SMSFs – Flexibility & Options

posted on October 10th, 2011 by Bellmont Research Team

The world of Self Managed Super Funds (SMSFs) is evolving dynamically and changing rapidly, the size of the SMSF market and the rate at which new funds are forming is staggering. The flexibility and options available to SMSFs is a key driver in why the SMSF sector has continued to perform in the face of the global financial crisis. I receive calls every week from clients asking about facts and myths about SMSFs, some questions are scary and some are entirely well thought out – what is clear amongst the barrage of questions and answers is that people are very attracted to the flexibility which SMFSs offer. Gone are the days of the three investment options offered by the retail super providers – SMSFs can provide members  ways to invest which may help their children or help widowed spouses in the future.

Non Geared Unit Trusts

Non Geared Unit Trusts are an increasingly popular way to co-invest with your SMSF to purchase property or shares. The non geared unit trust allows for a range of short term and long term financial and taxation benefits for both the SMSF and the individual member when purchasing an asset.  Non geared unit trusts offer advantages on cost, compliance and purchasing power when considering assets such as property – residential or commercial. Members can co-invest with their SMSFs into a unit trust, depositing money into the Unit Trust bank account which uses the available funds to purchase a property or other allowable asset.

The unit trust is owned by the SMSF and member in proportion to the asset value.  The SMSF receives its portion of the income from the asset which is taxed at the 15% rate and the member receives his or her share of the income which is taxed at their marginal rate. This investment strategy can help people who need added disposable income, who wish to use the strategy as a negative gearing tool or simply want to enter the property market and utilise the capital available in the SMSF. The SMSF can continue to purchase units from the member and over time purchase the entire unit trust so that it is held entirely within the SMSF, allowing the member a flexible and staged approach to sell the units to the SMSF, members can salary sacrifice or use their super guarantee payments to purchase units from themselves. This method presents a cost effective and flexible way in which to invest into property. Members can claim interest deductions for their portion of the investment in their personal name and provide some tax relief and further they can control the rate at which they sell the units in the unit trust off to the SMSF.  The non geared unit trust provides an alternative to the traditional instalment warrant structure to those seeking greater tax minimisation and flexibility in their SMSF investing strategy.

unit-trust-senario-4

Options Trading

Recently, we have received enquiries from a number of our self-managed super fund clients regarding the permissibility of SMSFs to trade in options. Amidst the turbulence in global equity markets, the clients want to implement a hedging strategy by purchasing options over the existing portfolio of shares in the SMSF.

Options are a perfectly allowable investment for a SMSF, subject to the following minimum conditions:

  • Ensure that the fund’s trust deed does not prevent an investment in options. Most standard deeds generally state that the SMSF is allowed to invest in any investments that are allowed by the Superannuation Industry Supervison Act 1993 (SIS Act) and Regulations 1994 (SIS Reg). As such, options would be allowable unless the trustee have specifically inserted a clause to exclude them. However, please check your deeds and obtain professional advice.
  • Ensure that the fund’s written investment strategy permits the SMSF to trade in options (SIS Reg 4.09). If it doesn’t, the strategy should be updated to include the provision. For a more meaningful strategy (from an ATO perspective), it would be prudent to include the reasons for the trustees to undertake this investment
  • As options are classified as a derivatives contract under Reg 13.15A of SIS Regulations 1994, it is a requirement for the SMSF to have a Derivative Risk Statement (DRS) in place. The DRS explains the SMSF’s risk management policies when using derivatives.
  • Ensure that the options are held under the name of the trustees and correct name of the fund (SIS Act Section 52(2)d).

The above addresses simple situations such as a SMSF buying and selling options a few times a year. For complex situations such as very frequent trading, offering collateral and complex option strategies, please consult your accountant or financial advisor first.

 

Ridhwan Hannan & Ash Haq – SuperDiligence



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