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Self Managed Superannuation

Is a SMSF right for you? Download our free PDF here or read on for more information

What is a self managed super fund?

A self managed super fund (SMSF) is a form of superannuation fund that can offer members greater control over their retirement savings than other types of superannuation funds such as industry or retail super funds. This includes wider investment choice and greater control over investments and the ability to pay retirement benefits, such as pensions and annuities, directly from the fund.

Self managed super funds must be established for the sole purpose of providing benefits to fund members on retirement. Or, if the member dies before retirement, a benefit to that member’s dependants. This is referred to as the Sole Purpose Test.

Why establish an SMSF?

An SMSF can provide many benefits including:

  • greater control over your retirement savingswith the ability to develop your own investment strategy and make decisions on when to buy and sell individual investments
  • a wide choice of investment options including corporate bonds, managed investments, listed shares, listed investment companies (LICs), exchange traded funds (ETFs) and direct property
  • potential tax advantages over other forms of super, and
  • potentially lower annual fees than retail and industry funds.

What are the requirements for establishing an SMSF?

To establish an SMSF, the fund must meet the following conditions:

  • have fewer than 5 members
  • each individual trustee of the fund must also be a member of the fund
  • each member of the fund must be a trustee of the fund
  • no fund member can be an employee of another fund member, unless they are related, and
  • no trustee of the fund can receive remuneration for their services as a trustee.

An SMSF can alternatively have a company trustee (known as a corporate trustee). Each director of the trustee company must be a fund member, and each fund member must be a director of the company.

Is a Self Managed Super Fund right for you?

Self managed superannuation funds (SMSF) have many advantages over the other superannuation funds that are available. Many of our clients who are small or medium size business owners, executives and/or professionals enjoy the confidence, control and flexibility of running their own super fund
 

Below are 8 benefits of Self Managed Super Funds

1.You have control over the total investment portfolio, with the ability to take account of the risk profile of all your assets, including those held outside superannuation.

2.The ability to have between 1- 4 members of the fund to allow the pooling of resources of others with similar financial objectives including your children.

3.You have the ability to tailor management of tax on investment income and capital gains through your fund.

4.The ability to own direct property in the superannuation fund.

5.The ability to transfer personally owned shares and other listed securities directly into

superannuation.

6.The ability to own your business’ real property (but not operating assets) in the

superannuation fund, assisting funding and cash flow problems for many businesses.

7.You have maximum flexibility in establishing and managing pension streams, including account based and transition to retirement pensions.

8.Holding life insurance policies within your SMSF allows control and the timely disbursal of any proceeds. Members of the SMSF can take advantage of paying premiums with before tax dollars and enjoy all the advantages of low tax rates on investment earnings on insurance proceeds within the fund.

10 Things you should know when buying property in a Self Managed Superannuation Fund

1. There must be an investment strategy

No SMSF can exist to create wealth without an investment strategy. An investment strategy can be simple, but it must include strategies to maximise member investments, provide diversification across asset classes, include a strategy for paying benefits and maintaining liquidity, and take into account each member’s term to retirement.

 An investment strategy may also define a set of criteria in order to draw a line between what is, and is not, acceptable as an investment by the SMSF. Clearly property is one of the most favoured asset classes amongst Australian investors.

2. SMSF’s can invest in any property type or sector

A SMSF can purchase a wide variety of property (including vacant land), which includes residential, commercial, factories, medical suites, office space and so on. In order to invest widely in any type of property, trust deeds must include provisions allowing direct property as an approved investment. Other options can also include direct shares in a listed property trust off the ASX, or investing in a non-listed property trust. These funds can have a broad exposure to commercial, industrial, office and even residential properties without the initial high purchase costs associated with direct property.

3. SMSF’s can’t buy property from a related party

It is against the law to buy an asset including propertyfrom a related party. All investments must be strictly at arm’s length. Related parties to a SMSF include all members and associates of a fund, employers and their associates. The definition of associates of a SMSF member is wide and includes: every member of the fund; relatives of each member; business partners of each member; and any spouse or child of business partners; and any company or trust controlled by a member or associate. This ensures that the transaction is made purely on a commercial basis and avoids potential conflict of interest. There are specific exceptions clearly defined by the ATO where an asset may be purchased from a related party, including: a listed security acquired at market value; and real business property.

4. SMSF’s can buy business real property

The happy news for business people is that a SMSF is allowed to invest in, or buy, your business premises, provided it is used wholly and exclusively for the business.

A super fund cannot purchase or run a business. It is in direct breach of the Superannuation Industry Supervision (SIS) regulations attracting heavy fines from the ATO. However, a SMSF can purchase the property in which a business is being conducted.

When a super fund buys the business premises of one of its members, the business becomes the tenant and pays the SMSF a commercial rate of rent. If a car repairer owned a factory from which he runs his business, his SMSF would be allowed to purchase that factory from him because it would qualify as a real business property. This would free up extra working capital to expand the business. It can also enable the transfer of a long-term real property asset into the superannuation as an investment.

When deciding to transfer business real property into their SMSF, trustees must take into account:

1.Their overall fund investment strategy

2.How this will affect all members

3.How it will affect liquidity and whether such a transaction will dilute their diversification benefits by creating a concentrate exposure to one asset

5. SMSFs can develop property

Generally speaking a superannuation fund cannot develop property. However if a potential development represents a small portion of the fund’s total value and is in line with investment strategy ,incorporating all the other assets in the fund, it may well be considered an appropriate course of action. Due to the complex nature of the process, specialist advice is highly recommended in order to take into account individual circumstances of the members and the fund, as well as the specific profile of any proposed development.

6. SMSFs can borrow to buy property

In September 2007, sec 67(4a) was inserted into the Superannuation Industry (Supervision) Act 1993 (SIS Act).

The changes mean that SMSFs can now borrow to acquire assets including residential and commercial property to support their investment strategies.

A separate trust is established to hold legal ownership of the property on behalf of the SMSF. These trusts are generally referred to as security trusts or warrant trusts. A loan is arranged to meet the purchase price (plus costs) that the SMSF is not providing. The SMSF becomes the beneficial owner and manages the property as it would any other real estate investment.

The loan is a non- recourse loan and the property asset are used as security. In the event of a loan default, the lender only has recourse to the residential and /or commercial property. They cannot claim on any other SMSF assets.

7. Family and associates are not allowed to use SMSF- owned residential assets

SIS law is very strict about residential property owned in SMSFs as an investment, including holiday property investments. They cannot be used by members or any related parties. Members including their family, associates and business partners are restricted in using the assets of the fund unless they are business real property, and then only if they are solely used for business purpose by a member or related party, and then only where commercial rates of rent and lease terms are being provided to the SMSF which owns the asset.

8. SMSFs allow you to buy a retirement home

Once retired, people need an income, and a place to live. One of the most fundamental superannuation questions is whether a member can acquire a residential property asset in their SMSF that will eventually become their retirement home.

There are ways this can be achieved through a SMSF structure.

For example, a couple both aged 50 may acquire an ideal investment property on the beach using their SMSF, either with cash, or with some allowable borrowings. The property in the SMSF is rented out, and the rental income plus contributions (any salary sacrifice plus any employer contributions) flow to the SMSF, less the 15% Contributions Tax .As cash builds up within the SMSF, the trustees use this money to pay off the loan that funded the original purchase.

After 10 years, they decide to sell their residential home and pay no capital gains tax.

They may then, providing the tenants have left, purchase the property off the SMSF.

If just before they purchase the property off the SMSF, they convert the fund into an allocated pension, as assets sold in pension phase pay no capital gains tax (CGT), then there will be no CGT on either property (note stamp duty is still payable). Purchase proceeds are in the superannuation environment, paying them tax-free income (assuming 60 years of age and over) and they get to live in the beach front home, purchased 10 years ago using their superannuation, in their retirement.

9. SMSFs enjoy benefits in the superannuation tax environment

As with all investments in a complying SMSF they enjoy the beneficial superannuation tax regime. Like negative gearing in an individual’s name, the SMSF would benefit from the same tax benefits, that is, tax deduction for the negative component of the interest, and depreciation. The biggest benefit however, is the CGT. If the fund holds an asset longer than one year and then decides to sell it, the CGT drops from 15% of the gain down to 10%. If sold in pension phase (generally over 55 years of age) CGT is zero.

The benefits from this tax environment means that income and capital gains earned from a property held in a SMSF provide greater reinvestment value, the difference between a member’s individual tax rate on income and capital gains, less the tax rate they will pay within the superannuation environment.

10. SMSFs must satisfy the law

As the SIS regulation is complex it is crucial to seek professional advice before proceeding with an SMSF. It is mandatory that trustees, understand the law and character of the governing superannuation legislation (SIS).As trustees of a fund, they must also understand their obligations under the Corporations Act and the relevant tax laws.

There are no excuses for trustees of SMSFs, if they don’t comply with the law and the rules outlined in the trust deed and the investment strategy.

Trustee obligations to the members of their funds are regulated by ASIC and the ATO.

Penalties for not following the rules may include:

Your SMSF becoming non-compliant and losing its preferred tax status; the trustee(s) becoming disqualified to act as trustees; prosecution under law; and a range of significant penalties including imprisonment for criminal breaches of the law. Trustees should keep informed of their duties and, when unsure, consult the ATO website or

Obtain further information from an accountant, financial advisor or a lawyer.

Company Overview

Keystone Partners is a multi-disciplinary 2 partner financial services business that specialises in Self Managed Superannuation, Estate and Succession Planning for small to medium size businesses.

Keystone will work with your existing adviser and accountant in looking after your Self Managed Superannuation, Estate and Succession Planning