitled to receive the government age pension if you are eligible.
Retirement phase – phase of a super fund when the fund starts paying benefits to its retired members.
Reversionary pensioner – the person you nominate to receive the remaining balance of your pension account should you die. This typically would be your spouse or partner.
Roll over – to transfer money or property into a superannuation fund.
Security or ‘bare’ trust – a separate entity created with the sole purpose of being the ‘interim’ owner of a property bought by a SMSF with borrowings, until the loan has been repaid in full and ownership of the property reverts to the SMSF.
Self managed super fund (SMSF) – a trust established for one to four people. Here money is held ‘on trust’ principally to fund members’ retirements
SIS Superannuation Industry (Supervision) Act – the Act that governs all superannuation funds inAustralia.
Sole purpose test – According to the ‘sole purpose test’ an SMSF’s primary purpose is to provide fund members with benefits when they retire or their beneficiaries with benefits should they die early.
Stamp duty – a tax imposed on the legal transfer of documents. This is a state-based tax.
Strata title – a form of ownership devised for multi-level apartment blocks and horizontal subdivisions with shared areas. The ‘strata’ part of the term refers to apartments being on different levels, or ‘strata’.
Tax file number (TFN) – Number issued by the tax office to identify all taxpayers – individuals, trusts and/or corporates.
Title – legal document recording the ownership of a property.
Transition to retirement income stream (TRIS) – an income stream paid to a member who has reached preservation and is starting to cut back their paid working hours. There are limits to the proportion of your fund that can be taken out as a TRIS each year.
Trust – a legal structure that is created to exist for a person or company to hold property for others who are intended to benefit from the property or income of that property.
Trust deed – the document governing how a trust should be managed, who it will benefit and who is to manage it.
Trustees – An individual or organisation which holds or manages and invests assets held in a trust for the benefit of another/others.
Unit trust – a trust in which investors are allocated a set number of units for their investment. For example, if each unit was valued at $1, an investor with $1,000 would receive 1,000 units.
Extract from How to invest in property through your self managed super fund
Reproduced with kind thanks to the author and Major Street Publishing
For more information, visit Major Street Publishing