WHY SHOULD YOUR SELF MANAGED SUPER FUND HAVE RESERVES?
Australia has over 400,000 Self Managed Superannuation Funds (SMSF or DIY Funds) worth over $370 billion. For Australians a self managed super fund allows you to have a unique strategy to achieve you and your family’s retirement, lifestyle and estate planning goals. This article looks at why you should have fund reserves in your self managed super fund.
1. Supplementing members’ account balances
Members’ accumulation accounts may be supplemented with reserves during times of poor investment performance, in order to ensure that members receive consistent growth in their benefits.
2. Providing benefits to those who cannot make contributions
Members who are at least 65 years of age must be gainfully employed on at least a part-time basis in order to make contributions (or have contributions made on their behalf) to their superannuation fund. ‘Part-time’ employment in respect of a financial year is defined as employment for at least 40 hours in a period of not more than 30 consecutive days in that year.
Note that an allocation of earnings from an investment reserve account is not a ‘contribution’ and can therefore be made to a member’s account, regardless of whether they satisfy this test or not.
3. Estate planning advantages
Investment reserves may assist a superannuation fund trustee to make what is commonly referred to as an ‘anti-detriment’ payment, in order to ensure the dependants of a deceased member (typically spouse and children) can receive a greater lump sum after death to which they are entitled.
Broadly, a superannuation fund may claim a deduction when it pays out a superannuation lump sum, on the death of a member to the member’s estate or their dependants, if it increases the lump sum by an amount equal to the additional amount it could have paid out if contributions tax had not been payable on the contributions which funded the lump sum payment. Specific formulas are prescribed for calculating this amount.
However, this increased lump sum must be paid out before the deduction can be claimed. Superannuation funds with reserves may fund this additional amount from the reserve account. Those funds without reserves may have difficulty making the extra payment beyond the deceased member’s benefits, especially if an SMSF has only one member.
4. Temporary incapacity benefits
Members who are temporarily unable to perform normal employment duties due to ill-health (physical or mental) may receive an income stream from their super fund. Broadly, ‘temporarily’ means that the member is not suffering permanent incapacity.
The income stream that the member receives is non-commutable. It must be paid for the purpose of continuing the remuneration the member was receiving before the temporary incapacity, and must end when the period of temporary incapacity ceases. Generally, such an income stream can only be paid from employer contributions that are above the superannuation guarantee level, insurance proceeds or reserves. The income stream is taxable to the member at marginal tax rates and there is no 15% pension rebate.
Thus, reserves can provide resources to fund a person’s temporary incapacity, especially as many people do not carry insurance for this risk within their superannuation fund.
5. Other reasons
There may be unexpected or unforeseen expenses that arise from time to time within a fund, eg a loss suffered on an investment which diminishes the member’s account just before they are paid their benefit. Having moneys in reserves may assist in managing these types of unforeseen expenses.
To discover whether an Australian self managed super fund is right for you contact Leennane Templeton The Self Managed Super Specialists at success@leenanetempleton.com.au Newcastle Accountant
Disclaimer
The information contained in this document is based on information believed to be accurate and reliable at the time of publication. Any illustrations of past performance do not imply similar performance in the future.
To the extent permissible by law, neither we nor any of our related entities, employees, or directors gives any representation or warranty as to the reliability, accuracy or completeness of the information, or accepts any responsibility for any person acting, or refraining from acting, on the basis of information contained in this communication.
This information is of a general nature only. It is not intended as personal advice or as investment recommendation, and does not take into account the particular investment objectives, financial situation and needs of a particular investor. Before making an investment decision you should read the product disclosure statement of any financial product referred to in this newsletter and speak with your financial planner to assess whether the advice is appropriate to your particular investment objectives. financial situation and needs.
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Leenane Templeton The Self-Managed Super Specialists Pty Ltd is the Corporate Authorised Representative of Lonsdale Financial Group Limited. Level 41, 120 Collins Street, Melbourne VIC 3000. Australian Financial Services Licensee, Licence Number 246934, ABN 76 006 637 225
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