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case studies

Below are some illustrative examples to help you better understand SMSFs, the benefits and potential pitfalls.

optimising investment strategies – Darren’s story

Darren was establishing his SMSF and wanted his investment strategy to be fairly low risk. When writing his formal investment strategy, he stated he did not want to invest in international shares, or property and only enter low- to medium-risk investments. Darren later saw, and was impressed with, the returns from a balanced investment fund and opened an account through his SMSF, and transferred some of his cash into it.

Balanced funds, while medium risk, include a significant percentage of their investments in both local and international shares, as well as in property trusts.

Darren went and saw his financial adviser who reviewed his investment strategy. She pointed out the new investments Darren had made through his SMSF were not consistent with his investment strategy. She pointed out that while this is not a breach of any relevant laws it is something that needs to be corrected. She helped him rewrite it so it could be flexible enough to allow different types of investments, and also developed one which Darren was comfortable with.

buying property inside an SMSF – Kieren and Jackie’s story

Kieren and Jackie Parker have a family grocery business where they own the business premises, which has an unused residential unit above it.

On the advice of their adviser, their SMSF, The Parker Super Fund, purchased the property from them for $700,000. The fund is worth $1.1 million. However, they did not fully complete their documentation, no formal lease was signed and the rent Kieren and Jackie paid to their SMSF was well below market rates. They also agreed to rent out the room above the shop to one of their employees to help maximise the return for their super fund.

They checked with their adviser who became alarmed. Even though they had met the business real property test at the time of purchase, he explained it had to continue to be met indefinitely. By renting out the room, the premises was no longer used wholly and exclusively for business use. And the low rental payments and absence of a lease breached the requirement that dealings be at arm’s length.

This also meant that the business property would be treated as an in-house asset, and its $700,000 value made it way above the 5 per cent maximum otherwise allowed.

The Parkers were now in a difficult position, as this breach had to be notified to the Australian Taxation Office. Having breached the in-house asset limit the Parkers must now come up with a plan to reduce the in-house assets to below 5% of the fund’s total value within 12 months – this means the property has to be removed from the SMSF, either by being sold to the Parkers or to another party.

estate planning and SMSFs – Carmel and Frank’s story

Carmel and Frank had four children and $2 million in an SMSF. Three months ago, their eldest son, Dean, asked his parents if he could join their SMSF. Their adviser told them that to comply with superannuation legislation, Dean had to become a trustee of the SMSF if he was to become a member.

Recently Carmel and Frank died in a car accident. Dean was the executor of Carmel and Frank’s Wills. They had also both nominated their four children equally as beneficiaries of their super upon their death, although these were not binding nominations.

The sole surviving member/trustee of the SMSF, Dean, was not talking to his brother and sisters. The SMSF trust deed gave the surviving member(s) the power to appoint a new trustee in the event of the death of any of the trustees. Without a binding nomination, the trustees have absolute discretion in distributing death benefits from the fund.

Dean appointed his wife as a non-member trustee of the SMSF. As trustees, they had a free reign over who got his parents super and how much of it. They exercised their discretion as trustees of the SMSF to pay out the $2 million to Dean himself to the exclusion of his siblings who were unable to stop him.

SMSF videos

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