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(October-2001) Weighing up SMSF options
The recent growth of the self-managed superannuation fund (SMSF) has presented many opportunities for master trust providers.
General estimates suggest there are about 230,000 self-managed superannuation funds in Australia holding varying amounts. The consensus of opinion is that it is not viable to create a SMSF unless there is at least $100,000 of assets.
Tower Trust national manager superannuation Peter Burgess says it is usually high-net-worth clients who use a SMSF as a tax-planning vehicle.
“There is no one reason for setting up an SMSF, but people are looking to maximise their benefits for retirement,” he says.
However, running a SMSF or an APRA-approved small superannuation fund is not easy, with increasingly complicated compliance and investment decisions required from the trustees of the funds.
Master trusts have provided a lot of investment flexibility, but they also have drawbacks for SMSFs.
“People really want to manage their funds for tax-planning opportunities, which are not present in master trusts,” Burgess says.
“Using things like reserve accounts to minimise excess benefits tax and surcharge may not be a viable option for master trusts, but they certainly are and always will be a viable and common option for SMSF clients.”
With a trust deed it is possible for non-mandated employer contributions to be allocated to a fund reserve, instead of the individual member’s balance, he adds.
Then, on retirement, an allocation can be made from the fund reserve to the relevant member up to their lump sum Reasonable Benefit Limit (RBL).
“The funds remaining in the fund reserve can then be allocated to other fund members, perhaps gradually over the next few years to avoid any surcharge implications,” Burgess says.
“While it is possible for master trusts to establish fund reserves, each member of the fund has an equitable ownership of the reserve which makes it difficult, if not impossible, to provide this type of strategy.”
The argument for using a master trust for a SMSF is to simplify the investing process and make compliance easier, says Norwich Union Navigator general manager product development Bruce Hawkins.
“A master trust enables the investments to be kept in one place, thereby creating a simple reporting procedure,” he says.
The Navigator master trust allows direct share reporting, as do many other trust providers’ products.
Hawkins says direct share reporting covers areas such as dividend repayments, franking credits and valuation, all areas a SMSF trustee would need to record for the end-of-year statements.
“A master trust can deliver a consolidated report on all investments, with the exception of direct property and alternative investments such as paintings and antiques,” he adds.
“This would enable a SMSF to comply with all taxation and compliance requirements.”
Hawkins estimates that 60 to 70 per cent of all investments would be covered by a master trust reporting systems. “That takes away the various different reporting problems from the client or their adviser,” he says.
Hawkins also dismisses the argument that investing in a master trust results in the SMSF trustee losing control of the investment strategy.
“Master trusts don’t rake away control,” he says, “they give a selection of managers and products.”
Navigator, for example, has 28 different fund managers giving the investor access to 110 different products as well as all listed securities on the Australian Stock Exchange. And, an SMSF still has the option of placing money outside the master trust if the trustee opts for more risky investments.
Hawkins adds that, through the master trust, a SMSF also gains access to wholesale funds, which are denied to the normal retail investor.
“Master trusts can offer discount pricing while also giving access to funds at wholesale rates,” he says.
On the SMSF level, fees for a master trust are normally about four per cent on entry, but ongoing fees vary depending on the amount of funds invested. Some industry experts have, however, estimated that a SMSF has to make returns of at least three per cent to cover these administration costs and fees.
At the end of the day, it is the administration benefits that will sway the final decision of whether to go into a master trust, Hawkins says.
After all, he notes, what a master trust does is take out the administration burden of the various investments that a SMSF might have in the fund.
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