Question

Karen and Paul are a married couple who work as accountants. They set up their own self-managed superannuation fund. They have chosen to be individual trustees. The trust deed includes the following clauses:

‘1. This fund is to cease operating on 1 January 2030.

2. Benefits can only be taken in the form of a lump sum.’

Advise Karen and Paul as to any issues that might arise regarding the particular clauses referred to.

Answer 1

SMSF FUND :

A Self-managed super fund (SMSF) is a private super fund that you manage yourself. SMSFs are different to industry and retail super funds. ... As a member, you are a trustee of the fund — or you can get a corporate trustee.SMSFs have high set-up and running costs , they come with complicated compliance obligations.It takes a lot of time to research investment options.It can be difficult to make such big financial decisions..

ISSUES TO BE TAKEN CONCERN BY KAREN AND PAUL :

1 . INVESTMENT STRATEGY :

One of the many benefits of having an SMSF is that when investment markets are turbulent, trustees can react quickly to reposition their portfolio’s asset allocation. This is a key consideration on the cusp of 2020-21. It is important to understand that an SMSF’s investment objectives and strategy are not set in stone, with the strategy needing to be reviewed at least once a year and signed off by an auditor. Indeed, it is a legal obligation.

2 . LOOKING BEYOND AN DIVIDEND FOCUS :

SMSFs are an attractive retirement savings vehicle for the control and flexibility they provide. At the end of the 2019 calendar year, SMSFs had 20 per cent of their $750 billion of funds under management in cash and term deposits – a handy buffer for what was to come. By contrast, their exposure to illiquid private-equity assets, for example, was minimal. SMSF investors have been typically attracted to blue-chip stocks paying fully franked dividends. Post the GFC, it was a policy that served them well. Buying companies paying fully franked dividends became the accepted investment norm for many trustees. But many companies are now cutting or deferring dividends, and they may not return to the levels of the 2018-19 financial year for many years.

3. MEETING NEW PENSION REQUIREMENTS

To help manage the economic impact of COVID-19, the Government has reduced the minimum drawdown requirements by half on common pensions, such as account-based pensions and market-linked pensions, for 2019-20 and 2020-21. This also occurred after the GFC in 2008, and trustees will need to consider and amend their pension strategies for these two financial years. This includes ensuring the minimum pension has been paid for this financial year. Where this requirement is not met, SMSFs will be subject to 15 per cent tax on pension investments instead of being tax free.

4 .PROPERTY :

For those exposed to property, in some cases with a limited recourse borrowing arrangement (LRBA), there are new considerations.  
Many SMSF commercial properties (and, to a lesser extent, residential property) will not be receiving full rental payments under their lease agreements because of COVID-19, meaning less income.

5 . CONTRIBUTION CHANGES :

Before 30 June, SMSF trustees should review their contribution strategies to ensure they have contributed what they intended to and are below the transfer balance caps. Non-concessional (after-tax) contributions are limited to $100,000 for the 2019 financial year and concessional (before-tax) contributions are limited to $25,000. These will remain the same for 2020-21.

These are the issues that might arise , So KAREN AND PAUL Should consider about these only..