The interest is understandable - many serious breeders are frustrated at not being able to access retirement funds to invest in an industry that they have great expertise in.

A solution to this problem is more obvious than ever. Family Retirement Funds ("FRFs") are becoming the most sought after vehicle of choice for families seeking to provide for their retirement and deliver a tax effective estate planning strategy. In the thoroughbred industry they also take on a new turn with flexibility of investment choice enabling, for instance, acquiring stallion shares and broodmares, as a legitimate investment of the fund if done properly.

Highly sought after but hardly understood by many participants in the thoroughbred industry. The following discussion is to bring readers up to speed on family retirement funds, where they come from, how they can be used and more importantly the six benefits of a family retirement fund.

At the outset I have to warn you that it is impossible to give you full insight into the complex, but rewarding, world of FRFs in the limited space that I have here. So for those wanting to find out more at the end of this article I warmly welcome you to a special Sydney based presentation on "Family Retirement Funds - a Must for the Thoroughbred Industry" by myself and Grant Abbott - Australia's leading authority on FRFs on July 25.

What is a Family Retirement Fund?

A Family Retirement Fund is simply a fund purpose built to meet a family's retirement dreams. To be more prescriptive it allows a family to accumulate their wealth and superannuation for the purpose of providing members of the fund with an income in their retirement or income and lump sum benefits to a spouse or children upon the member's death.

Importantly the Family Retirement Fund is the next generation of superannuation savings vehicle and as such all of the governing rules protecting member investments and the like apply in relation to the fund.

What does a Family Retirement Fund look like?

In most cases a Family Retirement Fund is limited to four members of the one family. For the most part this includes parents, sons and daughters. In some cases in-laws find their way into a Family Retirement Fund although the divorce laws generally sway people against inclusion of in-laws in their fund.

To think of a Family Retirement Fund in a simple sense, picture a house where mum and dad and two children are living. In this house there live four individuals under the one roof. In terms of sleeping accommodation, mum and dad share their bedroom and the two children have their own rooms. For other things such as watching TV there is a shared room. A Family Retirement Fund is much the same as that house. Each family member that participates in the fund is to be treated as separate from the others in terms of the amount of monies that they have in the fund. When it comes to investing those monies, more often than not we find that the parents share the same investments while the children manage their own investments in the fund. Although in some funds all members of the funds share the same investment portfolio while in others everyone has their own entitlement.

The key to a Family Retirement Fund is to understand that no two funds are ever alike. Each fund is an expression of the spirit of the family and the creation of the fund should reflect as much.

The Six Benefits of a Family Retirement Fund

1. A True Family Institution

Under the laws that govern Family Retirement Funds, the optimum number of family members is four. This may consist of mum and dad and their two children or grandpa, dad and two grandchildren. The key is to make a choice as to who is to join the fund out of the extended family bearing in mind our earlier potential warning against in-laws.

Where a family extends beyond four it is possible to build a larger fund however it is generally more practical to limit the numbers or build two funds. One of the key requirements of any Family Retirement Fund is that each member of the fund (where there are four or less members) must be a trustee of the fund. As a result the trustee-member must take responsibility for the decision making in the fund.

2. Investment Choice

Investors, business people, executives and families with Family Retirement Funds love the idea of investment choice. The current rules allow the fund and its members to invest in shares, residential property, farms, instalment warrants, bonds, managed funds and the like. A business owner can even buy business real property (including breeding property) with the monies in their fund and then lease it back to their business. We have even been investigating the possibility of these funds investing in broodmare syndicates. So there is a broad scope when it comes to investment.

The only restrictions on this strategy is that the super fund cannot borrow, any lease must be at market value and that the investment must be acquired for the sole purpose of providing member retirement benefits.

3. Asset Protection

One of problems in running a business is the potential liability that a business owner must constantly face. Figures show that 98% of small businesses fail within the first ten years.

However should the owner of a small business face bankruptcy, monies inside a Family Retirement Fund are generally protected from the member's creditors. This is so not only when the owner is running the business but also when they are retired. For example, even if a member is bankrupt and retired, they have creditor free access to their funds up to a set limit. The limit for the current year is more than $1,000,000.

4. Low Taxes & Government Support

Much has been said about the recent capital gains tax changes and the impact it will have on tax paid by investors. However few really understand the concessional tax benefits available to a super fund or Family Retirement Fund.

For example the trustee of a Family Retirement Fund can access a 33 1/3% discount on any capital gain realised by the fund. However the greater tax benefit for trustees is the investment in Australian shares and in particular the ability to obtain imputation credits.

For example where the trustee of a fund receives a 34% imputation credit on a 15% taxable fund, 19% of excess credits on the dividend are generated in the fund. This tax credit may be used to shelter other income, capital gains and contributions tax payable on superannuation contributions made into the Family Retirement Fund. Many trustees of these funds are able to keep tax, including contributions tax to a minimum with an investment policy weighted toward Australian shares. Moreover, when the trustee of the fund begins to pay the member's of the fund a private pension - funded from the fund's own investments, no tax is payable on income or capital gains earned in the pension part of the fund.

The Government and Opposition are painfully aware that Australians are not preserving their savings for retirement, evidenced by:

• The introduction of compulsory superannuation for employees in 1992;
  
  
• Extra superannuation funding by employers for employees is fully deductible (to extent of age based limits) and does not attract Fringe Benefits Tax; and
  
  
• The recent Opposition proposal to increase the compulsory employer superannuation rate to 15% (8% currently).

Whilst our saving culture remains poor, there appears little doubt that the Government will continue to support families and individuals who make retirement funding a priority. As the baby-boom generation moves into retirement, there will be more retired people than ever before. By the year 2031, it is predicted that about 20.7 per cent of the Australian population will be aged over 65, compared to only 12 per cent in 1996.

It is little wonder that superannuation is the Government preferred mechanism for retirement funding.

5. Accessing the Aged Pension

The aged pension is getting harder to obtain year by year. However the government has implemented laws enabling members of a Family Retirement Fund that take a certain form of pension, an assets test exemption in respect of the pension. Many Australian retirees, some with assets of up to $500,000 are using the assets test exempt pension in their Family Retirement Fund to secure partial or full Centrelink benefits.

6. Estate Planning

The Family Retirement Fund can be used as a flexible and highly tax effective estate planning tool enabling tax free lump sums to spouses and concessionally taxed income streams to children if need be. For example the trustee of a fund can pay up to $24,000 tax free to a child of a parent member if the child earns no other assessable income. No other wealth accumulation or estate planning can come close to the Family Retirement Fund for tax effective estate planning.

Things to Watch Out For

At first glance the benefits of the Family Retirement Fund appear to be too good to be true. In short they are but there is a catch. Family Retirement Funds are governed by the superannuation laws which means that there are a number of important things to watch out for including:

• Responsibility

We saw above that a member of a Family Retirement Fund must become the trustee of the fund. Trustee means responsibility to abide by the rules of the fund and the superannuation and tax laws that regulate that fund.

• Retirement Only

Assets sitting in the fund on behalf of a member can only be used when the member retires or dies. Any attempt to use the assets before either of these occasions, either directly or by indirect means is strictly prohibited.

• Tax Office Regulators

The Australian Taxation Office look after and regulate Family Retirement Funds. To date their role has been educational however that may change in the future. Those seeking to commence a Family Retirement Fund must understand that at some point in time their fund will be audited.

• Investment Monitoring

One of the most important things often asked for by investors, including the trustees of a Family Retirement Fund, is the ability to be up to date with their investment. In order to meet the requirements of ensuring that there is enough money to live on in retirement and also peace of mind, the ability to closely monitor investments on a regular if not daily basis can sometimes make a world of difference.

The opportunity for those in the thoroughbred industry to make something worthwhile for their family with a Family Retirement Fund is an opportunity well worth exploring.

TRAVEL CLAIMS UPDATE - TAX CASE BLOW TO INDUSTRY

The recent High Court decision in Payne's case has a real impact on the deductibility of car travel expenses for thoroughbred industry participants.

The decision in this case will remove the deductibility of car expenses that could be claimed by horse breeders who have their family home and horse business based on a rural property and also have employment or another business located away from that family property.

The decision in Payne's case means that travel between two unrelated places of work, such as the scenario I have outlined above, is no longer deductible. The removal will not apply immediately - taxpayers travelling between two unrelated place of work will continue to be able to deduct travel in this 2001 tax year. The ATO will not apply the decision in Payne's case until at least 1 July 2001.

In the case at hand, Payne was employed by Qantas as a pilot. He lived with his family on a rural property, where he also conducted a deer farming business. When he had to report to Sydney airport for flying duties, he travelled to the airport by car, bus and train. Deductions were claimed for these trips on the basis that he was travelling between two places of work. The ATO disagreed with the claims and the matter was ultimately decided in the High Court.

In a joint judgment, the majority of High Court members said that where, as in this case, travel is between two places of unrelated income derivation, the expense cannot be said to be incurred "in the course of" deriving income from either activity. The taxpayer's expenditure was not incurred in the course of his employment as a pilot, nor in the course of his deer farming business. The taxpayer's travel occurred in the intervals between the two income-producing activities and not while the taxpayer was engaged in either activity. These outgoings were occasioned by the need to be in a position where the taxpayer could set about the tasks by which assessable income would be derived. In this respect, they were no different from expenses incurred in travelling from home to work.

A consoling word - travel between two related places of work still remains deductible. For example, the deductibility of expenses for a breeder who travels from the breeding property to a horse sale is unaffected.

You are welcome to contact me if you would like me to clarify or expand on any matters I have raised in this article.

DISCLAIMER

Any reader intending to apply the information in this article to practical circumstances should independently verify their interpretation and the information's applicability to their particular circumstances with an accountant specialising in this area.



PAUL CARRAZZO CPA
CARRAZZO CONSULTING CPAs
22 BLACKWOOD ST, NORTH MELBOURNE VIC 3051
PH: (03) 9329 7044
FAX: (03) 9329 8355
MOB: (0417) 549 347
Email: carrazzo@ozemail.com.au