If you’re a wage earner, your employer takes care of your superannuation contributions.  If you choose, you can have little to no input in what is going on.

However the situation is very different if you are self employed.  Depending on the size and structure of your business, it may be that you are on the payroll and therefore receive some compulsory employer contributions.  However for most business owners that I deal with, if they are on the payroll it is for a nominal amount.  There major income comes from drawing down the profits of the business.

So lets consider the situation where either all or the majority of your income is derived by drawing down the business profits.  There are 4 key points to know:

1. How much must I contribute to super?

None.  As a self employed person there is no legal requirement for you to contribute anything into super.

2. What is the maximum I can contribute into super?

The current (2011/12) annual threshold is $25,000 of tax deductable contributions (note – you can contribute more in “after tax” contributions but that’s a separate matter).  If you are over age 50 there are currently provisions to contribute up to $50,000 in 2011/2, though this higher cap for over 50’s is due to cease.  The government is yet to confirm whether people over age 50 will continue to have a higher cap in 2012/13 and beyond.

3. Why should I contribute to super?

Because it is the most tax effective place in which to save for your retirement.  And you definitely need to save for your retirement because the Age Pension isn’t very generous and will only get worse as our population ages.

Also because of the annual contribution caps mentioned above, it’s not like you can ignore super until you’re 50 and then go hell for leather in contributing for the last 10 or 15 years of your working life.  You simply wont be able to put enough in to generate a comfortable retirement income.

4. But I hate giving my money to fund managers, all they do is charge me fees.

You should talk to us about setting up a Self Managed Super Fund (SMSF).  SMSF’s are very popular with business owners and the self employed, as they offer far more control in how your savings are invested.

Be very careful regarding the contribution limits.  If you exceed them the tax penalty can be quite severe.

Got some questions?  Give us a call on 03 9870 6544, or send us an email.

Download our Free ebook – SMSF – Australia’s most popular way to save for retirement.  Click on the green “Learn more about SMSF” on the right of this page.

This information is of a general nature only and has been prepared without taking into account your particular financial needs, circumstances and objectives. While every effort has been made to ensure the accuracy of the information, it is not guaranteed. You should obtain professional advice before acting on the information contained in this publication.

Guidance Financial Services – specialist financial planning advice for business owners and the self employed.

Photo from http://www.flickr.com/photos/guidancefs/

The Financial Planning Association (of which I’m a member) are currently promoting the difference between Certified Financial Planners and the rest, so that consumers are better informed when seeking out financial planning services.  I fully support this initiative.  If you are interested, the details can be found here.

Download our Free ebook – SMSF – Australia’s most popular way to save for retirement.  Click on the green “Learn more about SMSF” on the right of this page.

Guidance Financial Services – specialist Financial Planning advice for the self employed and those running a business.

Long Term Growth Chart

A really interesting chart produced by Morningstar here showing returns for the various asset classes since 1989.

The rollercoaster in the Listed Property space is a highlight.

Australian Fixed Interest would have been a pretty good option over the period, as would International Fixed Interest if you happened to hedge it against currency fluctuations.

Wouldn’t be hard for Aussie shares to have a bit of a bounce and get their nose in front in the coming years – here’s hoping anyway!

An article in today’s Australian Financial Review reports that assistant commissioner Stuart Forsyth is “open to suggestions about what more” the ATO can do to make SMSF trustees aware of there responsibilities.  This follows a recent court case where trustees were fined $50,000 and ordered to pay the Tax Office’s legal costs after being found guilty of 62 contraventions of the Superannuation Industry (Supervision) Act.  The trustees in this case actually got off fairly lightly since the maximum penalty is $220,000 per breach.

It is suggested that trustees are getting into trouble because they are listening to information from friends and relatives and only getting half the story.  Of particular concern is trustees being unaware that their Self Managed Super Fund cannot buy a residential property from a related party (eg. themselves or a company they control).

This article once again highlights the importance of receiving appropriate professional advice when dealing with Self Managed Super.  When you are running your numbers on whether to head down the SMSF path, factor in the cost of having access to a professional adviser.  If you can’t afford this advice, then perhaps an SMSF isn’t right for you.  After all, your superannuation savings will amount to hundreds of thousands, if not millions of dollars, by the time you reach retirement.

Download our Free ebook – SMSF – Australia’s most popular way to save for retirement.  Click on the ”Learn more about SMSF” button on the right of this page.

Professional fund managers digest mountains of ratios and statistics when evaluating investments. However for the rest of us, there are two pieces of information which are easily obtainable and provide considerable insight. These are the Price Earnings ratio, and the Dividend Yield.

Price Earnings ratio – Commonly abbreviated to the PE, this is a ratio of the price of the share, divided by the earnings per share. So if company XYZ was trading at $10, and in its last earnings notice it declared earnings of $1 per share, then the PE would be 10.
Most companies trade on PE’s of between 10 and 15 times. It can be interesting to compare the PE’s of companies in the same industry, e.g. the banks, to see which banks the market is rating more highly than their peers.

A high PE often reflects an expectation that earnings will grow strongly in the future. In contrast a PE under 10 typically suggests that the market anticipates earnings will decline in future. As an investor you can consider whether you believe the market assessment is correct.

Dividend yield – this is the income rate of return from the share and can be compared against bank interest rates.

Resources companies such as BHP typically pay quite low dividend yields of around 2%, because they tend to pour a lot of their profits into expansion of the business, rather than paying out dividends. The banks on the other hand are more generous, usually paying 5-6%. And then there’s franking credits on top, but that’s for another day.

Importantly both these statistics relate to the share price on that day. If you already own the shares, and purchased them at some other price, it has no relevance.

It is also important when considering both of these measures to remember that the earnings numbers they are working off are historical, and of course always obtain expert advice before investing your hard earned money.

Of course always obtain expert advice specific to your circumstances before making an investment.

Download our Free ebook – SMSF – Australia’s most popular way to save for retirement.  Click on the “Learn more about SMSF” button on the right of this page.

As flagged in our breaking news post earlier in the week, the ATO has announced a significant change around the issue of Self Managed Super Funds (SMSF’s) being able to improve properties acquired with borrowed funds.  They had previously advised that whilst repairs were no problem, a trustee could not make improvements to a property owned by a super fund where borrowings had been used.

This caused investors considerable angst, as it was common to acquire a property for rent, and perhaps put in a new kitchen or modernise the bathroom for instance.

Thankfully, the ATO has had a change of heart.  They have now stated that improvements are okay, so long as the SMSF does not use borrowings to complete the improvement.

The full Draft Ruling can be found here.

Within the ruling there is a helpful definition of what constitutes an improvement:

In contrast to repair, an asset is improved if the functional efficiency of the asset or the value of the asset is substantially increased through the addition of new and substantial features or rights or bringing a thing or structure into a more valuable or desirable form, state or condition than a mere repair would do.

The crucial change in approach from the ATO is found here however:

Money other than borrowings used to improve an asset

Although borrowings under an LRBA cannot be used to improve a single acquirable asset that is the subject of the LRBA, money from other sources could be used to improve (or repair or maintain) that asset. However, any improvements must not result in the acquirable asset becoming a different asset.

LRBA stands for Limited Recourse Borrowing Arrangement which is the technical jargon for the mechanism through which SMSF’s are able to borrow.

This change in approach should open up further the opportunities for Australian’s to utilise there superannuation savings to engage in property investment as a means to funding there future retirement.

Looking to set up a Self Managed Super Fund (SMSF)?  We have the experience and expertise to ensure this is a painless experience for you. – phone 03 9870 6544.

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The Australian Financial Review reports this morning that the ATO will be releasing a draft ruling which dramatically alters their position on SMSF’s being able to improve properties.  (Refer past blog item SMSF Property Investment Trap).

According to the AFR, the ATO will now allow SMSF’s to improve a property, provided borrowings are not used to make the improvements and the asset isn’t fundamentally changed.

The ATO’s assistant tax commissioner Stuart Forsyth is quoted “You can’t use borrowed funds to improve, but you can use money inside the fund to make improvements so long as they don’t fundamentally change the nature of the asset”.

Once we have access to the Draft Ruling we will provide a more detailed summary of these significant changes.

At Telstra’s current price of $3.05, it is trading on a PE of 11.37 against a market average of 12.64, and a dividend yield of 9.3%, or 13.29% grossed up for franking credits (great for SMSF’s, especially those in pension phase where they get the full franking credit refunded).

In its last profit result Telstra managed to show some growth, a departure from results over previous years. Sure land lines are in decline, but the number of calls isn’t declining, it’s just switching to mobile. And internet usage isn’t in decline. They also confirmed they would maintain dividends at current levels.

After the result Telstra got some further good news when an analysis by Grant Samuel estimated that Telstra would be $4.7billion better off as a consequence of its deal with the government on the NBN. Interestingly, were the NBN to be scrapped by a change of government, the report estimated Telstra would be between $6.4 and $11 billion dollars better off – it seems it just can’t lose.

Click here for an Income Protection Quote:

Income Protection quote

Still not convinced? Telstra management are. Since the profit announcement, the CEO David Thodey has spent $562,922, outgoing financial controller John Stanhope $349,576, and chairwoman Catherine Livingstone $45,900, buying Telstra shares. If they don’t have a good feel for the company then what hope the rest of us?

Disclosure – the author Paul Benson holds Telstra shares.

The Australian Financial Review reported this morning (26/8/2011) that once again the Self Managed Super fund sector was the fastest growing in the retirement savings space.  There is now $418billion in Australian self managed funds, held by 456,472 funds.  During the June quarter, 7,466 new funds were established whilst only 64 were wound up.

SMSF’s held $139billion in shares and $114billion in defensive assets (primarily cash).  Investment in residential property grew to $14.5 billion, as more and more people realise that self managed super funds can now borrow, making access to this investment far more attainable.

24.2% of funds had balances of less than $200,000.

Download our Free ebook – SMSF – Australia’s most popular way to save for retirement.  Click on the “Learn more about SMSF” button on the right of this page.

Why is my Life Insurance paid for by my super fund, but my Trauma and Income Protection not?

When reviewing and discussing our clients personal insurances we are regularly asked questions along these lines. For most of us, it’s handy to have your life insurance premiums paid by your super fund, because otherwise we would need to find the monthly premium money from the household budget. For many people this would result in less or perhaps no life insurance.

Life and Total & Permanent Disability (TPD) insurance premiums are tax deductable to superannuation funds, however they are not tax deductable to individuals. As a consequence, it makes sense to run your Life and TPD cover through super, as the after tax cost will in most cases be lower than were you to pay for it directly.

Income Protection can be obtained through super, where it is known as Salary Continuance. These policies are not as fully featured as an Income Protection policy due to superannuation laws. However where someone couldn’t otherwise afford to have Income Protection cover, Salary Continuance through super is certainly preferable to nothing at all.

Click here for an Income Protection Quote:

Income Protection quote

Unlike Life and TPD cover, Income Protection premiums are tax deductable to individuals. Since individual tax rates are typically 30%+, as against super fund tax rates of 15%, there is no compelling after tax cost case for running your Income Protection through super. And, as mentioned, Income Protection outside of super tends to be a more comprehensive product.

The issue with Trauma insurance is a little different. Whether owned by you individually, or by a super fund, the premiums are not tax deductable. However the problem were Trauma cover owned by a super fund, is that superannuation legislation would not permit a payout to be released to the member. So for instance a super fund member could be diagnosed with cancer, the insurance company pays the Trauma insurance out to the super fund, but the superannuation fund then can’t release that payout to the member until they reach age 60 and retire. The idea of Trauma insurance is to provide you with a lump sum of cash so that you can meet whatever expenses come up and not be worried about money during your recovery. It’s not much good if the money is stuck in super until you retire.

As a consequence, super funds simply don’t offer Trauma insurance to their members.