30/04/2002 - 22:00

Control and flexibility of family DIY funds proves a potent mix

30/04/2002 - 22:00


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RUNNING a DIY superannuation fund can be costly, time consuming and entails significant legal responsibilities.What, then, are the benefits that attract so many investors to DIY super?

RUNNING a DIY superannuation fund can be costly, time consuming and entails significant legal responsibilities.

What, then, are the benefits that attract so many investors to DIY super?

Julie Matheson, director of financial planning firm Sovereign Bridge, said DIY funds offered many estate planning and tax planning advantages.

One way of achieving these benefits is to pool a family’s assets in a single fund.

“A family DIY fund provides an effective and flexible means of shoring up a family’s long-term financial position,” Ms Matheson said.

Members of a family DIY fund can be replaced without affecting the activities of the fund and may include two or three generations at any point in time.

While the younger generations would be contributing to the fund, their parents or grand-parents could be drawing a regular income from the same fund in the form of a lifetime complying pension or allocated pension.

Any surplus from a complying pension is retained in the fund as reserves and can be used to boost returns for other members.

Family DIY funds can be used to pass assets between generations without crystallising capital gains.

The different generations could have their own investment strategies. For instance, the grandparents could invest their portion of the fund’s money to produce a regular tax-effective income, while the children may focus on capital growth.

An important advantage is that the fixed costs of running the fund can be shared between members.

Of course, this option will not suit all families. There must be full disclosure to all members /trustees of the fund and they must collectively approve all decisions.

In addition, keeping all members/trustees fully informed of the fund’s performance and activities means that running

a family DIY fund may be

more time consuming than a traditional DIY fund.

Many DIY funds invest in real property, including the business premises of a member/trustee.

Ms Matheson cautioned that the purchase and rental/leaseback arrangements must be on a commercial arm’s-length basis and must meet the sole-purpose test.

The same proviso applies to residential properties, which cannot be rented to a relative of a member/trustee.

Putting assets such as business premises into a super fund offers some protection from creditors or bankruptcy.

However, this only applies up to the pension Reasonable Benefit Limit, currently just over $1 million. Amounts over the pension RBL are not protected.

In the area of tax planning, DIY funds offer much more flexibility than a standard public offer or corporate super fund.

For instance, a member/trustee can transfer an existing loss-making asset into their DIY fund at its current value.

The loss can be used to offset any capital gains, while the subsequent growth in the transferred asset will benefit from the concessional tax treatment of the super fund.

Franking credits from share dividends can be used to reduce or potentially eliminate the 15 per cent contributions tax and the 15 per cent earnings tax payable by super funds.

There are many other strategies that can be employed to maximise tax benefits, such as investing in your spouse’s name or making undeducted contributions.

However, these strategies also can be used by members of most public-offer super funds.


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