Self-drive your super

1. Self-drive your super Matthew Dunstone Matthew Dunstone is an Authorised Representative of RI Advice Group Pty Ltd

2. Important Notice Disclaimer RI Advice Group Pty Ltd, ABN 23 001 774 125, holds Australian Financial Services Licence Number 238429 and is licensed to provide financial product advice and deal in financial products such as: deposit and payment products, derivatives, life products, managed investment schemes including investor directed portfolio services, securities, superannuation, Retirement Savings Accounts. The information presented in this seminar is of a general nature only and neither represents nor is intended to be specific advice on any particular matter. RI Advice Group strongly suggests that no person should act specifically on the basis of the information contained herein but should obtain appropriate professional advice based on their own circumstances.

3. Agenda • What is a ‘self managed superannuation fund’ (SMSF)? • What investments can I use? • Is a self managed super fund right for me? • What information do I need to decide? • Value of advice

4. The self-drive revolution Statistics indicate that a rapidly increasing number of Australians are taking up this option... • Almost 30,000 new self managed super funds were launched in the year to March 2010 • There are now over 400,000 self managed funds representing more than 767,000 individuals • Self managed funds have over $400.1 billion in assets According to average figures from the Australian Tax Office. Running your own fund means is a lot to consider – with greater freedom comes greater responsibility.

5. What is a Self Managed Superannuation Fund? The facts... • Up to 4 members • All members are trustees • If using a corporate trustee, all members must be directors of the corporate trustee • No member can be an employee of another member unless they are related • Can have ‘single member’ funds • Regulated by the ATO

6. Self Managed Super tends to suit… People who: • Operate small or family businesses • Like to have hands-on control over investment decisions • Like to have their superannuation customised to play a key role in family wealth and estate planning • Wish to invest in alternative assets

7. Why Self Managed? • Cost • Control • Flexibility • Tax-effective wealth accumulation • Access to wider range of investments • Effective estate planning

8. What are the expected costs? The cost effectiveness of an SMSF will depend on the level of investments!

9. What are the expected costs on $300,000?

10. Setting up a Self Managed Super Fund • Obtain a trust deed • Corporate or individual trustees? • Obtain a Tax File Number and Australian Business Number • Elect to become a regulated fund • Open a bank account in the name of the fund • Establish an Investment Strategy • Prepare minutes and documentation to admit members to the fund

11. Trustees A Trustee must be appointed, either a • corporate trustee, or • individual trustees where the primary purpose of the fund is to provide a retirement pension • all members must be trustees and vice versa. Restrictions on who can be a trustee: • Minors (person under 18) • Individuals under a legal disability (eg. has lost mental capacity) • Bankrupts • Anyone disqualified from being a company director • Anyone convicted of fraud or dishonesty.

12. Obligations? What obligations? • Responsibilities of Trustees • Investment Strategy • Investment Selection • Administration • Compliance • SIS Act • ATO

13. Investment Strategy It must have regard to: • The investment objectives • Diversification • Risk & return • Liquidity (cash reserve) • Ability to meet liabilities • Asset allocation Trustees must formulate and implement an Investment Strategy. An Investment Strategy is a plan for making, holding and realising fund investments.

14. Complete investment control? • Investment limits and restrictions • Sole Purpose Test • Restricted acquisitions from related parties • In-house Asset Limits • Business Real Property Exemption • Derivatives only for risk management • Arm’s length dealings • Limited ability to borrow via a limited recourse loan • Trustee covenants

15. Related parties • SMSFs are prohibited from acquiring most assets from a related party • Related parties include: • Members • Standard employer of the fund • ‘Associate of the member’

16. In-house assets In-house assets are: • Investments in, and loans to, related parties • Restricted to 5% of the value of the fund But there are some exceptions... • Listed shares • ‘Widely held’ unit trusts (managed funds) • Investments in pooled superannuation trusts • Business real property • Property owned by the super fund and a related party as tenants-in-common • Deposits with authorised deposit-taking institutions (ADI) and approved non-ADI • Life insurance policy issued by a life company (not acquired from a member or relative)

17. In-House Assets? Smith Family Super Fund Assets: • Macquarie CMT $ 15,000 • BHP shares $ 30,000 • Shares in Smith Pty Ltd $ 50,000 • Perpetual Aust Share Fund $ 50,000 • Shops 1-4, 52 Main St Adelaide $500,000 • Loan to Smith Pty Ltd $ 5,000 $650,000 NO NO POSSIBLE NO NO YES

18. Borrowing to invest • Prior to 2007 there were very few opportunities for funds to borrow directly. • Indirect borrowing via trusts or companies was possible but there were a number of risks and limitations.

19. Borrowing to invest – Limited recourse loans • A geared investment in a superannuation fund can be achieved via a structure known as a ‘limited recourse loan’ • A limited recourse loan can enable a fund to utilise borrowing to purchase a range of investments including direct property. With the right advice and approach this can be a powerful way to boost your super and diversify your investment portfolio

20. The legislation now provides… • The superannuation fund is permitted to borrow • The loan must be applied to acquire an asset that the fund can ordinarily invest in • The asset is held on trust for the superannuation fund • The superannuation fund has a beneficial interest in the asset • The superannuation fund must make one or more payments to acquire the asset • If the superannuation fund defaults on the loan the lenders right to recoup is limited to the value of the asset.

21. A snapshot • You can gear with your Superannuation Fund • Borrowing can be for any investments as allowed by SIS • Borrowing is limited to newly acquired assets (ie. not for currently held assets) • You can swap geared assets • You can only do a limited recourse loan via a Debt Instalment Trust structure • Lenders security is limited to the asset held in the debt trust

22. Lending • There is no limit on the amount of the loan • There is no restriction on who the fund can borrow from • The loan must be on a limited-recourse basis Remember, the SMSF is responsible for the loan repayments, so it is important to consider the fund’s cashflow before entering into a borrowing arrangement.

23. Case Study • Her SMSF has significant investments but she wishes to use $100,000 in the SMSF to purchase the property. • The property can be purchased by using a limited recourse loan Sandra wishes to purchase a property which is currently valued at $500,000

24. Let’s look at a limited recourse loan structure $500,000 • Commercial Property • Security $100,000 Trust Super Fund $400,000 Assets Cash $100,000 Shares $200,000 Property $500,000 • Bank • Institution Lender

25. Who can benefit most? • Gearing investments via super including property, shares and exotics • Those who have met the concessional and non-concessional contribution caps • Negative gearing by lending to the fund at a premium rate • Those who wish to put money in super but can’t contribute – over 65 who don’t meet work tests • Younger members who wish to bring forward the purchase of investments via super

26. Investment options • Superannuation is for the long term – the rest of your life. • Investments need to provide liquidity, growth and income. • Cash and Fixed Interest provide liquidity and income. • Direct Property provides income and growth • Shares provide liquidity, income and growth Growth investments such as property and shares can be volatile over the short term, but generally outperform cash and fixed interest over the long term

27. Investment options - Growth Property provides: • Income (rent) • Growth (price movement) • Tax Relief (depreciation) International and Australian shares provide: • Income (dividends) • Growth (share price movement) Australian shares also provide: • Tax Relief (imputation credits)

28. Investment selection • Are all the members (trustees) skilled in investing? • Will business or other real property be purchased? • When will members reach preservation age? • How would the withdrawal of a member affect the fund’s assets? • Does the investment strategy take into account the liquidity requirements for the payment of pensions? • Do members require insurance cover? • What are the Member assets outside the SMSF?

29. Administration • Being acquainted with and carrying out the terms of the trust • Ensuring that title of all fund assets is in the names of the trustees • Accurate bookkeeping • Annual lodging of tax return • Annual audit • Timely and efficient

30. Compliance • Act impartially in the interests of all beneficiaries • Ensure that all vesting and preservation rules are adhered to • Keep informed & up to date • Adhere to lodgement timelines & bureaucratic requirements • Legislative requirements e.g. investment activities & maintenance of fund documentation. • Severe penalties for becoming non-compliant • SIS Act over-rides trust deed

31. Self managed super funds Do it yourself • Advantages • Tailor to suit you • More control • Disadvantages • Only for retirement income • Formulate and implement a investment strategy • Must have a trust deed and trustees • Must comply with SIS rules • Severe penalties for non-compliance rest solely with the trustees

32. Is Self Managed Super for you? • What is your fund going to be used for? • What is the level of involvement you are willing to commit? • Do you want to out-source? • investment strategy? • investment selection? • administration? • compliance requirements?

33. Outsourcing Investment Strategy Investment Selection Administration Compliance Financial Adviser • Investment Advice • Direct Share advice • Managed Funds • Ongoing Investment and Strategic Advice Lawyer / Accountant / Super specialists • Trust deed & other document services • Annual accounts • Audit • Tax return preparation

34. The way forward Take advantage of this opportunity and get the right advice! We take a collaborative approach with your accountant and legal advisers. The result is a self managed super investment that is: • Professionally set up • carefully managed • creates the freedom for you to take a real hands-on approach to your investment • minimises risk and administrative time for you. The personal control and potential tax and cost savings can be substantial, so it's worth considering if a SMSF could be right for you.

35. Questions ANY QUESTIONS

36. THANK YOU Matthew Dunstone – General Manager RI Surrey Hills 400 Canterbury Road, Surrey Hills 03 9836 4744