Last week [1], we looked at the essential super actions to check off before the end of the financial year. This week, we look at the investing actions to take. And with only 14 sleeps to go, there is little time to waste!
1. Review your investment strategy
You should review your SMSF’s Investment Strategy whenever the circumstances of your members’ change, and periodically to make sure it is up to date and meeting your objectives. The transition from one financial year to the next is a good trigger point in this regard.
As part of any review, also consider the insurance needs of your members (life, TPD etc). While you are not required to take out insurance, the SIS Act requires that Trustees review regularly whether their Fund holds insurance cover for the members.
2. Check and confirm your asset allocation
Working top down first, let’s start with your Fund’s overall asset allocation. While you are not necessarily going to manage the allocation dynamically, they are also not meant to be static. If the circumstances of one of the members changes, or the investment objectives change, or your preparedness to accept risk changes, then your asset allocation will probably need to change.
Also, as your views on markets change and asset classes perform relative to each other, you may wish to review your allocation. And as the weighting is based on the market value of each asset class, the chances are that your allocation at the end of the year will be somewhat different to how you started the year.
Listed below are some indicative target asset allocations. These are categorised according to 6 common risk profiles, and comprise standard assets only. Starting with the ‘Secure’ profile, income style assets are weighted at 100% and growth style assets are weighted at 0%. At the other end of the spectrum, ‘High Growth’, income style assets are weighted at 1% and growth style assets are weighted at 99%.
Indicative Target Allocation by Risk Profile
[2]
3. For stocks, check your sector allocation
Continuing the “top down” approach in relation to your share portfolio, is the balance across the sectors right?
The S&P/ASX 200 is divided into 11 industry sectors, which have different weights according to the market capitalisation of the stocks that make up that sector. Over the course of the year, the weightings change as companies join or leave the index, others raise capital, and due to changes in the share price, the market value of each company changes.
Depending on your Fund’s investment objectives, you will probably target biases in some sectors where you will be overweight relative to the index, and in other sectors, underweight. For example, if your main priority is growth, you may wish to be overweight sectors such as consumer discretionary, industrials and health-care, and potentially underweight some of the defensive sectors such as utilities and property trusts or AREITs.
The following table shows the sectors and current S&P/ASX 200 weights (as at 29 May 2015), together with the current sector biases for the Switzer Income Oriented Portfolio and the Switzer Growth Oriented Portfolio.
[3]If the actual sector bias in your Fund is different to how you intend it to be (your target position), then depending on the materiality, you may want to take action to address it.
4. Throw out the dogs
Next in relation to your share portfolio, do you have any dogs? The hardest part of investing is to acknowledge a mistake and cut a position. There is an old adage that goes “your first loss is your best loss”, and in my experience, this proves right (in hindsight) at least 8 out of 10 times.
In thinking about this, you will also take into account your sector positions and mismatches away from your target position. The other factor that may influence your decision is whether you can utilise any capital loss.
5. Capital gains tax to pay? Can you offset with losses?
If your fund is in accumulation mode, then you are still liable for capital gains tax. While the nominal tax rate is only 15%, it is further reduced to 10% of the gain if the asset has been held for more than 12 months (super funds get a 1/3rd discount).
Importantly, you can offset capital gains with capital losses, and losses that cannot be used can be carried forward to the next tax year.
So, if you have taken capital gains during the year, then you may want to consider any assets in a loss situation and review whether you should continue to hold them. Of course, tax should never be the primary driver for an investment decision.
And just because you haven’t set out to sell shares on the ASX doesn’t mean you haven’t taken any gains. Takeovers are a disposal for CGT purposes – in 14/15, a number of high profile companies were taken over including David Jones and Toll Holdings. Also, you may have taken part in the Medibank IPO and then sold the shares.
6. Investment property? Deductions to organise?
If your Fund has purchased an investment property and it is in the accumulation phase, then you should be able to claim a number of deductions. While you cannot claim capital costs (these can potentially be used to increase the cost base and reduce any subsequent capital gains tax on disposal), you can claim revenue costs and you can claim depreciation.
Revenue costs are those costs incurred in the process of earning the rental income. They include, but are not limited to:
- Advertising for a tenant;
- Loan interest and bank fees;
- Body corporate fees, rates, energy and water bills;
- Land tax;
- Cleaning, mowing, gardening, repairs and maintenance;
- Building, contents, liability and landlord’s insurance;
- Property management fees, legal fees (not relating to the actual purchase);
- Lease costs;
- Pest control;
- Quantity surveyor’s fees;
- Security patrol fees;
- Stationery, postage and telephone; and
- Travel expenses when inspecting the property.
The list goes on, and your accountant will be able to tell you what’s included as a viable property expense.
You cannot claim:
- Stamp duty on conveyancing;
- Expenses on the property not actually paid by you, such as water and electricity paid by the tenant; and
- Expenses that do not relate to the renting of the property.
Depreciation can be divided into two types —depreciation on plant and equipment (also known as Division 40 deductions) and depreciation on the building or capital works deductions (also known as Division 43 deductions).
Where an item of furniture, or a fixture or fitting not a part of the building, is used to produce income, then the cost of its depreciation may be claimed against earned income. You have two methods to choose from in calculating the depreciation – the prime cost method or the diminishing value method The rate at which you can depreciate an item will depend on its effective life, and is anywhere between one and twenty years. The ATO has determined the average effective life on a long list of common items, however you can make your own estimate of effective life if it can be substantiated with evidence.
As a rule of thumb, if the item can be moved, then it is an item of plant and can be claimed as plant and equipment (fixtures, fittings and furniture) depreciation. If, on the other hand, it is part of the setting for a rent-producing activity, rather than a fixture, fitting or piece of furniture, then it would be claimed as a part of the capital works deductions.
Capital works deductions may include things such as:
- In-ground swimming pools, saunas and spas
- Plumbing and gas fittings
- Garage doors, roller shutters and skylights
- Sinks, tubs, baths, washbowls and toilets
Capital works deductions include the cost of the construction of the building apportioned over a 40 year period. You may need a Quantity Surveyor to assess this for you, and of course, your claim is limited to 100% of the cost of the construction. It is calculated at a rate of 2.5% of the cost.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.