Like many other baby boomers, Jill and Ben are the beneficiaries of their parent’s estate.
Jill (aged 52) and Ben (aged 54) have recently inherited a total amount of $2 million.
After paying off the balance of their mortgage, Jill and Ben have $1.5 million to invest.
Their Accountant indicates a Self Managed Super Fund (SMSF) provides the most tax-effective vehicle in which to invest so they make the decision to establish an SMSF.
Like many, Jill and Ben decided to ask their friends for a referral to a Financial Adviser, and were introduced to an Adviser at Prime Financial Group.
The Financial Adviser conducted an assessment of Jill and Ben’s financial situation and provided them with a recommendation to establish an SMSF. They were then presented with a Statement of Advice (SOA).
The SOA included a recommendation to run the SMSF whilst maintaining existing superannuation arrangements as their existing superannuation accounts have life and Total & Permanent Disability (TPD) cover attached.
The main benefit of an SMSF is the tax benefits it provides compared to other investment alternatives.
Jill and Ben earn just over $100,000 each.
The following table explains the difference in their tax position if they invest personally, compared with other investment alternatives.
*$20,797 plus 37% of amounts over $90,000 up to $180,000
• Medicare levy has been ignored for the calculation;
• Jill and Ben have nobody to make tax effective distributions from the family trust other than themselves.
Given the attractive tax environment an SMSF provides, there are limits on how much you can contribute into superannuation. Based on these limits, it will take 8 years before they can contribute the entire amount.
However, when Jill and Ben are in full pension mode, all income and capital gains in their fund will be entirely TAX FREE.
Jill said to Ben, “It’s a no-brainer.” Prime were engaged to establish and administer the fund.
The Prime SMSF Solution
Prime has a specialist SMSF division who assisted with the establishment of the SMSF using a corporate Trustee structure.
Jill and Ben had an initial consultation with Karen Dezdjek, Director – Wealth & Superannuation SMSF, who explained their obligations as trustees of an SMSF.
A trustee of an SMSF must keep informed of changes to legislation relevant to the operation of an SMSF, ensuring the trust deed is kept up to date in accordance with the law and needs of the members. Karen explained the following key principles when running an SMSF.
It is the trustees responsibility to ensure the fund is only maintained for the purpose of providing benefits to the members upon their retirement (or attainment of a certain age) or their beneficiaries if a member dies.
Trustees must at all times:
- Act honestly in all matters concerning the fund
- Exercise skill, care and diligence in managing the fund
- Act in the best interests of all the members of the fund
- Ensure that members only access their super benefits if they have met a legitimate condition of release
- Refrain from entering into transactions that circumvent restrictions on the payment of benefits
- Ensure that personal money and assets are kept separate from the money and other assets of the fund
- Take appropriate action to protect the fund’s assets (for example have sufficient evidence of the ownership of fund assets)
- Refrain from entering into any contract or do anything that would prevent trustees in property performing trustee functions
- Allow all members of the fund to have access to information and documents in relation to the fund.
SMSF investment strategy
It was explained that by law, SMSF trustees must prepare, implement and regularly review an investment strategy having regard to all the circumstances of the fund, which include, but are not limited to:
- The risks associated with the fund investments
- The likely return from investments, taking into account the fund’s objectives and expected cash flow requirements
- The liquidity of the fund’s investments having regard to the fund’s expected cash flow requirements
- Whether the trustees of the fund should hold insurance cover for one or more members of the fund
Jill and Ben are happy dealing with an SMSF Specialist for the fund administration and accounting, allowing them to focus on the fun part of running an SMSF – making money! If you would like to discuss how Prime can help with your SMSF, or have a family member or friend who would be interested, please click here.
Alternatively, you can download our SMSF brochure here.
Managing Director – Strategy & Operations, SMSF
Director – Wealth & Superannuation, SMSF