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Healthcare stocks and in-specie benefit payments

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Question 1: I am new to investing. Do you have any recommendations for International exchange traded funds (ETFs) to invest in, like Vanguard or iShares hedged or unhedged? There are so many different ETFs and I am not sure which one would be good long-term. Do you have any suggestions for long-term health sector shares or any shares with growth potential other then bluechip shares?

Answer (by Paul Rickard): As ETF managers, Vanguard and iShares (Blackrock) are both fine – they are global providers.

I would consider the following:

iShares Core S&P 500 (ASX Code IVV) or the Vanguard US Total Market (ASX Code VTS) for exposure to the US Market. Both unhedged, very low management fees.

There is an argument when it comes to international shares that hedged or unhedged doesn’t matter over the long term. In the short term, however, I feel that the Australian Dollar is still more likely to weaken – so I would prefer to be unhedged.

For exposure to the rest of the world, consider Vanguard’s All World ex US Shares ETF, ASX Code VEU.

On the health sector, I prefer companies like CSL and Ramsay. There is also a global heathcare ETF – from iShares, S&P Global Health Care – ASX Code IXJ.

Question 2: Can you pay yourself a benefit out of your super fund with an asset of the fund instead of using a cheque, cash or electronic funds transfer? For example, your super fund might own a house and you or your relatives want to live in the house during retirement, so you decide to take a lump sum out of your fund equivalent to the value of the home.

Answer (by Tony Negline): I’m going to call this transaction an in-specie benefit payment.

The short answer is yes this can be done, but there are a number of issues that have to be considered including the following.

  1. It can only be for lump sum benefits, not for pension income payments. It’s long been held by the super regulators (ATO and APRA) that pension income payments have to be made using cheque, cash or EFT; many super lawyers don’t agree with this view but I don’t know if anyone has been prepared to mount a challenge to the regulator’s restrictions in the Administrative Appeals Tribunal.
  2. Your fund’s trust deed – some older SMSF trust deeds don’t allow benefits to be paid using fund assets; you need to check that your fund permits such transactions.
  3. Preservation – benefits can only be paid when you meet a condition of release. Retirement is the most common reason investors can access their super monies. Make sure you satisfy at least one of these rules. If you’re receiving a Transition to Retirement pension, then you won’t be able to access any lump sum benefits unless you satisfy the super law retirement definitions.
  4. Capital gains tax – if you or other members of your fund aren’t receiving a pension from your fund, then when your fund disposes of the asset – by transferring its ownership to you as a benefit payment – the fund will have to pay any CGT owing. Depending on the asset you want to own in your personal name, there might be other transaction costs such as legal and state taxes to pay.
  5. Deal at arm’s length – the super laws demand that super fund trustees must make sure that with every transaction the super fund gets a good deal. At the very least, you have to make sure the super fund ends up no worse than it would if it were dealing with an arm’s length transaction. For example, you can’t pay a super fund asset worth $1 million as an in specie benefit and say that a $200 super lump sum benefit has been paid.
  6. Value assets using market value – the ATO demands that all super assets be valued at market.
  7. Tax components – when any benefit is paid from your super fund, it needs to be split between taxable and tax-free components. If the taxable component has tax payable when the benefit is paid, then your fund will need to retain this tax and would need to registered as a pay as you go collector.
  8. Lump sum paper-work – your fund needs to provide you with a payment summary when the benefit it paid.
  9. Restrictions on super fund asset sales and acquisitions – this policy was going to be put in place by the Gillard Government but was dropped just before the 2013 election; it’s unclear if the new Government will proceed with this policy.

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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