First published in Nestegg.com.au on 18 January 2018.
The cornerstone to any successfully operating self-managed super fund (SMSF) is its bank or cash account. After all, it’s the first thing that will be opened whenever an SMSF is established.
Whilst there is the ability to transfer ownership of some assets from outside the super environment to your own SMSF, most transactions will flow through a cash account. If you think about it, so much of your client's SMSF operates though the cash account. There will be contributions made to your client's SMSF by members or employers (such as super guarantee or salary sacrificed amounts), there will be returns from investments such as dividends, there will be amounts paid to purchase investments, amounts paid as benefits to members in retirement, and the costs for running the fund, including insurances, administration and taxation.
So what’s the best way to manage cash in your client's SMSF? Part of this comes to a question of how much cash your client needs for operating purposes (i.e., to meet regular expenses) and how much is for investment purposes.
Remember that cash can be an appropriate investment for your client's fund, particular where it is known that it will be needed for a particular purpose in the near term, or the members themselves are concerned about market volatility and looking for a capital stable investment. In these instances, you could be considering a range of options, from an ordinary cash account (with the highest possible interest rate you can find), a term deposit (which may offer a higher interest rate than a cash account, but locks your client's money away for a period of time), or even some other forms of fixed interest investments such as managed funds.
How do you choose the cash account and how to operate it for your client's fund? There is a range of choices available, with some accounts having been developed specifically for the SMSF environment. There is a number of considerations you could take into account for your client's SMSF’s bank account. These include:
- What rate of interest is payable on the account?
In an environment of low interest rates, many transaction accounts currently pay little in interest (depending on the amount held in the account). This may not be a concern if the balance you are looking to maintain in this account is comparatively low where it is used for transactional purposes.
- What fees are payable?
Like any investment, consider the fees that may be payable and compare that to the level of return you are generating. Is there also a minimum or maximum number of transactions required that impact the level of fees?
- What features does the account come with?
Remembering that as super funds are generally not allowed to borrow, you may need to carefully consider whether to attach any credit card or overdraft facility to the account.
Another thing you could consider is the possibility of having two cash accounts, if that better suits your client's needs or circumstances. Having two cash accounts can mean that one is used for the everyday transactions of the SMSF, and another that holds the majority of the cash to be kept aside for working needs. This second account could be in a different form, such as online account, which could pay a higher rate of interest. Your client then has the option of moving money between the two accounts as needed.
One final item to always be conscious of is to ensure that the bank accounts of the SMSF are always maintained separately to your client's own personal account(s). The Australian Taxation Office (ATO), as the regulator of SMSFs, has a strong focus on the separation of assets of SMSF members and trustees from personal accounts. There are some simple steps you can consider around this, such as whether it is worth setting up your client's SMSF accounts with a financial institution that is different to where your client banks personally. If there is some form of keycard associated with your client's SMSF accounts, consider ways to reduce chances of being accidentally used if your client tends to carry it around in their wallet. Or if there is a cheque book for the SMSF, they can consider separating it from their personal cheque book.
The real key to managing cash within your client's SMSF comes back to taking your time. Be clear on what it is your client is trying to achieve. Understand the type of account your client needs for specific purposes. And do your research.
Bryan Ashenden is Head of Financial Literacy and Advocacy at BT Financial Group.
Information current as at December 2017. This information does not take into account your personal objectives, financial situation or needs and so you should consider its appropriateness, having regard to your personal objectives, financial situation and needs having regard to these factors before acting on it. This information provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such. This information may contain material provided by third parties derived from sources believed to be accurate at its issue date. While such material is published with necessary permission, no company in the Westpac Group accepts any responsibility for the accuracy or completeness of, or endorses any such material. Except where contrary to law, we intend by this notice to exclude liability for this material. Any super law considerations or comments outlined above are general statements only, based on an interpretation of the current super laws, and do not constitute legal advice. This publication has been prepared by BT Financial Group, a division of Westpac Banking Corporation ABN 33 007 457 141 AFSL & Australian credit licence 233714.