Monochrome is a client of MGI South Queensland. This interview took place on Wednesday 15/12/21
Karen Ng, from our Brisbane office, spent some time talking with Craig Hobart, Head of Distribution to find out more about the world of investing in Cryptocurrency and what they are accomplishing in Monochrome.
Disclaimer: MGI South Qld does not provide financial advice to clients and this article is not intended to provide professional advice in any shape or form. MGI have produced this purely to highlight the interesting ventures of our clients and to give some interesting information on relevant topics in the marketplace. We recommend that readers of this article obtain their own financial advice before considering any of the investments discussed in this article.
Karen: Craig, thank you for your time and spending time talking to us today. Tell us a bit about yourself and tell us a bit about Monochrome.
Craig: I’ve been in the funds management industry for 25 years, predominantly in the intrinsic value, investing space around Australian equities. More recently, I was on the executive of a large industry fund called REST Industry Super. What attracted me to this business was a recognition that Bitcoin and digital currency, is a nascent asset class, and newish asset class. There is a lot of demand for understanding and inquiry around what is going on in this space. It’s been predominantly consumer driven and, importantly, that has created some problems. For example, digital exchanges are not regulated. So, if you buy through an exchange, you don’t actually own the digital currency, the exchange does and they make a promise to you that if they collapse, you lose your wealth. Obviously, a lot of the ramps in and out of these assets is fraught with fraud scams, I mentioned, the exchanges are also unregulated themselves. So, I saw there was a need and I identified with Monochrome’s vision that we need a solution that provides a safe pathway for investors to get exposure to digital assets.
Equally as important, I saw there’s obviously so much misinformation out there. This is one of those things, it’s like Dr. Google, yes, if you Google digital assets, you will go down a bunch of paths that are manipulative. There’s an agenda sitting behind the content that’s provided. Therefore, there is a very important role that Monochrome could play in providing balanced, independent, objective research that would allow not only investors but importantly, the advice community to explore what is occurring in the asset class.
Karen: What does that look like?
Craig: We’ve produced CPD content. Content that advisors can put on their training register as their continuing education requirements. We’ve put six modules on our website as well, which provide a foundation for advisors to get started in this space and respond to their client’s inquiry. For context, we did a survey and 77% of advisors have taken inquiries from their customers. And 89% of them have said that they’re ill equipped to respond. And that’s for a range of reasons. It’s regulatory. Their licences have not allowed them to advise not until the 29th of October. And there’s been no products that are issued. We could see that what we call “suits” were coming into the asset class, in other words, institutional investors, participants, therefore Monochrome has arrived at a time which provides a ramp for investors whether they be wholesale and ultimately retail. When we issue a PDS, it will be a pathway to get exposure safely. Also, provide an appropriate platform for institutional investors, like industry funds and sovereign funds to get exposure, and we use all of our knowledge around digital assets to provide that safe custody experience.
Karen: How would you describe Monochrome’s vision?
Craig: Okay, so our vision is to provide safe access to digital assets and to educate the market. Our foundation product is a Bitcoin fund and all that we do is buy the Bitcoin at the spot price at the end of the month, and put it in what we call cold storage, which means it can’t be hacked or got to it’s a bit like Fort Knox, I guess, like gold and continue to educate the market. It’s a very simple product, we’re not trying to generate outsized returns or do anything tricky. We’re not trying to pick the time of the day, that week that month to buy bitcoin, we just buy it at the market price at the end of the month, and invest it, put it in cold storage, and it’s a buy and hold Strategic Fund, it doesn’t have any intention of doing anything other than provide people that safe access to the asset class. That’s our foundation product, we will do other things in time. Bitcoin is the dominant digital asset by market cap in the world, and it’s also the foundation one, meaning that the protocol of Bitcoin won’t break. The technology is robust, it’s very liquid, meaning like that’s a deep liquid market, it’s over a trillion dollars. There are plenty of liquidity providers, and all the things that ASIC requires of this asset class to be suitable for an ETF, for example, is things like institutionally supported strong service providers, a spot market for accurate pricing, a regulated futures market for the asset, all of those characteristics and things exist with Bitcoin and initially, the only other asset out of the 10,000 out there. The only other one that meets that hurdle is Ethereum. So those two are what ASIC have given permission to proceed forward with.
Karen: You have mentioned that education was probably the biggest barrier for financial advisors to look at this asset class. There is still the opinion that cryptocurrency and Bitcoin, is a “Ponzi” scheme. How do you see that changing? Will it be at the point of when the ASIC and ASX sort out regulation? You are right in the thick of it all and talking to many financial advisors? Have you seen that change?
Craig: Well, there’s a few things inside all of that I mentioned, my background was Intrinsic value investing, so I’ve had to go on a journey as well. The first thing you have to recognise with Bitcoin, is that most other assets, in some way or another, they produce an income stream, whether it be dividends, profits, rental yields, bond yields, coupons and everything in the intrinsic world is linked to interest rates in one way or another. So, when you value a company, you do a discounted cash flow, and you have to put a risk-free rate in and you have to put an equity risk premium in and then you have a discount rate. The first thing to understand is that this (Bitcoin and other digital assets) doesn’t operate on that way of value, which for a lot of advisors is that’s it for them, “I only invest in things that I can intrinsically value”. That’s the Warren Buffett’s of the world, the Hamish Douglass’s of the world, they all operate in that realm, which is completely acceptable and understandable. What is interesting about Bitcoin in particular, is it’s not nominally valued, because it doesn’t produce an income stream and therefore, by inference, it’s not caught up in an event that occurred for the last 20 to 30 years as interest rates have gone down.
All of your readership has seen the value of their homes go up and money has become cheap. We’ve seen equity markets go up & up and we were reaching the end of the dance. We can’t ring any more out of the economy on nominal interest rates. Institutional investors are really looking for some insurance against a market correction, and a realisation that this dance can’t go on any further or for much longer. It’s quite nerve racking, in a way. We’ve seen some industry funds pull risk earlier, meaning like they said that this is all too expensive and have gone conservative being left behind. And they’ve been punished for that. Even though they might be right in the long term.
Bitcoin, for the institutional market, is also seen as a form of insurance because it’s not nominally valued, it’s a store of value and it can sit there when other things collapse. Like gold is sometimes seen as and is used for that purpose as well.
Now, Bitcoin still needs to prove itself, but that’s some of the thinking that’s occurring in that space. Our role in Bitcoin is not for everyone. I mean, it’s volatile. You need to have asbestos gloves on when you handle it. And you need to understand what it is. A lot of education is around the volatility, about the correlation with other assets and the limiting of exposure to percentage of your portfolio like we looked at the United States advice into experience which is ahead of Australia in this particular asset class in terms of understanding, and it’s one to 5%, is kind of where they actually say to clients, and it’s appropriate, how much are you willing to lose? What percentage of your wealth and of course, that then gives everyone a sense of their risk tolerance, and then when you invest it, you monitor it. If it doubles in value, and you’ve got a 1% allocation that goes to 2%. Well, you profit and then reinvest that in your diversified portfolio then need to put some disciplines around dealing with volatility. That is a strategy in itself, but also an awareness because it’s volatile, expect it to be volatile and not be put off by it.
When we turn to value itself, with Bitcoin, there are a number of models out there and people have different ways they look at things like network effects, like how infused is it in its brand value, like Bitcoin itself.
It’s very interesting times. If you take a very simple approach to Bitcoin, which is an economic 101, supply and demand, that determines price, what someone is willing to pay for something, not what it cost to produce, but what they’re willing to pay for it. That’s an interesting way of looking at what is occurring.
We know there isn’t a finite supply of Bitcoin to be mined, it’s 21 million coins, and we’re hovering around the 19 million mark. And every 10 minutes, six and a quarter coins are produced, and there’s a harvest every four years.
That means we are at the end of the production cycle. 99% of all Bitcoin will be mined by 2040. And that last 1% will take another 100 years. Inside of that is the demand equation. Interestingly, a couple of things, this is one of the reasons I got involved in the venture was there are a lot of believers in Bitcoin, and they’re very disciplined around their belief.
And they invest the percentage of their income every month, in continuing to add to their wealth inside the world of Bitcoin, the demand function for that exceeds the supply function, just that alone. If you think of all the coins that are going to be manufactured through this mining process in the next 12 months, over 100% of that production has already been requested through people that are already in Bitcoin, they want to continue to add to this, then we add to it the “suits” that I referred to coming into the sector, the institutional investor, you can just see that the demand exceeds the supply. That has to give us some growth. There may or may not be but certainly the protocol of Bitcoin’s not going to break, like that’s approved 13 years, it’s the first blockchain framework that’s beautiful and it’s eloquent in the way that it was manufactured and it’s not going to break. Bitcoin itself is robust, what you paid for it. That’s the market and we think in life, we don’t realise how much sentiment drives decisions, for example, residential real estate property. We do it all the time. Everyone’s very confident in residential and what we do is look at competitive prices. What did the house on the left sell for and how much did the one on the right sell for?
In the Bitcoin world, what did the coin on the left sell for and how about the one on the right? I know it sounds overly simplistic, but in reality, that’s what’s occurring and we see it in things like how much you are willing to pay for a pair of shoes, or for fine art, or, for a motor car, we’re seeing prices of vintage cars going up, and it’s what someone’s willing to pay for it. They’re all sentimental, we live with a sentiment market. In fact, if we look at traditional equities, you know, Tesla’s on a P E of 350 times, four months ago, it was on 1000 times. An intrinsic value investor wouldn’t be attracted to a stock like that. Even in the real, intrinsic investing world, there are many examples of sentiment being the determinant of the price that people are willing to pay.
Karen: Craig, it’s been a great conversation. Last question, what is one piece of advice for the consumer, who’s looking at possibly entering the asset class of investing in cryptocurrency and Bitcoin especially and then the other one being advice for business owners.
Craig: Yeah, I think, for consumers, do your homework and read extensively. Be careful of what you’re reading, you certainly can come to our website, the comfort of knowing that there’s no bias or sales pitch or anything other than just informing and educating. Like anything in life, before you invest, you should invest the time and understand what it is. Certainly, what we’ve seen with consumers is they just get on a rush from things going up, we’ve got our own fear of missing out. Yes, without having done the homework, we sadly say 90% of all digital ventures fail, no different to what happens in equity markets, or pre-equity markets and there’s a high failure rate. So the first thing is just to be very aware of your interest, and then channel that into knowledge gathering before investing and then be very wary about your pathway or ramp into an asset, particularly around digital assets. We have had plenty of experiences where people think they’re investing in an exchange, and it’s not, it’s a front, that’s a fraud. It’s an area where you need to be particularly careful.
For consumers, I think if they want to explore it, they should do their homework and verify and verify and verify. And make sure that they don’t get caught – the schemes and scams are very sophisticated now. So, they need to be extremely careful before they invest in it. There’s a lot to get over to be able to actually invest. Again, that’s why we came into existence is to basically take all of that concern. So, in terms of the pathways into the asset of the away, so there’s a claim, trusted by through trust accounting in a custodian.
The other thing, of course, for consumers is that when PDS are issued, take the time to read the target market determination, the TMD, which is new legislation. To really understand the PDS before you invest in it. I will be quite clear and it’s important that you read it. A lot of people don’t. And when things don’t turn out the way they want them, they want other people to take accountability for their lack of preparation for the investment. I think consumers need to be very patient about the documents that are prepared, particularly a PDF.
The target market determination, basically, on a page will tell the investor what to expect, are you this type of investor? What is the volatility? How long should I be investing? And, you know, that’s an important step that every investor should put themselves through before they invest.
In terms of business owners
There’s a number of things in this. We’re seeing innovation occurring with digital currency, which opens up new markets for businesses. You see companies like Square and Tesla, for example, have Bitcoin on their balance sheet and Twitter. There are a number of companies that are starting to invest in the primaries and they’re actually investing in Bitcoin, because they actually need a treasury function around the asset itself, because they are offering an alternative form of payment, or a service for their customers. We’re starting to see that.
There’s a range of participants that would love or like the opportunity to transact with a company, not using a fake currency, but using Bitcoin for example, you would have seen in the press recently a tropical island up in North Queensland, being offered for sale, settlement with Bitcoin?
Karen: Yes. I have heard of that
Craig: It’s emerged from a business strategy perspective. It’s just a new way of presenting your business to the market and taking another form of payment. If that develops, then that becomes a treasury and that’s where your accountant gets involved. The question becomes should you have a sleeve of your holdings in this other currency because that’s what you’re transacting in and then going back to the fundamental discussion around how your wealth should be invested in the price of Bitcoin and a portfolio can equally apply to a balance sheet. Remember I’m not giving personal advice here. I haven’t met the person on the other end of the camera. So, all those disclaimers need to be said, of course.
Karen: Yes of course. We are NOT a financial advice firm, and we are confirming that this is just an interview with one of our clients, a series we will hopefully continue in our newsletters. Craig, thank you for the tips and the really great insight to what’s happening in the world of Bitcoin and what’s happening in Monochrome as well. I’m very excited to hear about the journey so far. I certainly think that Monochrome has got a lot of great things ahead of them. So, thank you it really will be a case of “Watch this Space”
Craig: Yeah, we just have to be patient. The market takes time too, to get our head around it. So, you know, when you’re starting a business, it’s awareness, consideration and then there’s a purchasing decision. There will be competitors that will come in behind us and there will be flattery. In other words, they’ll be plagiarising our business model and our ideas. But, you know, we’re a specialist business that offers something special. We’re looking forward to how the next couple of years plays out.
Karen: Thanks Robert, for giving your time today to discuss this topic.
Data recently released by the Australian Tax Office (ATO) confirm that Australians have continued their love affair with self managed superannuation funds (SMSF’s).
The ATO publishes quarterly information about SMSF’s. Here’s a summary:
At 30th September 2021, there were nearly 600,000 (598,452) SMSF’s with just over 1.1m members (1,123,949), averaging 1.87 members per fund. With 53% of male members and 47% of female members, most SMSF’s appear to be your typical “mum and dad” super fund. Just on 70% of SMSF’s are two member funds, around 23% are one member funds, with the balance being three and four member funds.
Based on the most recent data available (2020 year), the average value of a SMSF is around $1.3m, with an average value per member of around $695k. This compares favourably with the average super fund balance of all Australians, which for those aged between 40 and 55, is between $121k and $214k for men and between $92k and $157k for women. (1)
The ATO data indicates that SMSF’s hold more than $860 billion in wealth, with around $29 billion in borrowings and a further $6.7 billion in other liabilities resulting in total net SMSF assets of around $825 billion. So, where is all this money invested?
Well, around $149 billion (or around 18%) is invested in cash and term deposits. A further $238 billion (or around 29%) is invested in listed shares and $53 billion (6%) in listed trusts. A further $134 billion is invested in property, with most of that (around $88 billion) invested in non-residential property.
Interestingly, the proportion of SMSF funds invested in cash and term deposits is highest amongst smaller balance SMSF’s, perhaps reflecting a more conservative approach given the recent volatility in share markets.
Around $63 billion of SMSF wealth was invested in limited recourse borrowing arrangements (LRBA) – basically, assets purchased by SMSF’s using allowable debt. This could be either shares or property. The appetite for LRBA’s appears to be highest in SMSF’s with between $200k and $1m in assets, with an average of around 15% of fund assets comprising LRBA’s.
SMSF trustees have also embraced crypto-currency, with around $230m held in crypto. This has grown steadily since the ATO commenced to measure investments in crypto.
There appears to have also been an increasing appetite for international shares, which now stands at around $12.5 billion.
Interestingly, around half a billion dollars ($509m) is invested in collectables and personal use assets.
In terms of member ages, there is a relatively even distribution between members aged 35 to 84, but relatively small representation from members aged under 35, perhaps indicating the lack of superannuation savings from this age group to be able to justify the establishment of a SMSF.
Interestingly, the 2021 financial year saw a near 20% surge in new SMSF’s established with 25,760 new funds established. However, the number of wind-ups of SMSF’s in 2021 halved from the levels of the previous two years, resulting in a significant increase in the number of net establishments. So it appears that Australian’s love affair with SMSF’s may have longer to run yet.
(ASFA figures as at July 2019).
If you need the support of a specialist SMSF accountant, the team at MGI are here to help.
When it comes to purchasing an investment property, a big decision you’ll need to make is whether to purchase the property inside or outside of super.
Unfortunately there is no one size fits all answer. It depends on what you are trying to achieve and the resources you have at hand.When it comes to purchasing an investment property, a big decision you’ll need to make is whether to purchase the property inside or outside of super. Unfortunately there is no one size fits all answer. It depends on what you are trying to achieve and the resources you have at hand.
There are much higher set up costs associated with purchasing a property through a self-managed super fund. As an example, you may need to have a combined superannuation balance of at least $200,000 to purchase a property worth approximately $600,000 to cover:
If you can only just scrape together this balance it may not be in your best interest to tie up most of your super in an illiquid asset. Let me explain. Typically a property loan goes for 30 years, so unless you have many working years ahead of you, you’ll need to consider whether you have enough cash left in superannuation to cover pension payments. Secondly superannuation balances can be used to provide a much needed payout should you be diagnosed with a terminal illness. If all your superannuation is tied up in property you will not be able to access this quickly in the event of a terminal illness.
If superannuation is a viable option, the next step is to consider why you are purchasing an investment property and whether purchasing through superannuation will allow you to achieve your objectives. To determine this let’s look at the benefits of using superannuation to purchase property.
For most of us, superannuation is one of our biggest long-term investments. You may well need to access this to be able to afford the deposit for your investment property. In this case purchasing through super is your only option. However if you have enough cash inside and outside of super then it pays to keep considering the benefits under each.
Especially if you have a high yield property it may be appealing to purchase the property through your superannuation where any income earned will be taxed at 15% rather than your personal tax rate which is generally much higher.
If you plan to hold the asset until your superannuation is in pension phase, you may pay no tax on capital gains if your balance is under the $1.6M transfer balance cap. This can be a significant saving compared to an asset owned outside of superannuation, where you’ll pay tax at your marginal tax rate on the taxable capital gain.
If you don’t hold the asset until retirement you will pay 15% tax on two thirds of the capital gain on a property held for more than 12 months.
If you are looking for additional asset protection superannuation can be a great way to go. Assets held in superannuation are generally protected in a lawsuit and are not at risk of creditors.
If you are a business owner who is looking to purchase your business premises superannuation can be a very appealing option. Business premises are generally high yield rental properties. By purchasing the premises in an SMSF business owners can minimise tax paid on rental income and can secure an asset for their retirement without changing their business cash flow.
You can claim interest on a loan to acquire a property in a SMSF, however, the tax benefits here are less because:- Generally the banks will only loan you 50 – 70% of the purchase price so you will have a smaller loan- You are only paying 15% tax on superannuation earnings where as you are paying anywhere up to 47% on personal income tax.
Therefore if a property will be significantly negatively geared, and if you have a high personal tax rate, then it is likely that you will achieve a better tax outcome purchasing outside of superannuation. But to make an educated assessment, you would need to “do your numbers” using some assumptions.
There are a number of additional restrictions on how you can use properties held by SMSFs. Firstly you or any fund member’s related parties cannot live in or rent the property. The exception to this is a commercial property which can be used to house a fund member’s business. Also there are restrictions on improving a property that has been acquired by a SMSF using a loan.
Purchasing a property through your SMSF, particularly if it is a commercial property, requires time-consuming paperwork and regular valuations. If ease of investment is a top priority you should think carefully before purchasing property through an SMSF.
At the end of the day whether you should use superannuation to purchase an investment property will come down to what you want to achieve. Superannuation may well present an opportunity to purchase a property that you could not do otherwise. It can also provide tax savings and better asset protection. It is definitely worth having a conversation with an experienced MGI adviser, particularly if you are a business owner, to explore whether you should be looking to at super to fund your next property investment.
Give the team of SMSF Accountants at MGI South Queensland a call or book an appointment for a review of your super strategy today.
The content above has been prepared by Accountable Financial Solutions Pty Ltd (“Accountable”), ABN 36 146 520 390. The above information is general in nature and does not take into account your personal situation. You should consider whether the information is appropriate to your needs, and where appropriate, seek professional advice. Although every effort has been made to verify the accuracy of the information contained above, Accountable, its officers, employees and agents disclaim all liability (except for any liability which by law cannot be excluded), for any error, inaccuracy in, or omission from the information contained on this website or any loss or damage suffered by any person directly or indirectly through relying on this information.
Last week marked the biggest change to depreciation legislation in 15 years.
As part of the government’s efforts to claw back negative gearing parliament passed the Treasury Laws Amendment (Housing Tax Integrity bill) into legislation.
This legislation means that you can no longer claim income tax depreciation for plant and equipment assets in second-hand properties unless you have personally made the outlay.
This legislation is grandfathered which means if you exchanged contracts prior to 7.30pm on the 9th of May and have previously been claiming tax deductions on the assets you will not be affected.
However for those second-hand properties purchased after 7:30pm on the 9th May you will no longer be eligible to claim these deductions.
Plant and equipment assets are items considered to be easily removable from the property such as air-conditioning, solar panels, blinds and curtains, and carpet.
The good news is there are still a number of opportunities to claim income tax depreciation for investment properties.
New houses are still eligible for deductions on plant and equipment as are properties considered to be substantially renovated by the previous owner.
Plant and equipment assets that have been installed and paid for by you personally will also continue to be income tax depreciable.
Other examples where you will still be able to claim deductions for plant and equipment include:
Investment property owners will also continue to be able to claim for qualifying capital works depreciations. These are considered to be the building’s structure and permanently fixed assets.
If you would like further information on how these changes might impact you contact your MGI advisor. BMT has a helpful tax depreciation calculator if you are considering purchasing a residential investment property in the future and would like to know what tax deductions you might be able to achieve.
A common question that we often get asked by our clients is “How can I protect assets left to my children from in-laws if their marriage breaks down?”
The best way to achieve greater control over the distribution of the assets in your will is to establish a testamentary trust.
A testamentary trust is also highly beneficial when splitting income with young children or where asset protection strategies are required (for instance if a beneficiary is in a high risk occupation).
A testamentary trust is a trust established in a will that comes into effect upon the death of the person making the will. The assets are held in the trust with income or assets distributed to the individual later. The trust can be fixed or as flexible as you like with discretion given to the nominated trustee over what and when is distributed.
A lineal descent trust is designed to keep your inheritance for your lineal descendants and out of the reach of the Family Court.
Person A dies and leaves their child $700,000 in inheritance.
Lineal descent trust
It is important that the LDT has been properly drafted otherwise the Family Court may find that its assets are available for distribution.
In the case of families with young children a testamentary trust can help generate extra income to support the surviving family and minimise tax.
This can also provide additional protection if the surviving partner remarries and that marriage subsequently breaks down.
Person A dies and leaves their wife and children $700,000 and 25% shares in husband’s business.
If your children are in high risk professions and have put in place asset protection strategies receiving a direct inheritance can present unanticipated problems.
Person A dies and leaves child $700,000 property
There are additional costs associated with establishing a testamentary trust and management of the trust upon the death of the testator. These are minimal however in comparison to the benefits the trust provides, particularly in the case where there is significant wealth involved.
Family members can still contest your will so if the distribution of assets amongst the family is not equal it can still be altered.
Every circumstance is different and there is no one-size fits all solution to estate planning. It is important that you discuss estate planning with your accountant and lawyer to come up with the best option for your family. If you haven’t reviewed your estate planning recently, or if you are interested in knowing more about testamentary trusts, please speak to your MGI advisor.
When most people think of Self Managed Super Funds (SMSFs), they invariably have visions of a grey-haired older couple looking forward to their retirement. Rarely, I suspect, do we imagine younger people in their thirties, forties and dare I say it – twenties. However, that perception is no longer the reality if recent ATO statistics on SMSFs are any indication.
First, let’s look at the data.
The recent ATO December 2014 quarterly report, as well as the 2013 annual report, showed a continuing trend for members of new SMSFs to be from younger age groups than those of the total SMSF member population. As at June 2014 the bulk of members of SMSF’s were still those aged 45 and over (around 80%), but there is a growing trend of new funds being established by those aged 25 to 45.
For the first time ever, the median age of SMSF members of newly established funds decreased to less than 50 years (in 2013). In addition, of the SMSFs established in 2009, 49% of members were under 55 years old. This compares to 68% of members of SMSFs established in 2013 – which represents a huge change in just four years.
Not surprisingly the graph below shows an increasing trend of SMSF’s being established by up to age 54 and a reducing trend of SMSF’s being established by those aged 55 and over. So it appears that Gen X’s and Gen Y’s are slowly catching up with their parents.
ATO Graph: Proportion of SMSF members by age range
Source: ATO “Self-managed superannuation funds: A statistical overview 2012-2013”
Firstly, let’s look at Gen Y’s, or those roughly born between 1980 and 1995, meaning they would be aged between 18 and 33 when the survey data was collated. In 2009, only about 5% of SMSF’s were established by those aged 25 to 34. In 2013, the figure had almost doubled to 9%.
Let’s now look at Gen X’s, generally considered to be those born between 1961 and 1979, meaning they would be aged between 34 and 52 in 2013. Over the same period, those aged 35 to 44 established around 18% of SMSF’s in 2009. In 2013, this figure is around 26%.
Combined, SMSF’s established by 25 to 45 year olds has increased from around 22% to around 35% – a 50% increase.
In my view I think there are a number of reasons for this.
Firstly, I think it is clear that in recent years the financial planning industry has not covered itself in glory, with a series of collapses, debacles and complaints of vested interest. In a nutshell, I believe that the industry has lost the trust of a large part of the population, including those with super.
Secondly, I think there is a perception (certainly since the GFC) that DIY’ers can invest their funds just as well as the fund managers. This perception may not be the reality, but I do feel this is driving some of the decision making. Regardless, there may be a perception of being “bullet proof” and that “even if I lose my money, I still have time to re-build it before I retire”.
I think a further reason is that we now live in a digital age and Gen X and Y have grown up in this digital age. As such, information and the ability to DIY are much easier than it was for baby boomers. However, whilst information is more readily available, information is not the same as wisdom. Baby boomers probably tended to rely on the wisdom of their traditional trusted adviser.
One tip is to ensure they have enough super in the first place to make it cost effective. The cost of administering a fund can vary, but given that most of the administration needs to be done regardless of whether you’ve got $1 or $1m, it makes sense to ensure you have enough to make it worthwhile. Some estimates suggest you need at least $200,000 to make it worthwhile; however this depends on a number of factors including how quickly you intend to build up your super or whether you’re intending to borrow and buy a property.
The desire to buy a property through an SMSF is often a reason why people want to establish their own SMSF. They can rollover their super from their existing industry or retail fund into their own SMSF and use the funds to buy an investment property. However, it is important to bear in mind that you can’t buy a beach house or ski chalet and then use it yourself. Business premises are okay though and offer particular advantages for those who operate their own business.
Another benefit is in developing your own share portfolio. Most companies pay dividends and these will generally be franked dividends, meaning tax has been paid by the company at the rate of 30%. Super funds are only taxed at 15%, so the balance of the franking credits are available as a tax refund to the fund or can be used to offset other tax payable by the fund.
Organising your life insurance through your super fund is also something you can do. By having the fund own the policy and paying the premiums through the fund you are effectively getting a tax deduction for the premiums by way of the super fund contributions.
However, there are also traps to be aware of and those setting up their own fund need to be aware of what they can and can’t do. Penalties for breaching the super laws can be significant. Some that SMSF trustees should be aware of include:
Limits on amounts that can be contributed to the fund.
Restrictions on investments in related parties (called in-house assets).
Restrictions of acquiring assets from members or associates.
Restrictions on borrowings of the fund.
It is important to seek professional advice before setting up your own fund.
MGI refers to one or more of the independent member firms of the MGI international alliance of independent auditing, accounting and consulting firms. Each MGI firm in Australasia is a separate legal entity and has no liability for another Australasian or international member’s acts or omissions. MGI is a brand name for the MGI Australasian network and for each of the MGI member firms worldwide. Liability limited by a scheme approved under Professional Standards Legislation.
As we approach the end of financial year SMSF holders should use this time for some important housekeeping. Below are 13 things you need to do to maximise the benefits of having a self managed super fund.
SMSFs are required to undertake annual valuations of all their assets for their financial statements and annual audit. See the ATO publication ‘Valuation guidelines for SMSFs’ for more detail.
If you have made considerable gains this financial year it might be worth taking some losses to offset the gains to minimise tax on capital gains (10% for super funds).
Your concessional contribution limit, if you’re under the age of 50 during the financial year, is $30,000 or $35,000 if you are 50 years or older. The non-concessional (after tax) contribution limit is $180,000. If you are under 65 you can bring forward up to two years’ worth of non-concessional contributions, which means you can make $540,000 in one year. Make sure your contributions are received on or before June 30.
Ensure that your Superannuation Guarantee contributions for the June 2015 quarter have been received and that you have accounted for these in your concessional contribution gap.
Salary sacrifice contributions are treated as concessional contributions. Make sure any salary sacrifice contributions have been received by your employer as per your salary sacrifice agreement before contributing additional concessional contributions.
If your partner hasn’t reached their preservation age or is under 65 and has not retired from the workforce you can choose to split up to 85% of your concessional contributions between you and your spouse. You cannot split non-concessional contributions. Splits must be made in the financial year immediately after the one in which your contribution was made. So you can split contributions made in the 2013/14 financial year in the 2014/15 tax return.
If you are under 65 at any time during the 2014/15 year you can access the ‘bring it forward’ rule. So if you have just turned 65 in FY 2014/15 this is your last chance to contribute three times your non-concessional cap in one year.
If so you may be eligible for a full or partial tax offset for spouse contributions up to $3000. The maximum offset available is 18% ($3000 x 18% =$540) but decreases if your partner’s income exceeds $10,800.
If you have a low-income spouse or partner who is engaged in employment, or an adult child who is working part time, you are most likely eligible to access the government co-contribution.
The maximum co-contribution is $500, which is paid when a taxpayer earns less than $34,488 and makes a personal super contribution of $1000. If the tax payer earns between $34,488 and $49,488 the maximum co-contribution is reduced by 3.333 cents for every $1 in excess.
Other conditions to access the co-contribution include that at least 10% of the tax payer’s income must come from employment related activities or carrying on a business (i.e. self-employed), the taxpayer must be under 71 years of age at the end of the financial year and that the person making the super contribution has not claimed it as an income tax deduction.
If you are taking an account-based pension (including a transition to retirement pension) you need to ensure that your SMSF has paid the minimum pension amount by June 30 in order to receive the tax exemption. If you are accessing a pension under a ‘Transition to Retirement” income stream also make sure you do not exceed the maximum limit.
Your SMSF financial statements and audit need to be complete to lodge your tax return. Make sure that you get your records and information ready to send to your accountant. At MGI we will provide you with a list of what information is required by what date.
An SMSF is able to claim tax deductions for a number of expenses including:
While it’s tempting to leave sorting out your SMSF until the last minute it’s best to get started early to make sure that any contributions are received well before the deadline for this tax year (otherwise you risk having the contributions treated as received in the following tax year). Contributions are only recognised when they are received by the superannuation fund’s bank account so make sure you allow plenty of time.
If you have any questions getting your SMSF ready for June 30 speak to your MGI tax adviser today on 3002 4800.
MGI refers to one or more of the independent member firms of the MGI international alliance of independent auditing, accounting and consulting firms. Each MGI firm in Australasia is a separate legal entity and has no liability for another Australasian or international member’s acts or omissions. MGI is a brand name for the MGI Australasian network and for each of the MGI member firms worldwide. Liability limited by a scheme approved under Professional Standards Legislation.
Over 60% of Australians are dying without a will. That number includes people who have incorrect wills and those who don’t have a will at all. How can this be the case in a supposedly highly educated and intelligent country like Australia?
It begs the question – is the traditional Aussie culture of “she’ll be right mate” getting in the way of practical common sense and will it mean that our families will be short changed?
There are a lot of common myths out there in relation to estate planning. And if we don’t know what we don’t know, how can we fix the problem?
Here are seven myths busted to help small business owners get a better understanding so they can better plan their estate, manage their wealth and protect their family by ensuring their assets end up with the people they intended.
This myth is founded on the premise that you “own” all of your assets. This could, in reality, be a fallacy.
For most people, including small business owners, their large value assets include their home and super, which may include life insurance. Whether your family home forms part of your estate will depend on how you hold (or own) the property. Most couples would own their home “as joint tenants”. This means in the event of the death of one of the parties (i.e. tenants), the property automatically reverts to the surviving party (tenant). Your share of the property does not form part of your estate.
Some people (generally unrelated owners of properties) will hold the property as “tenants in common” in agreed-upon proportions (e.g. equal shares). In this case, the death of one “tenant in common” will mean their share of the property will be dealt with in terms of their will and will not go to the survivor co-owner.
It is absolutely crucial you understand how your property is held and therefore whether or not your share of the property will form part of your estate (and dealt with in terms of your will) or not.
The reality is your super is held in a trust, being the super fund, so you don’t actually “own” it. You are therefore reliant on the trustee of your super fund to distribute your super, including any life insurance you have in your super fund, to those you intended it to be distributed to.
Your perception that you “own” your super is entirely that – a perception – unless you have specifically instructed your super fund trustee to distribute it in a certain way. However, you can’t just instruct your super fund trustee in any old way. You have to give them a binding death benefit nomination, or more specifically, a non-lapsing, binding death benefit nomination.
As the description suggests, this nomination is in writing, it doesn’t lapse and therefore remains in place until you revoke it, it is binding on the parties and it nominates who you want your death benefits to go to.
Importantly, every super fund trust deed is different and may contain specific provisions about the form and content of the nomination. It is critical that you specifically follow the requirements of your trust deed to ensure your nomination is binding on the trustee. This is particularly the case where you don’t have a self-managed super fund. In this case, you are reliant on a trustee who you don’t know and have never met, to distribute your super in the manner you had intended. Blind trust – perhaps.
If you die without a will, your state government decides how your estate will be distributed. There are particular rules regarding intestacy (dying without a will). Specifically, the government has a predetermined methodology of determining how to distribute your assets if you die without a will. This may, or may not be, how you had intended them to be distributed.
To illustrate how things can go very wrong, I want to give you a real life example. Recently, a young lady tragically passed away in an accident. She was over 18 years of age and died without a will. As she had no dependents, the intestacy laws in her state prescribed that her substantial death benefit (i.e. life insurance) in her super fund was to be paid equally to her mother and father. Sounds fair enough doesn’t it? The only problem was that the young woman and her mother had been estranged from her father since she was a young child and they had nothing to do with him since then.
Unfortunately, the rules of intestacy meant he ended up with half of her death benefit. Sad, but true.
In most cases, this may well be the case. But what if you are recently divorced from an ex-spouse with children? What if you are in a de facto relationship with someone other than your spouse? What if you are leaving your estate to some children and not to others? What if you are in a “blended” relationship with current and recent ex-spouses, children from prior relationships, step-children? And the list goes on. Do you really want all of your wealth forming part of your estate where it can potentially be challenged?
To the lay person it may seem logical and almost automatic that your assets must form part of your estate. However, for the reasons previously mentioned, there may be valid reasons why you want your estate to contain little, if any, assets. For example, if your will is likely to be challenged.
As discussed, it is possible, in fact probable, that your jointly owned home together with your superannuation will not form part of your estate and therefore beyond challenge. The same goes for interests you may own in a business or other structure, particularly in a trust.
As illustrated by the example in myth 3, even relatively young people can have a sizeable estate due to life insurance held in their super fund. Anyone without a valid will needs to think long and hard about where they want their wealth to end up and where it might end up if they die without a will.
Yes, but . . .
Generally the courts will look at whether the deceased has made “adequate provision” for potential beneficiaries. This might include situations where the deceased leaves a disproportionate share of their wealth to certain children in preference to other children. This could potentially also apply to step children and illegitimate children.
In determining whether adequate provision has been made to a particular party, the courts will look to things such as the size of the estate, the nature of the relationship of the parties, how the estate has been distributed and a number of other factors.
The bottom line is unless “adequate provision” has been made for the respective parties, there is the risk the courts will overrule the will of the deceased and distribute the assets in a different proportion. This shows why, with adequate planning (as discussed in myth 4 above) it may be possible to minimise the size of an estate.
Maybe, and maybe not.
This will depend on a number of factors including the age at which you or your spouse die, the age and marital position of your children and a raft of other issues.
The reality is, fortunately, we’re all living longer. This means if you or your spouse dies relatively young (and to some 60 could be relatively young) there is a fair chance your spouse may remarry or enter into a de-facto relationship. If you leave all your wealth to your spouse (at the expense of your children) there is the possibility they may subsequently break-up with their new partner or spouse and that part of your estate will end up in the hands of their estranged spouse. This won’t make your children happy.
Similarly, even if you spouse doesn’t remarry they may leave the balance of your combined estate to your children. What happens if your children subsequently divorce? Deja vu.
For these reasons, many people’s wills contain a testamentary discretionary trust. In other words, a trust is created on your death and all or part of your wealth is settled on this trust. The beneficiaries of this trust are your blood relatives. Whilst these are not always effective in the Family Court if your spouse and/or children end up there, they probably represent the best protection going around.
A myth is just a widely held, but mistaken, belief. Don’t be hoodwinked by estate planning myths. Everyone’s situation is different, so also don’t do something just because friends have done it. Get professional advice about your specific situation. The cost of doing things right now will pale into insignificance compared to the cost to your estate (and your loved ones) in getting it wrong, particularly dying without a will.
MGI South Queensland offers a range of estate planning and wealth management services including asset protection strategies to preserve wealth within families. Talk to your MGI Gold Coast or Brisbane Accountants today and make sure your assets end up with the people you intend. Call 3002 4800.
Below is an overview of the eight biggest myths we have read or heard in relation to setting up a self managed super fund.
You read every day that one of the down sides of having a SMSF is that you have to spend time keeping on top of the ever changing landscape of rules and regulations. It is, in truth, more complicated than a retail fund (which you can literally set up and forget about) however changes to the rules are limited and if you are engaging the support of a financial advisor or accountant they will help you to stay on top of the latest requirements.
Again if you want to take advantage of a SMSF but don’t want to invest time in managing your super you can outsource this function to your accountant or financial advisor.
Superannuation is not an investment it’s a structure for undertaking an investment. If your superannuation hasn’t performed well it’s because your chosen investments haven’t performed well. It does not matter if these investments were set up as superannuation or through another structure. They wouldn’t have performed any differently.
This depends on a number of variables including the investment structure you choose, the number and type of assets you hold and your fund balance. To find out more about whether a SMSF is an effective option for you, speak to your MGI advisor.
You do have control over your super. If it’s invested in a SMSF you have the most control, however even a retail super fund will give you a degree of control with different investment options.
As with any investment, the longer you invest the better chance you have of achieving your end goal. If you start planning early you also have the flexibility to pursue more high risk strategies, with time to recoup any potential losses.
You may not be part of an industry fund but when you set up an SMSF you are wise not to go at it alone. You will most likely need the expert support of a financial advisor to help develop your investment strategy and your accountant to ensure you meet the rules and regulations and that you are achieving the best tax outcome.
Most managed super funds have a large proportion of the fund invested in the share market. With a SMSF you can sell your shares if stock market falls are expected. However, with a retail super fund someone else (eg the trustee) is in control of this decision.
MGI works with our clients to set up and manage a SMSF. If you would like one of our consultants to review your retirement goals and to evaluate whether a SMSF is the best option for you please book a free SMSF consultation today.
For many small business owners, superannuation can be a confusing and complicated place.
This needn’t be the case. It is best to break things down into various “buckets” and tackle them one at a time.
If you would like to learn more about how to get the maximum benefit from your superannuation, or how to make managing your superannuation easier, register for our free upcoming breakfast Smart Super Strategies: How to get more from your biggest long-term investment.
There are yearly dollar limits on the amount that members or member’s employers can contribute into super. Contributions in excess of these limits attract the top marginal tax rate of 45%, so beware.
These limits are broken into two components – concessional contributions and non-concessional contributions. The former are simply contributions for which the member or employer (whoever makes the contribution) obtains a tax deduction. For those under 49 years of age, the limit is $30,000 and it’s $35,000 for those over 49 years of age. Non-concessional contributions are those contributions for which the member doesn’t obtain a tax deduction. These are unaffected by a member’s age and the yearly limit is $180,000 or the member can elect to “bring forward” up to three year’s contributions, meaning they can contribute up to $540,000 provided they have not exceeded the $180,000 cap in any of the previous three years. The member will also not be able to make any further contributions (above the $540,000) for the next three years.
There are a range of provisions regarding what a super fund can and can’t do, particularly in relation to self-managed super funds (SMSF’s). Here are some examples of rules impacting SMSF’s. The overriding “rule” is what is referred to as the sole purpose test. This simply means that the fund must be established and maintained for the sole purpose of providing superannuation benefits to members. There are then some very specific rules.
As the name suggests, these provisions mean that a super can’t make loans to, or investments in, a related party or entity unless that loan or investment is less than 5% of the value of all of the assets of the super fund. This also includes an asset of the fund which is leased to a related party unless this is business premises.
There are then a whole series of tests to determine whether someone is a related party.
Similarly, a SMSF can’t lend to a member or relative of a member.
Acquiring assets from members
As a general rule, a SMSF cannot acquire an asset from a related party of the fund unless the asset is business premises or listed shares. Any such transaction would need to be at market value.
Again, broadly speaking a super fund cannot borrow money except in certain specific defined situations. These include short term funding (i.e. less than 90 days) to fund superannuation payouts and limited recourse borrowing arrangements (LRBA’s).
The use of LRBA’s can be used to great effect by small business owners and this is discussed in more detail below.
It is important to realise that breaches of the above rules (and other rules) by a fund trustee could render the trustee liable to a range of potential fines by the ATO. These fines range from $850 up to $10,200 and importantly, they can be levied on each trustee. So a typical “mum and dad” fund where both are trustees could mean total fines of double the above numbers. For this and other reasons, many SMSF’s are replacing “mum and dad” trustees with a corporate trustee.
In extreme cases, where the fund trustee has blatantly disregarded the regulations, the ATO can disqualify a person from acting as trustee of a fund and/or remove the fund’s complying status which can have disastrous consequences. Basically, loss of complying status means that all assets of the fund are taxed at the top marginal rate of 45%. For example, a fund with assets of say $500,000, would have to pay tax of $225,000, leaving only $275,000 left in the fund. In addition, for every year that the fund remains non-complying, its income is also taxed at the top marginal rate.
There are also potential criminal penalties for the breach of certain superannuation rules.
Notwithstanding the above, SMSF’s provide significant opportunities, particularly for small business owners.
As mentioned above, a SMSF can acquire business premises from which the business owner operates their business, provided a market rental is paid. The super fund can also borrow (using a LRBA) to fund the purchase of the property if needed. It is important to note that there are strict requirements for LRBA’s and readers should seek professional advice prior to undertaking this.
It is also not too late if the business premises are already owned by “mum and dad” through another entity. The property can be sold to the super fund and there may be significant tax benefits in doing so, notwithstanding that stamp duty may be payable on the transfer. For example, the business may be operated through a company or trust, with a tax rate of 30% or more. By paying rent to your super fund, you get a tax deduction for the rent expense at 30% (or more) but the fund only pays tax on the rental income it receives at the rate of 15%, so there is a net tax benefit to the business owner equal to 15% of the rental income each and every year. If the fund is in pension phase (i.e. paying pensions to its members) then the fund pays no tax on the rental income it receives and the business owner pockets the whole 30% (or more) on the rental income paid each and every year.
In addition, even if the fund is not in pension phase, when the property or any other asset is sold, the capital gains tax rate inside a super fund is only 10% compared to up to 22.5% outside of super. Once again, if the fund is in pension phase, the CGT rate inside the fund is zero. So there are significant advantages in accumulating as much wealth as possible inside super.
Another potential advantage relates to the super fund investing in public company shares. Most dividends received will be franked dividends (i.e. tax paid at 30%). These are only taxed at 15% in super, so the balance of the franking credits are available as a tax refund to the fund or can be used to offset other tax payable. Where the fund is in pension phase, and the fund pays no tax, all of the franking credits would potentially be available as a tax refund.
Why talk to us?
Managing your super fund, and navigating the minefield of rules and regulations, can be a stressful and time consuming activity. MGI can help you maximise the opportunities that superannuation benefits present. Register for our upcoming Smart Super Strategies breakfast held on 3 September or talk to us today and begin the journey to achieving the lifestyle you want in retirement. Call our Brisbane office on 07 3002 4800 or our Gold Coast office on 07 5591 1661.
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