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1. Why SMSF are an essential part of a doctor’s financial planning process

Superannuation has always been important for doctors and dentists. It is a powerful financial planning tool that integrates tax planning with investment strategies producing very powerful long-term results.

Why a revolution?

For doctors and dentists the new super rules present a new world of investing where the SMSF becomes a tax free family investment vehicle, and where paying tax will be almost optional for persons over age 60. And that’s a large, and increasing, proportion of the population. This is a revolution in tax jurisprudence. It is the first time we have ever seen Government sanctioned/encouraged tax planning on such a large scale. It is not an exaggeration to say paying tax will be optional for doctors over age 60.

Take a 60 year old married male GP whose spouse does not work and who runs his own practice and that the practice is a business for tax purposes. The practice makes $150,000, and the couple has $3,000,000 in assets, comprising a home worth $1,000,000, an investment property worth $1,000,000 and shares in a SMSF worth $1,000,000. Assume an average earning rate of 10% per annum on these assets¹.

The couples’ total income is $450,000, made up of:

1. $150,000 per annum of practice profit;
2. $100,000 per annum net earnings on the property, comprising, say, ($25,000) net rent plus ($75,000) in un-realized capital gain;
3. $100,000 per annum net earnings on the shares in the SMSF; and
4. $100,000 per annum un-realized capital gain on home.

The couple face a tax bill of just $28,200, or about 6%, on this income of $450,000. This tax bills is calculated as follows:

The couple can take as much cash from the SMSF as they need, on top of their taxable income of $37,500 each. This extra cash is not assessable income and does not affect the tax paid on their salary and other assessable income. So cash flow is not an issue. This example is not an extreme example. We are achieving results like this every day with our clients. It’s simple, safe and has the Federal Government’s blessing.

How can a doctor or best use the new superannuation rules?

Careful planning over the years, even the decades, leading up to age 60 is the key. Doctors should start super planning as soon as possible. Certainly paying the maximum deductible contributions each year, for both yourself and your spouse, is a good start. Get your super balls rolling as early as you can and, if you are already over 50, make a big effort to pay the maximum deductible contributions whenever possible

If cash flow is a problem consider gearing the contributions. This has always been a good strategy but it is now even better because there will now be no tax, or limit, on the amount of the lump sum benefit able to be taken out of the SMSF at age 60, or later, to retire the original debt.

This strategy boils down to tax deductible debt reduction, and is a powerful strategy, particularly for those who have left super planning a little late. For example, a fifty-five year old GP using a PSI practice trust can borrow to pay a $100,000 deductible employer sponsored super contribution to a SMSF ($50,000 for the GP and $50,00 for the GP's spouse), pick up a $33,000 tax break each year and then pay the benefits out, tax free, at age 60 to retire the original borrowing.

If you are already reasonably wealthy and getting closer to age 60 consider paying un-deducted contributions to the limit of $150,000 per person per annum for you and your spouse each year². That’s a total of up to $300,000 per annum, or $3,000,000 in total, plus earnings, from age 50 to age 60. Transferring the future income stream to the SMSF is the economic equivalent of extra deductible contributions above and beyond the $50,000 cap.

It costs only $500 for McMasters’ to set up a SMSF. This includes the trust deed, ATO registration, tax file number application, assistance with bank accounts and assorted other minor tasks connected to setting the SMSF up as a McMasters’ SMSF client. The fee of $500 is fixed no matter what the size of the fund and includes GST.

We believe this is the lowest fee offered in Australia. The fee is low because the work is done by our staff in Vietnam using advanced technology and all documents are delivered to you over the internet.  The ATO registrations are also completed in Vietnam over the internet.

McMasters’ accounting and audit costs are set out on our website. As you can see, costs are much lower if you use Banklink. Banklink is free software designed to:

• save you time, we receive your SMSF’s financial data directly from your bank so almost all data entry is eliminated;
• save you stress, we set up simple account descriptions so you do not have to worry about complex accounting codes; and
• save you hassle because we provide you with simple checklists to complete to streamline and simplify the end of year accounting and audit processes.

Much of the hands on work is done in our Vietnam office, and is supervised by our 50 Australian based accountants and other professional staff.

McMasters’ accounting and audit costs include the annual accounts, the audit, the tax return and the APRA/ATO return. McMasters’ is independent, which means there are no commissions or hidden fees paid to us. The most important variable is the number of transactions and the second most important variable is the completeness and correctness of the records and source documents provided to us. Costs rise where records are not kept properly, if the SMSF is unusually big, if there is an unusually large number of transactions, including rollovers, sales or purchases, or an unexpected complexity arises or if we are asked to do extra work outside our normal engagement.

No work is charged to the client without the client’s prior written consent, usually obtained by e-mail on the delivery of a quote for the work before the work starts.

For SMSFs set up after 1 July, no accounting fees are payable until about January two years later, ie six months after the end of that financial year.  This compares with the up-front commissions charged by fund managers and life offices. By January 2011 a $500,000 investment in a managed fund set up on 1 July 2009 will have paid out $30,750 in costs and commissions to the manager.

This is a significant saving and cannot be ignored by anyone interested in investing minimizing costs is critical to your portfolio’s success.

McMasters’ does not receive commissions from any sources, and in fact our unique Commission Rebate Scheme means you may end up receiving rebated commissions greater than your accounting fees, depending on your SMSF’s investment profile.

Fees for consulting services 

Fees for services other than accounting and audit services, ie consulting services, are charged on a time-spent basis when the work is done.  

Insurance

All work is covered by appropriate professional indemnity insurance.  

Comparison with managed funds

McMasters’ fees are much less than the fees charged by managed superannuation funds. Managed fund entry fees are normally between 3% and 5% and annual costs are usually 1.5% or more of the amount invested. This means if you invest $400,000 in a retail super fund you pay between $12,000 and $16,000 on day one and another $6,000 each year thereafter. And this is only the fees you are told about. There are a host of other costs that are charged by the managers and others that the investors never know about. Life office fees are usually much higher. It is not unusual for life office fees to be so high the client gets back less than the client has paid in even after ten years.

Reduce your SMSF’s compliance costs with Praemium Portfolio Service

The “Praemium” Portfolio Service is an Internet based/on-line portfolio service that allows us to download your SMSF’s investment portfolio records directly into our accounting software. It then produces all required reports and other documents with significantly less accounting time. This means you pay lower SMSF accounting fees.

Praemim saves clients money.

Praemium’s key features include:

• transactions for listed securities are updated directly from your executing broker and corporate actions are added automatically, including dividend distributions;
• direct links to your SMSF’s bank account to reconcile trading activity;
• managed fund data is updated automatically including distributions and revaluations; and
• SMSF trustees have online access to portfolio valuation reports, realized CGT reports unrealized CGT reports, income reports, performance reports and transaction reports

How does Praemium help you?

• Praemium reduces your SMSF administrative burden allowing you to spend less time on paperwork and more time doing the things you enjoy.
• Praemium helps you keep on top of your SMSF investments by accurately monitoring portfolio and stock performance.
• At the end of the financial year our team will already have processed 90% of your SMSF’s transactions reducing your accounting costs and helping you meet your  SMSF’s statutory deadlines.
• Praemium costs around $220 a year. We pay this cost for you and then invoice it back to you as appropriate.
• Praemium is excellent software that is normally sold to SMSF clients under the service provider’s own banner, and presented as there own portfolio administration service. Some providers charge thousands of dollars a year for what is in fact an off the shelf software package that costs just $220 a year.

Banklink

Banklink  reduces your accounting and audit costs and is virtually mandatory for McMasters’ clients. You can learn more about Banklink and view our Banklink video presentations on the main part of our website.

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