By Mark Chapman, H&R Block
The number of self managed super fund’s in Australia has surged in recent years with many stating a Self Managed Super Fund (SMSF) has become the ‘must have financial fashion accessory’. Traditionally an area occupied by high net wealth individuals, professionals and small businesses, due to the significant reduction in compliance costs and the introduction of the ability to borrow to purchase property, SMSF’s have now become a viable option to manage retirement savings to a much larger cross section of the Australian population.
Just because an SMSF is now a more feasible and fashionable option, doesn’t mean it is appropriate to everyone. Kimberlee Brown, SMSF Director at H&R Block Tax Accountants, provides the following important information you should know if you wish to set up an SMSF.
What is an SMSF?
Self Managed Super Funds are a form of trust and can have up to four members. Each member must be a trustee. A company may be established to act as the corporate trustee in which case all members must be directors. If it is a single member fund, the trustee must either be a company, or an additional individual who is not a member of the fund must be appointed to act as an additional individual trustee.
Trustees must have the time and skill to run the fund, or be willing to pay suitable specialists to do this on their behalf. Trustees of an SMSF are personally liable for any decisions made by the fund, even if they engage a third party to assist or another member makes the decision. It is therefore vital trustees partner with appropriately experienced and qualified specialists when setting up and managing their SMSF.
SMSF’s are regulated by the Australian Taxation Office. The fund is required to have an ABN and TFN and there must be a set of financial statements and tax return prepared annually. These are then independently audited and the tax return lodged with the tax office. The Trustees (or an accountant/administrator on their behalf) must make available to the auditor source documents verifying the transactions within the fund and other information where applicable. This is an additional degree of accountability that most other entities are not subject to. Record keeping and documentation retention is of particular importance when managing an SMSF.
What Costs are Involved in Setting up an SMSF?
Whilst there is no minimum balance required to commence an SMSF, the general consensus is $200k. It is important to look at the fees you are paying your current superannuation provider and compare it to the costs of setting up and maintaining an SMSF. There are many fixed costs that are applicable to an SMSF regardless of its size and performance so these need to be considered.
There will be costs involved in setting up an SMSF, as well as ongoing expenses not limited to accounting and tax advice, audit fees, legal costs and financial advice.
The tax office levies an annual supervisory charge and the fund is liable to pay tax at a concessional rate of 15% on income and contributions, and 10% on capital gains while it is in accumulation phase.
Adequate cash flow within the fund is important to meet liabilities as and when they fall due. Any out of pocket expenses paid by the member will be considered contributions and cannot be repaid by the fund once it has an ample bank balance.
SMSF Investment Options
An SMSF can invest in anything provided it is allowed by the investment strategy prepared by the trustees, and that it meets the sole purpose test. That means that assets must be held ONLY to provide for members in their retirement. It therefore follows there is no personal use allowed of super fund assets and depending on the type of asset, additional requirements may exist (such as insurance and how the asset is stored). Assets must be carried at market value and therefore appropriate independent valuations will need to be sought in some instances.
A separate bank account needs to be set up for the super fund and all assets held by the super fund must be clearly identified as those belonging to the superfund and be kept separately to that of personal assets.
As mentioned, one of the reasons why SMSF’s have become so popular is because they are the only retirement vehicle that can hold real property. However, a residential property owned by a super fund cannot be occupied by any of its members or their relatives – even if it is at market rental. Furthermore, an individual cannot move an existing residential investment property they own into an SMSF.
Commercial property can be purchased or contributed by a member into an SMSF, and the member or an associate may lease the property from the SMSF on an arm’s length basis.
Obtaining a mortgage to purchase property on behalf of an SMSF requires additional legal structures to be established, and there are many things that can’t be done with that property that would otherwise be allowable outside an SMSF. Before progressing with an SMSF for the purposes of purchasing a property with borrowings it is recommended that these additional requirements and restrictions are understood. It is also important to note that the majority of financial institutions will not consider borrowing to an SMSF unless its member balance is at least $200,000.
SMSF Insurance Requirements
Many people are unaware that most industry and retail funds provide its members with life and TPD insurance benefits up to a certain amount. When you roll an existing super balance into an SMSF that insurance cover does not come across to the SMSF. It is not compulsory for an SMSF to hold insurance for its members but if the trustees decide this is appropriate, the SMSF will have to purchase a new policy which may be affected by age and health issues of its members.
There are only very limited scenarios in which you can live outside of Australia and maintain a complying self managed super fund. If a member moves overseas indefinitely or for a prolonged period of time there are restrictions on who can continue contributing to the super fund and the ‘central management and control’ of the super fund must reside with someone located within Australia. Therefore, an SMSF may not be appropriate for someone who is like to spend significant time living overseas.
Given the rise in popularity in self managed superannuation, there are a lot of providers out there willing to set up, advise and manage an SMSF on the trustee’s behalf. Costs can vary significantly, and so can the level of service and expertise provided. As earlier mentioned, even when a third party is engaged to perform functions on behalf of the trustees, ultimately the trustees remain liable for all activities relating to the fund. It is therefore vital for trustees to ensure they are engaging qualified, experienced specialists to assist them. Professionals must be appropriately licenced to provide personalised advice in relation to the establishment of an SMSF. Individuals can check if someone is licenced by asking for their Australian Financial Services Licence (AFSL) number, and the ASIC’s adviser register will confirm what that person can advise them on.
SMSF’s offer great flexibility, control and transparency over what is most people’s second biggest personal asset after their home, their retirement savings. It is important to understand the responsibilities involved and how to obtain appropriate assistance where necessary.