Self Managed Super

[Julia]

Boggo, the Trust Deed doesn't need to show what the Fund is investing in, unless presumably you have incorporated the Investment Strategy into the Trust Deed.

To do this wouldn't seem to make much sense as pretty obviously the investment strategy for most people is going to change according to market conditions and the situation of the member(s).

I just update the Investment Strategy from time to time and this is just a couple of paragraphs.

 

[Boggo]

I just update the Investment Strategy from time to time and this is just a couple of paragraphs.

Not that simple with derivatives (assuming writing options are an approved derivative), a dividend risk statement (DRS) must be prepared and both the Investment Strategy and Trust Deed must reflect that ability is my understanding of the rules, I am willing to be corrected though.

LawCentral
and
SuperGuide

 

[village idiot]

thanks for your reply boggo. have already trawled the ATO website without much luck.

this is from your first link;

What is a derivative?
A derivative is defined as a ‘financial contract whose value depends on, or is derived from assets, liabilities or indices (“the underlying asset’). Derivative Transactions include a broad assortment of instruments such as forwards, futures, options, share ratios, warrants, swaps and other composites.’

Can my Self Managed Superannuation Fund invest in derivatives?
If your Self Managed Superannuation Fund Trust Deed and Investment Strategy allows this type of investment, then yes.

the second para seems to confirm the point about the trust deed, but i would assume a blanket statement about buying and selling ETOs would cover that part of it.

dealing in options is clearly ok, but the problem i have taking statements like the above as confirmation is that they all use the term 'invest in', which to me implies buying rather than writing, which might or might not match the intent of the rules. I am not sure if this is deliberate or they are just using the word incorrectly.

 

[Julia]

You're likely right about the Trust Deed having to specifically allow for derivatives, Boggo.
I don't use them so haven't had to consider that.
If I wanted to get a clear definition I'd be contacting the ATO rather than just relying on my interpretation of anything on their website.

 

[Boggo]

If I wanted to get a clear definition I'd be contacting the ATO rather than just relying on my interpretation of anything on their website.

Agree Julia, especially if intending to write puts.

I had to produce a DRS etc a few years ago to be compliant when using Instalment Warrants.

 

[village idiot]

boggo, moved response re 'Superannuation warehouse' here to keep both threads on topic;

yes well that will depend a bit on how quickly they respond and how well they answer the questions I put, so I will let you know how that turns out....

apart from that, I am impressed by their website and the information on it (templates etc), and the $79/month deal seem the best I have come across for what it includes (although I havent trawled them all for sure). Provided you supply them with good data and check the work they send back, i dont see any need to pay any more.

I have downloaded their templates and amended them, and as long as they look like they are somewhat efficient in responding to my queries I think I will be giving them a go.

In fact if I didnt trade options and just wanted a place to store shares, I would have no problems swapping to Bell Direct and going for the $39/month deal, as their share trading costs at $15/.1% are less than comsec anyway

 

[village idiot]

superannuation ware did respond last night. here are the 2 questions and their answers;

1) Are there any known problems with using Interactive Brokers as broker for shares and options? There seems to be some possible problem in that they dont offer Chess Sponsorship so there is no HIN (at this time). They also do not issue a dividend statement which specifically notes the franking amounts and tax credits on dividends. But it is easy enough to look up the franked % and rate on the ASX website and apply them.
2) Is or is it not Ok to write options in a SMSF, and are those sort of transactions covered under your monthly fee ? I am thinking here of covered calls (pretty sure these are ok) but also puts. I cannot find any definitive answer on writing puts on the net.
Further, if written puts are allowed, is it known whether they must be 100% cash secured, or i am thinking it would be ok as long as the margin requirements are covered with cash (which is the equivalent of posting margin for CFDs in cash).


ANSWERS
1. You can use any broker you want as long as the account name is in the name of your SMSF. Dividends should be deposited in the bank account or will be reflected on the broker statement as a re-investment.

2. You want write call or put options. As long as the purpose of the fund is to provide for your retirement income. You can not be an active short term trader running a business in a SMSF. Writing call and put options is earning an income on an asset, so thats OK.

 

[Boggo]

2. You want write call or put options. As long as the purpose of the fund is to provide for your retirement income. You can not be an active short term trader running a business in a SMSF. Writing call and put options is earning an income on an asset, so thats OK.

Is that a contradictory statement or am I misunderstanding it ?

Instalment warrants are the limit of my derivatives.

I will be in Melb sometime in the next few weeks so I might pop in and see these people.

 

[Julia]

The following comes courtesy Colin Twiggs who probably won't mind it being reproduced here.

What's New: Borrowing Inside Your SMSF
By Warrick Hanley and Nathan Baker
July 13, 2011 2:00 p.m. AET

This newsletter is subject to Incredible Charts Terms of Use.


BackgroundSMSF Education is Australia's leading online educator for Self Managed Superannuation Fund trustees. Two of their founders Warrick Hanley and Nathan Baker have extensive experience in the SMSF sector, both being principals of their own SMSF specialist advice firms and accredited SMSF Specialist Advisors. They are active participants in the DIY Super industry with Warrick a former Director of the Self Managed Superannuation Professionals Association (SPAA) and Nathan on the SPAA National Regulatory Committee.

SMSF Education is the only education provider to have their content reviewed by an external party and accredited via SPAA as part of their industry best practice standards for SMSF Trustees. This ensures the information provided remains at the highest standard.

I hope you enjoy this guest article.
~ Colin Twiggs

Prior to 1999 super funds commonly used related trusts in which to hold leveraged assets. However, after 1999 funds could no longer establish these trusts, meaning that if the SMSF trustee wished to purchase an asset they needed to have sufficient money within the fund. This was a considerable problem when dealing with particularly large assets such as business real property.

Legislation introduced in 2007 with respect to instalment warrants took the industry by surprise as it once again allowed private borrowing structures provided certain criteria are met. Suddenly buying leveraged assets within a SMSF was once again possible.

The important difference between an SMSF borrowing directly and, for example, investing in an unrelated unit trust which has borrowings, is that within the unit trust arrangement the liability for repayment of that debt is limited to the value of the units purchased. In setting up any future borrowing trust, maintaining this limited liability is of vital importance if the trust arrangement is to comply with the law.

The current government has expressed concern as to whether leverage is appropriate within superannuation and whether there could be a rise in opportunistic marketing on the part of product manufacturers. To date, there has been little evidence of this. However, recent changes have further restricted the use of these structures, and if you are thinking of setting one up, make sure you know the limitations and whether these still suit your purpose.

As it now stands a superannuation fund is permitted to borrow under the following circumstances:

the borrowing is in the name of the SMSF trustee
the borrowing is to acquire an asset that the SMSF trustee would normally be allowed to acquire (for example, the SMSF cannot acquire residential property from a member using a borrowing trust, because this would breach the rule concerning acquisition of assets from related parties)
the asset must be held by a separate trustee (a bare trust)
the SMSF trustee makes an instalment payment to receive beneficial ownership of the asset
further payments are required to obtain full legal ownership
all income such as dividends, rents or interest accrue for the benefit of the SMSF trustee
the borrowing is limited recourse: the lender's right to recover in the event of default is limited to the primary asset being purchased
at the end of the loan period the holding trustee transfers full legal ownership
It is very important that you get the structure right or it will cause problems with respect to compliance, which can necessitate a very costly unwinding of the transaction as well as incurring penalties. It can also lead to increased tax and/or stamp duty.

Who Can Be the Lender
Banks: These perhaps remain the most common form of finance. While the banks are warming to this sector the disadvantages can be a relatively low lending ratio and a premium interest rate being charged due to the limited recourse nature of the loan. The banks may also ask for personal guarantees on the part of the trustees and/or members and this is permissible provided the rights of the guarantor are limited in the same way as the lender.

Member Finance: Where the member has sufficient assets or the capacity to borrow against other non-superannuation assets and subsequently extends finance to the super fund. This can overcome many of the problems which arise when financing through third parties.

Limitations of the Borrowing Rules
It is important to remember that the super fund can borrow to purchase an asset or a replacement asset. The borrowing rules do not extend to the situation where you wish to borrow in order to renovate or improve an asset. Nor can the super fund refinance an asset that is currently debt free within the fund or re-leverage the asset that is held within the borrowing trust.

The new laws further restrict this to the purchase of a single asset or group of identical assets. For example, a building or a parcel of BHP shares would be acceptable. The former is a single asset, while the second is a group of identical assets. However, you would not be able to use the trust to purchase a diversified portfolio of different shares. The new rules also significantly limit your ability to change the asset being held. Selling one property and buying another will not be allowed, nor would selling your BHP to buy ANZ. Likewise, you could not partially sell down your BHP to take some profit, as the entire parcel must be treated as a single asset.


ATF = As Trustee For

Apart from the ability of the borrowing trust to accept a replacement asset in limited circumstances, the trust is to effectively be a one transaction vehicle. So each time you wish to purchase a new asset with leverage you will need to establish a new trust. After the recent natural disasters there are also some serious questions being asked about the ability to rebuild an existing asset even where insurance makes this financially viable. The problem is that this would be considered a replacement asset of a type not permitted by the legislation.

The introduction of instalment warrant structures has certainly been a welcome move for SMSFs. It is of course important not to lose sight of the fact that the introduction of debt within your asset pool will increase the level of risk that you face. It still needs to fit within your investment strategy and you need to consider your fund's liquidity and insurance needs if a large asset such as property is to be introduced. Finally, there is a legislative risk here, both in terms of the restrictions that are already enforceable, and the very real chance of future change. Weigh up your opportunities and risks carefully.

 

[Mattie J]

For anyone using IB for your SMSF do you mind letting me know who you use for you admin work? And if an online provider do you recommend them?

Obviously Esuper is out with IB. The increase commissions on option contracts for me would be around $3,000 pa which would more than wipe out any savings in admin fees.

I am with Commsec now with the SMSF but use IB for all other trading. Once you use IB it is hard to stay with Australian brokers when you realise how overprice and crap their trading platforms are.

I spoke with someone at http://www.superaccounting.com.au who informed me you can use IB as your broker for around $1,500 pa for 300 transactions. He also warned about selling puts in a super fund and said selling covered calls would be safer. Hmm right, so I told him I sell synthetic covered calls, he said that was fine.