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What are the advantages of a passive approach to investing in the current market?

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To best answer this question, you need to consider what are the advantages of a passive approach to investment in general. The biggest advantage to passive investing is that it replicates the movements of a particular index. In its simplest form, passive investment is buying a series of stocks, property etc and trying to replicate a benchmark index; for example, that of the ASX. 

Passive investment is often seen as a low-cost and low-governance way to invest, as you’re not relying on a portfolio manager to choose stock for you. You have the control as the investor.

Because you’re not relying on research for selection of investment and you’re trying to replicate the index, passive investments can be cheaper to purchase and manage. Additionally, you will retain all rights to dividends and distributions from the underlying assets of the portfolio. 

What sort of passive investments could SMSFs look at at the moment and why?

Presuming the client is happy owning passive investments for their SMSF in the current market, it would be worthwhile looking into exchange trade funds (ETFs), which replicate particular indices or sectors. For example, ETFs can be in equities, property trusts and even commodities, such as gold currency. Another option for passive investments is contrarian investments, when it is undervalued in a weaker environment and then selling when the situation is improved. 

Additionally, you can purchase managed funds that are listed or unlisted. Unlisted funds are along the lines of vanguard funds, and you can purchase them directly from the fund manager themselves. 

Are there any risks involved in this type of investing in the current climate, and how can they be managed?

As with anything, it all comes down to timing. If you buy an ETF and the market falls, you’re relying on the market to come back up, otherwise you’re going to end up underwater.

A key principle is that in this type of market, replicating the index, you’re buying “the dogs and the darlings”.

Arguably, not all companies are going to come out of this alright with the prevailing market conditions they face, so therefore you’re taking a broad bet, for lack of a better word, on the market, and you’re hoping that there are more “darlings” than “dogs”. 

You also face liquidity risk due to the sheer volume of trading at the moment. The risk is that the underlying asset values might not be replicated in the unit price of an ETF, which is a result of the sheer volume of trading that is happening at the moment. As a result, the market makers can’t keep up with the volatility of the underlying stocks. 

There are ways to avoid this. When you’re buying an ETF on market, buy it at a price that you’re prepared to pay and a cost that you’re prepared to part with, don’t buy it at market price. 

Additionally, if you’re buying an ETF that is offshore, try and avoid buying when those markets are closed or at the beginning and end of the day, as the price of the ETF may not reflect the underlying asset value.  

What are the advantages of an active approach to investing in the current market?

Given the current climate, the advantages of an active approach would be that it is an opportunity to cherry-pick stocks and investments, avoiding the riskier stocks in market. In many ways, you can look at a volatile market as an opportunity to buy good quality long-term stocks at lower prices as people sell out. 

With an active approach, you’re also relying on the skills of the portfolio managers themselves to invest in what they feel are viable companies going forward. 

What sort of active investments could SMSFs look at at the moment and why?

SMSFs could look to buy managed funds and could certainly do so directly from the fund managers or via wrap structures. They can also buy listed investment companies, which will list investment trusts, which will trade on the ASX. 

Both managed funds and listed investments have their pros and cons. For managed funds, they tend to reflect the underlying value of the assets. Whereas a listed investment trust you may find in the current market is trading at a discount to net asset value as people move out of the market quickly. 

Are there any risks involved in this type of investing in the current climate, and how can they be managed?

As with any investment, timing is everything, as you may end up on the wrong side of the trade. If you have a disciplined approach to entering the market, you could go in with one lump sum or dollar cost averaging, and the risk you face is that if you miss the market, the opportunity may have already gone. 

If investing in active managers, i.e. portfolio managers, make sure that they are true to label. In other words, they invest in accordance with their philosophy standpoint. You don’t want to buy into something that you think is invested in a particular way and then the portfolio manager invests a different way. Ethical investing is an example of this. 

Make sure you’re paying for what you get, some portfolio managers are very expensive, so it is important to consider whether or not they are offering value for money. 

What else should SMSFs be thinking about in terms of passive versus active investing at the moment?

In a volatile market, active managers tend to outperform passive managers. But the overarching principle is you, as an investor, need to be very wary of the risks of momentum in the market. This means that if you’re investing in passive assets and money is generally leaving the market, that will have a negative impact on the market as a whole. Therefore, you’re not getting the opportunity to assess the intrinsic underlying value of the shares. Whereas if you’re using an active approach, the fund manager is making these calls on your behalf. 

On the balance of probabilities, moving in and out of markets, we can do more damage by trying to time the market. We’re far better off, hanging in there and investing on the basis of your overall time frame.

Andrew Heaven, of Wealth Partners Financial Solutions, is an authorised representative of AMP Financial Planning.

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What are the advantages of a passive approach to investing in the current market?

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The prudential regulator will monitor the progress of super funds in making early release payments to their members every week, with individual funds to be named and shamed for slower payment.

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In a statement released on Tuesday, APRA said it would begin collecting data to assess the progress of funds in responding to the government’s early access scheme from next week, with super entities asked to complete data forms around the scheme weekly.

“The reporting form will gather a range of information from [super] licensees, including the number and value of early release benefits paid to superannuation members and the processing times of those payments,” the regulator said.

“It will help the government, APRA and other stakeholders monitor the take-up of the new scheme among super members and ensure licensees are processing eligible applications in a timely manner.”

The form includes data around how many applications a fund has pending during a given reporting period, the number of business days taken to pay out applications, how many new applications have been received and how many have been fully or partially paid.

The regulator said it would publish the data on an industry and individual fund level, but the obligation to report was currently not binding on super entities.

“Reporting this data using the form is expected on a best endeavours basis, and APRA will implement reporting through a legally binding reporting standard if the response from industry does not meet the objectives of the data collection,” APRA said.

The first report was due on 29 April for information as at 26 April, the regulator said.

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The prudential regulator will monitor the progress of super funds in making early release payments to their members every week, with individual funds to be named and shamed for slower payment.

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The company founder and director alleged to have misappropriated $1.2 million in SMSF monies has been sentenced to 10 years imprisonment for his deception.

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George Nowak had pleaded guilty to 17 counts of aggravated deception and one count of dishonest dealings with documents in the District Court of South Australia back in February.

He was in the third week of his criminal trial at the time.

The offences related to his conduct in dealing with members of self-managed super funds, with the SMSFs undertaking property purchases offered by companies of which Mr Nowak was a director.

ASIC has reported that Mr Nowak failed to hold the $1.2 million in SMSF monies in a designated account and did not apply funds towards the intended property purchases between December 2012 and December 2013.

Mr Nowak was the director of the Charterhill group of companies, which operated as a “one-stop shop” in providing advice to clients on the establishment of SMSFs, the rollover of existing funds into SMSFs, the sourcing and purchase of investment properties, as well as assistance on property management, insurance and taxation.

In delivering Mr Nowak’s sentence, which has a non-parole period of six years and three months, Judge Sophie David emphasised the “utmost seriousness” of the offence.

She said the fraud had had a significant impact on the lives of Mr Nowak’s victims and was perpetuated to fund a lavish lifestyle.

Weighing in on the penalty decision, ASIC commissioner Danielle Press said Mr Nowak had “deliberately misled clients and used their funds for his own benefit”.

“Mr Nowak dishonestly and deliberately breached his clients’ trust.”

She said the court’s sentence “reflects the seriousness of this conduct and the impact it had on Mr Nowak’s clients”.

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The company founder and director alleged to have misappropriated $1.2 million in SMSF monies has been sentenced to 10 years imprisonment for his deception.

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Important things to know when splitting super" ["alias"]=> string(56) "separating-important-things-to-know-when-splitting-super" ["introtext"]=> string(379) "

There are a number of “incorrect and dangerous” misconceptions around the splitting up of superannuation if couples separate, a lawyer has warned. 

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Peter Townsend, the principal of Townsend Business & Corporate Lawyers, has reminded individuals that Family Court orders that do require the splitting of superannuation “are often not precise”. 

There are a number of reasons for this, he said. 

Often, splitting orders will depend on the type of superannuation interest and whether it is in the growth phase or the payment phase. 

This is also true of SMSFs, which “must always be compliant with the applicable superannuation and tax laws”.

Mr Townsend explained that because assets in an SMSF are often diverse, there is no standard approach to valuation. 

When it comes to a court-ordered split of such assets, usually an independent expert valuer is chosen by the parties or appointed by the court to conduct a review of the fund.

The lawyer highlighted three common ways in which superannuation interests are commonly split:

1. An order for a member to roll over their interests into another fund (which also means the member leaving the SMSF);
2. An order for a member to pay a percentage or dollar amount of their pension to the other member; or
3. An order that one of the members give their superannuation interest in the fund to the other member.

But on the other hand, some interests are unable to be split, Mr Townsend conceded. 

These include, but aren’t limited to, contributions made with a personal injury election, transfers from foreign funds, government co-contributions and super interest subject to another unrelated payment split, such as a previous divorce. 

According to Mr Townsend, the conversion of a member’s entitlements under a super split “can only be undertaken pursuant to the provisions of Part 7A.2 of the Superannuation Industry (Supervision) Regulations 1994”.

He noted that these are lengthy and can be difficult to comprehend. 

It’s why he highlighted two “incorrect and dangerous” notions around the splitting of super. 

He shut down the idea that super splitting converts the fund into a cash asset. 

“Unless members have reached retirement or preservation age, any interest within the fund must not be paid out to a member (or any other individual),” he stated. 

He also holds concern around the mistaken belief that parties can just agree on what should happen to the super. 

Mr Townsend said parties can’t “simply sign resolutions giving effect to that agreement”.

Instead, the lawyer advised that splitting couples should “always seek independent legal advice on how to give effect to super splitting orders and on the options for reinvesting their respective interests into another fund while ensuring that any action taken remains compliant within the law”.

He has observed that a failure to comply with these regulations “will likely cause material adverse tax consequences for the members and the fund”.

nestegg recently looked at one industry super fund that is looking to develop a streamlined process for the splitting of super after divorce that doesn’t require legal involvement. Read all about it here.

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There are a number of “incorrect and dangerous” misconceptions around the splitting up of superannuation if couples separate, a lawyer has warned. 

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In good news for SMSF landlords, the Australian Taxation Office has provided useful advice around rent relief and a handy concession for certain tenants.

Write comment (0 Comments) " ["fulltext"]=> string(2990) "

Last week, nestegg reported that while SMSF-owned property landlords could provide tenants with rent relief, Cooper Grace Ward Lawyers had noted that “it’s fraught with potential compliance risks where the tenant is a related party or related trust, or if a member, relative or related party or trust has an underlying economic interest in the tenant”.

Since then, the ATO has provided some guidance for SMSF landlords, which Cooper Grace Ward Lawyers has lauded as a “useful concession”.

Here’s the ATO’s position:

The ATO has confirmed that SMSFs can provide tenants with a temporary rent reduction, including to tenants who are a related party or related trust, and where a member, relative or a member or related party/trust has an underlying economic interest in the tenant.

While this would normally trigger a range of SIS Act compliance breaches, the Tax Office indicated that it won’t be taking compliance action for either the 2020 or 2021 financial years.

Cooper Grace Ward Lawyers has flagged that “as a result, an SMSF can provide a temporary rent reduction immediately without fear of the ATO taking adverse action”.

As of yet, the only requirement for this concession is that the rent reduction must be temporary.

But note, this concession does not apply to any other lease incentives or relief – only the temporary reduction of rent.

According to the law firm, this means the SMSF can determine:

• The amount of rent reduction provided
• How long to provide the rent reduction for (Note: the no compliance approach taken by the ATO is currently only applicable for FY 2020 and 2021).

Given current business challenges, “the ATO’s position is that there is no need for the rent reduction provided to be justified by market evidence”.

This means the SMSF can determine the reduction in its absolute discretion.

So, what should SMSFs do?

Cooper Grace Ward has noted that although the concession is “extremely broad”, it is important that it is not abused.

It advises that SMSF landlords should provide rent reduction to tenants who are suffering the effects of the COVID-19 crisis, and that “this rent reduction should be reasonable and measured to the COVID-19 impact suffered by the tenant”.

Best practice is that it is consistent with the approach taken by arm’s length landlords, it advised.

In addition, the rent reduction that is agreed to should be properly documented as it is an amendment to lease terms, since it’s likely SMSF auditors will be required to report any reductions.

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In good news for SMSF landlords, the Australian Taxation Office has provided useful advice around rent relief and a handy concession for certain tenants.

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As Australian families and businesses begin to feel the strain of the economic downturn and are turning to their landlords for rental relief, the landlords of SMSF-owned property need to be careful.

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Acknowledging it has received a large number of requests for information around the legality of SMSFs providing tenants rental relief, law firm Cooper Grace Ward has released an article on the topic: “SMSF landlords: Can you agree to COVID-19 rent relief?”

Here are some of the key takeaways:

Can an SMSF-owned property provide rent relief?

According to Cooper Grace Ward partner Clinton Jackson, the firm’s view is that it will be possible for an SMSF to provide rent relief, or other incentives, provided that the SMSF can establish it is in the best interests of the SMSF.

What is required to establish this “best interests” duty, and provide the best chance of fending off the Australian Taxation Office, will depend on a number of factors, Mr Jackson said.

These include the circumstances of each SMSF; the circumstances of each tenant, including its cash flow, operations and restrictions imposed by COVID-19; terms of the existing lease; the property that is the subject of each lease, including the ability for it to be leased to another tenant; and comparative rent relief and any other incentives being offered by arm’s-length landlords.

Beware compliance issues

Mr Jackson warned that because of the seriousness of legislative compliance risks, “obtaining sufficient evidence to justify the rent relief (or any other incentive) will be vital”.

Noting it would also be time-consuming and require detailed analysis and justification, the partner emphasised that it is “essential the new arrangement is properly documented”.

Where the tenant has no connection — either directly or indirectly to the SMSF landlord — there are unlikely to be legislative complexities when offering rent relief.

But it’s fraught with potential compliance risks where the tenant is a related party or related trust, or if a member, relative or related party or trust has an underlying economic interest in the tenant.

The lawyer flagged that when an SMSF does provide rent relief, there are a number of ways it may breach compliance provisions, such as:

• The sole purpose test – as the reason for offering rent relief could be viewed as to assist the tenant, not to increase the retirement benefits of the SMSF member.
• Arm’s length dealing – it could be difficult to establish that the SMSF is dealing with the tenant in the same manner they would an unconnected tenant.
• Financial assistance – due to the relief providing a benefit to a member or relative personally — whether directly or indirectly — outside the SMSF.

Where there is a potential connection, Mr Jackson said the “strict interpretation of these rules requires the SMSF to enforce the terms of an existing lease, including taking all necessary steps to collect the full rent payable, potentially down to taking possession or enforcement action”.

He noted this is the case even where it would have a detrimental impact on the tenant or the members.

In addition, the lawyer highlighted that standard lease provisions that do provide an ability to amend lease terms “will not help the SMSF overcome the potential SIS Act compliance consequences”.

Risks and consequences of non-compliance

Mr Jackson said where rent relief is provided without obtaining sufficient evidence or proper documentation, “there is a high risk of the ATO taking adverse action against the SMSF”.

This could include administrative penalties of up to $12,600 per breach per trustee.

“It is critical that rent relief (or other incentive) is not provided by an SMSF without them first obtaining proper advice in relation to the SIS Act compliance consequences,” the partner concluded.

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As Australian families and businesses begin to feel the strain of the economic downturn and are turning to their landlords for rental relief, the landlords of SMSF-owned property need to be careful.

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