Superannuation and you

You work hard to retire comfortably without having to worry too much about money.

For most of us, having super is the easiest and safest way to do this; your employer is obligated to make regular contributions on your behalf, and whenever possible, you should make additional contributions as well.

From the time compulsory superannuation was introduced to Australia in 1992, most employees opted to join the super funds offered to them by their employers.

In coming years, there became more flexibility to nominate the super fund to which your contributions should be made.

But not all super options are right for everyone.

In fact, many funds contribute poor returns for their members.

It was during this period that many Australians believed they could better invest those funds themselves and so proceeded to set up their own Self Managed Superannuation Funds (SMSFs).

In fact, in the five years to 30 June 2016, SMSFs were the fastest growing sector of the Australian superannuation industry.

 

So what exactly is an SMSF?

A self managed super fund is a private superannuation fund that you manage on your own.

It’s regulated by the Australian Tax Office and can have up to four members with each of these members acting as a trustee.

The sole purpose of a self managed super fund is to save money for your retirement.

Usually, they operate just like a regular super fund and follow the same rules, legislations, and restrictions.

However, members have a responsibility for meeting those regulations themselves, as well as paying any fees for set up and annual running costs.

 

What are the benefits of having an SMSF?

Considering it’s popularity (a third of all super funds are now self managed), it’s clear that there are many benefits for this structure.

Here are just a few reasons why Australians are switching to a self managed fund and eschewing the others.

1. Range of Investment Choices

Unlike standard super funds, an SMSF allows you to choose from a greater range of investment options such as real estate, term deposits and collectibles.

2. Tax Benefits

There are a few benefits to be had with your tax as they take into your account your personal and unique situation. These include less tax paid upon receiving your super, flexibility with tax control and the ability to pass on tax benefits to family members.

3. You Can Borrow to Invest

SMSF members are able to borrow money to invest through a limited recourse loan that takes into account your superannuation balance.

4. An SMSF Can Save You Money

When it comes time to access your superannuation, you won’t be charged brokerage costs, capital gains tax, and other transaction fees.

5. Protecting Your Assets

Any funds in your SMSF can not be touched by creditors so if you go bankrupt, you’ll still have your super to rely on.

While there might be plenty of advantages to this kind of super fund, you need to be fully aware of what it takes to set up an SMSF and also the potential risks.

 

What you should know before setting up an SMSF

Although it might sound simple enough, there’s actually quite a bit to consider before you set up.

1. How much money do you have?

The industry recommendation is around $200,000 however in some cases, it’s possible to start with less than that. But remember, the setup costs also need to be covered by your initial investment.

2. What Trustee Structure Will You Choose?

There are two main types of trustee; corporate and individual. Most funds are started as an individual as it’s usually cheaper however you may still choose the corporate option.

3. What is Your Investment Strategy?

By considering diversification, risk, and return, you should have a sound investment plan in place that will serve your SMSF.

4. Do You Understand Your Role as Trustee?

Many people underestimate the time and effort that can go into managing your own super fund so it’s essential to have the facts before you begin.

Once you can answer these questions, you can speak with an SMSF professional about how to set up an SMSF and the different options available to you.

 

Trustees and SMSFs

The role of the trustee is an important one and it’s one that comes with many responsibilities and obligations.

There are two different types of trustees in an SMSF, an individual or a corporate trustee, and each has its own pros and cons.

1. Individual Trustee

Even if you are the only member of your fund, you still need to have two trustees, so you may need to appoint someone else.

All members must be trustees in an individual structure and have an active part in managing the fund. If your SMSF breaks any rules, each member will be fined.

2. Corporate Trustee

This means that a company is the trustee of the fund and all members are directors.

Only the company is listed as the trustee, so even if the members change there will be no need to update this and if they receive any fines it will be one only and the cost will be shared amongst directors.

Although the corporate trustee structure is more expensive initially, it can work out cheaper than an individual trustee if you find you are changing ownership documents.

 

The essentials on super contributions

As the trustee, you’re able to receive contributions and rollovers from members. However, these are somewhat limited depending on their age and amount of contribution.

Contributions to an SMSF are covered by a cap which limits the amount each member can put into the super account each financial year, indexed annually.

An SMSF can’t accept contributions from a member who has already reached their capped limit, and if they do, this money must be returned from the fund within 30 days.

Concessional contributions are those made into the SMSF that are included as part of the fund’s income such as salary sacrifice and super guarantees that may have come from an employer.

These are capped at $25,000 for all members of the fund, regardless of age.

Here are some other rules relating to contributions to SMSFs

• With some exceptions, you generally can’t accept an asset as a contribution;
• You must have the member’s tax file number to receive a contribution;
• There are limits on age. E.g. you can’t accept non-mandated contributions if the person is over 75;
• The member must not have reached their cap for the financial year.

You should be fully aware of the rules in place for super contributions to your SMSF as failure to comply with the law could lead to a penalty or fine.

 

How do rollovers work in an SMSF?

In the case of rolling over money from another fund into your SMSF, checks are in place to ensure that the person requesting the rollover is indeed a member.

Note that any rollovers that come from other funds won’t be included in the assessable income of your SMSF unless, of course there are untaxed funds in the rollover amount.

If you are looking to rollover funds from your SMSF into another super fund for one of your members, there is a process and paperwork to be completed to do this correctly.

When it comes time to lodge your annual return, you’ll still need to list all members and their details even if they exited the fund during the year.

 

What does an SMSF mean for your tax?

The income earned from your SMSF is generally taxed at 15%, however, it will need to be a complying fund in order to qualify for this concessional rate. Look up complying funds here.

For those non-complying funds, the rate of tax is the highest marginal tax rate possible. Any concessional contributions that go over your cap will be included in your taxable income and can lead to a higher tax rate.

SMSFs must pass the ‘sole purpose test’ in order to be eligible for tax concessions that other super funds receive.

This test proves that your fund has been set up for the sole purpose of giving retirement benefits to its members, and if contravened, there are serious consequences including civil and criminal penalties.

The sole purpose test also allows for SMSFs to carry on a business in the trust, provided it can be proved that this is for providing retirement funds to members.

However, there is a limit to the types of business you can conduct, such as overdrafts and credit arrangements.

When it comes to tax on pension payments, pensions from an SMSF are usually paid tax free to the beneficiary, provided they have met their preservation age.

However, anyone who is under 60 and receiving a pension from the fund may also be entitled to a tax offset.

When it comes to advice on taxation as it applies to income, contributions, and benefits of your SMSF, you should always obtain specialist advice as ensuring that your meet all the requirements can be complex.

 

How do investments work in an SMSF?

Having the flexibility of managing their own investments is one of the reasons that many people choose to set up an SMSF. However, there is much to be aware of to ensure you choose the best superannuation investment mix.

Essentially, your super investment options should always be arranged in accordance with the law and in the best interest of your fund’s members.

With an SMSF, you get a wider variety of investment options, including everything from art and collectibles to commercial and residential real estate.

Before you even set up your SMSF though, you should have an investment strategy in place that has been developed with a professional broker or financial planner. This will help you to identify the objective of your fund, and the types of investments you will make.

Most importantly, your fund’s investments need to be separate from your personal and business affairs, and those of anyone else within your SMSF.

This is known as a ‘separation of assets’. All assets purchased and owned by an SMSF must be clearly defined as being the property of the fund, and not an individual, to ensure that there is no confusion over ownership.

Be aware, though, that even though you might use an adviser to help set up and allocate investment options, ultimately the decisions are up to the trustee of the SMSF.

This responsibility can’t be transferred, so all final decisions will be made by you and all penalties for failing to comply with super law are your responsibility as a trustee.

 

Receiving benefits in an SMSF

In most cases, your SMSF can only pay benefits to members when they have reached their preservation age and can prove they have met another condition, such as retirement.

You may choose to pay the member as a lump sum payment or through a pension stream option, depending on the circumstances.

For those members who wish to access their benefits before meeting a condition of release, these will be taxed at the standard income tax rate for their bracket.

In addition, if the benefit is paid and deemed to be unlawful, it’s likely that the SMSF will receive a penalty, as well as the trustees and the beneficiary.

 

Things to be aware of with your SMSF

Before you consider starting an SMSF, you should be aware of the potential pitfalls and risks that come with this type of arrangement.

Here are a few common risks for members of an SMSF:

SMSF Scams

SMSFs can be targeted in scams because they’re held in individual accounts so it’s essential for trustees to safeguard any PINs, passwords or sensitive information.

If an SMSF loses money due to a scam, they are not eligible for any special compensation schemes. Find out more about SMSF scams here.

SMSF and Bankruptcy

If you go bankrupt, you’ll no longer be able to remain in your fund as you’ll be a disqualified person under law. In this case, you may need to roll your super over to a retail fund or step down as a trustee.

Auditing an SMSF

You must appoint an approved auditor to audit your SMSF every year before you lodge your annual return. The auditor will assess the fund’s compliance with the law and will look over your financials closely.

SMSF Insurance

The government recommends having life and disability insurance for all members of an SMSF as part of the fund’s investment strategy so it’s essential to look into this before setting yours up.

Contingency Plans for SMSFs

As we age, the likelihood that we’ll develop some form of memory loss increases, especially the risk of serious diseases such as dementia.

All SMSFs should have a plan in place as to what will happen if your mental capacity starts to fade.

 

How to wind up your SMSF

If you’re looking to wind up your SMSF for any reason, there’s a few things you must do to ensure it’s deactivated correctly.

1. Notifying the ATO

Let the ATO know in writing the details of your fund and the date it was wound up.

2. Pay out or roll over member’s benefits

To remove all assets from an SMSF, you must pay out or roll these over to other funds nominated by existing members.

3. Arrange a final audit

Have one final audit before you wind up the fund just before you lodge your final tax return.

4. Receive Confirmation

Once you’ve heard back from the ATO that your fund has been wound up, you can then close all accounts relating to the SMSF.

Once the fund has been wound up, it cannot be reactivated so be sure that there are no future plans to open the fund again.

 

Is a Self Managed Super Fund right for you?

There’s no black and white answer as to whether a self managed super fund is the right option for you. Before making any large decisions such as this you should speak with a financial planner.

A self managed super fund financial planning professional can answer any questions you might have and help you begin the process of setting up.

Try not to think of your SMSF as a ‘DIY’ super fund – it still requires a lot of input from professionals.

One thing is certain though, if you’re willing to put in a bit of extra work managing your own superannuation, there are very real opportunities that are created from the flexibility that this option can deliver.

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If you would like more information please call 1300 ELSTON or email info@elston.com.au and an adviser will be in touch.