The ins and outs of SMSFs
Most Australians put their retirement savings into ordinary superannuation funds and let professional managers invest their money. Some, though, prefer to set up self-managed superannuation funds (SMSFs) so they can have direct control over how their money is invested.
Setting up an SMSF can be an expensive and complicated process, so it is not a decision to be taken lightly.
However, if you do take that option, you might decide to invest some of your fund’s money in property. In that case, you might decide to take out a dedicated SMSF mortgage so you can buy an investment property for your fund.
SMSF mortgages operate under different conditions from traditional mortgages. As a result, the SMSF sector contains fewer lenders offering different products at different (usually higher) rates.
For more information on SMSFs, read the FAQ below.
What is an SMSF?
An SMSF is a self-managed superannuation fund. SMSFs have to follow the same rules and restrictions as ordinary superannuation funds.
SMSFs allow Australians to directly invest their superannuation, rather than let ordinary funds manage their money for them.
SMSFs are regulated by the Australian Taxation Office. They can have up to four members. All members must be trustees (or directors if there is a corporate trustee).
Unlike with ordinary funds, SMSF members are responsible for meeting compliance obligations.
Should I get an SMSF?
Most people invest their money with traditional superannuation funds, which control about 70 per cent of Australia’s superannuation assets.
There are four main reasons why most Australians avoid SMSFs:
- SMSFs have high set-up and running costs
- They come with complicated compliance obligations
- It takes a lot of time to research investment options
- It can be difficult to make such big financial decisions
With that in mind, there are four questions people should ask themselves before taking out an SMSF:
- Do I have enough superannuation to justify the high set-up and running costs?
- Am I able to handle complicated compliance obligations?
- Am I willing to spend lots of time researching investment options?
- Do I have the skill to make big financial decisions?
It’s also worth remembering that ordinary superannuation funds usually offer discounted life insurance and disability insurance. These discounts would no longer be available if you decided to manage your own super.
How do I set up an SMSF?
Setting up an SMSF takes more work than registering with an ordinary superannuation fund.
An SMSF is a type of trust, so if you want to create an SMSF, you first have to create a trust.
To create a trust, you will need trustees, who must sign a trustee declaration. You will also need identifiable beneficiaries and assets for the fund – although these can be as little as a few dollars.
You will also need to create a trust deed, which is a document that lays out the rules of your SMSF. The trust deed must be prepared by a qualified professional and signed by all trustees.
To qualify as an Australian superannuation fund, the SMSF must meet these three criteria:
- The fund must be established in Australia – or at least one of its assets must be located in Australia
- The central management and control of the fund must ordinarily be in Australia
- The fund must have active members who are Australian residents and who hold at least 50 per cent of the fund’s assets – or it must have no active members
Once your SMSF is established and all trustees have signed a trustee declaration, you have 60 days to apply for an Australian Business Number (ABN).
When completing the ABN application, you should ask for a tax file number for your fund. You should also ask for the fund to be regulated by the Australian Taxation Office – otherwise it won’t receive tax concessions.
Your next step is to open a bank account in your fund’s name. This account must be kept separated from the accounts held by the trustees and any related employers.
Your SMSF will also need an electronic service address, so it can receive contributions.
Finally, you will need to create an investment strategy, which explains how your fund will invest its money, and an exit strategy, which explains how and why it would ever close.
Please note that you can pay an adviser to set up your SMSF. You might also want to take the Self-Managed Superannuation Fund Trustee Education Program, which is a free program that has been created by CPA Australia and Chartered Accountants Australia & New Zealand.
What is an SMSF investment strategy?
All SMSFs are required to have an investment strategy, which should explain what assets the fund will buy and what objectives it will pursue. This strategy must be reviewed regularly.
Issues to consider include how much risk the SMSF will take, how easily its assets can be converted into cash and how it will pay out benefits.
What contributions can SMSFs accept?
SMSFs can accept mandated employer contributions from an employer at any time. (Funds need an electronic service address to receive the contributions.)
However, SMSFs can’t accept contributions from members who don’t have tax file numbers.
Also, they generally can’t accept assets as contributions from members and they generally can’t accept non-mandated contributions for members who are 75 or older.
How are SMSFs allowed to invest its funds?
SMSFs can invest in conventional assets such as shares, term deposits, managed funds and property.
SMSFs can also buy ‘collectibles’ such as artwork, jewellery, antiques, coins, stamps, vintage cars and wine – although there are special rules that apply to collectibles.
Investments must be made on an arm’s length basis, which means that assets must be bought and sold at market prices, while income must reflect the market rate of return.
As a general rule, SMSFs can’t buy assets from members or related parties.
How are SMSFs taxed?
Funds that follow the rules are taxed at the concessional rate of 15 per cent. Funds that don’t follow the rules are taxed at the highest marginal tax rate.
Can I carry on a business in an SMSF?
SMSFs are allowed to carry on a business under two conditions. First, this must be permitted under the trust deed. Second, the sole purpose of the business must be to earn retirement benefits.
What compliance obligations does an SMSF have?
SMSFs must maintain comprehensive records and submit to annual audits.
How do I wind up an SMSF?
There are five things you must do if you want to close your SMSF:
- Fulfil any obligations listed in the trust deed
- Pay out or roll over all the superannuation
- Conduct a final audit
- Lodge a final annual return
- Close the fund’s bank account