Check where your fund can lend money

YOUR ADVICE CAN you advise me if a self managed super fund can lend money to a private company ( not owned by any of the members) with the view to earning a guaranteed interest rate for the term of the loan.

An SMSF may lend money to an unrelated party on an arm’s length basis. However, ordinary investment considerations would apply — for example the investment/ loan should meet the sole purpose test, the trustees should act prudently to protect their members’ benefits and the investment should complement the fund’s investment strategy.

To ensure the transaction is on an arm’s length basis it would be prudent to confirm whether a bank would lend to the prospective borrower and on what terms.

The investment should be run past the fund auditor to ensure they are comfortable with it and happy to sign off on the compliance of the fund.

If the SMSF were to lend to a related party the ATO would scrutinise the investment to ensure that there was no financial assistance being provided. The investment would be considered an in- house asset, meaning it could not exceed 5 per cent of the fund. I WANT to give my seven grandchildren $ 25,000 each to be put into term deposits, compounding, with the hope that they will eventually use the money for tertiar y education or a deposit on a house. With an interest rate of say 2 per cent the income would be $ 500 each, increasing. I do not want their interest to be subject to a penalty rate of tax, and I do not want their interest to add to their parents’ taxable income.

So, if each deposit was in the name of the child, and each got a Tax File Number, would the interest be tax free as long as it was less than the tax- free threshold?

Unfortunately, interest on money given to minors suffers a punitive tax at the top marginal rate once interest exceeds $ 416 a year. A better option may be to invest in insurance bonds which are not subject to tax in the holder’s name each year because it is paid by the fund — I would expect a share- based insurance bond to do much better than 2 per cent a year.

NOEL WHITTAKER Simply comparing one fund to another is like comparing apples with lemons

A CRITICAL issue in evaluating superannuation is how different funds perform over the three- five year time frame. Is there a website that compares relative performance of the funds? As you often quote, the benefit of compounding interest on fund performance makes a big difference in the long term.

There are many sources available that track individual fund performance but they can lead you astray. This is because any person deciding which fund to use must take into account their own risk profile. In any event, it is well- known that asset allocation itself plays a major part in the performance of your portfolio. This is why simply comparing one fund to another is like comparing apples with lemons – the comparison is not valid.

Anybody planning a longterm portfolio should sit down with a good adviser and agree on an asset allocation that suits their goals and risk profile.