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Maximise your SMSF investment strategy

maximise SMSF investment

The strategic importance of a trust deed

The trust deed of an SMSF serves as its strategic engine. An inadequate SMSF trust deed can limit the fund’s strategic opportunities, while a sound SMSF trust deed ensures that the fund can fully utilise the benefits of the Simpler Super revolution, including concessional taxation benefits and estate planning possibilities.

The trustee of the SMSF is the driver of the fund. To take advantage of strategic opportunities it is crucial to ensure that the trustee has the best vehicle. There are two options for an SMSF trustee: 

  1. The members themselves as individual trustees or, 
  2. A special purpose SMSF corporate trustee. 

Opting for a special purpose corporate trustee entails a small initial expense, but it offers four significant benefits in terms of practicality, taxation, family, and finances.

Benefits of SMSF investment strategies

Establish an SMSF for future generations

Under equity law, a trust may not exist for more than 80 years. However, while an SMSF is a trust, the Superannuation Laws exempt superannuation funds, including SMSFs, from the rule against perpetuities. Thus, strategically, it means that “an SMSF lasts forever.”

If the SMSF lasts forever by virtue of the Superannuation Laws, it is important for the trustee to also have the capacity to last forever. A company is the only entity that can fulfil this requirement as it exists until it is wound up or deregistered. While current and future members may come and go as directors, the company remains a permanent trustee.

SMSF for future generations

Guaranteed concessional taxation with a corporate trustee

The most significant strategic change brought about by the Simpler Super revolution is the abolition of the mandatory cashing requirement at age 65. Previously, the Superannuation Laws compelled fund members, who were not engaged in part-time gainful employment, to receive their superannuation benefits as a lump sum and/or a pension. Nevertheless, this law was repealed in 2007.

Today, many SMSF members no longer need to commence a pension account in the fund. They may retain all their superannuation benefits in an accumulation account until their death, drawing lump sums as and when required. In some cases, where the member is independently wealthy outside the fund, they may not withdraw any superannuation benefits during their life. This strategy enables their accumulation benefits on death to pass out to their dependents or legal estate, preferably via a SMSF Will. Although not commonly used, this approach is now an essential component of running a modern SMSF, making for good SMSF investment strategies.

Unfortunately, the Superannuation Laws only permit SMSFs with corporate trustees to pay lump sums and pensions. A SMSF with individual trustees must have a sole or primary purpose of paying old-age pensions; otherwise, the fund and its members will lose their concessional taxation status. 

This guideline does not allow for lump sums or estate planning benefits. Thus, SMSF investment strategies with individual trustees seeking to run a modern fund with accumulation accounts, pensions, and extensive SMSF investment strategies needs estate planning and must either change trusteeship to a corporate trustee or limit superannuation benefits to pensions only. Running a modern-day fund for pension purposes only is not practical in the 21st century.

Simplicity in SMSF administration

It is crucial that the members of the fund remain as trustees or directors of a corporate trustee at all times. Otherwise, the trustee of the fund must become licensed, which is an expensive proposition.

Since members come and go from the fund over time due to various reasons, such as marriage, divorce, death, disability, or bankruptcy, a change in trustees is required for funds with individual trustees. This change necessitates the completion of numerous administration forms. Moreover, the Superannuation Laws mandate that the SMSF trustee must hold all its assets in the names of the trustee. 

If a member leaves the fund or a new member joins the fund and there are individual trustees, the trustee must notify all share and unit holder registries, land title offices, and other asset registries of the change in trustee. After a divorce or death, this can be a significant administrative task, and it can also be costly. Using a SMSF corporate trustee provides a long-term administrative benefit and a far less admin intense of the SMSF investment strategies.

Safeguarding against litigation

Trustees may face the possibility of being sued if an event occurs to a fund asset. For instance, the trustee of a fund may own a residential property, and a tenant or visitor may sue the trustee personally under owner’s liability due to an accident or some other reason. 

If a corporate trustee is in place, the directors are personally protected, but individual trustees do not enjoy such protection. The threat of litigation is a significant reason why the SMSF trustee company’s sole purpose should always be to act as a trustee of an SMSF, rather than running a business or acting as a trustee of another trust. This is a major thing to consider when choosing between your SMSF investment Strategies.

SMSF protected

The trustee company must be a dedicated SMSF trustee company

Similar to SMSF Trust Deeds, not all companies are appropriate to act as a SMSF corporate trustee. A corporate trustee of an SMSF must be established exclusively for an SMSF to ensure that the trustee focuses on SMSF investment strategies rather than the ordinary business and shareholder principles found in most proprietary limited and shelf companies do not apply to SMSF corporate trustees.

There is also a legal and financial rationale for setting up a special purpose corporate trustee for an SMSF. In 2003, the government introduced company laws that permitted a “special purpose company” to act as the trustee of an SMSF. The advantage of being a special purpose SMSF company is that the annual ASIC fee is only $43 compared to the regular $230 for a proprietary company. 

In reality, for the cost of $320, a special purpose SMSF corporate trustee can pay ten years’ ASIC fees upfront, resulting in significant savings over using a traditional or shelf company as the SMSF trustee, which would cost $2,265 over the same period.

To set up a corporate trustee for your SMSF or change a corporate trustee to a special purpose corporate trustee, please contact our SMSF team today. We will gladly guide you through the process.

 

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