SMSF UPDATE - OCTOBER 2014 SMSF REVENUE EXPECTED TO SPIKE Accountants in public practice are banking on the SMSF space, with nearly a third expecting the sector to deliver revenue growth of over 50% in the next three years, new research has found. The Future of SMSF survey, a joint research study by The SMSF Academy and BGL Corporate Solutions also found 42% of respondents expect revenue growth of up to 25% in the same period. The majority of respondents (69.7%) said they expect to see additional revenue in the areas of administration and compliance while 57.8% also recognised the opportunity in strategic advice. The report also showed 55% of respondents looking to expand their existing services said limited licensing presents the biggest opportunity. Many practitioners see the ability to provide strategic advice as important to their SMSF clients, without focusing on advice around investment strategy and insurance, according to the report. The survey also found remaining competitive in pricing and fee recovery is a key challenge for SMSF professionals. In an open letter to the SMSF profession, The SMSF Academy's Aaron Dunn said he expects to see fee pressure continue to increase forcing practitioners to offer more. "Over the coming years, I expect to see fee pressures rise and trustees questioning the value of what they get from this annual compliance approach," Mr Dunn said. "Many trustees (and their advisers) are already demanding more — how to manage key risks within the fund, including contribution caps, pension limits, their fund investment strategy and more." On average, the fee charged for SMSF compliance and administration services is $2,371, with a median of $2,250, the research found. By Michael Masterman

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ARE DEATH BENEFIT NOMINATIONS BINDING? The law allows a member to set whether their Death Benefit Nomination is to bind the other trustees (or the other directors) or merely guide them. If a member's Death Benefit Nomination: 

is binding, then the trustees (or the other directors) must arrange for the

relevant amounts to be paid exactly as the member directed. However, the law says that a binding Death Benefit Nomination lasts for only 3 years. So a member needs to consider whether to make a new binding nomination, or to confirm the existing binding nomination, within 3 years after the date of the existing nomination. (There is some controversy about this point). 

is non-binding, then the trustees (or the other directors) still have a

discretion as to how the relevant amounts are to be paid. That is, they are not bound to follow the member's wishes. Some people use a binding Death Benefit Nomination in situations where the member thinks that the other trustees (or other directors) might distribute the money in a manner that is not consistent with the member's wishes. In some families, this is a likely scenario. They need to consider: 

keeping the binding Death Benefit Nomination up to date because it lasts for only 3 years from the date it was signed or last confirmed; or

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arranging a Death Benefit Agreement which is binding, and permanent until the member revokes it or replaces it.

We have attached a sample Binding Death Benefit Nomination form for your use.

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PITFALLS of OVERSEAS PROPERTY INVESTMENT Trustees need to consider the following factors, plus the compliance challenges, before embarking on overseas property investment. Expert legal advice is strongly recommended, and accounting and related advice should be obtained - both in Australia and the overseas jurisdiction, before SMSF Trustees buy overseas property. Experience has proven that dealings with different overseas jurisdictions can result in complicated legal analysis to ensure everything is properly bedded down. Increased costs In addition to the compliance aspects outlined, there are often inflated costs for the property transaction that must be taken into account. These may include:       

costs in sourcing the property (such as a buyer's agent or advocate in the foreign country); having maintenance and repairs undertaken; costs for the lawyers and advisers overseas to complete the conveyance and provide ongoing advice; costs of creating and maintaining a structure, such as a company, in the jurisdiction; overseas tax compliance; documentation to allow fund borrowings, if required; overseas land and wealth taxes; costs associated with dealing with tenants (evicting a tenant may not be a straightforward process in overseas jurisdictions);

and a range of other reporting and other obligations.

In-house assets The in-house assets rule provides perhaps the most common constraint on overseas investment by SMSF trustees. Some overseas jurisdictions require that a company or similar vehicle in the foreign country must hold the property. This means that a company uses its capital to buy the property, while the SMSF trustee acquires shares in the company. In some Asian countries, SMSF trustees pay a local native to hold the title on their behalf. It has been questioned previously whether this arrangement will hold up under the foreign country's laws. Exceptions to the in-house asset rule are outlined in 13.22C of the SISR. But among other issues, the exceptions will not apply if the company being acquired establishes a bank account with an overseas bank. Unfortunately, many SMSF trustees are 'lambs to the slaughter'. Smooth real estate agents tell them they are buying real estate — but when the deal is done and the advisers get involved, the detailed requirements of the local jurisdiction's law become apparent and a company or similar structure may be needed. This results in many falling into this compliance trap, with great downside risk and substantial costs to unwind the transaction. Investment with borrowings If the SMSF trustee acquires the property by using a limited recourse borrowing arrangement, new risks appear. Firstly, if the property being acquired has to be held via a foreign company, we question whether a bank would be willing to lend: their security is merely shares in a company or units in a unit trust. Moreover, few overseas banks that provide documents that are consistent with s67A requirements. Thus, the LRBA may not be limited recourse or may otherwise contravene the

law. As an alternative or supplement to taking security over the shares of the foreign company, the bank may seek to take security over the overseas property itself. If it were to do so (and the property was held via a foreign company), this would contravene the requirements of Reg 13.22C of the SISR. As such, the SMSF trustee's investment in the foreign company would be an in-house asset again, with numerous potential penalties and downside risk. If a related party lends instead of a bank, it is questionable whether that lending will be at arm's length, unless evidence can be gathered that the friendly-party LRBA terms and conditions are consistent with arm's length practices.

The overseas property challenge: key points   

SMSF trustees can invest in overseas property Either with or without borrowings, the compliance requirements are steep Compliance costs and a wide range of other costs may make the investment less attractive

BINDING DEATH BENEFIT NOMINATION As Trustee of ________________________ SUPERANNUATION FUND I,

____________________________________________________

of,

____________________________________________________

Date of Birth: ___________________________ BENEFICIARY DIRECTION I direct the Trustees that the following persons are to receive the benefit payable in the event of my death. PERSON

RELATIONSHIP TO MEMBER

PROPORTION OF DEATH BENEFIT

MEMBERS DECLARATION 1. My beneficiary(ies) and I will be bound by the provisions of the Superannuation Fund Trust Deeds relating to binding death benefit nominations where applicable. 2. This binding nomination is valid from the date of receipt or any confirmation or amendment of it. ____________________________________

______________________

Applicant’s Signature

Date

WITNESS DECLARATION I declare that I am over 18, I am not a beneficiary nominated on this form and the member signed this binding nomination in my presence. ____________________________

____________________________

Witness

Witness