This is a copy of the presentation of the August 2010 Webinar on High Net Worth SMSF strategies conducted on 'thedunnthing' blog, http://thedunnthing.com

1. High Net Worth (HNW)
Strategies for SMSFs
Aaron Dunn
B.Bus (Acc), CPA, SSA
SMSF Specialist AdviserTM
31 August 2010

2. Housekeeping
• Attendees are muted for the session
• You can type questions to the presenters from
your screen
• PowerPoint presentation and the recording will
be made available to participants after the
session
• Including all Q&A’s from the session

3. About Aaron Dunn
• 15 years within the accounting and financial services industry focusing on
the Self Managed Super Fund industry
• CPA and SMSF Specialist Adviser TM
• Previous role as Head of SMSF Solutions, Snowball Group Limited
• Personally invited by Jeremy Cooper to meet and discuss Phase Three of the
Super System Review
• Part of the ATO Auditor Working Group for Super Simplification
• Regular presenter within the industry and to trustees on SMSFs
• Recently established new specialist SMSF consulting business focusing on
strategic advice, training and education
• Specific technical assistance, helpdesk, in-house SMSF training, webinars/seminars , white-
label content including presentations, newsletters and trustee fact sheets
• more details about this exciting new venture will be available in the coming weeks

4. Today’s Session
• SMSF Statistical Analysis to understand traits
of HNW Trustees/Members
• High Net Worth Strategies for SMSFs
• Including case study examples

5. HNW SMSF Statistical Analysis
• Average Fund Balance = $912,739
(June 2010)
• 25.2% of SMSFs have balance
greater than $1,000,000*
• 15.9% of SMSFs have $1m - $2m (68,080
SMSFs)
• 8.0% of SMSFs have $2 - $5m (34,250
SMSFs)
• 1.1% of SMSFs have >$5m (4,710 SMSFs)
• 0.2% of SMSFs have $10m+ (856 SMSFs)
• Estimated Fund Assets held by HNW
SMSFs is $266 billion
• Represents 68% of total assets within
SMSFs ($266bn / $390bn
• $260bn calculated as mid-point of asset ranges
above multiplied by number of funds
$0 - $200k
25.47%
$200 - $500k
26.47%
$500 - $1m
22.88%
$1m +
25.17%
SMSFs by Fund Size
$0 - $200k
3%
$200 - $500k
10%
$500 - $1m
19%
$1m +
68%
SMSFs by Fund Assets

6. Statistical Breakdown
% of total
SMSF assets
% of SMSFs
holding these
assets
Average HNW
>$1m holding
these assets
Highest %
$1m HNW
Cash 26.4% 90.4% 23.7% 26.3% ($1-2m)
Listed Shares 32.4% 63.3% 33.3% 34.6%
($10m+)
Non-residential property (BRP) 9.2% 12.6% 9.3% 10.7% ($2-5m)
Residential property 3.3% 6.5% 2.7% 3.4% ($1-2m)
Listed Trusts* 7.7% 33.2% 7.0% 8.1% ($1-2m)
Unlisted Trusts 8.7% 19.1% 10.1% 11.5% ($2-5m)
Other managed investments* 5.8% 13.8% 5.8% 6.4% ($10m+)
* Both likely to include managed fund investments as reported in SMSF Annual Return – could be up to 13.5%
• Where are these assets invested?

7. Key HNW SMSF Strategies
1. Maximising Contributions
2. Fund Reserving Strategies
3. Limited Recourse Borrowing Arrangements
4. Multi pensions – tax free proportion income
streams
5. Investment Segregation
6. Anti-detriment reserves
7. Non-lapsing death benefit nominations & SMSF
‘Wills’

8. Strategy 1 – Maximising Contributions
• What strategies are available?
– In-specie asset transfers
• e.g. shares, widely held trusts, commercial property (BRP), in-house assets
• BRP – CGT small business concessions, stamp duty exemptions*
– Re-contribution strategies
• Shifting taxable component to tax-free component
– Contributions Reserving (June contributions each FY)
– 10% rule for concessional contributions
• Remember the impact RESC (salary sacrifice)
– Deferral
– Debt forgiveness on BYO Banker limited recourse borrowings
– Remember the CGT caps and use of the Small Business Concessions
– TR2010/1 – superannuation contribution
Remember the
timing of the
‘bring forward’
rule before age 65

9. Example - Contributions Deferral
• What if a client’s MTR is 46.5%?
• Can potentially salary sacrifice or make a personal
deductible contribution up to CC cap plus up to NCC
cap
• Employer / individual receives full deduction on
contribution
• Excess tax payable, but on receipt of a Notice of
Assessment (NoA)
• Provided no further NCCs or excess CCs made in
subsequent years there is no ‘double’ taxation

10. Example – Contributions Deferral
• Ken (62) is a company director, earning $1,000,000 (incl. super). This
includes a $500,000 bonus, payable in September 2010.
• He would like to retire in approx. three years time from his job
• Ken intends to salary sacrifice up to his CC cap of $50,000
• Expected personal tax payable on Ken’s taxable income of $415,300;
• What if,
– Ken salary sacrificed $484,800* of his bonus to super in 2010/11?
– Excess concessional contributions of $450,000
– Excess concessional contributions tax (31.5%): $141,750
– Excess non-concessional contributions: $0
• Instead of PAYGW on salary, taxed within SMSF
– Salary is withheld upfront vs. deferred at least 11 months after end of financial
year (May 2012 - due date of SMSF Annual Return)
* $500k bonus adjusted for SGC up to maximum super contribution base of $42,220 per quarter

11. Example – Contributions Deferral
Sept 2010 30 June 2011 May 2012 Jan/Feb 2013
Excess Contribution Made Financial Year End 2010/11 SMSF AR lodge & payable NoA for excess
CC tax payable
21 months
Up to 30 months
• Cash is able to work harder within the SMSF
• SMSF benefits from $209,750 invested up to 20 months, plus ability for $141,750 to
stay in the fund if Ken pays tax personally (which he can elect to do)

12. Strategy 2 – Fund Reserving Strategies
• Types of SMSF Reserves
– Anti-detriment Reserves
• Allows for additional payment as a lump sum to a SIS dependent of a deceased member.
– Contributions Reserves
• Allows for short-term ‘parking’ of contributions up to 28 days
– Pension Reserves
• Provides for solvency of income streams to ensure it can be continued to be paid at an agreed rate.
– Self Insurance Reserves
• Allows for the trustee to fund TPD payment to members as well as death benefits to dependents and/or
legal estate of deceased members
– General (Investment) Reserves
• Allows for the trustee to allocate earnings of the fund
– Expense Reserves
• Allows for trustee to use reserves to fund general and specific expenses of the fund.

13. Example – Contribution Reserving
• Tom (53) inherits a commercial property worth $700,000
• Tom is not married and has no children
• You were approached by Tom in May 2010 as to the best strategy to transfer
the property into a SMSF?
• He could have contributed 100% of the asset in June 2010 to the SMSF
1. Non concessional contribution of $600,000
– $150k allocated to as NCC to member before 30 June 2010 / $450k into contributions
reserve
– $50k allocated as CC to member before 30 June 2010* / $50k into contributions reserve*
2. Post 1 July (within 28 days of contribution made)
– Allocate $450k to member as NCC contribution
– Allocate $50k to member as CC contribution*
* Need to consider any other SGC or salary sacrifice arrangements
• This strategy can also be used to identify excessive contributions made in
June 2010, whereby they can be ‘housed’ in a contribution reserve and
allocation in July 2010.

14. Things to know about operating Reserves
• Typically reserves are built by using fund earnings
– May also be formed from insurance proceeds
• You must develop a separate investment strategy for
the use of reserves (section 52(2)(g) SIS Act)
• Need to consider contribution caps for anti-detriment
payments when paying out the beneficiaries
• Anti-detriment tax deduction can be used to offset CGT
when assets sold in accumulation phase
– No longer pension phase (per example)
Further discussion on
the use of anti-
detriment reserves
shortly

15. Strategy 3 – Limited Recourse Borrowing
Arrangements
• Requirements to borrow inside an
SMSF
– The borrowings must be for the acquisition of
a single asset
– The asset must be held on trust
– The trustee has a right to acquire the legal
ownership by making one or more payments
– The rights of the lender and any other person
against the trustee is limited to the rights of
the acquirable asset
– When the borrowing is fully repaid, the Fund
has the right for the asset to become an asset
of the SMSF
• Significant attraction for direct
property exposure
• Lender options - Bank vs. BYO banker
arrangements

16. BYO Banker – Borrowing Arrangement

17. Important recent changes
Section 67A & 67B (New Law) Section 67(4A) – (Old Law)
Explicitly defines the interpretation of acquirable asset
in the singular
While the Act refers to ‘asset’ in the singular, it is
possible to interpret asset in the plural
Ensures that the recourse of the lender or any other
person against the super fund trustee for default on
the borrowing is limited to rights relating to the
acquirable asset.
The SIS Act limits the rights over the original asset in
terms of the direct lender and associated borrowings.
Limits borrowing arrangements to a single asset or a
collection of identical assets treated together as a
single asset.
Allows borrowing arrangements over multiple assets
which may permit the lender to choose which assets
are sold in the event of a default on the loan.
Clearly defines circumstances under which assets can
be replaced
Allows arrangements where the asset subject to the
borrowing can be replaced at the discretion of the
trustee or the lender

18. HNW SMSFs considering borrowing
strategies
Five key areas that suit strategies using limited
recourse borrowing arrangements:
1. Business owners renting or wanting to upgrade
2. Business premises held outside of super
3. Assertive/Aggressive Investor – HNW?
4. Residential and Commercial Property Investors
5. Pre-retirees who are planning a sea-change

19. The Family Home
• Family home = $700,000
• Debt = $300,000 (not deductible)
• potentially used as business security
The Family business
• Run a successful widget business.
• Business premises held in family trust
• asset protection
• Factory Valued at $600,000
• Debt of $200,000 (deductible)
• Rental agreement (business & trust)
John & Jane
Existing
Superannuation
John = $150,000
Jane = $100,000
Case Study
The power of the SMSF &
Borrowing Rules
Widget Co.
Pty Ltd
(business)
Family Trust
Rent
Security
Security

20. John & Jane
John & Jane SMSF
John = $150,000
Jane = $100,000
Borrow = $350,000
(LVR 70%)
Case Study
The power of the SMSF &
Borrowing Rules
Widget Co.
Pty Ltd
(business)
Family Trust
Rent
Security
Custodian
(Bare) Trust
Asset held on
trust via
Custodian
Arrangement
Outcomes for John & Jane
• SMSF borrows money and holds
asset via Bare Trust
• Transfer of BRP into SMSF
• No CGT (SBC)
• ‘going concern’ (no GST)
• Dutiable (purchaser)
• Family Trust receives $600k
• payout FT debt ($200k)
• John & Jane payout $300k home loan
• Further $100k to invest (can contribute
back into super)
• 100% deductible debt for SMSF,
being made from deductible super
and rental payments in business
• Future growth of property – no CGT
(if sold post retirement)
Personal
Guarantee

21. Strategy 4 – Multi-pension strategies
• Introduction of “proportion rule” for pensions
has provided a greater focus on pension
strategies for clients
• Why?
– Provides tax efficiency under 60 years of age; and
• Non-assessable (NANE) pension income
– Provides estate planning benefits 60 and over
• Locking in tax-free components
• No (or reduced) intergenerational tax on wealth transfer
• Provides an ability to direct payment on
different income streams to different
beneficiaries

22. Example – Multi pension strategies
• John (60) starts a pension with $1 million
– 50% TFC / 50% TC
– Wants $60,000 p.a. indexed at 3% (CPI), net return 8%
• After 10 years, now $1,180k = $590k TFC
• After 20 years, now $1,235k = $617k TFC
• Alternatively, if John undertakes a recontribution
strategy and commences two (2) pensions
– Withdraws $450,000 and recontributes as NCC and starts
pension (ABP #1) (100% TFC); and
– $550,000 remaining balance of benefit (ABP #2) (50% TFC)
– Still takes $60,000 p.a. indexed at 3%, but can choose
which income stream to take from (net return 8%)

23. Example – Multi pension strategies
• Benefit of multi pension strategy:
– After 10 years, now $1,180k
• ABP#1 = $634,695 (100% TFC)
• ABP#2 = 546,219 ($273k TFC)
– After 20 years, now $1,235k
• ABP#1 = $812,367 (100% TFC)
• ABP#2 = $422,775 ($211k TFC)
The tax-free component
has improved by $317k
after 10 years and
$406k after 20 years,
saving more than $60k
in estate death taxes
http://thedunnthing.com/2009/11/20/smsf-multi-pensions-strategies/

24. Strategy 5 – Investment Segregation
• Ability to segregate specific assets within an SMSF
to a member or ‘pool’ of members
– Could be in pension or accumulation phase
• Why segregate?
– Tax exemption
– Members have different risk tolerances
– Accelerate the tax-free proportion of an income stream
– Improve the tax effectiveness of a TRIS (under 60)

25. Example - Segregation
• Ella (55) has $420,000 and wishes to start a TRIS on 1 July 2009
– Includes $20k NCC
• She has the ability to make in-specie share transfer of $330,000 as
NCC contribution
• Combine or setup two pensions (multi-pensions)?
• If setup two pensions (strategy 4):
– Can elect to segregate to each pension account
– Can assign ‘aggressive’ assets (i.e. shares) to TF pension ($330k)
– Share market rebounds 30%; overall fund portfolio increases 15%
– TRIS #1 = $420,000 x 1.032* (growth) - $42,000 (pension) =
$391,500
– TRIS #2 = $330,000 x 1.30 (growth) - $33,000 (pension) =
$396,000
– Increased balance and tax efficiency of TRIS #2 as 100% tax-free
• Not assessable even through <60

26. Strategy 6 – SMSF anti-detriment payments
• Additional payment available upon death of the
member when a lump sum is paid to a dependant
– SIS dependant (which includes adult children)
• Fund is entitled to ‘grossed up’ tax deduction on the
bonus amount
– e.g. $50,000 / 0.15 = $333,333 tax deduction
• Only benefits members with taxable component
• Effective strategy to use with non-dependant
beneficiaries
– Tax deduction can help reduce CGT on disposal of
assets from SMSF

27. Example – Anti-detriment reserve
• Paul (53), has account balance of $1,050,000
– Includes $135,000 tax-free component
• Paul died on 25/5/2010
• No tax dependents (divorced wife & adult children)
– Death benefits to be paid to Legal Personal
Representative (LPR)
• Fund Assets have cost base of $450,000
• What’s required for an anti-detriment reserve?
• What’s the benefit of operating such a reserve?

28. Strategy - Anti-detriment Reserve
• $89,349 paid in addition to
lump sum death benefit
• SMSF can claim tax deduction
of $595,665

29. Alternative ATO Method
Data Entry
Client name: Paul
Eligible service date: 01-March-1956
Date of death benefit payment: 25-May-2010
Total death benefit (including insurance): $1,050,000.00
Tax free component: $135,000.00
Death benefit insurance included in total death benefit: $0.00
Formula parameters
Days in eligible service that occur after 30 June 1988 P = 7,999
Days in eligible service that occur after 30 June 1983 R = 9,826
Taxable component of death benefit excluding insurance C = $915,000.00
Results
ATO ID formula * Anti-det = 0.15P / (R-0.15P) * C
Anti-detriment amount: $127,271.47
Total Benefit: $1,177,271.47
* refer notes below
• $127,271 paid in
addition to lump
sum death benefit
• SMSF can claim
tax deduction of
$1,177,271

30. Example – Anti-detriment reserve
Pension Phase – 0%
tax rate
Accumulation
Phase – 15% tax
rate
Paul dies
(no dependants)
Benefits paid to
estate - CGT Event
1/3rd discount
applies where
assets held
>12mths
Proceeds $1,050,000
Less: cost base ($450,000)
Capital Gain $600,000
Less: 1/3 disc. ($200,000)
Net Capital Gain $400,000
If, Anti detriment
tax deduction ($1,177,271)
Tax Loss $777,271
Ensures no CGT and can use tax
loss to offset against other
income or as a future benefit for
members.
SAVES $60,000 in CGT and future
benefit of $770k of future tax-
free income within the fund

31. Strategy 7 – SMSF Wills / non-lapsing DBNs
• Ability to prepare definitive instructions with a non-
lapsing binding death benefit nomination
– Create a SMSF “Will” for each member
• SMSFD 2008/D1 (finalised)
– Section 59(1A) SISA, 6.17A SISR
• Subject to SMSF trust deed
– Must meet conditions imposed by the trust deed
– Katz vs. Grossman, Donovan vs. Donovan
• SMSF trust deeds now may incorporate either:
– Binding agreements (non-lapsing); or
– Death Benefit Rules (an SMSF Will)

32. Strategy 7 – SMSF Wills & Non-lapsing DBNs
• Ability to prepare definitive instructions that can be binding
on trustees
– Death benefit rule is non-binding but allows for control by replacement trustee of the
deceased member
• Ability to prescriptive with instructions for DBN
– Can transfer assets to specific beneficiaries (i.e. BRP in family
business)
– Can create multiple income streams (incl. non-commutable) for
different beneficiaries
• Stream interests to spouses, children, disabled children, etc
This needs to be appropriately worked through with the client as
part of their overall estate plan (considering issues when they are
alive and no longer here)

33. Use SMSF strategies to target HNW individuals
1. Maximising
Contributions
2. Use of Fund
Reserves
3. Limited
Recourse
Borrowing
Arrangements
4. Multi-
pension
strategies
5. Asset
Segregation
6. Anti-detriment
payments
7. Non-lapsing
BDN and SMSF
Wills

34. Webinar Timetable
Date Topic
Late September 2010 Property investment strategies using a SMSF
Late October 2010 Limited Recourse Borrowing Arrangements
Late November 2010 SMSF Death Benefit Nominations
* Recommence in early February 2011, with sessions running every 6 weeks
Email me at thedunnthingblog@gmail.com regarding topics of interest

35. Thank you
• A link to access this Webinar and
PowerPoint presentation will be
emailed to you shortly once it is
uploaded
• My contact details:
Aaron Dunn
0488 055 836
thedunnthingblog@gmail.com
http://thedunnthing.com
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