| Self managed Superannuation Funds | |
| Q: | What actually is a SMSF? |
| A: | Essentially, a SMSF is a superannuation fund that you control and run yourself. It cannot have more than four members and these are usually, though not necessarily, members of a family such as husband and wife and perhaps some children. A SMSF is subject to similar (though not identical) rules and legislation as large public superannuation funds. |
| Q: | Why do people choose to set up a SMSF? |
| A: | The almost universal reason given by our clients for wanting to set up their own superannuation fund is that they want to control their own retirement monies and see what is happening with their investments. Other reasons include wanting to cut down on costs and wanting to improve their investment returns. Unfortunately, the wish to achieve better returns than the large superannuation funds does not always happen. Your accountant or financial adviser can discuss the advantages and disadvantages of a SMSF for your particular situation. |
| Q: | How much will it cost us per year to have our own SMSF? |
| A: | Each year the superannuation fund will need to pay accounting fees to have the financial statements and tax return prepared, audit fees to have the transactions audited by an independent auditor, an ASIC fee if the fund has a corporate trustee, a fee to the actuary if the fund is partly in pension mode and an ATO administration fee. At present, the ATO fee is $180, the ASIC fee should be about $45, and the actuarial fee (if applicable) should be about $190. The cost for accounting and audit can vary significantly from fund to fund. For a guide as to what influences these costs, please click here. |
| Q: | Should I have a company as the trustee of the fund or just have myself and my spouse as trustees? |
| A: | In general, a corporate trustee, although more expensive, is a better and safer option in the long run. Funds which may have adult children entering and exiting the fund from time to time would be better with a corporate trustee. As members get older, they would also be better to change to a corporate trustee if they don’t already have one. |
| Q: | If I decide to set up a SMSF, how long does it take to have all the paperwork done? |
| A: | The fund can usually be set up within a few days. However, if you are planning on transferring money from an existing fund, that process can take a month or so depending on the other fund’s procedures. |
| Q: | If we set up a SMSF and decide it is not suitable for us, is it possible to shut it down again and how difficult is it to do this? |
| A: | It is quite simple to close a SMSF and transfer the funds back to a commercial or industry fund. However, it usually means selling all of the fund’s assets and converting them to cash. There are tax issues involved that need to be considered and there is a trailing period which people sometimes find annoying. For example, if you decide to cancel your fund in July, you will still have to prepare financial statements and lodge a final tax return for the financial year ending the following June, which cannot be done until after the end of that financial year. |
| Q: | My spouse and I are thinking of setting up a SMSF. What happens if we separate or divorce? Is my money still protected? |
| A: | Each member of the fund has their superannuation balance recorded as a separate account representing their share of the fund’s assets. Unless one party commits an act of fraud, each person’s share of the assets should be protected. As with any superannuation fund assets, there are of course family court issues that can affect a member’s balance. It should also be remembered that the accountant and auditor are acting for the fund and not the individual members and cannot act on the instructions of one member of the fund only. |
| Q: | I feel far more comfortable with property investments than with shares. Can I use a SMSF to purchase a rental property? |
| A: | Yes you certainly can use a SMSF to buy a rental property if the transaction is for cash. If you are planning to borrow money to make the purchase, it is a far more complex and expensive procedure. |
| Small Business | |
| Q: | I am planning to start my own business. What is the first thing I need to think about? |
| A: | Assuming that you have already considered the advantages and disadvantages of being a business owner, the first consideration is what sort of structure would be best suited to your situation. Typical structures, in order of complexity, are (1) sole trader, (2) partnership, (3) proprietary limited company, (4) discretionary family trust, (5) a combination of these. You really need to sit down with your accountant and talk about these options. At the same time you can talk through matters such as applying for an Australian Business Number (ABN), a Tax File Number (TFN) and whether you need to register for GST. |
| Q: | I would like to start my own business but how do I determine how much capital I will need? |
| A: | Almost certainly you will need some capital to get you going. How much you need will depend on the type and size of the proposed business, but a few things to think about are (1) how much will you need to live on until you start to receive customer payments, (2) how much money, if any, you will need to spend on stock or tools and equipment, (3) whether you will need to pay rent payments in advance, install telephones, computer cabling etc. Have a talk to your accountant to get a ballpark idea before committing yourself. |
| Q: | My accountant says that I made good profits last year, but I have no cash. Where has the money gone? |
| A: | Often, the business owner has drawn more money from the business for private living than he realised or he has paid a lot of private expenses out of the business bank account during the year (and these are not taken into account in calculating profit). Alternatively, the business owner may have been paying off loans and reducing debt which is not taken into account in calculating profit. Your accountant should be able to jot down a few rough figures in a few minutes, which will give you some idea of where the money has gone. |
| Q: | My friend has a similar business to me but he says he never pays any tax because he has a company structure. How can this be? |
| A: | We are very fortunate, those of us who have ‘friends’ who are tax experts but in reality your friend’s circumstances may be a lot different to yours. It often turns out that he is not paying any tax because he is not making any money notwithstanding how successful he may tell you he is. |
| Q: | My next door neighbour says he is able to pay all of his expenses through the business bank account and this saves him bank fees as he does not need a private bank account. Can I do this too? |
| A: | You can do this and your accountant will love it as your accounting fees will double from having to sort it all out. You will not save any tax and the higher accounting fees will well exceed the cost of having a separate personal bank account. |
| Personal Tax Matters | |
| Q: | If I can complete my tax return on line using the ATO website, why should I pay to have a tax agent to do it? |
| A: | We encourage people with simple tax affairs to have a go at completing their own return on line themselves. This is especially helpful for younger people as it gets them involved in their own tax affairs. If you get into trouble you can always ask us for help. For people with more complex affairs, for example with rental properties or other investments, it is usually better to get an experienced tax agent. Also, if you expect to have a large tax bill, you may like to take advantage of the tax agent’s extended lodgement program which will give you approximately an additional four months to pay your tax. |
| Q: | How long does it take to get my tax return prepared with your firm? |
| A: | You will first need to make an appointment (and during the busy July to September period this may involve a bit of a wait). However, once you come in, 90% of all jobs are completed on the spot. It usually takes 45 minutes for a simple return or about 75 minutes for a more complex return. Refunds are normally paid by the ATO within about ten days. |
| Q: | I know this year that I am going to have tax to pay, so what is the latest date I can come in to get my tax done without being penalised by the ATO? |
| A: | When lodging through a tax agent with a full lodgement extension, the latest date for lodging the 2011 returns will probably be 5 June 2012, with any tax payment due on lodgement. However, payment dates are batched so any returns lodged from mid March 2012 onwards will also probably be due for payment on 5 June 2012. |
| Q: | For the last few years I have always had a tax refund but this year I have tax to pay. How can this be? |
| A: | There can be a lot of reasons for this but many people have been caught out with the changes to the spouse rebates in the 2010 financial year. Another common reason is that your Pay As You Go (PAYG) instalments were reduced in the current year. If you ask your accountant to give a brief explanation of the differences, they should be able to do this quite simply. |
| Q: | I have a rental property. I borrowed $400,000 to buy the property using a line of credit. Now my accountant says I can’t claim the interest on the full $400,000 because I put some temporary holiday savings money onto the line of credit for a few months. Why is this? |
| A: | It is the purpose of the borrowing that determines whether you can claim an interest deduction. The original borrowing was for the rental property and this is fine. However, you then reduced the amount of the loan by putting the temporary money against it. When you withdraw the temporary money it is deemed to be a withdrawal for private purposes and not to reinstate the original borrowing for the rental property. This is a common trap that many people fall into. Call your accountant before you undertake such a transaction as it can be impossible to reverse once it has occurred. |
| Q: | I haven’t submitted a tax return for a number of years but I think I should have done so. How do I go about bringing things up to date? |
| A: | You will almost certainly feel a lot better once you have sorted out your outstanding tax matters and it is not as difficult as you might think. The ATO tends to be sympathetic with people who voluntarily bring their affairs up to date. The first step is to contact an accountant who can quickly assess your situation and tell you what the ATO records show about your affairs. From there it is relatively easy to progressively lodge any outstanding returns. |
| Q: | What do I need to bring along to have my tax return prepared? |
| A: | You need to bring along any payment summaries received from employers, details of any interest earned during the year, dividends from shares etc. and any other income. On the expenses side, the accountant can advise you in more detail but, in general, anything that you spend in deriving your income is worth mentioning. Using your own car for work (but not driving to and from work) is a significant tax deduction that is often overlooked. |
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