Category: Money

Diversity in Self Managed Superannuation Funds (SMSFs)

By Heaney Business Group

Making a deliberate decision to have little diversity in Self Managed Superannuation Funds (SMSFs) is a choice many trustees make. Choosing to do this is acceptable however you must be able to prove this was an active decision and be able to justify your reasoning. The Australian Taxation Office (ATO) has stated: “a lack of diversification or concentration risk can expose the SMSF and its members to unnecessary risk if a significant investment fails.” The ATO has recently contacted over 17,500 trustees with concerns of a lack of asset diversity in Self Managed Superannuation Funds (SMSFs).  Trustees contacted hold 90% or more of the fund’s assets in a single asset or single asset class.

The Superannuation Industry (Supervision) Regulations state in section 4.09 that trustees must “formulate, review regularly and give effect to an investment strategy that has regard to the whole of the circumstances of the entity.”

In regards to the investment they must:

  • Evaluate the diversity of the strategy and the subjection of a lack of diversity
  • Evaluate  liquidity and the funds’ cash flow requirements
  • Understand the risks involved, its objectives and the cash flow of the fund
  • Evaluate the funds’ ability to release its liabilities and
  • Evaluate and have suitable insurance cover for members and assets

Area of concern

One area of concern being assessed by the ATO is property as low property prices have caused the asset value of many funds to decrease.

Recently, debt incurred by SMSFs has significantly risen. The number of SMSFs using Limited Recourse Borrowing Arrangements (LRBAs) to buy property has risen from 13,929 (or 2.9% of all SMSFs) in 2013 to 42,102 (or 8.9% of all SMSFs) in 2017. In regard to SMSFs that have bought a property through an LRBAs. These LRBAs amounts to an average of 68% of the fund’s total assets.

LRBAs are prevalent in SMSFs with a net fund size ranging from $200,000 and $500,000. The net fund size is inclusive of total assets, but excluding the value of the amount borrowed. The mean borrowing under an LRBA in 2017 was $380,000 and the average value of assets was $768,600

Need professional taxation advice? – Contact HBG Tax and Accounting

The team at HBG Tax and Accounting are your local Rockingham accountants with extensive experience in all areas of accounting and tax. Call the team on 08 9594 1963 to discuss your tax needs or call in and speak to the team at Unit 7, 12 Belgravia Terrace, Rockingham.

The material and content provided in this article is of informative nature only. It is not intended to be advice and you should not act specifically on the basis of this information alone. If expert assistance is required, professional advice should be obtained.

Contact Heaney Business Group today to talk about your SMSF

Director’s fees: What and How to Pay Them

By Heaney Business Group

Can you pay a Director?

Directors who work in the company, executive directors, would generally have an agreed executive remuneration structure that takes into account their service including attending Board meetings (so, generally no extra fees for service outside of the agreed remuneration structure).

For non-executive directors, companies can only pay Director’s fees if the company constitution allows for it or a resolution is passed to make the payments. The resolution to pay directors fees must be made and documented prior to the fees being paid.

These fees are in addition to any agreed expenses such as travel expenses to attend board meetings or in connection with the company’s business.

Fees paid to directors are subject to disclosure requirements. Special rules exist for listed entities, not for profits, APRA-regulated financial institutions and specific advice should be sought for the management of director fees by these entities.


Tax deductibility of director’s fees

Fees paid to Board members are tax deductible to the company in the year they are paid or intended to be paid. Many Boards pass a resolution to pay Director’s fees just prior to the end of the financial year to claim the tax deduction in that same year.  The fees do not necessarily have to be paid prior to the end of the financial year but the Board must have definitely committed to paying them and then the fees paid as soon as practicable.


Tax on director’s fees

Assuming the directors fees are being paid through an individual contractual arrangement (i.e. the contract is with Mr Smith to act as a director, not with Smith Pty Ltd to provide ‘someone’ as a director, and that happens to be Mr Smith), then the directors fees are treated like salary and wages for the purposes of PAYG withholding. PAYG is required to be withheld from the gross directors fees, reported on the IAS or BAS that is used to report the salary and wages and related PAYG W for that period, and should be remitted to the ATO.

Director’s fees fall within the definition of Ordinary Times Earnings, and superannuation guarantee applies.

Director fees are required to be reported on a payment summary, and are generally reported at item 2 of an individual’s tax return. If they are not reported on payment summaries, it could result in errors in the PAYG withholding annual report, and queries from the ATO regarding the payments.

While the ATO may recognise that there can be a difference in the provision of services by and payments to directors (e.g. the contract may be for ongoing director services and attendance at quarterly board meetings, with payments of director fees to be made once a quarter, not monthly), the PAYG W and superannuation contributions are still subject to reporting and payment by the standard deadlines that apply for all other employees.

The directors fee should also be included in any workers compensation calculation and would generally be captured for payroll tax purposes as well.


Can Director’s fees be paid as super contributions?

Yes, assuming the proper process has been followed (e.g., effective salary sacrifice arrangement has been entered into before the fees have been earned), fees can be paid to the Director’s superannuation fund as a reportable employer contribution to utilise preferential tax rates.  This assumes the director is within their contribution limits.