Self-managed interest grows

Self managed super funds are continuing to go through boom times. With the lead up to June 30, an unprecedented number of self-managed super funds are being es-tablished.

APRA statistics reveal there are now more than 200,000 self managed super funds housing the retirement savings of some 360,000 Australians. Importantly, the growth rate of funds under management in this sector of the superannuation in-dustry is 28 per cent compared to the industry average of 20 per cent. In the September 19

Self managed super funds are continuing to go through boom times. With the lead up to June 30, an unprecedented number of self-managed super funds are being es-tablished.

APRA statistics reveal there are now more than 200,000 self managed super funds housing the retirement savings of some 360,000 Australians. Importantly, the growth rate of funds under management in this sector of the superannuation in-dustry is 28 per cent compared to the industry average of 20 per cent. In the September 1998 quarter alone, more than $7 billion was contributed into self managed super funds.

Many advisers have clients that have chosen the self managed super fund to con-solidate and grow their retirement savings. Much attention is given by advisers to how these funds should invest, however little time is dedicated to tax planning within these funds. Just because the super fund pays a low rate of tax does not mean that fund trustees are not on the lookout for strategies that reduce the fund tax rate below 15 per cent, minimise contributions tax, or defer the surcharge.

With June 30 just around the corner, it is prime time to consider some of our favourite tax planning strategies for self managed super funds.

New investment standards

The May 1998 Budget ushered in new investment standards for self managed super funds. Many in the financial planning industry held the opinion that this move would spell the end of DIY funds. However the draft superfund investment standards released in April 1999 are far more generous than anyone could ever have expected. The proposed investment standards allow a trustee of a self managed super fund to use all of the fund's monies to acquire business real property from a member, employer or other related party. The 40 per cent rule that many advisers have grappled with over the past few years has been repealed, allowing the trustee to use the fund as a financing tool for the purposes of acquiring a factory or other business premises.

The standards also allow the fund to acquire an extended range of investments from a member, employer, family trust or other related party. In its original form, Section 66 of the SIS Act allowed the trustee of a fund to acquire listed securities from a member. However this has been extended, from the date the legislation is passed, to enable the trustee of the fund to purchase a life insurance policy, term deposit or managed fund from the member or other related party.

In many cases, the sale by a member (or related party) of an asset to the fund crystallises a capital gain. To negate the capital gain the member may consider contributing the asset in-specie to the super fund. Under certain conditions, the contribution may be a tax deduction and able to be used by the member to offset any assessable income of the member including a capital gain.

If the new investment standards become law before June 30, advisers can adopt the above strategy in respect of clients with life insurance policies as well as managed funds.

Imputation Credits

In his 1988 speech introducing tax on super funds, Paul Keating came up with the strategy which saw super funds able to minimise their income tax through the use of franking credits. In that regard, receipt by the fund trustee of a 36 per cent franking credit goes a long way to sheltering tax payable in a 15 per cent tax paying fund.

Moreover where the franking credit is generated on a tax-exempt dividend (paid in respect of a share held by the trustee to pay a pension), the trustee of the fund can still use the franking credits even though no tax is payable by the fund in respect of the dividend. Importantly, any excess franking credits generated in respect of both taxable and tax exempt dividends can be applied by the trustee against tax on other income, capital gains tax and contributions tax. Unfortunately, excess credits cannot be used to reduce the super surcharge.

Instalment Warrants

Instalment warrants are also becoming a favoured dividend paying investment for trustees of self managed super funds. The instalment warrant is a mechanism allowing the trustee to legitimately borrow inside the fund thereby maximising any investment upside as well as increasing dividend and franking credit returns.

For example, the investment by the trustee of a super fund in an NAB instalment warrant prior to 30 June 1999 will generate an interest deduction in the current year (able to offset assessable income, capital gains and contributions tax) and a franking credit in the 1999-2000 income year. Of course, the acquisition of a warrant should be for investment purposes, not solely to access the attractive tax benefits.

Grant Abbott is a director of Grant Abbott Consultants

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