Self-Managed Super Funds

Discover the benefits of owning assets within a Self- Managed Super Fund. The statistics will surprise you and you may reconsider your future financial plans! BY STEVE BLAKER

In the last issue of Peace of Mind, in my article entitled ‘Leaving Assets to Charity’, I made the following comment: “The benefits of owning assets within a SMSF are too numerous to mention in this article, and may well be the basis of a future article”. As such, I felt it appropriate to ‘make good’ on this quasi promise, and thus have chosen to provide a simple insight in to running a pension from within a Self-Managed Super Fund (SMSF). The current statistics (as at 31 March 2004 – APRA) on SMSFs are mind-blowing and are as follows: Of the 300 000 SMSFs currently in existence, they contain assets of approx. $136B, which represents around 22% of the whole superannuation industry. Of that $136B, around 25% (or $34B) remain in cash (is it any wonder bank shares continue to climb!).

Even more astonishing is that there are currently 2500 SMSFs being established each month. A popular way of providing retirement income is to commence a pension payable from a SMSF. This method is attractive because members can maintain investment control and flexibility and at the same time facilitate a number of taxation and estate planning strategies. At this time, there are many different types of pensions available to SMSFs, the most common being Allocated Pensions and, more recently, Market-Linked Income Streams. The Federal Government has recently announced a ban on SMSFs paying defined benefit pensions, however, a committee is currently looking at the issues and will report back to the Government sometime in April 2005.

Taxation Benefits
Generally, when a SMSF enters pension phase, the assets within the fund used to generate the pension income are not subject to any tax. For most SMSFs, this means that any income or capital growth enjoyed by the fund is not taxable. An often-overlooked benefit when in pension phase is franking credits. Given the zero tax environment of the SMSF in pension phase, any franking (also known as imputation) credits are refundable to the SMSF. A franking credit simply reflects that a company has paid company tax at 30% on profits, prior to paying the income dividend. For example, if the Fund receives $5000 of dividend income which is fully franked (i.e. like a dividend payment from, say, ANZ Bank), the refundable franking credit amount will be $2143 ($5000 x 3/7).

Given most of us believe we pay too much tax during our working lives this is always a welcome result for the investor. Further, a member of a SMSF in receipt of an income stream (pension) from a SMSF is taxed at their normal marginal tax rate, less a valuable fifteen percent (15%) rebate. This can equate to around $25 000 of income received from the SMSF, tax free. A further tax benefit is available with respect to undeducted contributions. An undeducted contribution is a contribution where no tax deduction has been claimed, as the tax has generally been paid. For example, if you had $50 000 sitting in a bank account and decided to contribute into a superannuation fund, this would be an undeducted contribution.

Where a member’s account balance has a component of undeducted contributions, that component is returned to the member tax free, subject to a formula. The formula is simply the undeducted contributions, divided by the member’s life expectancy. By way of simple example, if a member has an undeducted contribution component of $100 000 and a life expectancy of 10 years, then $100 000 divided by 10 equals $10 000. Therefore, the member would receive $10 000 each year tax free. Suffice to say that if structured correctly, it is possible to pay quite a significant annual pension to members of SMSF pension funds, without incurring any tax liability.

Estate Planning
In the event of a member (as a pension recipient) passing away, the tax treatment of a death benefit will depend on whether it is paid as a lump sum or a pension, whether the benefits are within or exceed the deceased’s pension reasonable benefits limit (PRBL), and whether it is paid to a dependant or non-dependant (for tax purposes) As superannuation benefits are legally owned by the Trustee of the Superannuation fund and held on behalf of the members, the Trustee of the superannuation fund has discretion to decide where benefits are paid upon the death of a member. Binding and non-binding death benefit nominations need to be considered and implemented as soon as possible.

A Non-Binding Nomination will indicate your preferred beneficiaries and the amount and type of payment you desire the recipient(s) to receive. In this instance however the trustees retain ultimate discretion over the amount, type and the recipient of the payment. With a Binding Nomination the Trustee has no choice but to follow the member’s instructions, effectively a Binding Nomination removes the trustee’s discretion. It should be noted that binding nominations require renewing every three years. As superannuation benefits are legally owned by the Trustee of the Superannuation fund and held on behalf of the members, the Trustee of the superannuation fund has discretion to decide where benefits are paid upon the death of a member.

Binding and non-binding death benefit nominations need to be considered and implemented as soon as possible. A Non-Binding Nomination will indicate your preferred beneficiaries and the amount and type of payment you desire the recipient(s) to receive. In this instance however the trustees retain ultimate discretion over the amount, type and the recipient of the payment. With a Binding Nomination the Trustee has no choice but to follow the member’s instructions, effectively a Binding Nomination removes the trustee’s discretion. It should be noted that binding nominations require renewing every three years.

CONTACTS

Steve Blaker CFP, Dip.FP–Authorised Representative Associated Planners Financial Services Limited Member Firm: Logical Financial Management Australia 12 Milford Grove, Cherrybrook NSW 2126
Phone: (02) 9899 4492 �Fax: (02) 9899 3713
Email: steve.blaker@apfs.com.au
www.apfs.com.au