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SMSF liquidity

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.

The risks of getting shown the Red Card as an SMSF Trustee

In soccer, a player who is shown a red card is instantly sent off the field, disqualified from playing for the remainder of the match and cannot be replaced. The red card is issued for serious offences, violent conduct, dangerous play, and any action that brings the game into disrepute.

But in the world of SMSF, a red card from the regulator, the ATO, is much more painful and can be a permanent ban on a person ever being able to be the Trustee of their SMSF.

It is a tough year for SMSF Auditors (and it is only going to get tougher)

And like all big legislative changes, as we see the compliance workload increase, so will the associated costs to audit and advise an SMSF increase too.

Two recent legal cases, Cam & Bear and Ryan Wealth Holdings, not only highlight the growing risks to SMSF Auditors, they're also warnings to professional advisers, planners, accountants and lawyers.

What happens when your SMSF can't pay its bills?

Failing to meet the financial obligations of a self managed super fund (SMSF) can trigger an unintended domino effect of financial problems, that could be impossible to stop.

The Government intends to introduce a new tax on people who have more than $3m in their Superannuation.

While it hasn’t yet been passed, legislation is already in Parliament to introduce this new tax and a Senate Committee has recommended it is passed. If it is, the new tax will be called “Division 296 tax” and will come in from 1 July 2025.

• Once the Division 296 tax is in effect, any earnings on superannuation balances exceeding $3million in a financial year will be subject to an additional 15% tax, making the total tax on this portion of earnings 30%.

From 1 July 2025 a new additional tax will apply to those who have a total superannuation balance (TSB) of greater than $3 million. Consequently, we often get asked the question, 'Should a client not have more than $3 million in superannuation?'

SMSF Members may Suffer under Division 296

Taxation of unrealised gains under Division 296 is of particular concern for SMSFs because they commonly hold illiquid assets like property.

• Thus, members with balances close to the $3m threshold (or with investments in assets with the potential for steep increases in value) may attract a liability under the proposed Division 296 tax.
• Individual members are liable for Div 296 tax costs, not the fund itself – although members can release funds from their superannuation interests or use external funds.
• Important: This creates additional issues for SMSFs that run very low cash balances and/or who are not managing their SMSF liquidity

SMSF Association (SMSFA) chief executive has said, taxing unrealised gains contained within the bill was “a tax on market movements and changes in asset values, not income, - an alarming precedent as it represents a fundamental change in how tax policy is implemented in Australia”.

Consequently, some SMSF members are forced to sell large, illiquid assets to fund a Division 296 liability because the member has insufficient funds outside superannuation to pay the tax.

Naturally, it is not a ‘one size fits all’ answer and it depends on many factors and assumptions.  But in reality, Division 296 tax will force many people who, up until now, may have not yet taken a sufficient interest in the basics of investing in super - to change how they see their financial future and cultivate a closer relationship with a financial adviser.

You can track the passage of this Bill through Parliament, at https://www.aph.gov.au/Parliamentary_Business/Bills_Legislation/Bills_Search_Results/Result?bId=r7133

Self Managed Super Fund 101

The ways to save and reach your financial goals are as varied and flexible as the people saving for them, and a Self Managed Super Fund (SMSF) is becoming a popular option for people who want greater control over their future.

If you want greater control and flexibility than you would get with a conventional off-the-shelf retail super fund, a SMSF could be an attractive option. However, they are more complex and also strictly regulated so there are new skills and learnings required to successfully use an SMSF as your retirement savings vehicle of choice.

An SMSF is not for everyone

A self managed super fund (commonly referred to as an SMSF) allows you to manage your own superannuation investments for your retirement. But let's be clear: setting up your own superannuation isn’t right for everyone, so it’s important to understand the basics before getting started. Sapience Financial provides ongoing investment management and guidance for SMSF members.

An SMSF is a superannuation fund that you manage yourself

Most people have their super with a retail super fund that's managed by a third party – a fund manager, a large corporation, or an industry body. You can also manage your own super fund – this is known as an SMSF.

How does an SMSF work?

An SMSF works the same as any regular larger superannuation fund, but there are some differences in how they are regulated by the government and how they are administered. One key difference between SMSFs and larger funds is that they must have no more than six members. In addition, the fund is run by all the members collectively.

Who can be a Member?

An SMSF can have no more than six members at any one time who are generally, though not always, members of the same family. A member cannot be an employee of another member unless they are related.

Who can be a Trustee?

An SMSF is in essence just a trust and like any trust, is run by the trustees.

There are two different SMSF Trustee structures.

1. Members are appointed as Trustees in their individual capacity,or
2. A Company is appointed as the Trustee, referred to as a corporate trustee, with the SMSF’s members being the directors of that company .

In both cases, it’s the members who run the fund, as a general rule all members are either trustees themselves or directors of the corporate trustee, and trustees cannot be paid for carrying out their trustee duties.

Who can't be a Trustee of an SMSF?

Certain people cannot act as an individual trustee or a director of a Corporate Trustee of an SMSF – this includes individuals who have been:

• convicted of an offense involving dishonest conduct
• subject to a civil penalty under the superannuation legislation
• insolvent or under administration (an undischarged bankrupt)
• persons formally disqualified from acting as a trustee.

There are additional rules for Trustees

All trustees are obligated to abide by the fund’s trust deed and the superannuation laws. Directors of corporate trustees will also have to comply with the company’s constitution and the laws applying to companies.

• SMSF Trustees are also required to consider the insurance needs of members in formulating the investment strategy. Given that quite often the trustees of an SMSF are also the members of the SMSF, this is about considering whether you have sufficient insurance of your own, and if not, whether you should acquire more cover through your super.
• The SIS Act in Regulation 4.09 requires SMSF trustees to consider the liquidity risks of the fund and its ability to meet obligations as they fall due.

Depending on the type of investments in your SMSF, you should also consider if you need the SMSF to take out other types of liquidity insurance. This could be an important consideration if you hold property inside the SMSF.

SMSF trustees must comply with the legislative requirements for managing super-account liquidity. Use our liquidity worksheet to help you begin to map out your SMSF liquidity strategy.

You must have a documented SMSF investment strategy

It's likely one that aligns with the future goals of the members (the trust deed should cover this) and what they are trying to achieve and ensures this is done with appropriate consideration of the risks in achieving these goals. It must also comply with super legislation and the sole purpose test.

How we can help

We focus on helping SMSF Trustees and their members manage the core risks of running a self managed super fund.

• SMSF Liquidity Insurance protection - Particularly important for people who purchase property within an SMSF structure then who are provided a funder with a personal director's guarantee through a LRBA mortgage. Liquidity monitor is an annual core covenant for every SMSF Trustee
• SMSF Trustee Company Power of Attorney documents (to ensure you're still able to make decisions and run the fund without it becoming locked due to a sickness or illness removing play director of the trustee company).
• Investment Strategy Document - that are both compliant with the law and that also reflects my commercial approach for the fund members achieving their retirement savings goals.
• Property Title & Ownership Services - each year an SMSF auditor is required to audit the status of the fund and verify property assets continue to exist, that any registered mortgages are lawfully in place and in accordance with the SMSF Members strategies and instructions.

The Auditor should obtain evidence that trustees have not given a charge over or in relation to a fund asset by seeking written confirmation from trustees and by carrying out the following checks: property title search to check for encumbrances on real property. ATO

Having a strategy for your superannuation is an important part of providing for yourself and your family into retirement while reducing the pressure on your business as the sole source of your future retirement funding too.

How we can help

Contact us for a confidential chat about your current SMSF needs.

Self Managed Super Fund Advice-on-Demand

There are three main stages of managing a Self Managed Super Fund (SMSF) and depending upon what part of the journey you're in, your needs may be very different.

We find people new to their SMSF journey are usually at one of three main stages;

• Establishment - Setting up their SMSF
• Administration - Annual Tax and Auditing
• Investment Advice - Documenting the SMSF's investment strategy and managing fund liquidity risks, for lumpy investment assets.

The Sole Purpose Test

All SMSFs need to comply with the sole purpose test, which requires the super fund to be run for the sole purpose of providing retirement benefits for members. Your SMSF needs to meet the sole purpose test to be eligible for the tax concessions normally available to super funds.

The sole purpose test applies to all super funds, not just SMSFs.

1. The sole purpose test is essentially related to providing retirement or death benefits for, or in relation to, SMSF members.
2. Specified ancillary purposes, which relate to the provision of benefits on the cessation of a member’s employment and other death benefits and approved benefits not specified under the core purpose.

You can read more about how it relates to SMSFs at the ATO website here.

Our Focus

An SMSF allows you to actively manage your own superannuation investments for your retirement. While SMSFs can potentially provide members with far more control and flexibility than big super funds,  that doesn’t mean it’s open slather. Breaking the rules can be costly and without ongoing professional advice, most Trustees would struggle to maintain an SMSF.

At Sapience Financial, we specialise in post-establishment SMSF investment advice.

• We focus on SMSF liquidity insurances for funds that may have purchased 'lumpy' investment assets, like property, and
• We focus on maintaining accurate SMSF investment strategy documentation after an SMSF fund has been established.

Ongoing Advice

Sapience provides advice-on-demand services for SMSF Trustees who don't necessarily wish to pay an annual ongoing retainer fee for a financial adviser, but who wish to engage our professional services on a fee-for-service basis, using our advice-on-demand service.

Regulation 4.09, of the SIS Regulations, asks you to consider diversification, not to be diverse. Similar to the insurance consideration, an SMSF is not required to hold life insurance. It just has to consider whether it should. The ATO asks trustees to have their investment strategy ready for their SMSF's auditor for their next audit.

SMSF Trustees need to consider diversity in their Investment Strategy, consider the fund's Liquidity Needs each year, and evidence to their SMSF Auditor that they're running a complying fund and up-to-date with all regulation changes. 

• For SMSF clients using our Investment Strategy and Documentation service, we provide clients with meeting minutes for the Trustees to sign and file for their auditor's review as necessary.
• For SMSF clients using our Liquidity Insurance Management service, we provide clients with meeting minutes for the Trustees to sign and file for their auditor's review as necessary.

How we can help

Having a clearly documented strategy for your SMSF is an important part of providing for yourself and your family into retirement while you plan to increase your investment returns to sustain your retirement.  Managing its ongoing updates and refinements, while making sure the fund's liquidity needs, enables it to meet the retirement needs of the SMSF members.

Contact us for a confidential chat about your SMSF needs.

Important Video Interview about new liabilities for SMSF Trustees

An interview with David Glenn Special Legal Counsel TAL Insurance and Drew Browne Senior Advisor at Sapience about the new and important issue facing Self Managed Super Fund (SMSF) Trustees

Important update for SMSF Trustees

In August 2012, the Australian Government made an amendment to the SIS Act in Regulation 4.09. ASIC has made it very clear that compliance with Reg 4.09 is a non—negotiable requirement for SMSF Trustees.

A Self-Managed Super Fund (SMSF) can provide you with a greater level of control and flexibility over your retirement savings.

Part of managing an SMSF is planning for unforeseen events that can create liquidity issues, particularly when it comes to paying out member death benefits of total and permanent disability claims when the invested assets are lumpy and not fast (or ready) to sell. Managing the liquidity of a fund and its ability to meet its obligations to its members is an ongoing Trustee responsibility.

Why would an SMSF Need Liquidity Insurance?

For investment portfolios heavily concentrated in 'illiquid' (or lumpy) assets like real estate, the greatest danger isn't always a market downturn but rather it's being forced into a fire sale to meet sudden cash obligations of an SMSF, which can destroy years of capital growth.

Our SMSF Liquidity Insurance Service is designed to provide your fund with the necessary cash flow to meet these obligations without the need for a forced sale of assets, if through unexpected death or disability the fund needs to payout member entitlements.

SMSF Liquidity Insurance Service

How to protect your SMSF entitlements and complying with the Superannuation Industry (Supervision) Regulation 4.09 impostyes a significant personal liability upon the Trustees of a SMSF if they do not comply with that legislations.

This is a strong warning to SMSF trustees that they ignore Regulation 4.09 at their own personal financial peril and must take active, documented steps to comply.

Why is SMSF Liquidity Insurance essential?

The key points for SMSF Trustees to consider are:

• Asset Protection: Prevents the forced sale of assets, such as property or shares, which may be undesirable or result in a significant financial loss.
• Timely Payouts: Ensures that your beneficiaries receive their entitlements promptly and efficiently, without placing financial strain on the remaining members of the fund.
• Peace of Mind: Provides certainty that your SMSF can meet its obligations in the event of a member's death, protecting the interests of all members and their beneficiaries.
• Flexibility: Allows for the proceeds of the insurance to be used to pay out death benefits as a lump sum or income stream, in accordance with your binding death benefit nomination.

How our service works

We will work with you to understand the unique circumstances of your SMSF and its members. Our process includes:

1. Needs Analysis: A assessment of your fund's assets, liabilities, and potential death benefit obligations.
2. Policy Structuring: Recommending the appropriate level and type of insurance cover to meet your specific needs.
3. Implementation: Assisting with the application and implementation of the insurance policies within your SMSF.
4. Ongoing Review: Regularly reviewing your insurance arrangements to ensure they remain appropriate as your circumstances change.

SMSF trustees must comply with the legislative requirements for managing super-account liquidity. Use our liquidity worksheet to help you begin to map out your SMSF liquidity strategy.

Secure the future of your SMSF

Don't let a lack of liquidity compromise your retirement strategy and the legacy you wish to leave behind.

How we can help

Contact us for a confidential chat about your current SMSF needs.

SMSF – It's Superannuation – done differently

A Self-Managed Super Fund (SMSF) is a private super fund you manage yourself as part of preparing for your retirement. SMSFs are different from industry and retail super funds because you choose the investments, investing strategy, and any insurances the fund should hold.

  Sapience Financial Advisors only work with SMSFs managed by a Corporate Trustee structure.

To manage your SMSF effectively you need to have a clear investment strategy. Whether its property or shares (or even buying art and collectibles) that motivates you to set up an SMSF, you're doing it because you believe you can achieve a rate of return in excess of the retail super funds that would otherwise be investing your money. To do this effectively you'll need to commit a certain amount of time to ensure your investments are managed effectively and learn to work with a trusted team of professionals. – Drew Browne, Founder Sapience Financial

SMSF Trustees

The Trustee controls the SMSF and makes all the investment decisions for the SMSF.

When you establish an SMSF, you have a choice of whether to appoint:

• Individual Trustees, or a
• Corporate (aka Company) Trustee

Companies acting as the SMSF Corporate Trustee are controlled by the directors of that company, and are usually the members of the SMSF.

Who do we work with

  We only work with SMSFs managed by a Corporate Trustee, whose sole purpose is to act as a trustee and not carry on any other commercial activity.

Who uses an SMSF?

• Small Business Owners and Self-employed people often find SMSFs more suited to their needs as commercial property can be purchased by their SMSF and then rented to their business on commercial terms.
• Individualsand Families can use their super to invest in residential property, and take a more hands-on approach to managing their investing for retirement.
• Couplesand Families can set up an SMSF, which allows them to pool their resources and invest together, make joint investment decisions, and plan for their retirement.

Regardless of who you are and the SMSF choices you've made, making sure you're running a compliant super fund – keeping good records, documenting key decisions, and auditing the fund annually – are all essential parts of acting as trustee for an SMSF.

SMSF is a complex and highly regulated area, so it's important to have a good understanding of the rules and regulations and work with professionals who can help you run a successful SMSF.

Our Focus

At Sapience Financial, we specialise in post-establishment SMSF advice.

• We focus on SMSF liquidity insurances for funds that may have purchased 'lumpy' investment assets, like property, and
• We focus on maintaining accurate documentation of SMSF investment strategy.
• We ensure all Corporate Trustees of an SMSF have an SMSF Corporate Power of Attorney in place to manage the risk of the director becoming unavailable to carry out their duties, due to sickness, injury or absence.

Ongoing Advice-On-Demand

Sapience provides advice-on-demand services for SMSF Trustees who don't necessarily wish to pay an annual ongoing retainer fee for a financial adviser, but who want to stay connected to our professional services on a fee-for-service basis, using our advice-on-demand service.

What our typical SMSF Client looks like

Running an SMSF is a complex and time-requiring task, and not for everyone.

This is why we only work with clients who have already decided to begin their SMSF journey utilising a sole-purpose corporate trustee structure.

• You have already established your SMSF (or already decided to do so)
• You have decided to use a company structure for the SMSF trustee
• You understand you need to regularly consider liquidity risks
• You understand you need to document your investment strategy
• You understand you need to consider diversity in your SMSF investment strategy
• You understand your individual and family financial needs are separate from your SMSF needs
• You value professional guidance, rather than taking a DIY approach to the security of your retirement

If this sounds like you, we'd love to have a chat to see whether we should work together.

Where to now

1. Learn about SMSF 101 - Basic rules for Trustees
2. Learn about SMSF 102 - The Sole Purpose Test and our Advice-on-Demand service
3. Get to know the Statistical Risks of Life we all face
4. Get to know the Growing Cost of Modern Medical Care
5. Decide how you want to manage the SMSF on behalf of its members, when you should use a life insurance policy to manage the SMSF liquidity risk, and how much financial risk is appropriate for the investment strategy in place.

Call us for a confidential chat about your needs.

Avoid a Fire Sale: Solving Liquidity in Your SMSF

Without liquidity insurance, the biggest threat to your family's financial future isn't a market crash, but a forced fire sale of your most valuable assets in your SMSF.

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

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.