What is an Investment Strategy in SMSF?
All Self-Managed Superannuation Funds, (SMSF's) are required to have a written investment strategy. An Investment Strategy is a plan for making and holding the Self-Managed Super Fund’s assets and helps the trustee make decisions on how they are going to invest for the best interests of the members.
The investment strategy starts with the investment objectives and then outlines the parameters for the investments, usually including an asset allocation percentage.
An appropriate investment strategy will take into account a range of matters including:
- Investment Risk vs Return
- Liquidity Risk and Response (the plan for how easily and quickly the assets can be converted to cash)
- Diversification
- The fund's ability to discharge liabilities as they fall due
- Insurance needs of the members
- Whether investing in property is consistent with the investment strategy and risk profile of the SMSF
The strategy should explain how the fund’s investments meet each member’s retirement objectives.
An investment strategy would also need to explain the reasoning and strategy as to why a fund had allocated a significant portion of its funds to an illiquid asset if it had very few other investments.
The investment strategy should be based on the objectives, needs, and preferences of each individual SMSF member taking into consideration their age, their retirement needs, and their attitude towards risk and volatility.
The One Constant is Change
As circumstances change, it is important the Investment Strategy is reviewed and updated at least annually, and the associated documented Minutes are your evidence of this.
Superannuation and Pension laws can change from year to year as much as investment performance rises and falls due to local and global markets.
- Life and Investment circumstances do not stay the same from year to year so develop your habit of regularly revising your SMSF member's needs and investment strategy, documenting your decisions, and making sure these documents are minuted and made available for your SMSF Auditor, so they can ‘evidence the activities taken in compliance with the legislation.
Pro Tip: Sapience Financial can help you ensure your Investment Strategy is fully compliant with Commonwealth legislation, contains Minutes for the Self-Managed Super Fund to adopt the Investment Strategy, as well as a letter from a law firm confirming the Investment Strategy is compliant.
How we can help
Having a documented and legally compliant investment strategy for your SMSF and making sure the fund's liquidity enables it to meet the retirement needs of its members, is a key part of providing for yourself and your family into retirement, while you plan to increase your investment returns to sustain the financial needs of your retirement.
Contact us for a confidential chat about your SMSF needs.
Annual Audits of SMSF's
SMSFs are personal superannuation funds where the members are also the trustees. Annual audits are a core part of successfully running an SMSF, so it pays to know what is expected.
Anyone who runs a self-managed superannuation fund (SMSF) must ensure that a registered SMSF auditor audits the fund annually.
- The superannuation legislation requires the Trustee of an SMSF to appoint an auditor to report on the fund’s operations for the financial year.
- The audit provides an independent opinion on whether the fund’s records are kept correctly and maintained solely for members’ benefit. Ultimately the audit is to ensure compliance with the law and safeguard the retirement income of the fund's members
- SMSF trustees (or their tax agents) can’t submit their annual tax returns until the SMSF audit has been completed. If these details are not completed, including auditor details, the ATO will reject the lodgement of the fund’s return for the year. This can have a wide-reaching impact with significant financial and legal consequences.
It sounds pretty straightforward — but as with many things SMSF, it can be more complicated than it looks.
The serious business of running an SMSF
Auditors are given detailed instructions on planning, conducting, and reporting an SMSF audit and encouraged by the ATO, to quickly identify and rectify actual (and potential) breaches of the legislation and “self-report” rather than wait for the ATO to investigate.
- Auditors are also given a list of ‘reportable breaches’ that must be reported to the ATO.
Below is a list of ‘reportable breaches’ of the governing legislation; the SIS Regulations and SIS Sections.
Reportable SMSF Breaches for the SIS Regs
| Reg | Regulation title | Reg | Regulation title |
|---|---|---|---|
| R4.09* | Investment strategy | R7.04 | Acceptance of contributions |
| R4.09A | Separation of assets | R8.02B | Valuation of assets |
| R5.08 | Minimum benefits | R13.14 | Charges over assets of the fund |
| R6.17 | Restriction on payment of benefits | R13.18AA | Investment in collectibles and personal use assets |
Reportable SMSF Breaches for the SIS Sections
Getting used to working with your Professional Advisors
Running a successful SMSF requires trustees to become familiar with working with their professional advisors. Mistakes and errors are common. To err his human. When they are uncovered be ready to engage the ‘team' — Financial Advisors, Lawyers, Accountants, and Auditors.
Each professional works within their own area of expertise to serve the Trustee.
- Only a financial adviser can give financial planning advice. e.g., investment strategies, liquidity insurance, diversification, and reversionary pensions.
- Only lawyers can give legal advice.
- Only accountants can deal with certain matters. e.g., the accountant preparing the SMSF tax returns is not an auditor. The accountant does not test the information provided.
- Only SMSF auditors can audit.
Trustees of an SMSF need to regularly work with their team of professional advisors to keep their SMSF working in an efficient and straightforward manner, to build wealth for a comfortable retirement. Its management can last for decades and involve making decisions that can make or break a financially comfortable retirement income.
How we can help
Running an SMSF can be a way to take personal control over your retirement planning, get exposure to different investment markets, and be an important consideration for many Australians actively planning for their retirement.
Contact us for a confidential chat about your needs.
Understanding SMSF Core Rules and Regulations
If you want greater control over your super and more flexibility than you would get with a conventional super fund, then a Self Managed Superannuation Fund (SMSF) could be an attractive option.
However, they are more complex and also strictly regulated.
An SMSF is a superannuation fund that you manage yourself.
Most people have their super with a fund that is managed by a third party – a fund manager, a large corporation or an industry body. However, a growing number of people have decided to manage their own super funds which are known as SMSFs.
An SMSF provides retirement benefits for its members in the same way as any regular larger superannuation fund but there are some differences in how they are regulated by the government and how they are administered.
Stages of the fund
SMSFs can have members in either the accumulation phase, the pension phase or a combination of both.
Accumulation phase
- The accumulation phase of an SMSF is where the SMSF accumulates contributions and aims to grow your balance for future retirement needs.
- Each member has a specific balance in the SMSF and earnings are generally allocated in proportion to their interest in the SMSF.
Pension phase
- This is where the accumulated funds are used to provide an income stream for the member of the SMSF based on their individual balance in a pension account of the SMSF.
Key rules and regulations
The rules and regulations that govern SMSFs are stringent. The governing legislation for SMSFs is the Superannuation Industry (Supervision) Act 1993, commonly referred to as the SIS Act. Here are some key rules you should be aware of.
The sole purpose test
The sole purpose test requires that SMSFs are maintained to provide benefits to members upon their retirement, or to their dependants if a member dies.
As a trustee of a regulated superannuation fund, you must comply with the sole purpose test for the SMSF to be eligible for superannuation tax concessions.
The sole purpose test is divided into core and ancillary purposes.
A regulated SMSF must be maintained solely for either:
- One or more core purposes, or
- One or more core purposes and one or more ancillary purposes.
Core purpose
An SMSF must be maintained to provide benefits for each member of the SMSF on or after at least one of
the following:
- The member’s retirement
- The member reaching an age not less than prescribed in regulations
- The member’s death, if the death occurred before they retired, and the benefits are provided to their dependants or legal personal representative or both
- The member’s death, if the death occurred before they attained an age not less than prescribed in regulations, and the benefits are provided to their dependants or legal personal representative or both.
Ancillary purpose
Ancillary purposes for maintaining an SMSF are to provide benefits for members in the following circumstances:
- Termination of a member’s employment with an employer who made contributions to the SMSF for that member
- Physical or mental ill health
- Death of a member after retirement where the benefits are paid to their dependants or legal personal representative (LPR) or both
- Death of a member after reaching an age not less than prescribed in regulations where the benefits are paid to their dependants or legal personal representative or both&
- Another ancillary purpose is approved in writing by the regulator.
This allows an SMSF to provide benefits in situations of financial hardship and/or on compassionate grounds, subject to the SIS Act, the governing rules of the SMSF and the approval of the appropriate regulator.
How we can help
Understanding that managing your SMSF involves additional time requirements, learning and working with professionals is part of the duties of an SMSF trustee and a key part of providing for yourself and your family into retirement, while you plan to increase your investment returns to sustain the financial needs of your retirement.
Contact us for a confidential chat about your SMSF needs.
What happens in a business when you only own half the pie?
What is a business Buy-Sell agreement?
A Buy-Sell agreement is a documented contract between two or more business partners where they agree ahead of time, how their valuable interests in the business will be transferred to the remaining owner(s) if one business owner suffers a documented trigger event.
- Such trigger events could include death, serious illness or injury, permanent disability, retirement or resignation.
When would I need a Buy-Sell agreement?
You need a Buy-Sell agreement whenever you are in business with another person.
- This includes Partnerships and Multi-owner company structures where there is more than one single business owner.
- Members of a Unit Trust ownership structure often incorporate a Buy-Sell agreement within their Unitholders agreement.
Why would I need one?
For the majority of small business owners, the ownership of their business is one of their main financial assets; and for many, their ability to ever afford to retire is tied to its successful future sale.
For small business owners and their families, a lot is riding on the stability of their business, growing its value, and ultimately getting back the money it owes them through a successful sale to another person.
- Being in business with another person (or persons) increases the known statistical risks of business interruption (not decreases) to manage.
Why hasn't my Accountant advised me about this need?
- Many business owners like to think their Accountant will proactively advise them of every single risk to be managed in their business.
- Many Accountants think their business owner clients will proactively ask them for advice about the risk to be managed in their business.
You can see how missed expectations can lead to a core business risk being missed.
What does a Buy-Sell agreement cover?
Buy-Sell agreements can be specific and provide for Business Debt Protection, or can be more board to cover all aspects of a future business exit.
Businesses involving multiple owners should always have a governing document that outlines what has been agreed to by partners and stakeholders, and what will happen if a particular event occurs.
- A Partnership agreement or a Shareholders’ agreement governs the day-to-day operations and decision responsibilities, and
- A Buy-Sell agreement governs the future exit strategy for the business owners.
- A Buy-Sell agreement can also provide the agreed roadmap for repaying a business debt.
The 'Will' of the Business
A Buy-Sell agreement is often considered the 'Will' of the multi-owner business and documents ahead of time the agreed method of dealing with an owner's exit from the business. The urgency of establishing this agreement is that most business exits are unexpected, unplanned, and high-risk to all parties.
- The first part clarifies the agreed valuation method of the business and what the insurable trigger events are.
- The second part of the agreement addresses how to pay for the departing owner's share of the business.
Agreements usually also cover:
- The specific trigger events to be covered by the agreement,
- Whether a sick or injured partner can still draw an income from the business, and for how long.
- What method of business valuation will be used if one owner’s share of the business needs to be sold,
- Give the parties to the agreement the option to purchase another partner’s interest following certain agreed trigger events, usually the death or incapacity of a partner, but also divorce, and
- Require the remaining parties to the agreement to purchase and buy out the existing partners (or their families who may inherit the ownership shares of a business) in a set period of time, and
- Set out the funding method to be used – usually a Life insurance policy, a Critical illness or Disability policy – to buy out a partner's share of the business.
Funding a Buy-Sell agreement
Life Insurance is commonly used to fund a trigger event departure as it avoids the need for remaining owners to use personal savings or borrow money. Insurance covers trigger events such as death, total and permanent disability, or serious illness or injury that also meets the terms of the insurance policy.
Other funding options (such as savings, loans, investment bonds, or deferred purchase agreements to make payments over a number of years) need to be considered for any trigger events in the agreement not covered by the insurance. Examples are retirement or resignation bankruptcy or directorship disqualification.
How relevant is a Buy-Sell agreement at the early stage of business?
A Buy-Sell agreement is a core business legal document that only reduces the risk once it is in place.
- If your business partner had to leave the business tomorrow, how would you afford to buy out their share of the business?
- What would happen if they sold their share to a competitor?
- What would happen if they used the company chequebook to purchase a Ferrari and then abandoned the business and their financial responsibilities to it (because it's only your home that was used to cross-secure the company debts)?
- What would happen to the business if their share was inherited by their family members whose plan for the business was very different from your own?
How would this put at risk everything you have built so far?
Not having a documented Buy-Sell agreement is beyond high risk
Not having a Buy-Sell agreement in place usually leads to decision deadlock during the most stressful time in a business ownership transfer, litigation, and the destruction of the business value, when faced with the unexpected departure of a business owner.
Problems associated with business partners departing a business because of unexpected sickness, injury, disability, terminal illness or even unexpected death, are best managed ahead of time by making a Buy-Sell Agreement between the business owners and partners.
Without a written Buy-Sell Agreement about this, you could end up in business with your former partner's family.
Where to now?
- Contact Sapience Financial and request a pre-insurance assessment on the business owner's insurability.
- Request your accountant to provide a Business Valuation
- Determine the percentage of business ownership, each owner holds
- Request a life insurance quote on each business owner to the value of their business interests to start your conversations.
- Then Insure your business to the value of the business valuation
- Document your plans in a legally drafted Buy-Sell Agreement.
- Store the executed document in safe keeping, preferably offsite.
- Meet with your Sapience Financial Adviser every 2-3 years to confirm the business valuation is still current and adjust your insurances as needed to match any future valuation changes.
This way all the business owners (and their families) will have certainty there is an agreement in place ahead of time, just in case, that provides certainty and clarity about what happens if one of the business owners or partners unexpectedly exits the business.
How we can help?
There are three elements needed in the creation of a Buy-Sell agreement provided by three separate professionals all working together; your Accountant, your Solicitor, and your Sapience Business Financial Advisor acting as your project manager for this key business transaction.
- Sapience Financial works with your Accountant (who provides your business valuation) and your Solicitor (who drafts the Agreement) to provide the funding strategy (using life insurances on each of the business owners) to help fund your Buy-Sell agreement and its valuation purchase price, using Life Insurances.
Contact us for a confidential chat about your needs.
Related: Key Legal Documents for Business Owners
- Non-Disclosure Agreements (NDA)
- Company Power of Attorney (CPO)
- Partnership Agreements
- Shareholders Agreement
- Unitholders Agreement
- Loan to Company Agreement
