COVID-19, undoubtedly, has had an impact on everyone. Whether it be from catching the virus itself, changes in employment, impacts on savings, or simply spending more time at home, the ongoing impact of COVID-19 has been widespread.
It is no different for trustees of self managed superannuation funds (SMSFs) when it comes to the operation of your SMSF. Rather than focusing on the negatives however, it’s an opportune reminder of the fundamental elements of SMSFs and how to revisit them.
Please note, the list below has been prepared without taking into account your personal objectives, financial situation or needs, so it’s best to consider seeking financial advice about its appropriateness before acting on it.
Is the SMSF still viable?
The starting point should always be a consideration of whether the SMSF remains viable to continue to operate.
There are many factors to take into account in assessing this question, although often the focus turns to the balance of the SMSF and that of its members as well as the running costs of the fund.
In assessing this, it is important to consider what’s in the best interests of each member of the SMSF. While the combined balances of all members may give the SMSF a significant asset base that makes the overall fund a viable proposition, the merits of being a member of an SMSF should always be considered on a member by member basis.
As a trustee, you also need to ensure you still feel comfortable to meet and discharge your obligations as a trustee. There are cases of SMSFs where one person largely takes on the trustee responsibilities – however, all trustees have equal obligations and all trustees are responsible and liable for actions taken in the name of the SMSF.
Safeguarding the operation of the fund
One option that should be considered to help your SMSF continue to operate is having replacement trustees lined up through the use of power of attorney arrangements. While this doesn’t solve problems that arise when one trustee of a two-member SMSF passes away, it can help where one member becomes incapacitated.
While naturally we would never want that to occur, if a trustee of an SMSF did contract the coronavirus to the extent that they required hospitalisation, can the SMSF still continue to run? While many businesses have been wound back and, in some cases, closed during this pandemic, this is not something that happens to an SMSF as they are not a business; they don’t rely on customers or other end users.
As an investment vehicle however, they may continue to operate and important decisions may still need to be made – and it’s possible some of these decisions could be among the most important that SMSF trustees have ever had to make as they look to protect the value of future (or current) retirement balances.
Having a stand-by trustee, appointed under a duly executed power of attorney, could assist in these times of need to ensure the SMSF can still operate. Choosing the individual to act under a power of attorney is important as the existing members will want to ensure that the right decisions will continue to be made for their benefit. While the appointed power of attorney does have an obligation to act in the best interest of the person they have been appointed to act for, there is still a risk that competing interests may come in to play.
Superannuation law provides some level of protection of the members’ interests, and can restrict how the SMSF’s funds are invested, but an ill-appointed attorney could be problematic for all concerned.
Other things to consider:
Review your investment strategy
While the Australian Taxation Office notes that the investment strategy should be reviewed at least annually, they also note that certain other events should trigger a review too, such as a market correction. In addition to the question of underlying investments, trustees could also use this time to review the liquidity of their investments.
Be aware of your expenses
Unfortunately, not all expenses stop during times like this; in particular, the need to pay pensions to members who have commenced retirement income streams from the SMSF. For SMSFs, that have outstanding limited recourse borrowing arrangements in place, many financial institutions are also offering SMSFs the ability to defer repayments for a period of time, in the same way those offers have been made to individuals and businesses.
In addition, the minimum pension drawdown rates have also been halved for the 2019/20 and 2020/21 financial year, which will allow retirees to ride out current volatility and avoid crystallising any losses by keeping more of their money invested.
Also, if there is a concern for an SMSF in receiving rent from a tenant of a property owned by the SMSF, these loan deferral arrangements may be of considerable benefit.
Understand your risk tolerance
It’s natural for some investors to become more cautious at a time like this, but a sense of hesitancy doesn’t mean a change in risk tolerance. It might just mean you are taking longer to arrive at a decision than you would have pre-COVID, which might not be a good enough reason to sell.
Are there in-house assets?
The other investment-related aspect for SMSFs that may need to be reviewed at this time is the investment in any in-house assets.
Comprising investment in related parties, loans to related parties, or assets leased to related parties (other than business real property), the value of these investments is at all times limited to a maximum of five per cent of the fund’s total assets.
With assets such as shares, and possibly property, falling in value, it’s also possible that the value of any in-house assets of an SMSF may exceed the allowance limit. In such cases, the SMSF trustees need to formulate a plan to bring the SMSF back into compliance with the five per cent limit. Waiting and hoping the market value of other assets increase to adjust the ratio will not adhere to the rules.
Communication will be key
The real key to how successful your SMSF is throughout the duration of COVID-19 will be communication, on a range of different levels.
Is the administration arrangement you have in place for your SMSF still operating on a regular basis so there is no delay in reporting requirements? Are administration systems online, enabling paperwork to be processed even though the administrators themselves may be working from home? Are you easily able to get a picture of the health of your SMSF in terms of real-time asset values (as far as possible) so that decisions can be made, and action taken, at the appropriate time?
Having online access to investment accounts, as an example, will make it easier for investments to be purchased and sold quickly and at the most appropriate time, particularly if investment opportunities start to open once the pandemic starts to subside.
Finally, but perhaps most importantly, you should consider (if not already in place) seeking advice from a qualified financial adviser. With so much information being released on different stimulus packages from the Government, combined with relief options from financial institutions, getting advice to help you determine what is relevant for you and your SMSF has never been more important.