Top10 SMSF strategies for 2011/12 presentation conducted by Aaron Dunn of The SMSF Academy in conjunction with Business Fitness. Download a copy of the free webinar, by visiting http://thesmsfacademy.com.au/free-webinars/

1. Top10 SMSF Strategies for 2011/12 Aaron Dunn Managing Director, The SMSF Academy

2. This presentation provided general advice only. No direct or implicit recommendations are given in this document. This means that the general advice provided has not been prepared taking into account an individual’s financial circumstances (i.e. investment objectives, financial situation and particular investment needs). You should assess whether the advice is appropriate to your individual financial circumstances before making an investment decision. You can either assess the advice yourself or seek the help of an authorised representative through an Australian Financial Services License (AFSL) holder. The SMSF Academy Pty Ltd believes that the information in this presentation is correct at the time of compilation but does not warrant the accuracy of that information. Save for statutory liability which cannot be excluded, The SMSF Academy disclaims all responsibility for any loss or damage which any person may suffer from reliance on this information or any opinion, conclusion or recommendation in this presentation whether the loss or damage is caused by any fault or negligence on the part of presenter or otherwise. General Advice Disclaimer

3. Strategy 1: Contribution Splitting is back in vouge!

4. A reincarnation of RBLs? Government proposal to extend contribution cap for over 50’s with balance of less than $500,000 Consultation paper dealing with parameters including: How to calculate member balances? Assessment model? What financial year to use for assessment? SMSF specific issues

5. Example John (52) – member account balance of $489,000 SMSF audited financials at 30 June 2011 For the 2011/12 financial year: $50,000 concession contribution Net earnings of $10,000 Closing Balance of $541,500 What level of contributions will John be able to make from 1 July 2012? Answer: $50,000 Why? Government likely to utilise balance ‘two years’ prior (i.e. 30 June 2011) Contribution Splitting benefit? Remember: $50,000 cannot be split until 1 July each year 30 June 2011 member balances become very important!! Think about whether the 2010 contributions should be split when doing the 2011 financials.

6. Strategy 2: Contributions Reserve – strategy & saviour

7. Using a Contributions Reserve Ability to “park” contributions for up to 28 days after the end of month in which contribution made June contributions can be held-over until following financial year (allocated before 28 July) Deduction for taxpayer when paid Assessed against cap when allocated to the member NTLG Super Technical Sub Group Committee minutes 16 June 2009 Applicable to both concessional and non-concessional contributions

8. Reported FY 2011 contributions Keep this in mind… FY2011 contributions X XX X XXXXXXXXX Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun A contribution reserve can be used to identify excessive contributions made in the previous financial year Reduction in contribution caps for FY2010 caught many people June 2011 contributions only 28 days to allocate after month end

9. Example – Contributions Reserve saviour! Doug (53) currently salary sacrificing to his $50,000 concessional contribution limit The timing of his super payments received by his employer has meant that the SMSF has received $54,167* for FY10 13 months x $4,166.67 Trustees can allocate any June contributions to a Contributions Reserve Must be allocated to Doug’s member balance before 28 July Saves a minimum of $1,313 in tax (31.5%) Potentially more if maximum NCC reached (bring forward) Ability to revise salary sacrifice arrangements to $45,833 for FY12 (Total CC = $50k)

10. Strategy 3: Contributions Deferral

11. Contributions Deferral What if your client is on the top MTR (46.5%)? Can potentially salary sacrifice or make a personal deductible contribution up to CC cap plus up to NCC cap Employer / individual receives full deduction on contribution Excess tax payable, but on receipt of a Notice of Assessment (NoA) Provided no further NCCs or excess CCs made in subsequent years there is no double taxation but get the benefit of the assessment deferral

12. Example – Contributions Deferral Ken (62) is a company director, earning $1,000,000 (incl. super). Includes a $500,000 bonus, which was to be paid in September 2011. He would like to retire in approx. three years time from his job Ken intends to salary sacrifice up to his CC cap of $50,000 Expected personal tax payable on Ken’s taxable income of $448,550* What if, Ken salary sacrificed $484,225** of his bonus to super in 2010/11? Excess concessional contributions of $450,000 Excess concessional contributions tax (31.5%): $141,750 Excess non-concessional contributions: $0 Instead of PAYGW on salary, amount taxed within SMSF @ 15% + ECT Salary is withheld upfront vs. deferred at least 11 months after end of financial year (May 2013 - due date of SMSF Annual Return) * Includes Income Tax, Medicare & Flood levies ** $500k bonus adjusted for SGC up to maximum super contribution base of $43,820 per quarter (2011/12)

13. Example – Contributions Deferral Excess Contribution Made Financial Year End 2011/12 SMSF AR lodge & payable ECT Assessment payable Sept 2011 30 June 2012 May 2013Jan/Feb 2014 21 months Up to 30 months Why? Cash is able to work harder within the SMSF SMSF benefits from $209,750 invested up to 20 months, plus ability for $141,750 to stay in the fund if Ken pays tax personally (which he can elect to do)

15. 93% tax payable on an excessive concessional contributions for the next two years

16. Having triggered bring forward provisions

17. If fund is going to pay excess tax, need to ensure the NOA is provided within the timeframes

19. How does section 67A work? Personal guarantee Bare /Holding Trust

20. Benefits of SMSF borrowing Case Study Property purchase - $600,000 Loan - $350,000 @ 8% (P&I repayments) Rental - $460 p/wk (increases 3% p.a.) Expenses - $4k p.a. / Depreciation - $5k p.a. Individual currently salary - $100,000 (increases 3% p.a.) Eight (8) years away from retirement What is the tax benefit of acquiring the property within a SMSF vs. personally?

21. Calculator available under Free Resources | Calculators www.thesmsfacademy.com.au

22. Calculator available under Free Resources | Calculators www.thesmsfacademy.com.au

23. What needs to be considered Property Investors (residential or commercial) Yield (rent) Capital growth LVR Lender & interest rate P&I or Interest-only period Term of loan Expenses, Depreciation & Building Allowance Ability to contribute to super / servicing Timeframe to retirement

24. The impact of the variables?

25. Strategy 5: Borrowing for Property Development

26. Section 67A & 67B restrictions Changes to super borrowing laws (s.67A & 67B) have imposed significant restrictions Definition of a Single acquirable asset? What constitutes a replacement asset? Within SMSF, can not undertake (breach of replacement rules): Capital improvements Subdivision Property held over 2 or more titles (e.g. farmland) Question – what strategies (if any) can be used to address the above?

27. Property Development Use of a SISR 13.22C trust (ungeared unit trust) Unit Trust is the developer; SMSF is a contributor of capital to the trust (in full or part) Trust acquires land and/or property to develop Need to get capital in ‘up-front’ or would require additional bare trust for further borrowings unless additional unit holders subscribed Banks unlikely to provide a SMSF Limited Recourse loan Related Party (BYO lender) loans only Only security allowed by lender are the units in the unit trust ATOID 2010/162 – dealing with SMSF on more ‘favourable terms’ Do not breach SISR 13.22D requirements

28. SMSF (5). Lease agreement between SMSF and tenant (can be related party for commercial property) (1). Redraws on equity in own home to provide a loan to SMSF (2). SMSF borrows money from related party on arms-length basis (6). Rent paid to Unit Trust (8). Repayments made by SMSF back to lender (principal and/or interest) – subject to terms of loan Tenant (inc. related party) Bare Trust Lender to SMSF Units in U/T (7). Distribution paid to SMSF as beneficial owner of units in unit trust (3). SMSF acquires units in ungeared unit trust units in name of Trustee of Bare Trust (4). Unit Trust acquires land and uses additional funds to develop site (9). Lender makes repayments back to own bank where money originally drawn. Ungeared Unit Trust (SISR 13.22C) (3b). Lender’s rights in the event of default are limited to the property only.

29. Strategy 6: Taking the minimum Pension as Lump Sum

30. When does an income stream cease? TR2011/D3 released on 13 July Income tax: When an income stream commences and ceases Death benefits, failure to meet minimum pensions, commutations, etc. ATO views in draft ruling on partial commutations and interaction between SIS Act and Tax Act Example: Bob (57) has recently retired and has $1,000,000 in accumulation within SMSF Wishes to commence an Account Based Pension and take minimum of $40,000 (4%) Subject to Bob’s other assessable income he will have between$600 (16.5% tax rate) -$12,600 (46.5%) of tax payable on this pension If taken as a lump sum can use LRT, but 15% super fund tax rate applies (accumulation phase) Could Bob have the best of both worlds?

31. Yes, he can Where pension is partially commuted and payment is elected to be received as a lump sum, this amount will count towards the member’s minimum pension for the financial year. This benefit payment can be made in cash or in-specie Partial Commutation Example

32. Strategy 7: Locking in tax-free proportion for pensions

33. Proportioning Rule Simpler Super introduce many changes including the proportioning rule when commencing an income stream Proportioning rule locks in the tax-free and taxable component Why is this important? Greater tax efficiency for pensions under 60 years of age Estate planning benefits

34. Proportioning Rule Example John (60) commences Account Based Pension with $1,000,000 50% tax-free proportion olddeductible amount was $23,084 Move forward 10 years, account balance is $1,200,000 Tax-free component - $600,000 | old rules - $269,160 difference of $330,840 Move forward 20 years, account balance is $1,000,000 Tax-free component - $500,000 | old rules - $38,320 difference of $461,680 Why is this so important? Future Tax saving of between $69,252 - $76,177 (incl. Medicare) Consider optimising through recontribution strategy & running multiple pensions

35. Strategy 8: Using segregation effectively

36. Segregated Understanding Segregation – what is it? It’s a fund within a fund Segregated Segregated Member 1 Member 2 Segregated

37. Reason to segregate Both members in the pension phase Member A – accumulation phase Member B – pension phase 1 July 1 June 30 June Average value of current pension liabilities Average value of super liabilities Asset sold here Capital gains tax (ancillary benefit) Different investment strategies (per member or interest) Benefiting from a market recovery

38. Strategy 9: Understanding the benefits of Anti-detriment

39. Anti-detriment tax deduction Section 295-485 ITAA 1997 Additional amount paid in the event of the death of a member (tax saving amount) to compensate for tax paid on contributions received. Use Audit Method or Calculation Method (ATOID 2010/5) to determine amount How to ‘fund’ the tax saving amount? Tax deduction claimed only on amount paid as lump sum Confirmed in ATO NLTG Super Technical Meeting Minutes – March 2011

40. Anti-detriment Example Frank (58) recently passed away and is survived by his wife Maria Death benefit of $550,000 to be paid Maria wishes to take $150,000 as a lump sum with balance as an Account Based Pension (ABP) Can we claim a deduction for the tax saving amount and how much can we claim?

41. Tax Saving Amount 15/55 x $72,056 = $19,652 tax saving amount Lump Sum to Maria of $169,652 Tax deduction available of $131,013 Available under SMSF resources  SMSF calculators on The SMSF Academy website

42. Strategy 10: Maximising the death benefit with a Future Liability benefit deduction

43. Future Liability Benefit Deduction Section 295-470 ITAA 1997 Lesser known estate planning tool particularly beneficial for SMSFs Election to claim tax deduction on future liability benefit replaces claim of deduction for insurance premium where: Member dies*, Disability superannuation benefit is paid*, Income stream is paid as a result of temporary incapacity * Must be in connected with employment Note: SMSF becomes ineligible claim future insurance premium deductions for members No need for the fund to have insurance to claim the deduction

44. Future Liability Benefit Example John dies suddenly at age 50 and is survived by wife, Jane (48) and two (2) sons, Robert (23) & Chris (19) Member balance of $600,000 in SMSF ($120k TFC) Life Insurance policy of $650,000 in which fund is ordinarily entitled to a tax deduction John’s service period (work) was 24 years What tax deduction can the fund claim for the Future Liability to pay benefits? $1,250,000 x (15 years / 39 years) = $480,769 Remember that no tax deduction can be claimed for the insurance in the elected year of the tax deduction Regardless of previous years where tax deduction was claimed Look to magnify the tax deduction using both anti-detriment and future liability to pay benefits.

45. Top10 SMSF Strategies Contribution splitting back in vogue!! Contribution Reserves Contribution Deferral SMSF Limited Recourse Borrowing Borrowing for Property Development Minimum Pension as Lump Sum Locking in Tax-Free proportion income streams Using segregation effectively Anti-detriment Future Liability Benefit

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48. This presentation provided general advice only. No direct or implicit recommendations are given in this document. This means that the general advice provided has not been prepared taking into account an individual’s financial circumstances (i.e. investment objectives, financial situation and particular investment needs). You should assess whether the advice is appropriate to your individual financial circumstances before making an investment decision. You can either assess the advice yourself or seek the help of an authorised representative through an Australian Financial Services License (AFSL) holder. The SMSF Academy Pty Ltd believes that the information in this presentation is correct at the time of compilation but does not warrant the accuracy of that information. Save for statutory liability which cannot be excluded, The SMSF Academy disclaims all responsibility for any loss or damage which any person may suffer from reliance on this information or any opinion, conclusion or recommendation in this presentation whether the loss or damage is caused by any fault or negligence on the part of presenter or otherwise. Disclaimer