Aaron Dunn provides five SMSF suggestions that could be used to attract new business in 2012.
The New Year provides us with time to think about new ideas and assess our goals for the year ahead. With our clients, it provides a time to think about opportunities and strategies for their self-managed super funds (SMSFs) in what continues to be a difficult time with investment markets.
Below are five resolutions to discuss with your clients or use to attract new SMSF business in 2012:
1. The year of the property gear?
With the Australian Taxation Office providing clarification on key concepts using limited recourse borrowing arrangements (section 67A and B of Superannuation Industry Supervision Act) in September 2011 (SMSFR 2011/D1), there now appears to be greater scope for SMSF trustees to consider the use of borrowing to acquire property.
Year 2012 may become the year of the property gear as there appears to be a greater appetite for property investment within super due to:
- Share market uncertainty;
- Property prices representing reasonable value;
- Younger entrants to the SMSF market (35-44 range).
SMSFR 2011/D1 provided clarity on what constitutes a single acquirable asset, along with providing scope for a SMSF to make property improvements where the fund’s own resources are used.
However, this can only be to the extent that the asset doesn’t become a different asset (replacement).
This strategy provides an excellent opportunity to provide scaled advice to clients and focus on the cash flow and tax benefits of property investing with a SMSF.
There are significant benefits with property investment inside super, in particular the capital gains tax exemption once a member reaches retirement (or transition to retirement).
This area will see more activity with new SMSF entrants and existing clients, so it is important to keep this in your financial adviser toolkit for 2012.
2. Maximise, but manage carefully concessional contributions in 2012
The 2012 financial year is the last year of the five-year transitional concessional contribution cap that was introduced with the Simpler Super reforms from 1 July, 2007.
With the Labor Government halving the concessional contribution cap in 2010, we still await details of the proposed law changes to extend this cap beyond 1 July 2012 for those over 50 with account balances under $500,000.
From 1 July, 2012, this concessional contribution cap will reduce to $25,000 for everybody regardless of age. In addition, an indexation of this cap now appears unlikely until 1 July 2014 as the Government in their Mid-Year Economic and Fiscal Outlook announced a freeze of the indexation for 2013/14 financial year.
It is therefore important to maximise concessional contributions for those 50 and over this financial year to make the most of the last year of these transitional caps.
This means considering salary sacrifice arrangements, transition-to-retirement strategies and deductible member contributions.
You do, however, need to be highly sensitive to the caps with excess contributions tax (ECT) continuing to grow.
Whilst the Government announced a 'once-off' ECT refund of up to $10,000 for breaches of the concessional contribution cap, I wouldn't be relying on this or a contributions reserve strategy as a management tool to deal with excessive contributions.
You need to take an active role in tracking your client’s contributions.
3. Get in before it’s too late
A great attraction of SMSFs has been the ability to undertake an in-specie transfer or contribution of listed shares in a fund.
This strategy, however, will end from 1 July, 2012, with the Stronger Super reforms to prohibit off-market transfers of investments where an underlying market exists.
Therefore, a small window still exists to capitalise on this strategy with your clients, in particular during a time where financial markets continue to languish.
The current markets provide an opportune time to take advantage of the lower capital gains impact (or capital losses) and benefit from the lower prices to maximise contribution caps.
4. Pension planning – get things into proportion
Current market volatility in upward or downward markets can provide you with the ability to optimise a client’s superannuation interest proportions when drawing income streams.
With proportions locked in at the commencement of an income stream, it is important to maximise the tax-free component to build greater tax efficiency under age 60 and for longer-term estate planning benefits.
For example, when conducting recontributions, it is almost always beneficial to have multiple pensions operating to create an entirely tax-free proportion pension with the recontribution.
This allows members to target specific income streams when drawing down post-60.
In downward markets, it is worth considering whether to rollback to accumulation phase for a period of time to improve the tax-free element of a member’s benefit.
Whilst in pension phase a member’s benefit would increase or decrease proportionately, where rolled back to accumulation, any reduction in the account balance is absorbed by the taxable component. Once the pension is re-established, you create a higher tax-free proportion.
When markets ultimately improve, you can also consider switching the investment strategy to a segregated approach to potentially maximise growth assets to the income stream with the highest tax-free proportion.
5. Establish a comprehensive SMSF estate plan
Simply having a death benefit nomination and a standard Will is not sufficient in this day and age. A range of associated risks could derail how your clients ultimately want their benefits to be distributed when they are no longer here.
Discussing and implementing strategies for your clients around these issues is critical to the advice process.
You should address issues such as when the client is ‘no longer here’, but also the 'life risks' such as if the client ‘loses their marbles’.
A comprehensive SMSF estate plan needs to intertwine a member’s Will, death benefit nomination, Enduring Powers of Attorney, and guardianship.
Consideration also needs to be given to the creation of testamentary trusts within the Will for nominated beneficiaries, to help protect from marital, business and other risks that might expose your client’s death benefits to not ending up where they ultimately wanted them.
Aaron Dunn is the managing director of The SMSF Academy and author of thedunnthing blog.
