Recognising the different phases of your life and adjusting your retirement strategy to adapt to those changes is important to the success of your long-term planning.
This is the case whether you are setting up your SMSF, accumulating wealth, paying an income stream or winding up your fund.
So, what are some of the issues which must be addressed in the lifecycle of your SMSF which come about due to the different circumstances in your life?
Establishing your SMSF
Setting up your SMSF can be a time-consuming process, potentially involving lawyers, an accountant and more often a financial planner. There are some key steps in the process that you as trustee, must ensure happen, so that your SMSF can operate smoothly on a day-to-day basis.
Opening a bank account for your SMSF is a first obvious step, once the fund has been established, that is, the Trust Deed has been signed and dated and properly witnessed. Documents electing for the SMSF to be a regulated superannuation fund must be lodged with the Australian Taxation Office (ATO) so that your fund is entitled to the lower concessional tax rate that applies to an SMSF of 15%. The ATO will register you on their website as part of this process.
In order to open a bank account however, it is also a requirement that you provide an Australian Business Number (ABN) and a Tax File Number (TFN) to the bank. You apply for these at the same time as electing to be regulated. Your SMSF will have its own ABN and TFN, so don’t use your personal TFN, ABN or the TFN of your corporate trustee.
You will also need to ensure you have a written investment strategy, adopted by the SMSF trustees, in place before investing any of your fund assets.
You are now ready to accept roll overs from other funds, employer superannuation guarantee contributions or salary sacrifice contributions into the fund. It is worth noting that any costs of set up paid by you personally will be treated as a contribution to your SMSF and should be recorded as such.
Accumulating wealth for retirement
During the accumulation phase, investments will be made, changed, adjusted, sold and sometimes repurchased. There are a few things to be careful of when making your investment choices and entering into transactions.
Firstly, great care should be taken when acquiring assets from related parties, that is, members of the SMSF, relatives of members or businesses they run, family trusts they control and so on. Restrictions apply to these transactions and so you should always seek qualified professional advice before entering into these types of transactions.
Income earned on your SMSF investments is recognised for tax purposes in exactly the same way as for you as an individual investor, that is, when you receive it in your bank account. Equally, you only pay capital gains tax on assets you actually sell for a gain. If you have owned the asset for longer than 12 months, you will pay tax on a discounted capital gain just as you do as an individual. The difference here is that the discount applied is a 1/3 discount rather than the 50% discount you receive personally. Contributions are taxable on a receipt basis as well.
Two small exceptions to this general rule are:
- Distributions from managed funds, which like family trust distributions you may receive personally, are recognised on an entitlement at 30 June, even though the cash does not come into your bank account until later; and
- Dividends which are taxable once they are available to be paid (usually when the share goes ex-dividend) which may be before it is paid into your SMSF bank account. This is the same for you personally, for shares you own in your own name.
Lastly, remember to invest within the parameters of your investment strategy and change it if necessary to accommodate new investments you want to make.
Paying an income stream or pension
Once you start a pension in your SMSF for one or more members, you need to apply your mind to a couple of issues.
Firstly, the superannuation law requires that as a trustee, you invest fund assets to ensure the SMSF is able to meet all obligations as they fall due. When a pension is started, ensuring the fund has sufficient cash to make pension payments is part of this
obligation. So, carrying a little more cash is recommended and should be reflected in the investment strategy of the SMSF.
Remember too that it is also compulsory for a minimum pension amount to be paid each year to ensure that the tax concessions that flow to your SMSF because a pension is being paid, are received by your SMSF. Many of you would be aware that the Government has introduced limits on the amount of capital that can support a pension for each member and this will need to be monitored going forward.
As for being more conservative in your investment choices once a pension has commenced, this will vary between funds and the members of those funds. Even at retirement, the investment horizon, on average, is still considerable for both men and women. Invest as you feel comfortable, just as you have in the past. Retirement itself is not a trigger for a more conservative mix of assets unless that is what you want. Also remember, member choice of investments applies to members of all SMSFs, so investment mixes can be adjusted between retired members and those still in accumulation phase if needed.
Winding up your SMSF
The day will inevitably come when your SMSF is no longer required. It may be because you have drawn down most of the assets as an income stream, perhaps you have lost interest, or your health prevents you from being actively involved any more. Whatever the reason, your SMSF needs to be wound up.
Seeking qualified professional advice is essential to ensure that the process is as smooth as possible. Assets should be disposed of before income entitlements are crystallised. Sell shares before they go ex-dividend. Sell managed funds before you are entitled to a distribution. Let employers who contribute superannuation guarantee contributions to the SMSF know that the fund is being wound up and organise alternative super arrangements to accept these contributions. Make sure fund expenses are met or accounted for before paying out member entitlements or roll overs to other superannuation arrangements. Don’t’ forget you will have a final tax bill to pay as well as a lodgement fee with your last tax return for the fund.
As always there is lots to think about. Consult an appropriately qualified SMSF Specialist to help in your decision-making process. Investing the assets of your SMSF is part of the enjoyment of having your SMSF and part of the satisfaction of the engagement in saving for your retirement. Attention to a few important details outlined above will make the process run smoothly for your SMSF.