SMSF Snapshot

 

 

The ATO recently released the latest SMSF numbers up until the end of the March quarter. The following infographics highlights some of the key takeaways.
SMSF Snapshot
SMSF Snapshot
As can be seen above, there are now nearly 1 million SMSF trustees in Australia across more than 500,000 funds.
SMSF Snapshot
Asset allocation remains heavily weighted towards listed shares and cash.
SMSF Snapshot
Total assets are now reaching close to $600 billion.
SMSF Snapshot
SMSF Snapshot
SMSF Snapshot
SMSF Snapshot
Australian Tax Office (Self-managed super fund report) Last modified: 29 May 2014

SMSF Trustees: Review your investment strategy

 

 

Coming up to the end of the financial year, it is worth reviewing your investment strategy for your SMSF.

The ATO requires that SMSF’s have a documented investment strategy that considers:

  • investing in a way to maximise member returns taking into account the risk associated with the investment
  • diversification and the benefits of investing across a number of asset classes (for example, shares, property and fixed deposit) in a long-term investment strategy
  • the ability of your fund to pay benefits as members retire and pay other costs incurred by your fund
  • the needs of members (for example, age, income level, employment pattern and retirement needs)
  • whether the trustees of the fund should hold a contract of insurance that provides insurance cover for one or more members of the fund

 

Many funds these days have investment strategies which are very general and/or unchanged from the original strategy when the SMSF was established.

 

They have not been updated to reflect market volatility over recent years or the changed financial circumstances of the SMSF members themselves.

 

Upon further examination, it is clear trustees have amended their strategies and asset allocations in response to changing circumstances but have failed to update their strategy documents accordingly.

 

In such instances it is prudent good practice to revisit the Investment Strategy and document the current SMSF Investment strategy, addressing in particular, the ATO requirements outlined above.

 

To make this process easier, our partner Australian Stock Report have provided a sample Investment Strategy template which you can download here.

EOFY Checklist

 

 

With July 1 almost here, The SMSF Review team have compiled the following checklist to ensure you’re making the most of your self-managed super fund and how you can avoid being hit by the tax man.

1. Be aware contribution caps are changing

The 1 July 2014 increase in superannuation contribution caps means that from age 50 you’ll soon be able to contribute $35,000 at a concessional tax rate and $180,000 out of after-tax money.

Using the bring-forward rule, this means a person with spare cash could put up to $540,000 into super and never have to pay tax on what the money earns or what the super fund pays out to them. Or up to $1.15 million for a couple!

The bring forward rule enables a fund member under age 65 to contribute up to three times the non-concessional contributions cap over a fixed three year period. But beware if you exceed the limit – excess non-concessional contributions are taxed at 46.5%.

In planning for financial year end, remember that once the ‘bring forward’ rule is triggered, the non-concessional contributions cap is fixed for the three year period and is based on the cap applicable in the first year. If this takes place on or before 30 June 2014, the maximum aggregate amount that can be contributed over the three years covered is $450,000 and access to the higher cap will not be available until the fixed three year period has been exhausted.

 2. The superannuation guarantee rate is also going up

Currently, employers must pay a minimum of 9.25% super guarantee to SMSFs. From July 1, the rate will increase to 9.50%.

Subsequently, you need to factor in that your employer will be obliged to contribute 9.5% instead of 9.25% and with an increased obligation on your employer to contribute, your voluntary component may reduce.

If you want to maximise your contributions before June 30, you need to talk to your accountant or professional adviser to make sure your salary sacrifice agreement with your employer allows the maximum to be salary sacrificed.

3. Watch out for the new penalty regime from July 1

New penalties will apply for breaches from 1 July 2014. These breaches include

  • bank accounts going into overdraft
  • failure to get accounts and returns prepared
  • providing loans to family members from your SMSF
  • investments being made into in-house assets which are not solely for the SMSF
  • SMSF assets not being separated from personal assets
  • taking money from the fund for living
  • incorrect borrowing structures being established for the purchase of assets by a SMSF

 

Previously, if trustees breached the rules, the ATO could declare the fund non-complying and subject the fund to a 45 percent tax on the value of assets.

From 1 July 2014 the ATO will have the power to penalise the fund without declaring it non-compliant, depending on the type of breach that is involved.

It is important to note that any penalties cannot be paid for or reimbursed from assets of the fund – they will be payable by the trustee personally.

See the table below for a summary of some of the estimated penalties:

BREACH Penalty
Requirement to prepare financial statements $1,700
Requirement to keep records $1,700
Operating standards e.g. contributions and preservation rules $3,400
Prohibition on lending money to relatives $10,200
Prohibition on trustees borrowing $10,200
Requirements to comply with in-house asset rules $10,200

 

The ATO can still, in addition to penalties, declare the fund non-compliant. However, the change provides the ATO with a variety of enforcement options at their disposal.

The penalty that will apply will ultimately depend on the nature and severity of the fund breach.

The penalty for lodging your SMSF accounts by 30 June has also increased.

If you haven’t done your 2013-14 accounts by 30 June, there’s a possibility that the ATO will be imposing a penalty on trustees that could be up to $1700.

At the moment the non-lodgement fee is a few hundred dollars, and in fact the ATO will probably be looking to impose that and then they’ll come along and impose this new penalty.

4. Don’t risk being declared a non-person

Non-lodging SMSFs will be declared a non-person for tax purposes if they’ve been slack with their lodgements.

If you have a SMSF and you haven’t lodged a tax return for two or more years, the ATO will classify your fund as a non-person.

That means your fund won’t be able to receive contributions, rollovers or transfers.

In other words, if you’re in that situation and you’re well behind on your reporting, your fund will effectively stop being able to operate.

5. Don’t exceed your minimum or maximum pension withdrawals

If you’re on a pension in your super fund, make sure you withdraw your minimum pension that you’re required to take out each year.

In some cases, there’s also a maximum limit.

Minimum and maximum pensions from SMSFs have to be paid by June 30 if you want to avoid paying tax on them.

If you don’t pay by 30 June, the risk is the government will take away the tax exemption on the fund and that can be significant, there can be thousands of dollars at risk.

If you are eligible to draw amounts from superannuation, you may be able to defer receiving the amount until after you reach age 60, or until a later financial year when you may end up paying a lower rate of tax.

6. Employers beware of SuperStream by 2015

The ATO is putting in place a new system that aims to standardise the way employers pay super.

The new SuperStream standard will require all SMSFs to be paid electronically and is being phased in gradually over the next few years.

Many employers still lodge their employee’s super by sending checks or banking it at the local bank.

Large and medium-sized employers, or those with 20 or more employees, must complete the implementation of SuperStream by no later than 30 June, 2015.

If you’re a larger employer, you should have looked out for the SuperStream changes and made arrangements by 31 May.

Large employers were supposed to get new electronic service numbers to pay their employees electronically by the end of May.

Small employers, or those with 19 or fewer employees, have another year starting from July 1, 2015 but must complete their implementation no later than 30 June, 2016.

Small businesses may be eligible to use the Small Business Superannuation Clearing House, which is a free online service provided by the ATO that allows you to pay contributions to a single destination in one simple electronic transaction.

ATO set to tighten noose on auditors

 

 

The ATO has outlined its continuing and new areas of focus in the SMSF sector and has warned of increased scrutiny of self-managed super funds and their auditors as it gears up to impose penalties of up to $10,200 on funds found breaking the law from July.

Speaking at the Institute of Chartered Accountants’ 2014 Business Forum, the ATO’s SMSF assistant commissioner Matthew Bambrick reiterated the regulator’s focus on auditor contravention reports for the coming year.

“Every single auditor contravention report that comes into us, we’ll do something about. So we’ll risk-rate every single one that comes in the door on the basis of what’s in there but also everything else we know about the fund and the trustees,” Mr Bambrick said.

“For medium-risk [funds], we are going to call to them and talk to the ­trustee directly,” he said.

“We’re going to gauge from that conversation whether it sounds like they know what they are doing. On the basis of that phone call we will decide whether to say ‘thanks very much’ or we will bump them into the high risk category – which means we will be doing a comprehensive audit on them.”

Mr Bambrick said the ATO is also focusing more on high-risk funds, and is placing an increasing focus on looking for “problem areas” in relation to SMSFs.

“We’re also focusing more on people who are promoting schemes, looking more at the high-risk areas like [non-arm’s length income] and LRBAs and so forth,” he said.

The ATO is also looking to auditors who only do a “low number” of audits per year, and low-cost audits.

“With the very low cost audits being offered, it does make you wonder how they’re able to do it for that kind of price. There might be good reasons, but there might not be,” Mr Bambrick said.

From July 1, the tax office will be able to impose a range of fines up to $10,200 that it hopes will provide better targeted deterrents.

“Until now, what we’ve been able to do is say ‘please don’t do it again’ or, ‘that’s a contravention, we’ll take away half your assets because your fund is non-compliant’. That doesn’t give us a lot of flexibility,” Mr Bambrick said.

Since July 2013, SMSF auditors have had to register with the Australian Securities and Investments ­Commission. There are now about 7000 registered auditors – 3000, or 25 per cent, less than were auditing SMSFs before the requirement.

The ATO believes those that are now registered – which were already doing 90 per cent of the audits – will provide higher quality audits and be a more ­reliable source of contravention ­notifications.

Mr Bambrick said they will be using the auditors themselves to tell them the funds they should be ­targeting. The tax office also wants auditors to tell them every fund they have audited to prevent SMSFs using the new list of registered auditors to lie about which firms have audited them.

Why and when super self-managed super funds identifying and rectifying the spouse “blow-in” problem

 

 

by Peter Bobbin

 

Introduction

The definition of “spouse” in the superannuation law includes what we know to be a spouse: it is a married person.

It also includes a couple who are in a relationship that is registered under a law of a State or Territory. In both situations the identification of a person as a spouse of another for superannuation purposes is clearly defined in law and in fact, there is no mistake as to who is and who is not a spouse.

With over $1.4 trillion dollars in superannuation and death of superannuation members a literal daily occurrence, the fact of who is a spouse is financially critical to everyone, the spouse in particular.

 

The “blow-in” problem

What is not known or understood is the extended meaning of “spouse”.

This is defined to include another person who, although not legally married to the person, lives with the person on a genuine domestic basis in a relationship as a couple. Those in a de facto relationship may breathe a sigh of relief, they will fall into this definition.

 

But how quickly can this occur?

This may seem like an odd question; isn’t a de facto a de facto after living together for two years?

Yes, but in the superannuation extended meaning of spouse there is no reference to time. There is no minimum time that the person must live with the other superannuation-deceased person.

What needs to be understood is how and when this extended meaning of spouse is to be used. When a superannuation member has died, the question is asked about the deceased superannuation member’s superannuation, effectively as at the date of death. This means that a person who has lived with someone on a genuine domestic basis in a relationship for just one day (the date of death) will be a “spouse” for superannuation law purposes. This is the “blow-in” problem. This becomes very important if the member dies since this person will have a claim in respect of the deceased person’s superannuation death benefit.

Before too much concern is raised it is certainly not suggested that one day is enough. Whilst at law this is the test, the courts take a more pragmatic approach and look to all of the surrounding circumstances to answer the question: did the claimant of the deceased’s super, although not legally married to them, live with them on a genuine domestic basis in a relationship as a couple? Often this will encompass an examination of mutual and shared housing, house expenses, time together and the comments and observations of friends and relatives.

Unlike de facto law where the relationship must exhibit these ‘couple-attributes’ for two years, the superannuation definition of spouse starting point is from the first time the ‘couple-attribute’ is found to exist.

 

So who can this affect?

Young couples who make the first step to move in together, from when they move in. A separated former partner who, although still married, will have another spouse (by definition they will have two) when they cohabit with another. An elderly parent whose earlier partner has died and in pursuit of companionship shares accommodation with another.

 

What is the risk?

If you are the parent or sibling of one of the young couple, on their unfortunate early death your child’s super may go to someone they have only recently met.

If you are the other separated former partner who is still married, you may find that you are in the courts fighting over who gets the super. You may be fighting for yourself or for your children.

If your elderly parent has a new companion, on their death your parents super may pass in ways not expected or appreciated.

 

Does your super have the blow-in problem?

If you are a member of a multi-member superannuation fund which is completely independent of you, almost certainly the answer will be yes, you have the blow-in problem.

This is because it is all too common that the rules of the superannuation fund, of which you are only one small part, will mimic the superannuation law; the definition of spouse will be as described above.

If you are a member of a self managed superannuation fund (SMSF) the answer lies in the

rules that govern your fund. What these rules say will govern whether a blow-in may or may not lay claim to a deceased superannuation member’s superannuation benefit.

 

Looking for and fixing the blow-in problem

By working through the following simple steps, you can determine whether your SMSF has the blow-in problem and if so, how to rectify it.

Does your SMSF have the blow-in problem?

Check your SMSF trust deed for the following:

(a) Does the definition of “dependant” include the word “spouse”? If yes, look to see if there is a

definition of spouse. If no, got to (c) below.

(b) The definition of “spouse“, does it include words to the effect that; 

It includes another person who, although not legally married to the person, lives with the

person on a genuine domestic basis in a relationship as a couple.

If yes, you have the blow-in problem.

(c) If there is no definition of spouse, look to see if there is a rule in your trust deed that says to

the effect that;

any provisions of the Superannuation Industry (Supervision) Act 1993 (SIS Act) or

Regulations are stated to apply or the interpretation of these rules is to be read in the

context of that Act. 

If yes, you have the blow-in problem. This ‘deeming clause‘ has the effect of putting into

the rules what isn’t there, the definitions that are used in the SIS Act.

If the definitions of either “spouse” or “dependant” are linked to the meanings in the SIS Act, or the definitions are included there is a blow-in risk. If the spouse or dependants are named in the deed, this risk is reduced (although it may not be eliminated).

If there is a blow-in risk, read on.

 

How do you fix the blow-in problem?

In the SMSF environment the question becomes: can you amend the trust deed/super fund rules?

(a) Does the amendment power in the SMSF deed permit the trustee to amend the terms of the

trust deed?

(b) If no, consider a new SMSF if the blow-in risk is of such a concern.

(c) If yes, are any restrictions or rules on how to do this?

If the amendment is permitted by the trust deed, you can change the rules that apply to your

superannuation. If you are the controller of your superannuation fund you may approach your

lawyer and ask them to help to draft an amendment or if you feel you can do it, you can effect the

change. If doing it yourself please be careful and consider the guide below.

 

Amending your SMSF trust deed

Amending your SMSF trust deed is rewriting the rules that govern the way in which your

superannuation is to be administered. With respect to the application of a deceased person’s

superannuation there are potentially many more questions that can and should be addressed than the question of whether a blow-in risk exists. But removing this risk is an important and early start to better control over superannuation.

What we have looked at so far is the fact of the blow-in risk and that it is found in the trust deed.

So to address this, the trust deed needs to be changed. There are many ways to do this, below is

just one simple example.

(a) Define “spouse” and “dependant” in your SMSF deed by naming the family members in each

category. You may like to do this by;

Deleting the definition of ‘spouse’ and inserting in lieu thereof;

‘Spouse’ means with respect to;

 YOUR NAME as a member of the fund, his/her husband/spouse/partner THEIR

NAME; and

THEIR NAME as a member of the fund, his/her husband/spouse/partner YOUR

 Deleting the definition of ‘dependent’ and inserting in lieu thereof; ‘Dependent’ means with respect to;

YOUR NAME as a member of the fund, his/her children THEIR NAMES.

(b) It is prudent to check the trustee direction/powers to pay a death benefit against the changed definitions, does it still work the way that you expect that it would.

(c) Once the above is done, it is also necessary to deal with any deeming clause such as the one

described above. Making the style of changes above can give a false comfort if there exists a

deeming clause in your trust deed that has the effect of causing the definitions within the SIS

Act to override and adjust any inconsistent definitions in your trust deed. What these deeming clauses do is change your altered view of spouse and dependent from the persons you have named back to the definitions that caused the blow-in problem in the first place. This deeming clause needs to go. It needs to be deleted, often it is not necessary.

(d) The form of amendment to your superannuation trust deed will be guided by the

rules or clauses that describe how to amend the deed. If it says that a change can be made

by resolution then a meeting that achieves such a resolution may be enough. This meeting should be written down. If it says that a resolution must be in writing then do this and

have the meeting consider, accept and pass the resolution and record this in the minutes. If

it says that a change must be by deed, then the format of the amendment must be a deed

format. Commonly, though not always, a deed format will start and end with;

 This deed is dated….

 This deed is signed, sealed and delivered this day of DATE by NAME OF EACH

If in doubt about whether a minute, resolution or a deed is needed, the default rule of

amending a trust deed is to amend a deed with a deed.

 

Next steps

Now that the urgent risk of the blow-in problem has been addressed, take the time to carefully consider specific rules on how to deal with the superannuation death benefit.

Broadly, in order to provide the highest level of certainty and to lock-in the individuals that will

receive the superannuation death benefit upon a death, it is preferable that the Trustee has the

power to make and does make a prior written determination. Alternatively, the deed can name the persons who are death benefit dependants.

State that in the event of the death of a member, the superannuation death benefit will be applied as described above and that in the event of those provisions not applying, the superannuation forms part of the deceased estate. Then, ensure that under your Will, the superannuation benefit is allocated in accordance with your wishes.

You should note that disputes over the death benefit of a deceased superannuation fund

member are the most contentious and litigated of all superannuation disputes. It is especially

important that you properly deal with the treatment and application of your superannuation death

You should also be aware that State and Territory laws that allow a person to claim against the estate of a deceased person may allow claims to be made against the deceased person’s superannuation interest. These rules vary across Australia and are not consistent.

If there is any potential for completing claims to be made in respect of your superannuation death

benefits you should seek independent and competent legal advice.

Please note that this alert is not specific advice to or for you and it does not contain tax advice upon which you can personally rely. This alert is just a general guide about an important topic and as such is designed to make you aware of something that you may wish to consider as part of your overall planning. Much more is needed to do that planning than what is expressed in this alert.

 

For more information please contact:

Why and when super self managed super funds identifying and rectifying the spouse blow in problem

Peter Bobbin

Managing Principal (Sydney)

T +61 02 8263 6622

E pbobbin@ro.com.au

© Copyright in this content and the concepts it represents is

strictly reserved by Rockwell Olivier (Sydney) Pty Ltd, 2013

Increase in super contribution caps

 

 

For many, the recent Federal Budget officially marked the end of the ‘age of entitlement’.

Whilst that may hold true to the majority of the ‘entitled’, there are always havens within the financial landscape which remain lucrative.

For those who have a spare million or two lying around, the recent changes to super contribution limits provides one such haven, of the tax variety.

The increase in superannuation contribution caps from 1 July 2014 means those over 49 will be able to contribute $35,000 at a concessional tax rate and $180,000 of after-tax money.

Using the pull-forward option, that means a couple with some spare cash could put in up to $1.15 million in their super tax haven and never have to pay tax on what the money earns or what the super fund subsequently pays out to them.

This dilutes the argument that it is no longer possible to build a large superannuation balance.

While this sounds great there are a few trips and traps, especially for those who have already triggered the ‘bring forward’ rule or will trigger it in the lead up to 30 June.

In the majority of cases the ‘bring forward’ rule is triggered intentionally to maximise NCCs over a short period in the lead up to retirement. But when the ‘bring forward’ rule is triggered unwittingly it can create a number of difficulties with excess NCCs being taxed at 46.5%.

Unfortunately, the relatively new rules relating to the refunding of excess contributions apply only to CCs and not NCCs.

Once the ‘bring forward’ rule is triggered the NCC cap is fixed for the three year period based on the NCC cap applicable in the first year. If this has taken place on or before 30 June 2014, the maximum aggregate amount that can be contributed over the three years covered by the ‘bring forward’ rule is $450,000.

Access to the higher NCC cap will not be available until the fixed three year period has been exhausted. If NCCs are made based on the increased cap, or if an excess occurs for any reason, the excess will be calculated from the current fixed cap.

Using the ‘bring forward’ rule before 30 June 2014 will mean missing out on the benefits of the indexation of the NCC cap and could result in high rates of tax if an excess NCC is made.

Superannuants should ensure the most favourable options are taken, and the numbers add up nicely in the right circumstance.

SMSF Investor Strategic Update 15/05/2014

 

 

The World in Numbers

Australia:

  • The National Australia Bank monthly business survey found confidence lifted to positive four points in April, returning to long-run average levels after its post-election low of positive four points in March. Mining and wholesale face the biggest challenges, despite a strong improvement in wholesale conditions, NAB found, while the wholesale leading indicator suggests much weaker underlying conditions that point to further below trend economic growth in the first and second quarters of 2014.

China

  • China’s annual consumer inflation rose 1.8 percent in April, slower than March’s 2.4 percent rise, data on Friday showed. The reading was below expectations for a 2 percent rise in a Reuters poll. On a month-on-month basis CPI fell 0.3 percent, below expectations for a 0.1 percent decline.
  • Producer prices fell 2.0 percent on year in April, below expectations for a 1.8 percent decline in a Reuters poll.
  • Industrial production in China fell unexpectedly last month, official data showed on Tuesday. In a report, National Bureau of Statistics of China said that Chinese Industrial Production fell to 8.7%, from 8.8% in the preceding month. Analysts had expected Chinese Industrial Production to rise to 8.9% last month.

United States

  • Retail sales barely rose in April, tempering hopes of a sharp acceleration in economic growth in the second quarter. The Commerce Department said on Tuesday that retail sales edged up 0.1 percent last month, held back by declines in receipts at furniture, electronic and appliance stores, as well as restaurants and bars, and online retailers. Retail sales, which account for a third of consumer spending, rose by a revised 1.5 percent in March. That was the largest increase since March 2010 and reflected pent-up demand after a brutally cold winter. Economists had forecast sales’ advancing 0.4 percent last month after a previously reported 1.2 percent surge in March.
  • Data like employment, as well as manufacturing and services industries surveys, had suggested the economy regained strength early in the second quarter. Growth was held down to a 0.1 percent annual rate in the first quarter by bad weather and a slow pace of restocking by businesses.
  • U.S. producer prices posted their largest increase in 1-1/2 years in April as the cost of food and trade services surged, hinting at some inflation pressures at the factory gate. The Labor Department said on Wednesday its seasonally adjusted producer price index for final demand rose 0.6 percent, the biggest gain since September 2012. Producer prices increased 0.5 percent in March. Economists polled by Reuters had forecast prices received by the nation’s farms, factories and refineries rising 0.2 percent. In the 12 months through April, producer prices advanced 2.1 percent, the biggest gain since March 2012, after rising 1.4 percent in March. Producer prices have been volatile in recent months, driven by swings in the trade services category. The PPI series was revamped at the start of the year to include services and construction.
SMSF Investor Strategic Update 15/05/2014
SMSF Review: Portfolio Strategy – May 2014
Investment Horizon (Yrs) 3+ 4+ 5+ 6+ 7+
Strategic Asset Allocation (%) Conservative Moderately Conservative Balanced Growth High Growth
Cash 25% 15% 5% 3% 0%
Fixed Interest 40% 29% 18% 9% 0%
Property and Infrastructure 5% 9% 12% 14% 15%
Australian Equities 15% 22% 28% 34% 40%
Global Equities 10% 14% 17% 24% 30%
Alternatives 5% 13% 20% 18% 15%
Total 100% 100% 100% 100% 100%
Asset Class Tactical Commentary
Fixed Interest Underweight We prefer shorter duration, high quality bonds at this point in the cycle. Indexing looks risky.
Property and Infrastructure Benchmark Listed property looks to be fully priced at this point in the cycle.
Australian Equities Benchmark We remain comfortable with a benchmark position at this time.
Global Equities Overweight Major economies continue to have potential for growth. Tend towards unhedged exposure. Continued risk in emerging markets due to sovereign bank intervention.
Alternatives Benchmark Continue the search for non-correlated returns.
Further information
This material has been prepared by FMD Financial for long term investors.The material has been prepared by FMD Financial using various sources including van Eyk’s strategic asset allocation. It is not intended to be comprehensive and should not be relied upon as such. In preparing this publication, we have not taken into account the individual objectives or circumstances of any person. Legal, financial and other professional advice should be sought prior to applying the information contained in this publication to particular circumstances. FMD Financial, its officers and employees will not be liable for any loss or damage sustained by any person acting in reliance on the information contained in this publication. FMD Group Pty Ltd ACN 103 115 591 trading as FMD Financial is a Corporate Authorised Representative of Paragem Pty Ltd 297276.

ASSET CLASS DEFINITIONS:

Cash:
  • 30 days or less
Fixed Interest:
  • TD’s longer than 30 days
  • Australian Sovereign Bonds
  • Australian Investment Grade Corporate Bonds
  • Global Sovereign Bonds
  • Global Investment- Grade Corporate Bonds
  • Non-Investment Grade Bonds
Property and Infrastructure:
  • A-REITs, Global Property, Global Infrastructure
Alternatives:
  • Real Assets: Commodities, Gold Bullion
  • Private Investments
  • Absolute Return Strategies: Fixed Income Macro, Global Macro, Equity Market Neutral, Alternative Beta

For further information or advice on how this may apply to your portfolio, please fill out the ‘Leave a reply’ section below with your name and contact details and an FMD Representative will be in touch with you shortly.

SMSF Investor Strategic Update 08/05/2014

 

 

The World in Numbers;
Australia:

  • Australia’s unemployment rate was steady in April and employment grew more strongly-than-expected, adding to nascent signs joblessness may have peaked. Economists had expected an unemployment rate of 5.9% in April. The number of people employed rose 14,200, compared with an expected 9,000 rise, the Australian Bureau of Statistics said today. The number of people in full-time work rose 14,200 to 8.05 million, while the number of people in part-time work was unchanged at 3.5 million.
  • Retail sales missed expectations, edging just 0.1 per cent higher in March, driven largely by food. Economist forecasts had centred on a rise of 0.4 per cent, seasonally adjusted, although there was a wide variation in forecasts between 0.7 and -0.2 per cent. The main driver of the result was a rise in the Bureau of Statistics figures was food sales, both at supermarkets (up 0.5 per cent) and cafes and restaurants (up 1.8 per cent).
  • Activity in Australia’s construction sector continued to contract in April, according to the Australian Industry Group. AiG’s performance of construction index fell to 45.9 points in the month, compared with 46.2 points in March. A read over 50 shows the sector is expanding, while a print under 50 indicates the sector is contracting.
  • The Reserve Bank of Australia announced on Tuesday that it would be keeping interest rates on hold, as was widely predicted. A weaker than expected rise in consumer prices combined with strong unemployment data encouraged the RBA’s decision.

China:

  • China’s factory activity showed signs of improvement in April but not enough to dispel concerns over sluggish growth in the world’s second-largest economy. Data released in recent days indicate the manufacturing sector is struggling to gain traction but is showing signs of life. The final HSBC Manufacturing Purchasing Managers’ Index for April released Monday edged up to 48.1 from 48.0 in March, but remained below the key 50 level that separates contraction from expansion on a monthly basis. The index is a gauge of nationwide manufacturing activity.
  • Last week, though, the official manufacturing index, which covers more big state companies than the HSBC measure, showed that activity strengthened slightly to 50.4 in April from 50.3 in March, with the key new-orders segment showing improvement. The official non-manufacturing Purchasing Managers’ Index, which covers services, also advanced slightly in April.

United States

  • The non-manufacturing sector in the U.S. showed signs of expansion in April, according to an Institute for Supply Management (ISM) report released Monday. The non-manufacturing purchasing managers index (PMI) by ISM rose to 55.2 in April from 53.1 in the previous month. Analysts surveyed by The Wall Street Journal had forecast April’s PMI to rise, but only to 54.1.
  • In a separate report released Monday, data provider Markit reported that its version of the service-sector PMI fell slightly to 55.0 in April from 55.3 in the prior month. Like the ISM report, readings above 50 for the Markit index suggest expanding activity on month.
  • The U.S. trade deficit narrowed in March as exports rebounded, but the improvement was probably not enough to prevent the government from revising down its estimate of first-quarter growth to show a contraction. The Commerce Department said on Tuesday the trade gap shrank 3.6 percent to $40.4 billion, broadly in line with economists’ expectations. When adjusted for inflation, the deficit dipped to $49.4 billion from $49.8 billion in February. March’s shortfall, however, was a bit bigger than the $38.9 billion that the government had assumed in its advance first-quarter gross domestic product estimate published last week. Economists said the data implied about a two-tenths of a percentage point reduction to the first quarter’s 0.1 percent annual growth pace. The report came on the heels of March construction spending and factory inventories data that also proved weaker than the government had assumed in its advance GDP report last Wednesday.
SMSF Investor Strategic Update 08/05/2014
SMSF Review: Portfolio Strategy – May 2014
Investment Horizon (Yrs) 3+ 4+ 5+ 6+ 7+
Strategic Asset Allocation (%) Conservative Moderately Conservative Balanced Growth High Growth
Cash 25% 15% 5% 3% 0%
Fixed Interest 40% 29% 18% 9% 0%
Property and Infrastructure 5% 9% 12% 14% 15%
Australian Equities 15% 22% 28% 34% 40%
Global Equities 10% 14% 17% 24% 30%
Alternatives 5% 13% 20% 18% 15%
Total 100% 100% 100% 100% 100%
Asset Class Tactical Commentary
Fixed Interest Underweight We prefer shorter duration, high quality bonds at this point in the cycle. Indexing looks risky.
Property and Infrastructure Benchmark Listed property looks to be fully priced at this point in the cycle.
Australian Equities Benchmark We remain comfortable with a benchmark position at this time.
Global Equities Overweight Major economies continue to have potential for growth. Tend towards unhedged exposure. Continued risk in emerging markets due to sovereign bank intervention.
Alternatives Benchmark Continue the search for non-correlated returns.
Further information
This material has been prepared by FMD Financial for long term investors.The material has been prepared by FMD Financial using various sources including van Eyk’s strategic asset allocation. It is not intended to be comprehensive and should not be relied upon as such. In preparing this publication, we have not taken into account the individual objectives or circumstances of any person. Legal, financial and other professional advice should be sought prior to applying the information contained in this publication to particular circumstances. FMD Financial, its officers and employees will not be liable for any loss or damage sustained by any person acting in reliance on the information contained in this publication. FMD Group Pty Ltd ACN 103 115 591 trading as FMD Financial is a Corporate Authorised Representative of Paragem Pty Ltd 297276.

ASSET CLASS DEFINITIONS:

Cash:
  • 30 days or less
Fixed Interest:
  • TD’s longer than 30 days
  • Australian Sovereign Bonds
  • Australian Investment Grade Corporate Bonds
  • Global Sovereign Bonds
  • Global Investment- Grade Corporate Bonds
  • Non-Investment Grade Bonds
Property and Infrastructure:
  • A-REITs, Global Property, Global Infrastructure
Alternatives:
  • Real Assets: Commodities, Gold Bullion
  • Private Investments
  • Absolute Return Strategies: Fixed Income Macro, Global Macro, Equity Market Neutral, Alternative Beta

For further information or advice on how this may apply to your portfolio, please fill out the ‘Leave a reply’ section below with your name and contact details and an FMD Representative will be in touch with you shortly.

Alternative Investments as Part of a Well Balanced Portfolio

 

 

ALTERNATIVE INVESTMENTS AS PART OF A WELL BALANCED PORTFOLIO

The exponential growth of SMSFs means that they are now a permanent and prominent feature of Australia’s retirement savings landscape.

SMSFs have grown to more than half a trillion dollars of retirement savings, accounting for almost one-third of Australia’s total superannuation assets.

There have been a number of drivers of this growth, including dissatisfaction with the returns generated by large superannuation funds, the desire among investors to take more control of their financial futures, and the ability of SMSFs to invest in a broader range of assets.

In our recent survey of theSMSFreview.com.au members, 92.7% of respondents selected ‘Control over investing’ and 62.55% of respondents selected ‘Flexible investment choices’ as the main benefits of having an SMSF.

While these benefits are compelling, one of self-managed super’s drawbacks has been the way portfolios are constructed, with many investors not taking full advantage of one of their stated goals, i.e. the ability to invest in a broader range of assets.

Australian self-directed investors have traditionally had a strong bias towards Australian equities, property and, to a lesser extent, traditional yielding assets like term deposits.

Shares have been widely used by SMSF trustees but recent experiences (particularly during the GFC) have demonstrated how equity market volatility can compromise overall portfolio returns.

It is rather ironic that the event which prompted many now trustees to take control over their superannuation, i.e. the GFC, can also be used to highlight that the very portfolios they’ve since constructed fall short of protecting them as best as possible against the repeat of such an event.

Residential property lacks liquidity (an issue we touched upon in the following article; http://www.thesmsfreview.com.au/blog/property-investment-smsf/), which poses a problem for older SMSF members, and there are challenges in achieving appropriate levels of diversification. As for cash and term deposits, in a low interest rate environment they struggle to reduce risk, generate an income and drive performance.

Finally, the GFC demonstrated that the diversification benefits of investing across asset classes can be illusory when correlations between these asset classes are high.

Most self-managed super funds have historically had almost no allocation to alternative asset classes, largely because of a lack of knowledge, understanding and access.

Alternative asset classes include private equity and venture capital, hedge funds, private real estate and ‘real assets’ like infrastructure, timberland or farmland.

The common thread and most important feature among these asset classes is a risk, return, liquidity and correlation profile different from the traditional asset classes of equities and fixed income.

There is considerable data to show that institutional investors overseas have recognised the importance of significant allocations to alternative asset classes.

According to Russell Investments, international institutional investors allocate more than one fifth of their portfolios to alternative asset classes, whilst the Harvard Endowment Fund allocates 60 per cent or more of their portfolios to alternatives (although admittedly the Harvard endowment fund has the benefit of having people like Mark Zuckerberg come through the university, making ground floor investment just that much easier).

Closer to home, the Future Fund, an early leader in the Australian market, allocates more than one-third of its portfolio to alternatives. Finally, some years ago a person close to The SMSF Review, upon speaking to a financial advisor, invested some funds into a chicken farm in order to diversify. The chicken farm, which guaranteed to pay 8% per annum, continued to deliver the stated returns even through the GFC, much to the chagrin of all the naysayers who said it was a poor investment choice.

Investors allocate meaningfully to alternatives for a number of reasons. Alternatives are typically uncorrelated with equity markets, providing genuine diversification benefits.

Alternative asset managers often invest in relatively illiquid markets where assets are more frequently mispriced, creating the potential for strong managers to generate sustained outperformance.

Finally, alternative asset managers have a much more strongly aligned fee structure, concentrated on performance fees that reward absolute performance, not performance relative to a benchmark.

Many self-managed super investors are beginning to realise that these benefits apply to them as well.

SMSF investors are among the most sophisticated investors in Australia, and many are seeking investments with diversification benefits and the potential to enhance risk-adjusted returns.

Liquidity has been a constraint in the past because most alternative asset classes are somewhat illiquid, making them ill-suited to a wealth management model that relies on platforms requiring daily liquidity.

However, sophisticated SMSF investors understand that liquidity comes at the price of diversification and returns, and that the long-term time horizons of SMSFs make them the ideal place to consider an allocation to alternatives.

If you’re interested in investing in alternative assets, we strongly suggest you speak to your advisor or an alternative investments specialist.

Is an SMSF Right for You?

 

 

We all know by now that SMSFs are growing at a rapid pace in Australia.

Statistics up until the end of last financial year from the ATO show that there are more than half a million SMSFs with nearly 1 million members.

The average size of a SMSF is more than $990,000 with the average member balance being approximately $524,000.

Around 3000 SMSFs are established every month in Australia, whilst FY 2013 saw the lowest amount of wind-ups in the last five years, with less than half a per cent of funds closing down.

These numbers support the view that as more people shift away from retail and industry funds, members are rarely going back on their decision after establishing their own SMSF.

Whilst SMSFs are increasingly popular, they are not for everyone.

Before deciding to embark upon setting up an SMSF, you should get specialist advice about your own personal circumstances in order to determine if one is right for you.

Anyone who advises on SMSFs must hold an Australian Financial Services Licence and be qualified in advising superannuation trustees and fund members.

If the advice is that an SMSF may be appropriate, you then need to make sure that you know your responsibilities.

As a trustee of a SMSF, you are solely responsible for the day-to-day operations of your super fund. Getting it wrong whether by accident or carelessness can have serious ramifications. It can mean loss of concessional tax status for your fund, fines or civil or criminal penalties for the trustee.

That being the case, don’t do it on your own.

Whilst a self-managed super fund implies that you are managing it yourself, you can partner with a financial planner to ensure all rules are being followed and yearly obligations are met, allowing members to concentrate on business or pursue other personal interests like travel whilst still retaining control.

Another pitfall to avoid is setting up an SMSF simply because you think it will save you in costs.

Your retail or industry fund investments were professionally managed and you were paying fees for them to do this on your behalf, so expect to pay fees for an adviser to assist you with managing your own super fund investments.

As is often the case, you get what you pay for, and poor advice or trying to keep up with all the changes in legislation yourself can mean trouble with the regulator and an under-performing super fund. Do it right and do it well, the first time. Plain and simple.

If you do press ahead and establish and SMSF, don’t think that that there is nothing more to do other than buy and sell some investments.

Firstly, you must establish the strategy for your SMSF and you must review it regularly. In our experience, failing to review a strategy is one of the main reasons why SMSFs underperform.

A strategy will become ineffective unless it is monitored and reviewed regularly. To think that there is one set of rules and investment choices that apply to all market conditions and all of your investment goals is ignorant at best, and just plain stupid a worst.

Review your super fund strategy at least once a year to ensure it is right for all members, their objectives and personal circumstances. The upside of regular reviews of your fund strategy can potentially lead to extra benefits, tax savings and more money in retirement.

While there are many benefits of having your own SMSF, you should always seek advice first to ensure it is right for you. Be mindful that not all financial planners are licensed to advise on SMSFs, so ask the question of your financial planner to ensure you are getting both points of view when it comes to deciding on whether you should stick to your existing super fund or establish your own. Your financial planner can run you through what your role and responsibilities will be, how to best structure a SMSF and the advantages and costs of having one.

Good luck.