Superannuation And Retirement Planning: A Comprehensive Guide

Client’s Details

 The above table shows the details of the clients and also all the relevant information which is associated with the client. The above table gives a hint to the intentions of the client to purchase a property which can be used as a B&B as part of the retirement plan of Mr. and Mrs. McDowall. The assessment aims to review the advice which is provided by the financial planners of Westpac in relation to the options which Mr. and Mrs. McDowall has for purchasing a property which can be used as B&B.

The forecasted cash flow statement by Mr. and Mrs. McDowall is presented in the above table which shows the necessary cash inflows and outflows of the business which can be anticipated from the proposal which is anticipated for the project which the clients wants to proceed with. The various expenses which are anticipated by the business which includes loan repayment expenses and also the purchase of property is shown in the above table. The table also shows the amount which the clients anticipates for purchase of property which can be used as a B&B. The cash balance which is shown in the above table is based on the expectation of the clients judging from the loans which will be allowed and the price of the property which are entirely taken on an anticipation basis.

The main function for carrying out this assessment is to analyze the case of where in the advice which was provided by a professional of Westpac bank due to which the clients Mr. and Mrs. McDowall could have suffered losses. We would consider the situation provided in the case and also weigh the viability of the advice which was provided by the financial advisors Krish and Karl. Mr. and Mrs. McDowall wanted to open a B&B which would allow them to settle down after retirement and for the purpose of buying such a property, the clients went to Westpac for getting financial advice whether they can use their superannuation fund for the purpose of purchasing a new property in order to establish a B&B. The clients have around $ 200,000 In their superannuation fund and the requirement of the client with relation and the advice which is provided by the financial planners includes transferring this fund from the old SMSFs to set up a new SMSF for purchasing the B&B and also the client had to take out the insurance amount which cost them around $22,523 and the only revenue was made through superannuation. The statement of advice which was given by the financial planner to Mr. and Mrs. McDowall stated that the clients needs to set up a new SMSF for the purpose of purchasing a new B&B as per the intention of the clients and the old superannuation fund which the clients have can be closed and the money can be transferred to the new trust. In addition to this, the advice also included to take out the insurance. On the basis of the new SMSF fund which was established the financial planners had initially suggested that the Mr. and Mrs. McDowall would be able to borrow 2 million but later on the amount which was allowed to be borrowed was $ 200,000. Therefore, the funds which was allowed to be borrowed by Mr. and Mrs. McDowall was in sufficient to meet the needs to purchasing a B&B property. The superannuation funds and the borrowings which were made by the clients are to be analyzed considering the provisions which are covered in

Forecasted Cash flow Statement

The compliance of the advice which is provided to the clients with the relevant provisions which are covered in Superannuation Industry (Supervision) Act 1993. The Superannuation Industry (Supervision) Act 1993 has established strict rules when it comes to related party transactions and property investments and if trustees of the fund are in breach of any provisions, there is a risk of ATO making the funds non-complying and also charge excessive taxes for the same.  As per the provisions which is provided by the act, a trustee of a superannuation fund should not intentionally acquire from any related party of the funds unless the same is a business real property or listed securities. The provisions which are stated in the act states that that an appropriate investment strategy is to be prepared and implemented for an SMSF to ensure that there is compliance with the SIS Act and also various regulations which are available. Furthermore, it is requires that the SMSF trust deed which is being followed specifically allows the client to borrow funds in order to finance the property which the client wants to purchase. The act provides restriction on acquisition of property from a related party unless the same property can be established as a Business real property. In case the provision is not satisfied than no member of the trust should rent the property or live in the same.

The act provides that a member can borrow money for the purpose of purchasing a single asset or a collection of identical assets. In such cases, the investment should be legally held on to the trust and the trustee of the fund should be the beneficial owner of the property. The amount which can be borrowed depends on the amount which is invested in the superannuation fund and this determines how much the member can draw out of the trust. In addition to this, the requirements of borrowing some finances from the trust the liquidity requirements are to be meet in order to ensure that the loan repayments can be held smoothly. Another important provision which is stated by Superannuation Industry (Supervision) Act 1993 is that in case an individual is intending to purchase a property with the help of establishing a SMSF than the transaction should be undertaken under a single title in order to satisfy the Single Acquirable Assets provisions. The above consideration is to be taken into account before framing a Statement of Advice for the clients in order to provide the client with accurate advice. The provisions which are stated in Superannuation Industry (Supervision) Act 1993 needs to be followed by the clients while setting up an SMSF and also borrowing on the basis of the same.

Provisions of Superannuation Industry (Supervision) Act 1993

As per the case provided the financial planners of Westpac, have provided inappropriate advice to the clients regarding the options which are available to the management of the business. The financial planners have given the advice that the Mr. and Mrs. McDowall would have to set up a new superannuation fund which is needed to be established by the clients for the purchasing the new property as per the requirement of the client. The financial advisors also have provided the advice that the amount which can be borrowed from the superannuation fund newly established would be around $ 2 million, however Mr. and Mrs. McDowall were not able to borrow more than $ 200,000 which was definitely insufficient for purchasing an appropriate property for B&B purpose. This is another instance where in correct advice was given to the clients. In another instances the superannuation fund was established for borrowing appropriate amount for purchase of the property under two titles while the act states that the property which is to be purchased should be under a single title in order to meet the requirements of Single Acquirable Assets provisions. Therefore, it can be said that the financial advice which was provided by the financial planners does not comply with the provisions of Superannuation Industry (Supervision) Act 1993.

As per the recommendation which of the Financial System Inquiry which was conducted by Murray Inquiry, there should be prohibition without any exception to borrowings which are made from such Superannuation Funds. In case of Superannuation Funds, gearing is generally allowed for assets such as shares and securities and properties which may be of residential purpose or a real building property. The primary benefit which was associated with the advantage of borrowing of the asset was that the borrowing allowed the business to purchase the properties which otherwise was not possible to purchase. With the recommendation which is provided by the Murray Inquiry, such borrowings are to be prohibited which therefore would not allow clients to purchase properties which have high price value. However, it is the opinion of the commission that the increase in the borrowings from Superannuation funds would affect the entire financial system adversely and therefore it should be avoided.

The SMSF traps are more than the benefits which are associated with SMSFs and therefore the fact of the superannuation funds and relevant provisions should be considered. The provisions which is related to the borrowing arrangements which is stated in the act is very much complex in nature and therefore the same needs to be considered. In most of the cases, gearing strategy applied in relation to SMSF, inexperienced trustee often gets tripped as there are strict rules which governs superannuation funds of a business. The gearing in case of superannuation funds are generally a long period strategy which is applied by clients for the purpose of purchasing a property, the term of loan is to be considered along the aspect of capital gain is also to be considered for the purpose of determining. In order carry out the borrowings strategy in relation to superannuation funds the borrowing structure and the cost of borrowings needs to be met.

As per the case which is provided in the case of advice provided to Mr. and Mrs. McDowall, the gearing strategy applied by the client is risky. The case shows that the financial advisor of Westpac advised Mr. and Mrs. McDowall to follow loan strategy which would allow the clients to draw appropriate capital for the purpose of purchasing an appropriate property for the business of B&B. The client was advised that he could draw around $ 2 million from the superannuation fund established but in reality the clients were able to draw about $ 200,000 which was regarded to be insufficient for the purpose of purchasing the property which was intended by the management. Therefore, it is clear that the client was given in correct advice and the instance effectively prove that the gearing strategy which is associated with SMSF are very risky in nature for individuals who are planning to cease their work and retire from their job.  

Reference

“Superannuation Industry (Supervision) Act 1993 “. 2018. Legislation.Gov.Au. Accessed October 23 2018. https://www.legislation.gov.au/Details/C2017C00052.

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