What is an SMSF?
An SMSF is a trust where money or assets are held and managed on behalf of up to 4 members to provide benefits for their retirement. All members of an SMSF must be trustees of the fund or directors of the fund's corporate trustee (subject to certain exceptions).
Why should you establish an SMSF?
There are three key reasons for establishing your own super fund: control, flexibility and investment choice.
As a trustee of your self managed super fund, you decide on your fund's investment strategy and choose what your fund's assets are invested in. You can invest in almost anything and tailor your fund's investments to suit your specific needs - although it is subject to some limitations and legal restrictions.
Like all super funds, an SMSF receives concessional tax treatment. The top tax rate for the investment earnings of your SMSF is 15%. It's important to note that this tax concession is only available if your fund complies with all the rules and regulations that apply to SMSFs (a complynig fund).
Rules and obligations of an SMSF
As a trustee, you need to consider your fund's investment philosophy. Investing successfully takes time, effort and discipline.
How will you spread your money to manage risk? How long will you give an investment to prove itself? What's an acceptable rate of return? How much risk are you willing to take with members' retirement savings?
Another important consideration is your fund's performance - how is it performing relative to other funds after expenses? If it's not doing better, or at least as well, you may want to consider using a professional to manage your super fund.
Rules and obligations that apply to a self managed super fund are complex and even if you employ a financial advisor to help you with an investment strategy, compliance and administration, you will still be legally responsible for making sure your fund complies with all the rules under superannuation law.
Some of the rules and obligations include:
1. Sole purpose test
The sole purpose of your super fund must be to provide retirement benefits to your fund's members. If you use your fund for other purposes (such as running a business), your fund may be considered non-compliant and you risk losing the 15% maximum tax concession.
2. Compliance
Some key areas of compliance for an SMSF relate to:
- in-house asset rules
- conducting all transactions at arm's length
- borrowing (or gearing) in super
- acquiring assets from related parties
- separation of assets
You can't lend to (or invest in) a related party or related trust of the fund, or lease an asset of the fund to a related party of the fund, if the total of the related party investments or assets being leased is worth more than 5% of the market value of the fund's total assets.
4. Arm's length requirement
The arm's length requirement means that if you lease any asset that belongs to the fund to a related party, it must be at a commercial rate. Any asset purchased must be for market value.
5. Gearing in super
There is a general prohibition of borrowing in super, although certain exceptions do apply. You can, however, borrow funds (use gearing) to invest within an SMSF in certain limited circumstances. Gearing, where appropriate, may help you to accelerate the level of savings you have in super for your retirement. but you still need to consider the risks associated with gearing and the loan must be established on a 'limited recourse' basis.
6. Acquiring assets from related parties
the trustees of SMSFs in general are prohibited from acquiring assets from related parties of the SMSF. This rule generally prohibits such parties from selling most assets to their SMSF, or from contributing assets in-specie. Some assets such as listed securities (shares, units or bonds listed on the approved stock exchange) or business real property are exempt from this rule.
7. Seperation of assets
Your super fund must maintain its assets seperately from those of a business involving one or more of your trustees. If a trustee were to hold assets in their own name instead of the fund, the fund risks losing the asset if that trustee is declared bankrupt or if their business goes into receivership.
8.Investments
Tho help ensure that the assets of an SMSF will be available to provide retirement income, SMSFs are restricted in the investments they can make. However, one concession that SMSFs enjoy is their ability to invest up to 100% of the fund's assets in business real property.
While there are no restrictions on SMSFs investing in collectibles, such as art, members can't benefit from the investment prior to reaching their preservation age (for example, a trustee shouldn't display a piece of art belonging to the fund in their home or office).
9. Fiduciary responsibilities
Meeting fiduciary responsibilities is also important, particularly in relation to your SMSF having its own bank account, rather than banking being done through personal accounts of one or more of the trustees, and not overdrawing that account.
Aside from the initial set-up costs, the cost of sound administration of an SMSF, including compliance with all the regulations, generally means that fund members collectively need a minimum amount of between $200,000 and $250,000 to invest for an SMSF to be worthwhile.
We recommend that you speak with a financial advisor from Intellichoice to discuss in detail what super options are available and whether a self managed super fund is the best solution to meet your investment needs and circumstances. Call us on (07) 3624 1900 or email us and one of our financial planners will be only too happy to answer your queries.
