Do-it-yourself super via a self managed super fund (SMSF) is becoming an increasingly popular choice for investors who want to have control over how their super is invested.
What is an SMSF ?
An SMSF is a trust where money or assets are held and managed on behalf of up to four members to provide benefits for their retirement. Subject to certain exceptions, all members of an SMSF must be trustees of the SMSF or directors of the SMSF ’s corporate trustee.
Why establish an SMSF ?
Three key reasons for establishing your own SMSF are control, flexibility and investment choice. As trustee of your fund, you decide on your fund’s investment strategy and choose how your fund’s assets are invested. This means you can tailor your fund’s investments to suit members’ specific needs. Your fund can invest in most asset classes, although there are 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 SMSF s (a ‘complying fund’).
Understanding the 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 fund. Rules and obligations applying to SMSF s are complex. Even if you employ specialists to help you with investment strategy, compliance and administration (particularly with Australian Taxation Office requirements), as trustee of your fund you are still legally responsible for making sure your fund complies with all the rules under superannuation law. Let’s look at some of the key
rules and obligations:
Sole purpose test
The sole purpose of your 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 noncompliant and you risk losing the 15% maximum tax concession.
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.
In-house asset rules
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.
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 commercial rates. Any asset purchased must be for market value.
Gearing in super
There is a general prohibition of borrowing in super, although certain exceptions apply. You can, borrow funds (i.e. use gearing) to invest in certain limited
circumstances. Gearing, where appropriate, may help beneficiaries to accelerate the level of savings they have in super for their retirement. However gearing may also magnify losses and the loan must be established on a ‘limited recourse’ basis.
Acquiring assets from related parties
The trustees of SMSF s are generally 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 an approved stock exchange) or business real property are exempt from this rule.
Separation of assets
Your fund must maintain its assets separately 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.
To help ensure that the assets of an SMSF will be available to provide retirement income, SMSF s are restricted in the investments they can make. However, one concession that SMSF s enjoy is their ability to invest up to 100% of the fund’s assets in business real property (subject to any restrictions in the SMSF ’s trust deed). An issue for trustees to consider is whether this lack of investment diversification is an appropriate investment strategy.
The financial advisers at Maximum Wealth Strategies specialise in providing advice in relation to self managed superannuation funds. Assistance can be provided in relation to investment strategy documentation, asset allocation and placement of investments including direct shares.
To find out more, or to make an appointment, simply call Maximum Wealth Strategies on 02 60562229 or contact us.