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Self Managed Super Fund (SMSF) Article
Better Super Short Comings
By Tony Negline.
This article may be out of date.
31st May 2006
The super industry has begun the hard slog of eating and digesting the big beast that is the government’s latest attempt to simplify the super regulatory environment.
An initial problem that we must deal with is lack of certainty about the new rules. In broad terms we know what the government would like to do with the super laws but the fine detail, which often affects many people, is yet to be finalised. It will be many months before we see the new system in its final form.
The key to coping with the new rules now is to remain flexible and not to put a strategy in place that cannot be undone. Another mistake would be to enter into a strategy that costs money to undo.
Specifically in relation to Self Managed Super Funds the changes will cause a number of immense changes. Here we look at just some of the issues to consider:
1. Property is always a big attraction for some SMSF users and under the new rules they will become even more popular.
Under the current regime it is very difficult – if not impossible - for a super fund to hold a property indefinitely because the existing rules demand that an investors’ account balance be paid out as a lump sum or pension. If a pension is paid then the member’s account balance runs down over time. Eventually the fund has to sell down all its assets to continue making the income.
Under the proposed rules, a fund never has to pay a member his or her account balance. This means that a fund will be able to buy a property and keep it for as long as the trustees want to own it.
The new rules will not change how the related parties (that is, fund members, their relatives or companies or trusts controlled by the members or their relatives) of a fund can use a property. If the property is used wholly and exclusively by one or more businesses then the fund can be lease it to its related parties on an arm’s length basis. If the property is not business real property then the related parties of the fund probably cannot use the asset.
Will a fund be able to keep that property for more than one generation of members? That is, will it be possible for a fund to pay a member’s death benefit to the member’s children by transferring the death benefit to the childrens’ account within the super fund? At this stage we do not have an answer to this question.
2. Intergenerational wealth creator
Once a super fund member reaches sixty years of age, it will be possible to pay out a benefit to a member tax-free. The benefit can be paid as a lump sum or pension and can be paid at any age.
Additionally there will be no limit on the amount of money that can be accumulated into the super environment. In other words, the Reasonable Benefit Limit system will not exist.
On the other hand the taxable part of any death benefit paid to non-dependents – including children who are not financially dependant - will be taxed at 16.5%. How the taxable portion is to be worked out has not yet been determined.
If a fund member wants to bequeath assets to their children then it may become easier to transfer some of this wealth before death because of the tax saving.
3. Unlimited life insurance
Many people under the current super regime need to be very careful about the amount of insurance they purchase because of the heavy tax penalties that may apply because of Reasonable Benefit Limits.
Under the proposed rules lump sum death benefits paid to dependants will be tax-free. As RBLs will be done away with it will be possible to purchase insurance of any amount.
How these benefits will be taxed if they are paid as a pension is yet to be determined.
4. The new income stream
We will soon have a new income stream structure which appears to be much more flexible that the current system. How this pension will operate is still to be determined.
SMSF investors who wish to begin receiving an income during the next twelve months need to think carefully about the type of pension they commence. Should they lock their money away into a Term Allocated Pension in order to access Centrelink concessions?
Or should they find a way of waiting until they know how the new product will work? For example should they purchase a one year term certain pension which will return all their purchase price in a lump sum form at the end of the term? A SMSF is not allowed to provide this type product except through the purchase of a certain type of annuity.
5. Trust Deeds
Lastly it is highly likely that all the new rules will necessitate an upgrade to all SMSF trust deeds. These amendments however should not be completed until all the rules have been finalised.
This email is general in nature only and does not constitute or convey specific or professional advice. Legislation changes may occur quickly. Formal advice should be sought before acting in any of the areas discussed. Be aware that the information in these articles may become innaccurate with time. Responsibility is disclaimed for any inaccuracies, errors or omissions. Particular investments are neither invited nor recommended and hence this publication is not "financial product advice" as defined in Section 766B of the above legislation. All expressions of opinion by contributors are published on the basis that they are not to be regarded as expressing the official opinion of any other person or entity unless expressly stated. No responsibility for the accuracy of the opinions or information contained in the contributor's articles is accepted by any other person or entity. Copyright: This publication is copyright. If you wish to reproduce this article you require a license, which can be purchased here, to do so.