Over the past 10 years in particular there has been an explosion in the number of Self Managed Superannuation Funds (SMSF’s) in this country.
By Anthony Bell
What are the superannuation fund choices, including SMSF’s?
Ever since compulsory employer superannuation contributions were introduced (currently 9% of employee’s wages, but soon to increase), the amount of money in superannuation as a nation has increased enormously.
All this money needs to find a home and it must be in a superannuation fund. There are 3 main types:
- Public offer fund. There are numerous financial institutions offering a wide range of superannuation funds that the public can access.
- Industry fund. These are funds that designed primarily for specific industries such as HESTA for employees in the health care industry. In some cases, you don’t need to be employed in a specific industry sector to access these funds.
- SMSF. A very small fund tailored for generally a single family.
What do all the funds have in common?
There is an overriding principle that relates to all superannuation funds including SMSF’s which is that you cannot access the money in your superannuation fund until you retire (for most people age 60), unless in the most extreme circumstances such as terminal illness.
There are specific rules as to what a superannuation fund can invest in.
There are significant tax benefits; a tax rate of 15% on earnings and pre-tax contributions (within contribution limits) and 10% on capital gains for assets held longer than 12 months. In fact on retirement if you start a superannuation pension, you don’t have to pay any tax at all on your earnings.
In fact, tax in the superannuation fund environment is another topic in itself for another day!
What is a SMSF and how does it work?
As the name suggests, a SMSF is a fund that is usually set up for a family so that you can manage your own superannuation monies, rather than pool your money with hundreds or thousands of others in a public offer or industry fund.
It must have a trustee(s), which can be either the members of fund or a company (known as a “corporate trustee”). The trustee(s) role is to make investment decisions on behalf of members and to ensure that the fund complies with all the relevant rules and regulations applicable to SMSF’s and superannuation funds generally.
A few basic facts include:
- Maximum of 4 members all of whom must be over 18.
- All members must be individual trustees, unless there is a corporate trustee, in which case all members must be directors of the trustee company.
- For a single member fund, there must either be a corporate trustee where the member is the sole director or the member must be an individual trustee along with another person who is a related party or someone who does not employ the member.
What’s the benefit of a SMSF?
The principal advantage of a SMSF is that it can be a great way to achieve a higher level of flexibility and control over your superannuation investments. You can choose exactly how and in what your superannuation monies are invested (there are some restrictions). You can utilise the services of a licensed financial planner as much or as little as you choose, although arguably trustees have an obligation to seek professional advice – and frankly it simply makes sense to do so.
You can of course change the nature of the investments over time which is important as you get closer to retirement.
A SMSF can also borrow money in limited circumstances, typically to top up the amount of money you may want to use to acquire an investment property in the fund (special rules apply). As a rough guide, up to two thirds of the value of the property can be borrowed by a SMSF.
A SMSF can also be a great way of consolidating all your superannuation monies into one fund.
Your employer must provide you with the option of paying your compulsory 9% superannuation contributions into your SMSF.
What’s the disadvantages or traps to be wary of?
There are very specific rules that a trustee of a SMSF must be aware of and comply with including having a documented investment strategy (your advisor can assist with this) and ensuring that all investments are on an arms length basis and are permitted investments under the SMSF rules.
In the worst case, non-compliance can lead to a SMSF being forced to pay almost half the fund’s assets in penalty tax.
All SMSF’s must have a financial report prepared each financial year (ended 30 June) and have the financial report independently audited. This audit will also include a review of the SMSF’s compliance with the relevant rules and regulations.
These compliance and related administrative costs normally mean that the members of the fund need to have around $200,000 combined in the fund (or expecting to soon have a balance of about that amount) to make it economically feasible.
Before you proceed to set up a SMSF
If you’re thinking about starting a SMSF, it is very important that you seek specialist financial advice so that you can ascertain whether it will be right for you in your circumstances and so that you can understand the compliance requirements that you will be responsible for as a trustee.
For professional assistance: www.bellpartners.com
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