SMSF News, Employee Regs, Pre-Retiree Concerns & More

What properties can a self-managed super fund buy?

Any person can make use of the SMSF (Self-managed super fund) in order to buy residential or commercial property.  Nevertheless, what needs to be kept in mind is that any property under your SMSF must provide retirement benefits to all the members of the fund, or a benefit to any of their dependents if in any case the member dies before retirement.

Talking about residential property, you can always buy one so long as you are not buying the property from anyone related to the members.  Commercial property can also be bought through ones SMSF, including one’s own business property. It needs to meet the requirement of providing retirement benefits to its members.  However, a SMSF has the advantage that they can lease the property back to any member or a related party of the fund itself.

Let’s now take a look at the benefits for a SMSF. Through the fund you will get paid 15% tax on the rent that it receives from the property if you buy property through a SMSF. For properties that are held longer than 12 months, the SMSF receives 1/3 discount on any capital gains made, thus getting it up to 10%.  Once the members of the fund have retired and they start receiving pensions, the fund will stop paying tax on both rental income and capital gains once the property is sold out.

Now, who shouldn’t buy property through SMSF? Buying property through SMSF wouldn’t be wise for someone who doesn’t have a large sum of money to give space for diversification of investments.  Generally, you allocate a certain percentage to other kinds of investments such as term deposits or shares.  It may also not be a good idea for the ones who earn a low income.

Most banks allow SMSFs to borrow up to 70 to 80 per cent of the value of the property.   However, it is much better to have at least 50 percent deposit to make sure that the property is geared in the positive direction.  Salary sacrifice contributions, tax-deductible personal super contributions and compulsory super guarantee payments that are made into your SMSF can all be used by your SMSF to cover any loan payments.  It is also considerably important to have a plan or strategy to pay off the property over time.

The importance of a well-planned SMSF investment strategy

The Section 52(6) of the SIS Act and Regulations requires a trustee to develop, analyze regularly and produce an investment plan for the entire fund, and also for each and every investment option that is offered by the trustee in the fund, whilst also taking into account the following:

  1. The risk involved in creating and keeping account of the investments that has been covered by the strategy, keeping in mind the objectives of the trustees in regards to the strategy and the expected cash flow requirements.
  2. The structure of all investments covered by the strategy – including whether the investments are diverse and whether they will possibly suffer from inadequate diversification.
  3. Liquidity of investments with regards to the funds’ expected cash flow requirements.
  4. Whether enough information is available regarding the investments covered by the strategy.
  5. The ability of the fund to discharge its existing liabilities.
  6. The possible tax issues for the fund with regards to the investments covered by the strategy.
  7. Costs that the fund might have to pay with regards to the investments covered by the strategy.
  8. Whether the trustees of the fund should have a contract of insurance that covers the insurance of one or more fund members.
  9. Any other matter that may seem relevant.

Failing to follow these requirements may lead to penalty.  Once the investment strategy has been formulated by the trustee, the investments of the fund should follow the same strategy.

The Australian Taxation Office (ATO) provides guidance on what to consider when formulating an investment strategy:

  1. Diversification – don’t limit to one asset, but invest in a variety of assets and asset classes.
  2. Liquidity of the assets of the fund – at what pace the assets can be converted to cash in order to fulfill the expenses.
  3. The ability of the fund to pay members once they retire.
  4. Whether or not the fund should allow insurance cover for members.
  5. The needs and situations of the members.

Testable accommodation for the employee by the employer

Businesses that lease apartments for their employees that travel are entitled to receive a deduction for accommodation.  Moreover, they also receive an exemption for fringe benefits tax.  Apartments are usually leased by businesses for short-term work abroad, especially if the business operates in two different countries or more.  Thus, for collaboration and communication purposes, apartments are leased.

The apartment is a deductible for the business as it is not considered as staying away from home allowance benefit for the employees. The Private Binding Rule may provide an idea for other businesses to save costs in the future.

The 5 major concerns of pre-retirees

  1. Fear of future expenses:  Planning for the future which can be unexpected and mostly unknown can be a challenging task.  From home repair, automotive repairs to one’s own health, expenses can flood in any time without any notice.  This can negatively impact a retiree who may not have enough income.  Death of partner may cause a chaos in your retirement plan and the surviving partner must make better and stronger strategies again and come out financially and mentally strong. 

The first step should be to look for a financial advisor who can guide you through your expenses and help you save as much as possible.  They will, additionally, help you come up with a plan to incur all losses and expenses strategically.

For those interested, they can create a fund for family trips, family events and destination weddings.

2. Impoverished retirement fund:  A completely depleted retirement fund can be rather devastating for any retiree and can cause them undue stress.  It is difficult to say exactly how many golden years a retiree can spend after retirement because the value of the dollar is lost over time.

Moreover, unexpected expenses may come up at any time.  These unexpected expenses may include health issues, rising health costs, pensions that aren’t paid anymore and much more.  Thus, it makes it impossible to calculate how much is enough for them to live comfortably.

For many retirees, retirement is not a choice made by them, instead, it is made for them. Planning is extremely crucial if you want to retire at the right age and live comfortably thereafter.

However, one way to bring this issue under control is by funding an emergency fund.  This will help in ensuring any unexpected expenses that may come your way.

  1. Social security:  Previously, social security and pensions were known to be entitlements when we talk about retirement.  However, times are changing.  For anyone planning to retire from their workforce, they should probably fund their own retirement.

Although social security benefits do not completely fund retirement, they were initially started to help support senior citizens, especially the ones with low income.  Sadly, this has greatly reduced as the number of people claiming these entitlements has greatly increased. 

  1. Mortgage or debt payments:  The harsh reality for homeowners is the fact that their mortgage or debt doesn’t go away.  In fact, they still need to pay just as much and more with a limited income source.

Housing markets are usually fluctuating with prices going high and low from time to time.  Furthermore, there is continuing debt coming from other sources such as medical expenses, credit cards and more that play a crucial role in increasing the levels of stress in senior citizens.  Reduce monthly payments, apply for consolidation loans and use of home equity to pay off debts are all the right methods to address ongoing debt.

The best thing one can do is work with a financial advisor who will advise them on how to go about paying off the debts thus decreasing your stress levels.  Moreover, a financial advisor may also talk to you about your benefits that you were probably not aware of before.

  1. Inflation and increased cost of living:  Many might assume that social security benefits and salaries will increase with the increase in costs of living – but this may all be considered wishful thinking!  Keeping up with inflation and increased cost of living can be a hassle for someone who doesn’t earn anymore and is solely surviving on government pensions.

Inflation has caused drastic changes in retirement plans of many.  It is affecting 3 out of every 5 new retirees from the middle-class by outliving their retirement funds if they plan on maintaining their current lifestyle.  The best advice for pre-retirees would be to factor their annual inflation rate of about 3% to make sure that they don’t exceed their retirement funds.

Pre-retirees are advised to keep track and focus on investments when they assess the inflation rate that may affect their style of living. They need to verify with the investment company or agent about the value and all other terms and they should be made aware on how to protect their retirement fund and keep intact.

Timely reminders*

7th   September Payroll Tax

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At Tax Depot, we service Logan, Springwood and Beenleigh clients in all areas of taxation, tax planning, bookkeeping and business accounting services.   If you need assistance or advice from our CPA qualified accountants, call us today on 1300 722 955 | (07) 3133 3752 ; we would be only too happy to discuss how we can help you and your business.  


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