SMSF trustees need to truly understand diversification and better diversify their portfolios.
The benefits of a well-diversified portfolio are numerous but the key ones that SMSF trustees should focus on are the benefits of mitigating volatility and short-term downside investment risks, preserving capital and the long-run benefits of higher overall returns. By spreading an SMSF’s investments across different asset classes and markets offering different risks and returns, SMSFs can better position themselves for a secure retirement.
However, did you know that 82% of SMSF trustees believe that diversification is important but in practice many do not achieve it?
This is because half the SMSF population cite barriers to achieving diversification. The top being that it is not a primary goal for SMSF trustees, and they believe they have a lack of funds to implement it.
Furthermore, 36% of SMSF trustees say they have made a significant (10%) asset allocation change to their SMSF over the last 12 months. This demonstrates that SMSFs may not be actively restructuring their portfolio on an annual basis to respond to changing market conditions.
The property market, you will probably know that we don’t often comment on residential property. Due to it being such a heterogeneous asset class (the opposite to homogenous) there are pockets performing differently everywhere. However, given that most of us will have some exposure, we have included some observations from SQM Research to update you on the broader market.
Source: SQM Research
Perth and Darwin prices are the only ones showing year on year falls. We recall only 2 years ago being offered apartments in booming Darwin to ‘sell’ to our clients. Our scepticism and avoidance of conflicts of interest kept us well away from that disaster.
Over the month of June, Sydney prices are showing a small decline, though year on year was strong. Melbourne too was a standout, with even bigger gains than Sydney. Hobart off a low base showed strong gains as well.
While we are not local market experts in each suburb,
After a big sell-off in May, (-4.01%) the S&P/ASX200 Accumulation index managed a small gain of 0.17% for the month of June.
That was better though than Global markets, where the MSCI World index (in Aust Dollars) lost 2.54% for the month.
Bond markets sold off during June as interest rates rose, and the A-REIT sector (real-estate trusts) also had a fall, losing 4.51% over the month.
In spite of those falls, stepping back a bit to look at the whole year shows a much brighter picture of returns. The table below looks at the major liquid asset classes over the last ten years.
There are a few notable points here. The one, three and five year returns for Australian and International shares have been very positive overall. Yet, when looking at the 10 year numbers, the returns from those assets are below the Fixed Interest returns. And, when looking at fixed income returns we see that the returns this year have been low,
Whether it’s for diversifying the investment pool or even for the trustees fearing the next financial ‘doomsday’ event, a common question we get asked at Superfund Partners is “can an SMSF buy gold? And are there any rules we need to be aware of?”.
In short, yes and yes!
The first thing to consider is what type of gold we are analysing; are they collectable gold coins or bullion bars? For the purpose of our blog, we look at bullion bars. Please refer to ‘collectable rules’ via the ATO website for more details on collectables.
Gold bullion bars
Since they are not defined as a collectable, when an SMSF buys bullion bars, the key issues to consider are as follows;
Where will it be stored?
- Whilst there are no specific rules around this, it’s the trustee’s responsibility to make sure the gold assets are securely protected.
Don’t let the title fool you, even if you are not a Millennial you may benefit from these fantastic apps. These tools could help you save for your first home, new car or your next holiday adventure. But most importantly, they can help you build your wealth which seems to be an area that millennials are struggling with the most.
GoodBudget is a budgeting app that allows the user to create a budget that is easy to stick to, making saving money a lot easier. GoodBudget uses a virtual form of the old envelope system where you put your money into an envelope for each expense and when an envelope is empty to stop spending. You start with a savings envelope then allocate funds to your expenses. You have planned your savings before your expenses so you don’t overspend.
GoodBudget comes with a free plan that includes 10 regular envelopes and can be used on 2 devices.
On issuance of the Practical Guidance in June this year for related party borrowings, the ATO acknowledged that further information was needed.
Recently, the ATO released Tax Determination 2016/16 which dealt with the subject of when a limited recourse borrowing arrangement has not been entered into on arm’s length terms.
The core principal at the heart of the release of the information from the ATO is that all dealings between a related party of the SMSF and the SMSF must be on ‘commercial terms’, or ‘arm’s length’. The meaning of commercial terms or arm’s length in relation to obtaining a loan in an SMSF, is that the terms of the loan, ie the interest rate, amount borrowed and term of the loan, must reflect what can be obtained from a third party such as a banking institution.
An example taken directly from the ATO tax determination compares a non arm’s length LRBA and an Arm’s Length LRBA, provides the following example:
The SMSF purchased a commercial property;
Effective from July 1, 2017, the government intends to place a $1.6 million cap on the amount of superannuation that you can retain in, or transfer to, a super pension account. The government released an exposure draft of the proposed legislation for this measure on 27 September 2016. Final legislation is expected to be passed before the end of 2016. This proposed budget change capping pension balances (and therefore limiting the corresponding tax exemption available) to $1.6 million has caused major concern to impacted SMSF trustees – but it may not be all bad news!
The Changes Explained
There are 5 areas in which the new changes impact.
1. Cap on tax-free super accounts
Currently: No limit on the amount of money in superannuation that is tax-free in retirement mode.
Proposed: From July 1, 2017, a limit of $1.6 million can be transferred into a tax-free super account.
Well, I can’t say that this year’s budget was my favourite, which I’m sure is a shared sentiment among a lot of our clients. Whilst I still believe that Superannuation is a great space and retains a high degree of tax advantages, there are some changes on the table that will affect quite a few people.
For simplicity’s sake, let’s break it down into the good and the bad:
- The work test has effectively been done away with. Up until now if you were over 65 and wanted to contribute you had to meet this test. From 1 July 2017, this will be no more. One less thing to provide at audit time as well.
- Low-income spouse rebate. This has been introduced as a measure to equalise spouse super accounts – namely women. It’s a $540 offset that phases out once the recipient’s income is $40,000.
- Another initiative for the low-income earner is the rebate on contributions tax if you are earning less than $37,000.
Chloe interviews Mark Beveridge from Quill Group and gets his insight on the difficulties investors are facing and what opportunities they should be looking out for.
Australia has relatively strong investor protection laws, and although they don’t always meet the public’s expectations, they typically ensure investors have access to appropriate disclosures and protection mechanisms when they invest or take financial advice. However there are certain exemptions (namely the sophisticated investor exemption) available to companies that issue investments or provide advice and SMSF trustees can unknowing be placed into a situation where they can’t access these protections.