Self-managed superannuation funds (SMSFs) are a popular type of superannuation in Australia. But what exactly is an SMSF, and how does it work? Here is a quick guide to get you started.
What is an SMSF?
An SMSF is your own personal super fund that gives you complete control over how your money is invested. Self-managed super funds have similar benefits to professionally managed funds, such as concessional tax rates and the ability to accept contributions from your employer.
SMSFs, though, have the following unique features:
- Each member is a trustee, with up to four individual trustees allowed in a fund
- SMSFs are regulated by the Australian Tax Office (ATO)
- They must pass the ‘sole purpose test’, which proves the fund exists only to provide benefits to its members on their retirement (or to beneficiaries in the event of death)
- While an SMSF has no minimum balance, the general wisdom is the higher the fund balance, the more cost-effective the SMSF is compared to other superannuation funds in Australia
What do SMSF trustees do?
Trustees oversee their SMSF’s investment strategy. They are also responsible and personally liable for the legal and statutory requirements of their fund.
Trustee responsibilities include:
- Developing, implementing and reviewing the SMSF’s investment strategy (this is compulsory)
- Maintaining records such as financial statements and a transfer balance account report
- Organising an independent audit of the SMSF and lodging an annual tax return
- Purchasing insurance, including income protection and disability cover
All this paperwork can be complex, and accuracy is needed to make sure your SMSF meets government regulations. Well-considered SMSF strategies for investment are also important for future financial security.
If you need help, the ATO’s videos and guides can provide assistance. You can also hire an adviser to help administer your SMSF and develop an investment strategy, although you are still liable for any decisions made.
Can I get SMSF loans to buy property?
Using an SMSF to invest in property is one way to build retirement wealth. In recent times, this has become a more popular option due to a ‘limited recourse borrowing arrangement’ (LRBA): a special type of loan which allows SMSF trustees to borrow money for property purchases.
If you default on your loan, an LRBA restricts the compensation a lender can seek, which means you are not at risk of losing your entire super. Take note, though: when it comes to SMSF borrowing, you can’t use a LRBA to buy property to live in. The purchase must be for the sole purpose of investing in your retirement.
How do you set up an SMSF?
An accountant or adviser can help you establish an SMSF, but the basic steps are:
- Obtain a trust deed: a legal document that sets out the rules for operating your SMSF
- Appoint trustees and sign the trustee declaration
- Lodge an election to be a regulated, self-managed fund with the ATO