Important Information: The information in this presentation is provided for illustrative purposes only and does not take into consideration your personal circumstances. You are encouraged to seek financial advice suitable to your circumstances to avoid a decision that is not appropriate. Any reference to your actual circumstances is coincidental. Magnitude

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Disclaimer

This information was prepared by Magnitude Group Pty Ltd, ABN 54 086 266 202 & AFSL 221557 (Magnitude) and is current as at May 2015.

This presentation provides an overview or summary only and it shouldn’t be considered a comprehensive statement on any matter or relied upon as such. The information in this publication does not take into account your objectives, financial situation or needs and so you should consider its appropriateness having regard to these factors before acting on it and obtain financial advice. Any taxation position described in this publication is a general statement and should only be used as a guide. It does not constitute tax advice and is based on current tax laws and our interpretation.

Your individual situation may differ and you should seek independent professional tax advice. The rules associated with the super and tax regimes are complex and subject to change and the opportunities and effects will differ depending on your personal circumstances.

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Tips and traps in the process of setting up and running an SMSF

Liam ShorteFinancial Planner & SMSF

Specialist Advisor™VERANTE & SMSFCoach

Theory vs Reality

This presentation is focused on decisions you must make before setting up a new fund and real issues experienced in the actual setting

up of an SMSF

OVERVIEW

1.Pre-setup Preparation2.Starting the fund3.Informing 3rd Parties4.Insurance strategies5.Initial contributions6.Funds 1st Year7.Proactive communication with ATO

PART 1Pre-Setup Preparation

RIGHT DEED FOR THE JOB

ONE SIZE FITS ALL OR TAILORED MADE?

ADVANTAGES OF ONE SIZE FITS ALL DEED

Accountant & Adviser familiarity with 1 document, know provisions dealing with issues

Know how matters such as binding death benefit nominations managed are standard.

Law changes – Deed update by provider when they do everyone else – minimum cost v deed to be reviewed by lawyer to change your specific deed - costly.

Notice to update deed at the same time as everyone else in a cost effective manner rather than costly personalisation

Document providers usually have standard form documents within available to match carefully with the trust  deed.

WHEN TO USE A TAILORED DEED

1. Complex Estate Planning - managing control of the fund

2. Business Partners

3. Business Succession Planning

4. Children or Family in the fund

5. Commercial Property

6. Unit Trust Strategies

INDIVIDUAL V CORPORATE TRUSTEENo real option in my opinion.

ATO leaning towards compulsory corporate trustee. ASIC clearly in favour of corporate trustee.

• Time to Grieve or Adapt - Paperwork at the worst time• Continuous succession v Forced decision making• Administrative efficiency v Extra and costly paperwork• Ability for Individual to have own fund – 100% control• Meets LRBA Lenders Requirements - Higher LVRs accepted• Greater asset protection• Allows for mental incapacity of one member• Penalties apply “per trustee”• Easier to keep fund assets separate from personal

PART 2

Starting the fund – Best PracticeTips and Traps

GET THE BASICS RIGHT

Check availability of names in advance

Full legal names, addresses, place of birth, DOB, TFN, Occupation

Apply for ABN, TFN, Bank a/c

Trustee Declaration – Do you understand your duties?

Sign everything: Deed, Constitution, Minutes, Consents, Trustee Declaration, BDBN

Check details, check again and again for certainty

TIPS FROM EXPERIENCE

• Keep names short and smart

• Execute the deed - don't leave it

• Use a bank that does not need ABN for setup

• Make sure you and partner understand duties www.smsfassociation.com/trustees

• Make 3 signed originals + unbound copy

• Ensure all members have EPOAs

• Registers kept at your Accountants/FP or Administrators office (Keep a signed original trust deed at home)

TRAPS FROM EXPERIENCE

• Default - No adult children

• Business Partners - Separate Funds

• No Trading Companies as Trustees

• No U18s, Disqualified, Incapable

• No non-member trustees for > 1 member fund

• Systems hate full stops, hyphens, &, /, é etc.

PART 3

INFORM 3RD PARTIES

WHO NEEDS TO KNOW

• Complete Choice of Fund form for each member to provide to Employer

• Apply for Electronic Service Address – Superstream

• Elect Accountant/Admin on ATO portal• Copy solicitor/administrator in on any

BDBN – Reversionary Election

PART 4

INSURANCELOOK BEFORE YOU LEAP!

PROACTIVE ADVICE

To cancel or maintain current industry /employer/ retail super fund  insurance.

(Tip) Leave small balance to maintain insurance cover

(Trap) some policies terminate if no contributions for 13 months

Do not use ATO Whole of Balance Transfer Form

PROTECTIVE ADVICE

Always maintain cover until replaced and confirmed

Check the old fund rules and premiums annually

Look at long term costs as Group Cover is becoming expensive

Consider leaving SG Contributions going in to old fund

Reference all insurances in SMSF investment strategy under "consideration of insurance needs of the members"

CONTRIBUTIONS - DON'T RUSH IN

Obtain 3 year contribution history for all members

Remind clients - All funds even if not rolling over

Submit S290-170 Notice (NAT71121) prior to move

Fix name or address issues before rollover

Use fund-specific form to avoid delays

DOUBLE CHECK / OTHER STRATEGIES

Consider lump sum withdrawals and recontributions at this time

Super Splitting before move

Warn the client about "time out of the market“

Check again about any ancillary benefits lost

PART 6

THE FUND'S FIRST YEAR

MUST DO

Written Investment Strategy

Include consideration of insurance needs of members

Best Practice to minute decisions

Choose Administrator / auditor

Ensure admin can Lodge 1st years returns by October

Keep all advisers (Accountant/Auditor/Solicitor/Mortgage Broker) informed

Check pension documentation in place

Ensure Minimum pensions taken and Maximums not breached(TTR)

PART 7

IF SOMETHING GOES WRONG

Contraventions

The top 6 types of contraventions• loans to members or relatives• breaches of in-house asset rules• administrative or housekeeping type breaches,• assets not listed in the name of the fund• operating standards not met• breaches of the sole purpose test.

Dealing with the ATO

Be Proactive in Communication with ATO Understand what has gone wrong and the implications (use

Technical advice)

Understand ATO’s options – Penalties/Education/Rectification

Prepare a solution/corrective action or better still put it in place immediately. (repay money with interest)

Approach the ATO via your Auditor with full details of the contravention and the steps proposed to fix it

Show you as trustees understand mistake and are taking steps to ensure they improve their education and processes.

Fix it when you promise or ATO will really come down on you!

Case Study 1

ROLLING OVER WITHOUT AN INSURANCE REVIEW

Rollovers

Clients (B1 and B2) had 4 super fund accounts between them and wanted to roll them over to their new SMSF. They asked the Accountant what they needed to do and was there anything they should consider.

Accountant provided a copy of the ATO rollover form by email and told them in writing in the email that this was all that was required to move their funds and they could arrange insurance via the SMSF later through his referral partner.

Rollover initiation request to transfer whole balance of superannuation benefits to your self-managed super fund (NAT 74662).

The Reveal!

Went to bank to set up a share trading account and the Financial Planner offered to do an Insurance Review for them.

She found:

• Banana 1’s Life and TPD cover of $750,000 and salary continuance of $5000 per month in one policy had been terminated on rollover.

• Life and TPD cover of $350,000 in the second account had been terminated on rollover

• Banana 2’s Life and TPD cover of $175,000 and salary continuance of $3200 per month had been terminated

Needs Analysis

After a needs analysis she recommended they each apply for $750,000 cover for Life and TPD as they had a large mortgage and also Income Protection cover.

When it came to underwriting B1 was refused cover on all 3 insurances polices on the basis of a being clinically morbidly obese and high alcohol dependence.

Eventually more limited cover was replaced at higher premiums (considerable premium loadings) than previously and with some exclusions.

The overall premium difference was $5200 in first year rising to $11,200 in year 10.

B1 is making a claim against the Accountant for negligent advice seeking at least the 10 year gap in premiums.

Estimated cost $75,000 and questionable if covered by PI cover as not covered for financial advice.

HINDSIGHT – What should have been done?

1. Full insurance review by Trustees or engage a risk planner.2. Read the Product Disclosure Statements (PDS) of the current funds to see if

insurance can be continued and under what circumstances it is terminated.3. Decide to retain or replace insurances;4. If retaining, follow current fund rules to keep the current covers in place which

may require:a. Requesting a partial rollover to SMSF if funds needed using the existing funds forms not ATO form.b. Leaving a minimum balance (e.g. REST $5,000)c. Ensuring balance does not fall below (REST $3,000)d. Let SGC contributions continue to the fund if 13 month contribution rule applies.

5. If replacing:a. Requesting a partial rollover to SMSF if funds needed using the existing funds’ forms not ATO form.b. Apply for new cover first before cancelling existingc. Disclose existing covers and indicate they are to be replacedd. On confirmation of cover and confirmation of payment of premiums, then you can do a final rollover form the old funds.

Case Study 2

BUSINESS PARTNERS IN THE SAME SMSF

Mary and Joanne - best friends since childhood and ran a clothes boutique together.

An opportunity came up to buy the business premises form their landlord and secure their future tenancy.

Decided to buy the premises in an SMSF where they and their spouses were the members and all were directors.

Mary has aggressive brain tumour and passed away.

1st issue: valuing the business (not the premises) No buy-sell agreement in place. The business wasn’t worth much but had good turnover and provided regular income.John insisted on a high payout figure for Mary’s share and this caused animosity.

2nd Issue: Rent and ControlJohn then insisted that the rent on the building owned by SMSF be increased with rental estimates for similar properties.Mary’s balance had been transferred as reversionary pension to John but he now had only one vote. Joanne and Steve out voted him and left the rent at the current rate.John then wrote to the Auditor with evidence of the rent being at non-market rates. Auditor insisted that a market rate of rent was required.

3rd issue: Liquidity6 months later John submitted a full rollover request for his entire balance.

HINDSIGHT – What should have been done?

If it was deemed sensible then subject to point 2, the 2 couples should each have has separate SMSFs owning their share of the premises.

An agreement should have been in place to value the business premises in the event of one member leaving, divorcing, being disabled or dying. This would include a right of first refusal, a period set aside to raise the funds before sale could be forced etc.

A buy sell agreement should have been in place with appropriate insurances (outside of the SMSFs ATO ID 2015/10) or alternative financing to fund the exit of one party from the business and also the SMSF.

Rent should always be at market rates to comply with regulations.

Never trust friends or family when it comes to money or estate planning and always have an Exit Plan.

Questions?

THANK YOU FOR ATTENDING

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Strategies for Life

Contact UsTel. 02 9894 1844Fax. 02 9894 1944contact@verante.com.au

Main OfficeSuite 5, 15 Terminus Street Castle HillPO Box 987, Castle Hill NSW 1765

SMSF Office

Suite 2 Charrington CtOld Northern RoadBaulkham HillsPO Box 6002, BHBC Baulkham Hills NSW 2153

Windsor Office

Hawkesbury Chambers Cnr George & Dight Streets WindsorPO Box 701, Windsor NSW 2756

www.verante.com.auVerante Financial Planning Pty Ltd is a corporate authorised representative of Magnitude Group Pty Ltd | ABN 54 086 266 202 | AFSL 221557