Tuesday, 30 April 2013

April 2013 in review

The time is flying by, and today is the end of month number five for the Millionaire on Heels.

Financially, it’s been a pretty stellar month for me:
  • The value of my share portfolio zoomed up close to 12%!  I thought it would be pretty stagnant given that the market hasn’t moved much.  But I have a large Woodside Petroleum holding, which jumped in value at the end of the month when they announced a special dividend
  • My super balance was pretty stagnant, up just over 1%
  • My cash balance grew close to 16%, as I received my share of the commission payment from my mortgage refinance from my cash back mortgage broker and a few other bits and pieces.  The bill for my holiday in March also hasn’t come through yet, so I don’t expect next month to be as flash
So my overall progress against the April target is:


Monday, 29 April 2013

SMSFs – winding up an SMSF

There are a number of reasons why you might want to wind up your SMSF:
  • All the members and trustees may have left the SMSF
  • All the benefits may have been paid out of the fund
  • There is an insufficient balance of funds in the SMSF to meet the ongoing costs of operating the SMSF
  • The fund may no longer meet the definition of an “Australian superannuation fund” because the trustees have moved overseas permanently (there was a great article in the AFR this weekend on this topic – http://www.afr.com/p/markets/market_wrap/diy_transfers_risk_departure_tax_TtT6ahFS7lIYStQ1nQKXIL – the solution is apparently to set up an APRA-governed fund instead)
  • You may simply not want to continue with the fund
It’s a decision that requires some thought, because once the fund is wound up, it can't be reactivated.

If you want to proceed, the ATO publication Winding up a self-managed super fund at
http://www.ato.gov.au/superfunds/content.aspx?doc=/content/00182487.htm provides a step-by-step guide to assist you with the process.


Basically, to wind up your SMSF you need to:
  • Notify the ATO within 28 days
  • Deal with all the assets of the fund so that the fund has no assets left
  • Arrange a final audit of your fund
  • Complete your reporting responsibilities, including lodging your final SMSF annual return and finalising any outstanding tax liabilities

Sunday, 28 April 2013

SMSFs – compliance and audit requirements

As I mentioned yesterday, numerous compliance and audit requirements await the newly-minted SMSF trustee, including the need to:
  • Appoint an approved auditor to audit the fund
  • Lodge your SMSF annual return each year
  • Pay the ATO supervisory levy
  • Lodge a rollover benefits statement when rolling any member’s benefits into other funds
  • Notify the ATO if there is any change of details for the fund (e.g., a change in trustee or members)
The ATO has a comprehensive compliance regime in place for SMSFs, and penalties for trustees who are found on the wrong side of the regulations.

I’ll cover each of these topics in more detail below.

Annual audit report

According to the super rules, an audit report from an approved, independent auditor must be given to the trustee by the day before the fund is required to lodge its SMSF annual return.  You are required to appoint an auditor to conduct this audit at least 30 days before the report deadline.

Your auditor is required to:
  • Examine your fund's financial statements
  • Assess your fund's overall compliance with the super law
An audit is required even if no contributions or payments were made in a given income year.
 

Saturday, 27 April 2013

SMSFs – administration requirements

SMSF trustees have numerous administrative and compliance obligations.  At a bare minimum, you need to:
  • Appoint an approved auditor to audit the fund
  • Lodge your SMSF annual return each year
  • Pay the ATO supervisory levy
  • Lodge a rollover benefits statement when rolling any member’s benefits into other funds
  • Notify the ATO if there is any change of details for the fund (e.g., a change in trustee or members)
  • Keep comprehensive records of all the dealings of the fund
And if you choose to outsource some of the workload, you need to ensure that the professional advisors you select are up to scratch.

I’ll focus on the first five points tomorrow.  Today I’ll cover recordkeeping and professional advice.

Recordkeeping requirements

The super and tax laws require SMSF trustees to maintain adequate records to demonstrate that you have:
  • Met your tax and audit obligations
  • Operated your fund efficiently
The best records:
  • Provide an accurate history of your fund
  • Support the decisions that the trustees made on the fund’s behalf
  • Assist your SMSF auditor (and the ATO if required) in ensuring that you have complied with the super and tax laws

Friday, 26 April 2013

SMSFs – accessing your super

Accessing your super regardless of whether it is held in a traditional fund or in an SMSF is subject to numerous conditions with lots of fancy names.  To make it even more challenging to understand, the government keeps changing the rules.  So for those of us a couple of decades at least from retirement, it may understandably seem like we may never access these funds!

Today, I’ll recap a lot of the content I discussed earlier in the month around accessing super generally, but stress the differences for SMSFs.

Key topics include:
  • Preserved and non-preserved benefits
  • Preservation age
  • Conditions of release
  • Rollovers and transfers
  • Early access to benefits
  • Paying benefits

Preserved and non-preserved benefits

In general, most of the super held in SMSFs is in the form of what’s known as preserved benefits.  They are called “preserved” because they must be preserved in the fund until the law and your fund's trust deed allows them to be paid.

Preserved benefits include:
  • All contributions made by or on behalf of a member since 1 July 1999
  • All earnings for the period since 1 July 1999
  • Employer eligible termination payments (received before 1 July 2007) rolled over into a super fund

Thursday, 25 April 2013

SMSFs – running an SMSF

In additional to managing your fund’s investments (which I discussed on 19 and 20 April), there are a number of aspects you need to consider in running an SMSF:
  • Your obligations, rules, and other requirements
  • Accepting contributions and rollovers
  • Taxation requirements
  • Paying benefits to members
  • Administration requirements
  • Compliance obligations
I’ll cover the first three today and the remaining three later in the week.

Your obligations, rules, and other requirements

As I highlighted yesterday’s post (http://www.millionaireonheels.com/2013/04/smsfs-rules.html), there are numerous rules and regulations you need to comply with in running an SMSF, including:
  • Superannuation Industry (Supervision) Act 1993 (SISA)
  • Superannuation Industry (Supervision) Regulations 1994 (SISR)
  • Income Tax Assessment Act 1997 (ITAA 1997)
  • Tax Administration Act 1953 (TAA 1953)
  • Corporations Act 2001
You also need to act in accordance with your fund’s trust deed.  And if there is a conflict between the super laws and the trust deed, the law overrides the trust deed.

The ATO publication Running a self-managed super fund (http://www.ato.gov.au/download.asp?file=/content/downloads/spr46427n11032.pdf) has a succinct summary of the rules you need to follow as a trustee of an SMSF.  Basically you need to:
  • Act honestly in all matters concerning your fund
  • Exercise skill and diligence in managing your fund

Wednesday, 24 April 2013

SMSFs – rules

Drumroll … this is the topic you’ve all been waiting for ... SMSF rules and regulations.  Who doesn’t love a good rule or two or ten?

Today, I’ll cover:
  • Who are the SMSF regulators
  • Your role as trustee
  • Key SMSF-related laws and rules
  • The consequences of non-compliance

SMSF regulators

The Australian super system is regulated by three key government agencies:
  • Australian Taxation Office (ATO) – administers the relevant super laws for SMSFs and works with you to help you meet your obligations
  • Australian Securities & Investments Commission (ASIC) – regulates financial services to protect consumers
  • Australian Prudential Regulation Authority (APRA) – regulates large super funds other than SMSFs, and assesses applications for the release of retirement benefits on compassionate grounds from SMSFs
The role of each regulator is outlined briefly below, courtesy of the ATO publication How your self-managed super fund is regulated (http://www.ato.gov.au/superfunds/content.aspx?menuid=0&doc=/content/00162377.htm&page=1&H1).

ATO

The ATO aims to help you understand your duties and responsibilities as a trustee under the law and make it as easy as possible for you to comply with the law, for the future benefit of the members of your fund.  The ATO does check compliance to safeguard your retirement income, but it does not evaluate your investment choices.  It is responsible for administering the super and income tax laws, but not for developing the law or related policy.

Tuesday, 23 April 2013

SMSFs – costs

There seems to be a fair debate about whether running an SMSF is more or less expensive than using an industry or retail fund.  I imagine there are a lot of vested interests at play.  But intuitively, if you have a large super balance and put in the effort to run your fund efficiently, it is likely to work out more cost effectively to manage it yourself.  If you have a small balance and use a bevy of high cost advisors, your balance will be frittered away before you know it.

So, as I mentioned in my 17 April post covering the basics of SMSFs (http://www.millionaireonheels.com/2013/04/smsfs-basics.html), it is generally recommended that you do not start a fund until you have a balance of $200,000 to $250,000 to invest.

To test that, I’ve outlined below the major costs you are likely to incur in establishing and running an SMSF, along with a typical range of fees.  I’ve then calculated what that would mean for a fund balance of $100,000, $200,000, and $500,000.

The major categories of SMSF costs include:
  • Establishment costs
  • Minimum ongoing costs to meet regulatory requirements
  • (Optional) administration and accounting costs
  • (Optional) investment advice costs

Monday, 22 April 2013

Book review: A Step-by-Step Guide to Buying and Selling Shares Online

I came across A Step-by-Step Guide to Buying and Selling Shares Online by Kel Butcher at my local library.  It caught my eye because it looked a bit easier to read than some of the other share trading books I’d been trawling through earlier in March.

The Introduction outlines two important prerequisites to running a profitable trading and investing organisation, namely:
  • It must be approached as a business, with all the associated planning, risk management, and performance and review measures
  • It requires maximising the technology available in order to implement business decisions as efficiently as possible
Butcher then positions the book as a user-friendly, practical manual that addresses the mechanics of online trading, from setting up an account through to trade execution.

Chapter 1 – Trading and Investment Styles covers the two primary investing styles: fundamental analysis and technical analysis.

Chapter 2 – Online vs Traditional Share Broking addresses the advantages and disadvantages of using an online broker versus a traditional full-service broker.

Chapter 3 – Setting up an Online Account covers the basics of applying for and setting up an online trading account, using NAB Online Trading as an example.

Sunday, 21 April 2013

Review: Cash Back Mortgage

Cash Back Mortgage

Cash Back Mortgage
Source: 
http://www.cashbackmortgage.com.au/

I don’t often share the names of businesses I reference in my posts, but I received such good service from Cash Back Mortgage during my mortgage refinancing this year that I thought I’d write a review.


It’s quite timely because I just received my refund of 70% of the upfront commission on my mortgage this week.

The average mortgage broker ...

If you remember back to my 7 February post on mortgage refinancing, I described my journey so far with my mortgage refinancing.

Basically, I had found:

  • A home loan with the features I wanted
  • A good lender
  • An (unnamed) cash-back mortgage broker that offered to rebate the full trail commission

Saturday, 20 April 2013

SMSFs – borrowing

One of the hottest trends in the land of SMSF spruiking at the moment seems to purchase property using a limited recourse borrowing arrangement (LRBA).  The Millionaire on Heels is a bit of a cynic when it comes to “hot trends,” as they often seem to make more money for the spruikers than the spruikees. 

(My spell check is going crazy at the moment – I didn’t think that spruikee was a word, but I’m sure spruiker and spruiking are!)

So I thought it would be interesting to explore what SMSFs can borrow for and how to do it.

A search of the ATO website and some googling reveals that, low and behold, despite all the publicity around LRBA’s, as a general rule, SMSFs are not actually allowed to borrow money.  However, there are a couple of exceptions.

Basically, different rules apply to direct and indirect borrowing:
  • Direct borrowing is when you borrow directly from a bank or other lending institution
  • Indirect borrowing is when you invest in an asset that someone else has already geared or take out an option to purchase an asset at a future date

Friday, 19 April 2013

SMSFs – investment strategies

One of the major benefits of establishing an SMSF is the ability to set and execute your own unique investment strategy.  However, at the same time, you do have a legal responsibility as a trustee of the fund to ensure that your investment decisions are designed to protect and increase your members' benefits for retirement.  There are also numerous legal requirements that your investment strategy must comply with, including restrictions on what you can invest in and requirements to keep your investments separate from the personal and business affairs of fund members.

Today, I’ll discuss:
  • The requirements set out by the ATO to develop an investment strategy
  • Steps to develop your investment strategy
  • Restrictions on investments for SMSFs
  • Restrictions on investing in collectables and personal use assets
  • Requirements around ownership and protection of assets
  • Restrictions on acquiring assets from a related party
  • Restrictions on in-house assets
  • The sole purpose test

Legal requirements for your investment strategy

SMSFs are required to invest according to a written investment strategy. The investment strategy should be in writing so that you can demonstrate how your investment decisions comply with both the strategy and the super laws.

Thursday, 18 April 2013

SMSFs – setting up an SMSF

The Millionaire on Heels loves the idea of an SMSF, but the process to set one up has always seemed a bit daunting.  (In addition, my super balance needs to grow somewhat to make it a cost-effective exercise!) 

So, for today, I thought I’d research practically what needs to be done to set up an SMSF, and in case that’s too difficult, who offers a packed all-in-one service to do it for you.

The post is structured into:
  • Explanation of the “trustee” concept
  • 10 steps to establish an SMSF
  • SMSF “packaged” services

What is a trustee

Before we get into discussing how to set up an SMSF, I think it’s important to understand what a trustee is, as there are numerous references to trustees throughout the post.

Basically, when you set up an SMSF, you must take on the role of either a:
  • Trustee
  • Corporate trustee
A trustee in general is a person or company that holds and invests a fund's assets for the benefit of its members' retirement. 

A corporate trustee is specifically a company that acts as a trustee for a fund.  To be an SMSF corporate trustee, all directors of the company need to be members of the fund, and all members need to be directors of the company.

Wednesday, 17 April 2013

SMSFs – the basics

While the majority of Australians still house their superannuation in an industry, corporate, or retail fund, a growing number of people are choosing to establish a self-managed super fund (SMSF). 

According to the ATO publication Self-managed super funds: A statistical overview 2010-11 (http://www.ato.gov.au/superfunds/content.aspx?doc=/content/00341497.htm&pc=001/149/030/004/010&mnu=49150&mfp=001/149&st=&cy=), at 30 June 2012, there were around 478,000 SMSFs in Australia holding $439 billion in assets. There were also approximately 913,550 members in the SMSF sector, almost 8% of roughly 11.6 million members in Australian super funds.

SMSFs allow you to control directly where your super is invested and manage your investment costs more closely.  However, there are numerous rules that must be followed, and ongoing compliance and audit requirements.  So you need to ensure that you have the time to commit to managed the fund, or outsource the work, which can fast become more costly than using a retail fund!

Today I’ll provide:
  • Some basic facts about SMSFs
  • Some of the benefits of SMSFs
  • Compliance, cost, and other considerations
  • Additional SMSF resources

Basic facts about SMSFs

An SMSF can have one to four members. Each member is a trustee (or director if there in a corporate trustee).

Friday, 12 April 2013

Book review: Online Investing on the Australian Sharemarket

Online Investing on the Australian Sharemarket by Roger Kinsky is a book that really helped me to “get” the principles of online share investing.  The edition I read (third edition published in 2007) is getting a little bit dated, but the principles are still excellent.

Kinsky is a long-time online share trader.  He has written over 10 books on subjects as diverse as share investing, business management, and engineering.

The book is targeted at both novice and experienced online investors.  Novice investors should be able to trade proficiently based on the principles outlined in the book, while more experienced investors can benefit from the information and strategies in the book to become more knowledgeable and make more successful trades.  Personally, I’ve read the book a couple of times as I’ve advanced in my own knowledge of online investing.

Sunday, 7 April 2013

Superannuation – finding lost super


If you’ve changed jobs over the years – and who hasn’t – and taken your employer’s default super fund option at any stage, you may have acquired a number of accounts with a variety of institutions.  It seems to be one of those facts of life that everyone knows should be diligently attended to, but a few moments of forgetfulness and one account breeds into an entire family.

The Millionaire on Heels changed jobs a couple of times in two years and wound up with four accounts – at a retail fund, an employer fund, an industry fund, and a corporate sponsored retail fund no less!  I went through last year and tried to consolidate them back to one.  Of course my last employer contribution slipped through after that transfer, and I still have one month’s contribution remaining in a fund I know longer want or need.

It is important to find those small accounts and consolidate them for several reasons:
  • As you are generally charged account keeping fees for each super account, the fees can be significant
  • If you move house and forget to update your address with each fund, you won’t receive your statements and may lose track of your balances over time
  • The government is increasingly focused on collecting small amounts of super via the ATO.  While you reclaim your super from the Australian Taxation Office (ATO), it won’t be earning significant investment income while it’s there

Thursday, 4 April 2013

Superannuation – the basics

Superannuation is getting a lot of press in Australia at the moment, with speculation as to what changes the government will propose to the system, and to what extent they are designed to improve the design of the system for the long term versus providing short-term funds for government spending priorities.

One figure that has stood out for me in all the recent coverage is the average balance of superannuation women are now retiring with – according to the First State Superannuation website (http://www.womenandsuper.com.au/Essentials/SuperGenderGap/TheFacts), the average retirement payout in 2010 (determined by the average balance for those aged 60 to 64) was $112,600 for women and $198,000 for men.  And this is after 20 years of the superannuation guarantee being in place in Australia!

If you want to ensure you have enough money for a comfortable retirement and not rely on the pension (and who knows if that will even be around when the Millionaire on Heels retires), you need to make sure you are contributing to superannuation now.  Given the power of compounding, a small investment each year over a several decades can provide you with a substantial balance upon retirement.

Tuesday, 2 April 2013

Case study: health and beauty


I’ve made a lot of progress over the last few years in terms of rationalising my expenditure on expensive beauty products and services.  And while the difference to my face and body has not been noticeable, the different to my wallet has.

Some of the key changes I’ve made include:
  • Including basic products in my beauty routine – QV cleanser, sorbolene, etc. – rather than paying for expensive brands that will just get washed off
  • Supplementing the basics with one or two luxuries – e.g., a glycolic moisturiser, which genuinely does keep my skin clearer and looking younger (you don’t have to believe the marketing hype …)
  • Using mostly generic products when they are pretty much identical to their branded cousins – contact solution, soap, toothpaste, deodorant, etc.
  • Using up products by cutting open the tubes to extract every last bit (there can be a week or more left of a product trapped inside)
  • Buying expensive products online, overseas, or at a discount chemist to get the lowest price
  • DIYing some treatments – e.g., eyebrow tinting
  • Generally avoiding beauty therapists like the plague
  • Avoiding on-sells – e.g., at my hair salon they go through product-pushing phases, and I firmly say no thanks

Monday, 1 April 2013

And the winner is …


The best thing about having a contest is that you get to announce a winner.

I’ve had a last minute flurry of entries … even one from a male … and with that photo you may get a lot of attention!

Some of the best ideas (and my responses) include:
  • Improve the blog design.  It’s hard to stand out when you use the standard Blogger templates – I’ve been working on this throughout March, and I hope you like the new logo, background, and colour scheme.
  • Improve your site navigation.  There are so many posts, it’s difficult to locate all the ones relevant to a particular topic – Thanks, I have to admit I lose track of them, too!  I plan to add some additional pages that will address the major topics covered - e.g., mortgages, shares, starting a business.  On each of these, I’ll have links to some of the key posts on that topic.
  • More photos – I’m working on this … my family say the same thing.  I need to get out and about a bit more with the iPhone and take a few.
  • Please do a series on superannuation, including women-specific issues and how to establish an SMSF – OK, I will include this in my April posts.
And the overall winner is (drumroll) ...

Upcoming April posts


The Millionaire on Heels is now celebrating four months and over 80,000 words, about the size of a small novel.  Taking on board some of my own advice in my starting a business series, I am becoming hooked on the idea of writing my own book.  While it won’t be a work of fiction, I am hoping that it will be a good read.  Stay tuned for updates ... I imagine it’s going to take a few more months, but one day soon there will be a Millionaire on Heels book.

Now I hope you like superannuation (super) … or at least can tolerate the subject.  Because April is all about super.  Thanks to one reader’s suggestion, I thought I’d include it.  In fact, I was originally going to discuss other topics as well.  But when it came down to it, there was so much to cover on super, the other content got bumped to May.

To break the monotony, I will throw in a few case studies and book reviews as per the usual.

So, the plan for this month’s posts includes:
  1. And the winner is …
  2. Case study: health and beauty
  3. Book review: The Business of Share Trading