Macro Investor: Marry the right SMSF trustee

I believe it is essential to have a company as trustee and the option to have individual trustees is short-sighted and could be costly long-term.

Over 70% of existing SMSF’s and 90% of new funds set up in recent years have individual trustees yet if you talk to SMSF specialist advisors they cringe at these statistics and recommend a corporate trustee in most circumstances. Indeed a survey I did of my SMSF colleagues on LinkedIn last year resulted in over 90% favouring corporate trustees with some harrowing tales of the mess left by individual trustees.

The obvious advantages include:

  • Having a corporate trustee for your self-managed super fund will save you time, money and stress in the long-term.
  • It can also save future heartache for your family when you pass away, not to mention the executor of your will.
  • With greater asset protection, higher LVRs in borrowing and more efficient administration, it also adds to the bottom-line.

But that is really only the tip of the iceberg…

Liam Shorte is Macro Investor’s respected SMSF specialist. To read this rest of this weekly guide to SMSF management, take up a free trial at Macro Investor.

Comments

  1. Good points on the trustee. Is it difficult to change the trustee?

    Does having a corporate trustee change the tax rate?

  2. i still do not understand much of the benefits of a smsf, I dont use mine much, the tax benefits do not balance in my mind the fact my cash would be pretty much locked away ( and I now invest mainly in properties, look a bit complicated with the smsf).I am probably wrong of course.

    • The benefit is control, you can switch at will. Your SMSF can buy property – much like a home loan but you need a larger deposit and you can’t occupy the property if it’s residential, but if it was your place of work (eg an office) then owner occupation isn’t a problem. You can pay rent to your own long term benefit.
      It’s not for everyone, but used correctly it does have benefits.

      • Remember that the cost of any loans associated with property (which must be held within a separate trust, within the SMSF) can only be offset against earnings, for which the max rate of tax would only ever be 15%.

        If the property is negatively geared, you need to make sure that you can (legally and financially) make the required level of contributions to service the loan.

        Because the loan/equity structure is non-recourse, interest rates will often be higher too. Most financial instos lending on property within SMSFs will ask a higher interest rate + require a large upfront commitment of equity (SMSF’s cash etc).

        The key benefit (as I see it) is that, under current legislation, if you want to sell the property down the track, so long as you’re over the age of 55 your can commute it to a superannuation pension (Account Based Pension, it’s a slightly different tax structure) and you won’t be liable for CGT.

        Also if you’re over 60 you can commute it to an Account Based Pension, retain the property, and the rental yield will be received tax-free.

        Seek you’re own advice. Preferably not from someone who’s in the game of selling property or making a mint out of “managing” the property or tax/audit/legal requirements of SMSFs….

        • Yes and no – interest rates from many lenders are almost home loan rates. Although the loan is technically non-recourse, the lender seeks guarantees from the beneficiaries, so it effectively becomes full recourse in a defacto way.

          This isn’t a key area for me, but I think that you will find that the need for an expensive new trust has also been sidestepped, although I would have to confirm that to be sure. I’m pretty sure that Macquarie are writing a fair bit of this, so a phone call to them would give you the answer.

          • Yeah, I know a few lenders are trying to get personal guarantees from SMSF beneficiaries, however the ATO’s been pretty clear that this isn’t on…. still, they’ll try. Not sure what the legal ramifications would be, would bet the lender would win that one (if the borrower has already offered & signed over personal assets as security).

            Re: loan costs, there are some pretty competitive rates out there, but usually only if LVR is low (or they can get guarantee against personal assets…)

            Quite right Bare Trust etc can ramp up costs. In most (95%) of cases that I’ve seen, the greatest benefit is going towards the accountant/auditor, lender, mortgage broker….and in many cases the property developer/s that are sitting behind the scenes flogging it as the best thing since sliced bread…

    • Personally – seek your own advice – but I would only invest in property via SMSF (and intend on doing so in the future) for the benefits Peter says, plus others, which we will be going into at Macro Investor in future editions.

      • +1 Agree. SMSF offers good flexibility and diversity for investing at tax efficient rates (once yoi get through all the set up paperwork – ughhh).

        • There is no difference in tax treatment. Superannuation – regardless of fund structure (i.e., SMSF, retail, ISN) – is the same. In most cases SMSFs work out more expensive, not only because of audit/accounting fees, but time required to administer…not to mention the responsibility (penalty for non-compliance could see you handing over 46.5% of your assets to the ATO)

    • The benefit is control. The negative is the responsiblity.

      If you are in a an SMSF solely for the tax benefit- you possibly pay more in fees than you did before.

      Super rules, and investing require a certain amount of attention- that’s what a lot of those fees go towards. If you are the kind of person who enjoys reviewing your investments on a regular basis and are willing to invest the time to understand the rules, they can be good.

      If you aren’t- well, bad news. It may not be the best road.

      I do see mostly the horror stories admittedly, but there are a lot of accountants who sell the concept on the tax benefits (and the “services” they provide) but who do not have a clue about some of the more significant elements and wind up costing their clients way more than would ever be saved in tax.

      • Isn’t it clear that SMSF are for the financial professionals and the richest. It is another way of paying less taxes than the rest, who are working in the not privileged industries or are not earning income at the top 10%.

        • Lori,

          If you feel guilty about not paying enough taxes then by all means donate more.

          The “Top 10%” pay 61% of all Australian income tax so your comment ;”It is another way of paying less taxes than the rest” is completely untrue.

  3. Mark HeydonMEMBER

    I set up a SMSF for my wife and I last year. Chatting to a few people I know in the industry, it seemed like a no-brainer to go with a corporate trustee. The additional cost up front is negligible in the scheme of things and the potential savings of time and effort, not to mention money, are considerable.

    In the 12 months the fund has been running I’ve probably saved several thousand in fees and also achieved a much better rate of return on the assets than I would have in the fund the money was previously invested in.

  4. An open question: I have a relative who is about to go through the process of opening an SMSF (in pension phase) after being in government super while working.

    I’ll be assisting (Read: doing) in this process (I used to do this when I was a financial planner)

    Would MB or MI readers be interested in a blog-type journey of how this is done step by step?
    Including how to allocate the portfolio, all the admin/setup/costs etc?

    • absolutely. im with esuper who seem pretty good, and definitely interested to see a comparison.

    • preaching to the choir here but yeah a blog sounds good. (you’ll see me bleeding from the eyes though)

      When the smsf was set up for us in 97 the costs were c. $3k.

      I’ve heard setups cost less than 1/3 of that now.

      • A decent deed to handle 99% of people’s needs costs about $495 but you can get cheaper that will do the trick. A Sole Purpose Corporate Trustee costs about $720 including the ASIC fee. You can apply for the ABN and TFN yourself or have your accountant do it.

        Liam

    • +Gazillion

      I’ve decided I need to do this myself, but not yet gathered the strength and fortitude to actually do it. It would be great to see some insights from someone on the inside but without the vested interests.

  5. Cognitive Dissonance

    I was in cash and bonds at one particular super company…..I got 1.8% over the year – fees

    I could have gone out and deposited money in the closest bank and got around 5.5% for no effort at all…..these sharpies cant even beat inflation once they have finished with you on ‘safe’ investments.

    This just encourages people into riskier packages during a global downturn and we don’t even know where they put our money and keep lobbying to keep non disclosure alive.

    In a low growth environment it also encourages them into more and more speculative larger gain stuff with someone elses money so they can meet profit expectations.

    If we are in a new low growth environment the whole promise of the industry becomes false, how can a high cost industry live well off managing other peoples money then later on we are supposed collect more than we put in……….it simply becomes an illusion that we will only find out when we come to collect
    They will also need to run it like a ponzy scheme to keep the illusion real that will depend on more people entering than leaving, keep an eye on future lobbing for just that.

    I am got so angry with the industry after slowly losing money (in cash and bonds) with them during this low growth period, I am now on a SMSF shared with my family it cost us each $174 per year in fees to keep it running, I can get 5% on my bank deposits, buy a little gold or wait for property to become a fair price.

    Or you can worry about your money and the companies managing it as the years go by if we have on again off again recessions and low growth.

    • Some questions on this issue

      1. Audit costs?- You do have to have these periodically and given the increased
      2 SMSF levy? (I know that is increasing)
      3. Administration management for the payment phase
      4. Intergenerational balance. If you are sharing this with your kids, how are they going to feel about funding your retirement spree? Are your investments appropriate for all
      5. insurance?
      6. Excess contribution monitoring- this seems to be an area that SMSFs are having issues with, judging by the number of ATO IDs and AAT decisions.
      7. Stronger super changes- while most will not impact SMSFs, SuperStream will- if you want to roll monies in from an APRA fund, if you want to receive contributions from larger employers- you will need to be using the ATO mandated systems

      I would be very interested to see how people manage these. Fees cover a lot of work that has to be done to remain compliant with all of the regs. I am always curious the extent to which this is considered in SMSFs.

      What would deter me the most from SMSF would actually be the PITA that getting separate insurance would be. I have a nice chunk of TPD insurance (and death, but I care about TPD), with no underwriting required.

      • Cognitive Dissonance

        You used the word “issue”

        You seem very informed already, informed enough to be able to go looking in the right places to the questions you posed from official sources

        You made it sound like a regulatory mine field, as if to say doing your own tax return or the road rules are regulatory mines fields too

        ?

        • I am curious to what degree most of these issues are covered by people considering SMSFs. The commentators here have clearly considered certain issues before setting one up- but have any of the other issues been considered?

          I get that people want more control, and that they feel they get better value, but some don’t take much responsiblity. SMSF’s are a good thing, but given that the taxpayer is liable for your pension if you stuff it up, it would be nice if there was a minimum level of investment knowledge and responsibility required.

          I know that I do hear the horror stories more than the success ones, so my take on it is biased from that perspetive. There are more compliant funds than not- but they don’t ring me asking for help!

          And yes, it can be a regulatory minefield- if you get your taxes wrong- the ATO demands the difference and charges penalties. You get the compliance elements wrong and you can find yourself owing 46.5% on your fund. The regulatory agencies generally don’t apply that penalty to APRA regulated funds (because it is unfair on the members) but the ATO does not have that generosity on the SMSF sector.

      • Audit costs $400 -$850 depending on your fund assets and activities
        SMSf levy rising to $259 annually
        Admin Management varies considerably and depends on your needs
        Intergenerational balance, you have separate accounts within the fund and you can have separate investments strategies for each member If needed so no funding anyone else.
        Insurance easy to arrange but many keep Employer or Industry fund open for access to group rates. Many insurers will offer transfer terms.
        Excess Contributions. limit is $25k concessional for everyone now so not hard to remember. $150k non-concessional per annul or bring forward 2 years to do $450k. A bit of common sense and you avoid trouble
        SuperStream: SMSF cash hubs working on a solution already.

        Hope this helps

        Liam

    • Very very good points your raise there Persnickety.

      Last year I setup some very big life insurance in my SMSF – mainly TPD for similar reasons I’m assuming you state too – and it was no problem.

      Mind you, I knew who to talk to in the business. (Michael Ord at Miners Insured)

      • and as per GSM. FAQs section of esuper answers a lot of these. insurance an issue for me too as my mum is a partner in the trust and she had nice policy previously. esuper has competitive life insurance but as a safety we kept 6k in her hold account to keep the insurance ticking over till we pull the trigger

        • sorry old account. esuper from memory was offering macquarie life which was pretty close to what was being offered with my mums AMP account. the contact at esuper informed me they would have a suite to offer by november this year from memory.

  6. Personally the only reason I would have a SMSF is for direct property or physical gold
    Most of the major banks now have wrap accounts that have nil costs for cash and term deposits and have direct share facilities. I reckon for the bulk of people this is sufficent.

  7. The Prince,

    On portfolio strategy for SMSF’s could you also take into consideration and “all ETF” model that would include International ETF’s? There are good sectors that combine both a currency and income type features that may be worthwhile looking into.

    I’m thinking here of pursueing returns for the SMSF in a manner that requires limited maintenance.

    • Yep good question.

      Was the first Classroom article I did at Macro Investor:

      How to build an ETF based portfolio

      Plus an article on how to use currency based ETFS: http://macroinvestor.com.au/classroom/gold-in-etfs/

      Its roughly how I run my super, with only a few individual stocks, since I prefer not to do much trading (you can only really “hedge” in super)

      Yes, limited maintenance and time – I spend 1 hour a week including checking the weekly charts of the ETFs, and of course I have the benefit of being part of a one hour long investment meeting each week with the likes of Greg McKenna and Michael Feller helping with asset allocation!!!

      • No problem.

        We’ll be improving the “Portfolio” section on MI soon, which will include strategic (what asset classes) and tactical (specific assets e.g ETF) asset allocations updated on a weekly basis, so you can action that alongside our model portfolios.

        • Good and valuable innovation. Steering your Super through this economic and tax maze requires a clear strategic plan of attack over the longer term. Look forward to seeing it in MI.

  8. thomickersMEMBER

    Advantages of SMSFs

    Can apply for insurance with almost any insurer.

    Disadvantages of SMSFs:

    If you don’t like the trustee you can’t complain to the superannuation complaints tribunal. You are the trustee!

    Time/organisation required. SMSF disorganisation is painful.

    Allows you to get suckered into borrowing for property/shares. I’ve just had a peek at an negatively geared SMSF that lost all the equity in it due to job loss. Aged 55. $180,000 gone. Begin age 56, retail fund super balance: $0.

    • innocent bystander

      Allows you to get suckered into borrowing for property/shares

      you don’t need a SMSF to fall for that.

      • Yeah, but it helps…

        Actually it’s pretty hard to run the same scenario via retail super funds as the only gearing you can access is via internally geared managed funds, and being internally geared you don’t need to keep contributing to fund the servicing costs of the debt etc… hence the max you could lose would be the investment in that particular managed fund. Effectively job loss (not being able to contribute $ to service debt) would not have any impact on portfolio

      • thomickersMEMBER

        Marketing around SMSFs, limited recourse borrowing + property investments are increasingly being marketed/spruiked ATM.

        At my workplace we lost a client who decided to break their $100,000 3-year TD (@6.25%pa) on a $400,000 defensive retail portfolio because they found a one-stop shop (accountant/financial advisory/property developer firm) via junkmail to implement a SMSF limited recourse borrowing arrangement to buy an OTP unit 5 years from retirement. Good luck to them…

  9. innocent bystander

    re Corporate Trustee, apart from the good points above another reason is for a SMSF you need 2 signatures on everything; if a single member SMSF a corporate trustee allows single signature (director/secretary).
    Tho opening bank accounts/term deposits etc is a right pain with corporate trustee as most bank seem illiterate in regard to SMSF deeds etc. and no, you might be doing this operation a lot more often than you think if you have a reasonable cash component.

    • Good points Innocent bystander. I can tell you that as an adviser I have access to a Term Deposit facility that offers access to up to 24 term deposit providers and 3 high interest cash accounts with only one application form at the outset.

      No constantly getting deeds and IDs certified.

      Clients love the ability to have 3-4 TDs over different durations and with separate providers ensuring they get the government guarantee on all their funds.

      I am sure it won’t be long until it is available to non-advised investors but in the time I am happy to assist.

      Innovators are filling these service gaps.

  10. Fidelisfinancial

    Good and valuable innovation.SMSF offers good flexibility and diversity for investing at tax efficient rates.