Education
Information on self-managed super and some specific issues you should consider.
Contents
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Background to Self Managed Superannuation Funds (SMSFs)
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What it means to be a trustee
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Individual or Corporate Trustee?
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The Sole Purpose Test
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Contributions
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Benefits & Payments
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Investments and Investment Strategy
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Borrowing
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Residency
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Direct Property
Background to Self Managed Superannuation Funds
The management of all superannuation funds is governed by the Superannuation Industry (Supervision) Act 1993, otherwise known as the SIS Act. The Australian Taxation Office is responsible for overseeing the compliance of SMSFs with the SIS Act. Superannuation funds are ideal in that they are concessionally taxed at 15%, as opposed to the progressive rates of tax for individuals, or 30% for companies. In order for a superannuation fund to qualify for these tax concessions, the ATO must be satisfied that the fund is complying with the SIS Act.
The number and the amount of funds held in SMSFs has seen explosive growth over the last number of years. According to Australian Taxation Office (ATO) records, the number of SMSFs in Australia has grown by over 130,000 funds between 2005 and 2010, and the average value of assets in these funds has risen more than $250,000 in this time. Clearly, more Australians are choosing to have more control over their retirement.
Essentially, a superannuation fund is a special type of trust. The trustee holds funds on behalf of their members for their retirement. What makes SMSFs different is the fact that the members of the fund are also the trustees, giving greater flexibility in investment management.
With greater flexibility comes more responsibility. Please remember that if you are going to run your own SMSF, you must be able to manage it on a consistent basis. Here are some basic rules which you need to follow when running your SMSF:
1. An SMSF can only have up to four members
2. Each member must be a trustee (unless the member is under a legal disability)
3. Each trustee must be a member
4. The SMSF must adhere to the “Sole Purpose Test” – the sole purpose of a super fund is to provide for members’ retirement.
5. Maintain separation of the SMSF’s assets from your personal or other assets.
6. Accept allowable contributions
7. Payment of benefits – withdrawals from an SMSF can only be made if a ‘Condition of Release’ is met.
8. The trustees of the SMSF need to develop and implement an investment strategy for the fund, and review or adjust as necessary over time.
9. Borrowing within your SMSF is only allowed in limited circumstances
10. Be careful when going overseas for extended periods of time (over 2 years) as this may have serious tax consequences
11. The SMSF is only allowed to buy or sell assets from related parties (e.g. members or family) in very limited circumstances
12. Maintain your annual compliance obligations. The financial accounts of the SMSF must be completed and audited each year, and the income tax return should be lodged. Rivkin Super can assist you with this process.
What it means to be a trustee
As trustee of your own fund, you are ultimately responsible for running your fund. It is essential that you understand the duties and responsibilities of running an SMSF. All trustees are now required to sign a trustee declaration to ensure this.
Remember - each trustee must act honestly in all matters concerning the SMSF, and act in the best interest of the fund’s beneficiaries.
Individual or Corporate Trustee?
As a trust, your SMSF must have a trustee. You have the option of having individual trustees or a company as trustee for your fund. Below is a table which summarises the differences between the trustees – please consider both options to see which is the most appropriate for you.
| Corporate Trustee | Individual Trustee |
|---|---|
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Greater Upfront Cost
In order to have a corporate trustee, a company must first be established prior to the SMSF trust deed. The ASIC fee for setting up a company is must first be paid, and there is an ongoing annual fee for each successive year. |
Lower upfront cost
SMSFs with individual trustees are easier and less costly to establish. |
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Continuous succession & Estate planning flexibility
A company has an indefinite life span. Therefore, a corporate trustee can make control of a SMSF easier in the circumstances of the death or incapacity of a member. This also ensures greater flexibility in estate planning. |
Ceases upon death
If the SMSF has individual trustees (e.g., a mum and dad SMSF), then timely action must be taken upon the death of a member to ensure the trustee/member rules are satisfied. This can give rise to additional administrative work and costs at an inopportune time. |
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Administrative efficiency
When members are admitted to, or cease, membership of the SMSF all that is required is that the person becomes, or ceases to be, a director of the corporate trustee. The corporate trustee does not change as a result. Therefore, title to all the assets of the SMSF remains in the name of the corporate trustee. |
Extra and costly paperwork if trustees change
To introduce a new member to a SMSF with individual trustees requires that person to become a trustee. As trust assets must be held in the names of the trustees, this will require the title to all assets to be transferred to the new trustees when a member is admitted to or exits the fund. |
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Sole member SMSF
You can have a SMSF where one individual is both the sole member and the sole director. This individual can also sign solely on behalf of the fund. |
Sole member SMSF
A sole member SMSF must have two individual trustees. This means that another person will need to sign ongoing documentation for the fund other than the member. |
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Greater asset protection
As companies are subject to limited liability, a corporate trustee will provide greater protection where a party sues the trustee for damages. |
Less asset protection
If an individual trustee suffers any liability, the trustee's personal assets may be exposed. |
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Non-recourse Borrowing
In the event that the SMSF would like to borrow to invest in an asset, an SMSF with a corporate trustee is more likely to be able to establish the required non-recourse loan with a bank lender. |
Non-recourse borrowing
In the event that the SMSF would like to borrow to invest in an asset, it will be harder to establish the required non-recourse loan with a bank lender as most lenders require that the trustee of the SMSF be a company. |
The Sole Purpose Test
Your SMSF must meet the Sole Purpose Test to be eligible for the tax concessions normally available to superannuation funds. This means that your fund needs to be maintained for the sole purpose of providing retirement benefits to the members of the fund, or to their dependents if a member passes away before retirement.
Essentially, this means that the fund cannot provide members with benefits before their retirement. This may happen where the SMSF invests in artwork, but the artwork is then displayed in the member’s home. As this is clearly providing a pre-retirement benefit, this is therefore a breach of the Sole Purpose Test. Other breaches include the provision of financial help (e.g. through loans) to a member or associate.
Contributions
A contribution is a payment made to the fund. It is generally made in the form of cash, but in some circumstances members can also contribute assets (known as an in-specie contribution). Contributions that your SMSF can generally accept include:
1. Employer contributions
2. Personal contributions
3. Salary sacrificed contributions
4. Super co-contributions
There are two types of contributions – concessional, and non-concessional. Concessional contributions are taxed at 15% on entry into the fund, and include your employer and salary sacrificed contributions. Non-concessional contributions are not taxed and include your personal contributions and super co-contributions.
A member may only contribute to certain limits, or ‘caps’, as indicated by the table below. It is important to remember that contributions in excess of these caps should be avoided where possible as it attracts a severe tax penalty.
| Concessional Contributions Cap | Transitional Concessional Contributions Cap* | Non-Concessional Contributions Cap | |
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| Financial Years ended 30 June 2010 and 2011 | $25,000 | $50,000 | $150,000 |
*For those over 50 years of age, available to 30 June 2012
Where a member chooses to transfer their existing superannuation from another fund, it is called a ‘rollover’.
Benefits and Payments
Most superannuation benefits are ‘preserved’ for retirement. In order to access your benefits, you must first meet a condition of release. The most common conditions of release are reaching preservation age, and retirement. The preservation age ranges from 55 to 60 years of age, depending on the member’s date of birth.
Benefits can be paid out in a single lump sum, or a pension can be started. A pension pays the member’s benefit consistently over time. When a pension is started, your superannuation moves from accumulation phase to pension phase. When your superannuation is in pension phase, the earnings of the fund are no longer taxable, and if you are over 60, the pension itself is not taxed in your individual tax return. This is a significant advantage.
Benefits may be accessed prior to preservation age, but only in limited circumstances. These include severe financial hardship, terminal illness or permanent incapacity.
Investments & Investment Strategy
Every SMSF must have an investment mandate, or strategy. The investment strategy provides clear guidance to trustees as to which assets the fund can invest in, and the allocation between those assets. We provide a standard investment mandate that you can choose to adopt, or tailor an investment mandate specific to your needs.
Investments can generally be classed as follows: Cash, Shares/Units, Derivatives, Property. Exotic investments such as artwork will need to be classed separately. The investment strategy will need to be signed by all trustees.
Borrowing
SMSFs may only borrow in limited circumstances.
One of the relatively recent changes to the law involves the use of borrowing through limited-recourse loans. When considering this type of arrangement, don’t forget to check whether your trust deed allows this, and whether it is consistent with your investment mandate.
A limited recourse loan is a loan where money is borrowed to acquire the asset in the traditional way, however if the borrower defaults on the loan, the lender is only limited to control over the asset for which the loan was made. The lender has no rights to any other asset of the borrower. Limited recourse borrowing is only allowed if it meets a certain list of conditions.
Limited recourse borrowing is relatively new to SMSFs, so if you are considering doing this or you already have this in your existing fund, please contact us.
Residency
As trustee, you should be aware of the residency rules surrounding your SMSF. If more than 50% of the trustees/members of the fund are considered to no longer be residents of Australia, the SMSF automatically becomes a non-resident. In this circumstance, the SMSF is automatically deemed non-complying, which means that it will lose the concessional tax rate of 15% and the highest marginal rate of tax will apply to the assets and income of the SMSF at 45%.
Purchasing Direct Property
Both commercial and residential property can be purchased by an SMSF. Aside from ensuring that the purchase of the property is in line with the SMSF’s investment mandate, there are other particular rules for purchasing property, which are outlined below.
Residential property
An SMSF can buy a residential property, but cannot buy the property from a member, or related party. The property cannot be leased to any of the members or their associates as this would be considered to be a breach of the sole purpose test.
Commercial property
An SMSF can buy commercial property, either from a third party or from a member, providing the transaction is done at market value. The property can be leased to a member or a third party, again at market rates of rent. This is a popular option for business owners who wish to enjoy substantial tax benefits through buying the business’s property through a SMSF.