My ‘End of Year’ SMSF

Co-founder of the Switzer Report
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Whenever I talk to investors about the end of the financial year, the first question asked is usually along the lines of “well, what are you doing?” So, I thought I would outline what I plan to do with my SMSF in the lead up to 30 June.

I have to admit that sometimes, there can be a bit of a gap between the “planning” and “doing” parts – however hopefully, I will be disciplined enough to see it through. Before I get to the plan, a brief overview of my (I should say “our”) SMSF;

Our SMSF

We have four members – my wife, two of my adult children (both university students) and yours truly. Structurally, we have a company that acts as the trustee of the fund. While it is a collaborative effort, I do most of the hard work – the investment, accounting and the administration – and don’t access any assistance as I like to “keep my eye in”. In terms of investment, I would describe our profile as somewhere between ‘balanced’ and ‘growth’, with the following asset allocation:

  • Australian shares 52%
  • Overseas shares 2%
  • Property 10%
  • Hybrids and fixed interest 29%
  • Cash and term deposits 7%

Get our contributions right

Our first step is to make sure that both my wife and I are maximising our concessional contributions up to the cap – no more, and not much less. At our ages, our concessional caps are $25,000 each – so I check the contributions we have made during the year and arrange to pay the balance from our family company that will take us close to the $25,000 cap. As the monies must be in the super fund’s bank account on or before 30 June, I will make sure we do this well before 30 June.

Help our kids access the co-contribution

There aren’t too many free handouts from government and its super co-contribution remains one of the few that is still available – so it seems silly not to try to access it. Potentially, the government will contribute up to $500 if a personal super contribution of $1,000 is made.

To be eligible, there are two tests. The person’s taxable income has to be under $33,516 (it starts to phase out from this level, cutting out completely at $48,516), and at least 10% of this income must be earned from an employment source.

As university students, my kids do considerable part-time work, but don’t go over the income threshold. I will help facilitate a personal (non-concessional) contribution of $1,000 prior to 30 June, and following the lodgement of the fund’s annual return, the ATO will forward a cheque for $500.

Of course, my kids won’t get to access the personal contribution and co-contribution amounts for another 40 years or so … however, that doesn’t worry me too much.

Our investments – rebalancing, and cutting the “dogs”

Next, to the fund’s investments. Is our allocation to the asset classes where we want them to be? In the case of our share portfolio, is the balance across the sectors right? Are there any ‘dog stocks’ that we should liquidate?

On the asset allocation side, we are reasonably comfortable with the basic mix between growth and income assets. There will be some cash from the additional contributions noted above, and with a maturing term deposit coming up in July, we will probably re-direct this to increasing our exposure to offshore equities.

On the sector side for Australian equities, we will compare our holdings to the ASX 200 sector weights (as at 6 June). We want our SMSF to be overweight financials, health care and telecommunications; broadly index weight on consumer discretionary, consumer staples, energy, industrials and utilities; and underweight materials and real estate investment trusts (REITs). Information technology is just too small a sector too focus on, and while REITs have had a great return this year, we prefer to take our exposure to property through more direct vehicles.

Over the year, due to new investments added and also as a function of relative sector performance, our weightings have changed. We have broadly maintained our key exposures in the major sectors (financials and materials) or where we set out to take a position away from index (health care and real estate investment trusts), and become a little overweight in consumer staples and marginally underweight consumer discretionary and energy. None of these sector positions are in themselves that material or concerning, so they can be addressed in part when new money is added or stocks are exited.

The other factors we have to weigh up with any re-balancing are transaction costs (brokerage), and any taxation impacts. We are not yet in pension phase, so any profits are potentially subject to capital gains tax (at an effective rate of 10% on stocks we have held for more than 12 months), and capital losses can be used to offset capital gains.

Bottom line this year is that we don’t really need to do much to re-balance the portfolio.

Finally, 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 eight out of 10 times. In our portfolio, we are sitting on some QBE, which we have held for some time. We have been “substantiating” our decision in the expectation that QBE will do better when the Aussie dollar falls, and/or US interest rates rise.

Time to admit that this is not likely in the short term and that QBE is doing nothing – take the hit, and re-invest in some consumer discretionary stocks geared to a little more economic upside, probably JB Hi-Fi.

This is what we are doing with our SMSF for the EOFY.

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.

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