Strategising Your Risk Levels Of Super Fund Investments Could Pay Off

When it comes to investing, there is always a certain amount of risk involved. The key to a great investment strategy is to discern how much risk you are willing to take.

The risk profile of your superannuation investment strategy should be determined by combining your financial goals and the time frame in which you want to achieve them.

As you get closer to retirement, you may care to reduce the risk profile of your investments.

Younger people are better positioned to deal with market fluctuations because they have more time to compensate for losses.

The returns you receive on investments are based on the income those investments can generate and the capital growth that the investments will experience. Investments can be broadly categorised into defensive and growth assets.

Growth assets typically have a better potential for high returns but carry short-term risks. Shares and property are examples of growth assets. Defensive assets, such as cash and term deposits, generally have a very low level of associated risk but will also yield lower returns.

By diversifying your superannuation investments between growth and defensive assets, you can fine-tune your portfolio to suit your circumstances.

Individuals running a self-managed superannuation fund should already have a robust understanding of their risk profile. However, if you are a member of a public fund it can still be possible to retain a high degree of control over your risk profile.

Some public funds offer broad investment categories that you can select (usually between five and ten). Others offer members a much higher degree of control over their portfolios, even going so far as to allow you to select specific companies to buy shares from.

Individuals interested in gaining a higher degree of control over their superannuation risk profile may wish to look at joining one of these more precise funds.

However, the downside is that these funds usually have much higher fees, potentially eroding the benefits of more control. Involved investors with an active interest in determining their risk profile may wish to investigate self-managed superannuation.

Before making any major decisions, consulting with a professional is advised.

Binding Death Nominations Are An Important Part Of Your Estate Planning

You must make a binding death benefit nomination to maintain control and certainty over who will inherit your superannuation assets after you pass away.

Contrary to what you may think, your will does not automatically control the payment of your death benefits. If you do not make a binding death benefit nomination, your super trustee will decide who your super passes onto.

Familiarise yourself with the death benefit nomination rules, so your super assets are paid on your terms after you are gone.

Binding And Non-Binding Death Benefit Nominations

You can make a binding or non-binding death benefit nomination depending on your super fund. A binding death benefit nomination provides the greatest certainty as the legal document binds the trustee to pay your death benefits to the beneficiaries you have nominated.

Some super funds do not offer binding nominations, so individuals make non-binding nominations instead. Non-binding nominations act as a guide to your trustee that they will take into consideration but are not obliged to follow. Your trustee may pay your death benefit to an individual you did not nominate if they feel they are more appropriate.

Lapsing And Non-Lapsing Nominations

Understanding your fund’s options for lapsing and non-lapsing nominations will help you keep your nominations up-to-date and binding. Lapsing nominations typically expire after three years and must be renewed. If your binding nomination lapses without renewal, it will be considered a non-binding nomination upon your death. Non-lapsing nominations are permanent unless you change them.

Changing Death Benefit Nominations

Life circumstances like divorce, marriage or the death of a nominated individual may trigger you to change your nominations.

You can amend, cancel or replace your death benefit nomination at any time, provided the nomination is validly concluded. Remember that a power of attorney can renew lapsed binding nominations if you are mentally incapacitated or unable to sign.

Eligible Beneficiaries

You cannot pay your superannuation death benefits to just anyone, as there are strict eligibility requirements. You may only nominate your dependents or personal legal representative.

Dependents are strictly defined by law. According to the legislation, dependents include

• Your spouse, whom you are legally married to, in a registered relationship with or live with on a genuine domestic basis
• Your child (including adopted and foster children) or your spouse’s child
• Anyone in an interdependent relationship with you at the date of your death
• Other persons who the trustee deems were financially dependent on you at the date of your death

You can also have your superannuation death benefit paid directly into your estate.

Validity Requirements

Whether you are making a new binding death benefit nomination, replacing an old one or cancelling altogether, you must meet these requirements to make your nomination valid:

•     Nominate eligible beneficiaries
•     Clearly allocate your benefits amongst your beneficiaries
•     Allocate 100 per cent of your death benefits
•     Sign and date your nomination in the presence of two witnesses who are legally adults and not nominated to receive your death benefits

Ensure your witnesses sign and date the notice in your presence

Self-Employed Individuals & Super Aren’t Mutually Exclusive

Superannuation may not be the first thing that springs to mind as a self-employed individual, but just like how looking after your tax and business expenses benefits you, superannuation is an important subject to consider.

While you don’t need to pay super to yourself, it might help you feel more secure about your finances during retirement. You can make regular or lump sum payments, can usually claim a tax deduction on contributions, and may be able to save tax.

Contributions you make to your super will only be taxed at 15%. Depending on which tax bracket you fit into, this might be a concession compared to your usual tax rates. Additionally, investing in your super will most likely yield a higher return than if you put your money into a bank savings account.

You may be able to contribute to your pre-existing super fund after becoming self-employed. All you need to do is provide the fund with your tax file number (TFN) so that your contributions can be added to the fund. Alternatively, you can choose a new fund.

There are two ways you can contribute to the fund which are dependent on how you receive income:

• Wage: Make regular transfers to the super fund from your pre-tax income (such as by salary-sacrificing).
• Income from business revenue: Transfer lump sum amounts when there is sufficient cash flow from your business.

If you make contributions to the super fund from your pre-tax income, then you can claim tax deductions for them. Your overall taxable income is reduced as well. Ensure you complete a ‘Notice of intent to claim’ to receive this deduction.

There are limits to the amount of money you can contribute to your super every financial year:

• Up to $27,500 in concessional contributions (from pre-tax income, so you can claim a deduction)
• Up to $110,000 in non-concessional contributions (from after-tax income)

As an example, employers contribute a minimum of 10.5% of an employee’s earnings to their super (since July 2022) – if you are not sure how much to contribute, this could be a starting point.

For Example – How Your Concessional Contribution Can Work

You claim a tax deduction for your superannuation contribution above what your employer paid, up to the limit (currently $27,500), and will receive a refund of your marginal tax rate. In this example, we’ll say that it’s 34%.

But, your fund pays 15% tax. So if you put in $10,000 into your fund, you should receive a tax refund of $3,400 (34%) cash into your pocket. However, the fund pays $1,500 (15%) in tax, which comes from your contribution.

This 15% will go up to 30% when your adjusted income is above $250,000, but your savings will be 47% instead of 34%.

If you are a low to middle-income earner, then you may meet the eligibility criteria to receive government super contributions. The government will determine how much you are entitled to when you lodge your tax return. If you’re eligible, the government will pay the co-contribution directly to your fund.

Although it may be challenging to make super contributions when self-employed, consider starting off the process so that when you are in your retirement period, you have some financial security.

SG Payments & Your Employees – What You Need To Know

Superannuation payments need to be made to your employees, otherwise, stringent penalties can be implemented that could be financially more devastating to your business than simply paying their super.

Eligible employees must be paid their minimum superannuation of 10.5% of their ordinary time earnings (OTE). By 2025, this is predicted to increase to 12%.

This compulsory payment is called the super guarantee (SG) and is paid at least quarterly.

The current super guarantee percentage is the minimum required by law. You may pay super at a higher rate under an award or agreement.

You must pay the super guarantee charge if you don’t pay the required SG amount by the quarterly due date. This amount will be more than the super you would otherwise have had to pay to your employee and is non-tax-deductible.

To manually work out how much super to pay for a quarter, multiply your employee’s OTE, based on salary and wages paid in the quarter (before tax), by the SG rate. If you’re paying super at a higher rate, use that rate.

Employees who started during the quarter need to have their super worked out based on any salary and wages paid in the quarter.

What Are Ordinary Time Earnings (OTE)? 

Ordinary time earnings (OTE) is the gross amount your employees earn for their ordinary hours of work (before tax). It includes

• over-award payments
• commissions
• shift loading
• annual leave loading
• allowances
• Bonuses

Ordinary hours are the normal hours an employee works unless their hours are specified in an award or agreement.

In the case of casual employees, where determining the normal hours of work changes per week, the actual hours worked by the employee are their ordinary hours of work.

For contractors paid mainly for their labour, the SG is calculated based on the labour component of the contract.

You must pay super on back pay of OTE amounts, even if the employee no longer works for you. If you don’t, you’ll be liable for the super guarantee charge.

Is There A Cap To SG Payments? 

You don’t have to pay SG for your employee’s earnings above a certain limit, which is known as the maximum contribution base. This amount is indexed annually. For the 2022-23 income year, this is currently capped at $60,220 per quarter.

When Do I Not Have To Pay Employees The SG? 

High-Income Earners Who Opt Out Of Super

You do not have to pay super for high-income earners working for multiple employers who ask you not to pay the super guarantee to them. If this is requested, you must have an SG employer shortfall exemption certificate for the employee (sent by the ATO after the employee has applied to opt-out).

International Workers

You do not have to pay super for:

• non-resident employees who work outside Australia
• some foreign executives who hold certain visas or entry permits
• employees temporarily working in Australia who are covered by a bilateral super agreement – you must keep a copy of the employee’s certificate of coverage to prove the exemption.

If you’re a non-resident employer, you do not have to pay super for resident employees for work they do outside Australia.

Self-Employed

If you’re self-employed as a sole trader or in a partnership, you do not have to pay super guarantee to yourself.

New Kids On The SMSF Block: Millennials & Gen Y Shaping Their Futures

Individuals may be looking to opt for an SMSF because these provide entire control over where the money is invested. While this may have traditionally been the domain of middle-aged, experienced investors with higher fund balances, a new breed of investors is arising.

Millennials and Gen Y represent the fastest-growing segment of newly created SMSF account holders, with this group accounting for 10 per cent of all those opened in the past two years – double the rates seen in 2016-2019.

Thanks to technology and a wealth of complex financial information available online, this new breed of investors is making decisions about sharemarkets traditionally reserved for institutional investors.

While this sounds enticing, the downside is that an SMSF involves a lot more time and effort as all investment is managed by the members/trustees.

Firstly, SMSFs require a lot of ongoing investment of time:

• Aside from the initial setup, members need to continually research potential investments.
• It is important to create and follow an investment strategy that will help manage the SMSF – but this will need to be updated regularly depending on the performance of the SMSF.
• The accounting, record keeping and arranging of audits throughout the year and every year also need to be conducted up to par.

Data shows that SMSF trustees spend an average of 8 hours per month managing their SMSFs. This adds up to more than 100 hours per year and demonstrates that running an SMSF is a lot more time-occupying compared to other superannuation methods.

Secondly, there are set-up and maintenance costs of SMSFs such as tax advice, financial advice, legal advice and hiring an accredited auditor. These costs are difficult to avoid if you want the best out of your SMSF. A statistical review has shown that, on average, the operating cost of an SMSF is $6,152. This data is inclusive of deductible and non-deductible expenses such as auditor fees, management and administration expenses etc., but not inclusive of costs such as investment and insurance expenses.

Thirdly, investing in an SMSF requires financial and legal knowledge and skill. Trustees should understand the investment market to build and manage a diversified portfolio. Further, when creating an investment strategy, it is important to assess the risk and plan ahead for retirement, which can be difficult if one is not equipped with the necessary knowledge. In terms of legal knowledge, complying with tax, super, and other relevant regulations requires a basic level of understanding at the very least. Finally, insurance for fund members also needs to be organised, which can be difficult without additional knowledge.

Although SMSFs have the advantage of autonomy when investing, this comes at a price. Members/trustees need to invest time and money into managing the fund and, on top of this, have some financial and legal knowledge to successfully manage the fund.

Before investing your time and money into establishing an SMSF, consider your long-term financial goals and determine if an SMSF is right for you. Consult with a professional regarding your options for further information.

Deciding Between Corporate Versus Individual Trustees For An SMSF

If you have a Self Managed Superannuation Fund (SMSF), the Fund is considered to be a trust and must have a trustee. There are two options as to who this trustee can be.

Barring a few exceptions, it can be individual members, or it alternatively can be a company with the members as the directors and shareholders of the company. The choice, either way, is that the trustee of an SMSF can be either an individual trustee or a company as a trustee.

When choosing the appropriate trustee structure for your SMSF, a closer examination of the advantages and disadvantages will assist you in determining what is right for your needs.

The Cost

When looking specifically at the cost, a company as a trustee could initially cost around $1,000 or more to establish. An annual fee of roughly $50 will also need to be paid to ASIC, and when you are finished with the company, there will be costs associated with deregistering it. Using individual trustees, there is no initial cost associated.

Asset Separation

Most importantly, you have asset separation. The assets are held in the name of a separate entity; if the individuals are ever attacked financially, there is nothing to point toward the super fund.  Even though the fund’s assets should be protected even with individual trustees, if assets are in the individual names, you will need to spend legal fees to prove they are fund assets.

If the fund members are changed, you will need to change the trustees, and if you change the trustees, you need to change the ownership of all the assets. This will be a major administrative burden, as a lawyer will need to be engaged to do the necessary documentation to change the trustees and is required to be engaged if real estate is involved. In most instances, simply changing trustees and ownership of the assets will cost far more in the long run than the initial investment costs of setting up a corporate trustee.

Compliance Concerns

People always make mistakes, but with SMSFs, mistakes can create breaches of the law. If you have all of the assets in a special purpose company name, there is less chance that you will make the mistake of thinking that a particular fund asset (such as a bank account) will be your own asset. If you take money from the super fund account by mistake, thinking it is your own money, the auditor may report a breach. If you deposit money into your SMSF account, which is yours and not the fund’s, you may not be able to take that money back if the mistake isn’t realised in time. While price-wise, individual trustees may seem advantageous at first glance, companies as trustees possess more benefits over individual trustees.

Do you already own a company, and after reading this article, are you asking yourself if you can use that to set up a corporate trustee? It is only recommended that you do so if the company is not operating in any other capacity, but yes, doing so can save on the initial set-up costs.

There is no one size fits all advice we can give you, but we can try to determine what would best suit your needs. We may sit down with you and agree that individual trustees may be appropriate, but if our recommendation is for a corporate trustee, it is for sound financial reasoning.

What Do You Need To Do To Make Your Business Compliant With Superannuation Requirements For Employees?

It is your responsibility as an employer to set up your business to pay super into your eligible employees’ chosen super funds or their stapled super fund where no choice has been made.

If your employee hasn’t made a choice and doesn’t have a stapled super fund, you can contribute their super to your default super fund.

What you need to do:

• Select your default super fund.
• Offer employees a choice of super fund and keep records that show you’ve done this.
• Request your employee’s stapled super fund details if they do not make a choice
• Provide employees’ TFNs to their funds.
• Set up your systems to pay super contributions electronically to the right fund.

If you pay extra super for an employee:

• under a salary sacrifice agreement, you must set up the arrangement for the employees’ future earnings, document the arrangement and use a complying fund.
• you must report the amounts being made to the employee’s fund.

Salary Sacrifice Agreements

To create an effective salary sacrifice arrangement, you must:

• set up the arrangement for employees’ future earnings
• document the arrangement
• use a complying fund.

Set Up The Arrangement For Employees’ Future Earnings

The arrangement must be set up for your employee’s future earnings. It can’t include previously earned or accrued:

• salary, wages or entitlements
• annual or long service leave.

Document The Arrangement

You and your employee must prepare and sign a document that states the terms of the salary sacrifice arrangement. If you don’t have this documentation, it may be difficult to establish the facts of your arrangement.

Employees can renegotiate the arrangement at any time, within the terms of their employment contract or industrial agreement. If your employee has a renewable contract, you can renegotiate the salary sacrifice amount before the start of each renewal.

Use A Complying Fund

The salary sacrifice amount must be contributed to a complying fund for the period of the arrangement.

Contributions can’t be accessed until the employee satisfies a condition of release, such as reaching retirement age.

Report The Amounts

Reportable employer super contributions (RESC) are not included in your employee’s assessable income. They do not affect the way you calculate super contributions for your employees.

The following employer super contributions are reportable:

• additional contributions as part of an employee’s individual salary package
• additional contributions under a salary sacrifice arrangement
• pre-tax amounts paid to an employee’s super fund at the employee’s direction, such as directing an annual bonus into super.

You must report extra contributions if:

• your employee can influence the rate or amount of super you contribute for them; and
• the contributions are in addition to the compulsory contributions you must make under
  • super guarantee
  • a collectively negotiated industrial agreement
  • the rules of a super fund
  • federal, state or territory law.

The extra contributions are reportable super contributions for employees unless you show that:

• the extra contributions are made for administrative simplicity
• a documented policy is in place that does not allow an employee to influence the contributions you make on their behalf.

Can You Use Superannuation To Pay Off An Existing Mortgage?

A relationship has been established around superannuation and mortgage debt that could impact the stability of your retirement.

As prospective Australian retirees approach their preservation ages and retirement, those who are yet to own their own homes may struggle to maintain a comfortable retirement. Retirement plans often work out a prospective financial situation, and assume that an owned home is an already existing asset.

Housing is quickly becoming a critical aspect of retirement, alongside the pension, super and voluntary savings as the main means of ensuring a comfortable retirement for future retirees.

Mortgage debt and the threat of continued payments to pay it off is something that workers must now take into consideration when looking into their retirement, as Australians struggle to pay off their homes. Can it be paid off without the extra income earned from their work?

As more and more Australians retire with healthy superannuation balances, the allure of using that money to pay down a mortgage is strong.

Factors that may be affecting retiree’s mortgage debts could include:

• Higher property prices (now ten times the average wage as compared with three or four times two decades ago).
• A delayed entry into the property market as they save for a deposit, leaving fewer working years to pay off the loan.
• Relatively low-interest rates – currently, every dollar used to pay down a mortgage is saving less than 3% on interest, while in superannuation that same dollar has the potential to return 7 or 8 per cent.

Paying down a mortgage is a growing problem for retirees who are increasingly leaving the workforce with mortgage debt, which is far from the norm among middle-income Australians as recent as a decade ago. Among retirees, homeowners in the years prior to retirement (ages 55-64) had dropped from 72% in 1995 to 42% in 2015-16.

However, those who began their working careers prior to the 1990s face another challenge as they move closer to their preservation age; the superannuation guarantee was only introduced in 1992, which means that many may have accumulated less superannuation than other generations after.

It is understandable that for those approaching retirement, preferencing super over mortgage could seem like a logical move, as the extra funds generated can be diverted back into property on retirement. Using superannuation to pay a mortgage can make some tax sense – in an assets test for the Age Pension, a primary residence is exempt while superannuation is not.

This may become a more common approach for retirees and those looking to retire within the next few years. However, you should consider what the best approach is for your situation, and whether paying off the mortgage with your super is worth it in the long run. Consulting with a professional before taking any action should be your first step in this process.

Who Has The Power To Make Your Financial Decisions?

As you grow older, your aim may be to live a long, happy and healthy life. This is hopefully with the mental capacity to make your own financial and lifestyle decisions, and the appropriate superannuation to fund it.

But not everyone is always able to do this as they grow older. In the worst-case scenario, you may find yourself unable to make those choices yourself due to a diminished mental capacity (such as from mental deterioration, illness etc). If you can’t make your financial decisions, this could be bad.

There is often a misconception that people who lose their capacity to make, for example, financial decisions will simply be able to have their partner or spouse step in to make those decisions on their behalf. This is not the case.

Even if you are in a relationship with someone or own property jointly with them, they do not automatically have the power to make those financial decisions for you. This is where estate planning comes into play.

An estate plan records what you want to be done with your assets after your death. It can include documents such as:

• your will
• a testamentary trust (as part of your will)
• superannuation binding nominations

It also covers how you want to be cared for — medically and financially — if you can no longer make your own decisions. This part of your estate plan may be in documents such as:

• any powers of attorney
• a power of guardianship (giving someone the right to choose where you live and to make decisions about your medical care)
• an advance healthcare directive (your needs, values and preferences for your future care)

You may also choose to create an Enduring Power Of Attorney, which is a substitute decision-maker on your behalf. An EPOA is essential for clients who have their own Self-Managed Super Fund (SMSF).

The SMSF regulations require that members of the SMSF are either a trustee of the fund or directors of a company acting as the trustee. If a fund member is incapacitated, the member cannot be a trustee or a Director of a company. If that occurs, the SMSF becomes ‘non-complying’ which means it loses the tax concessions given by the super regulations.

Depending on your state of residence, powers of attorney may have different rights and obligations, particularly with respect to financial matters. Doing research and consulting with us about what your course of action could be if you were to lose your mental capacity for financial decisions could be a great start.

How You Structure Your SMSF Could Impact The Trustees In The Fund

The way in which a self-managed super fund is structured could change its legal compliance requirements. If you are in the process of setting up an SMSF, you will need to make a decision about how to structure it appropriately to suit. 

An SMSF can be structured as a single-member fund or a multiple-member fund, with the trustees of those funds deemed as either to be individual trustees or a corporate trustee

Examining the circumstances of your members could help to narrow down the structure that will be best suited. You can also work out from the requirements of each structure whether or not a fund structure would be suitable for the needs of your members. 

Individual Trustees

Individual trustees in a single-member fund will have two trustees within the fund. One trustee must be the fund member, but cannot be the other trustee’s employee (unless they are also relatives). An example of a single member trust fund structure could be a family super fund, where the members are trustees for the fund.

Individual trustees in a multiple-member fund structure generally have between two to six members. Each fund member must be a trustee and each trustee must be a fund member. Like the single-member fund, members of this fund structure cannot be the employee of another member (unless they are relatives). 

SMSFs that use individual trustees or are looking to use individual trustees in their structure may benefit from the following: 

• The fund can be cheaper to establish, as a separate company does not need to be set up to act as a trustee.
• Trustees must follow the rules in the fund’s trust deed, the super laws and the tax laws.
• There are fewer reporting obligations which means it can be easier to administer, however, changing trustees can mean more paperwork and administrative costs. .
• Another trustee must be appointed if your fund only has two trustees and one leaves or dies to continue operating as an SMSF, or it must change to a corporate trustee structure. If the trustees change, you need to notify the ATO within 28 days.
• Fund assets must be held in the name of the fund or the names of the individual trustees, “as trustees for” the fund. If the trustees change, the name in each asset’s ownership document must be changed as well, which can be time-consuming and costly.

Corporate Trustees

SMSFs that are set up using corporate trustees, typically set up a business or company to act as a trustee. The members within these kinds of funds are known as directors and will need to apply for a director identification number as such.

Corporate trustees within a single-member fund structure may have one or two directors, but one of those directors must be the fund member. If there are two directors, the member cannot be the other director’s employer (unless they are relatives).

Corporate trustees within a multiple-member fund structure generally number between two to six members, with each fund member also being a director. A member cannot be the employee of another member (unless they are relatives). An example of a corporate trustee SMSF could be a business acting as the trustee for a super fund, where the members are also directors of the fund. 

SMSFs that use corporate trustees or are looking to use corporate trustees in their structure may benefit from the following: 

• A company must be set up to act as the corporate trustee, for which ASIC will charge a fee to register them as a corporate trustee and an annual review fee.
• Directors must follow the rules in the fund’s trust deed, the super laws, the tax laws, the company’s constitution and the Corporations Act 2001.
• Company directors, including directors of an SMSF corporate trustee, will need to obtain a director identification number. 
• There are some extra reporting obligations to ASIC but it can be easier to administer the ownership of fund assets and to keep fund assets separate from any personal or business assets.
• The corporate trustee does not change if a director leaves or dies, as it can operate with just one director. However, you will need to notify the ATO and ASIC within 28 days if the directors change.
• Fund assets must be held in the name of the fund or the names of the company, “as trustee for” the fund. If the directors change, the corporate trustee does not change so the titles of the fund assets are unchanged. 

The setup of an SMSF can be a complicated process. You may benefit from speaking with a professional assisting you in its preparation and establishment. Choose someone who is qualified, registered and licensed, and right for you and your circumstances.