Managing your SMSF is hard work. Here are some guidelines to help you ensure your SMSF is compliant.
The Self-Managed Super Fund (SMSF) is a superannuation or a superfund that is a form of saving for your retirement. The main difference between an SMSF and other types of fund is that the members of an SMSF are its trustees.
If you are able to directly control your investments, the SMSF is a good option. However, don't forget that more control also means more responsibility and a greater workload.
If you are an expert trader or investor, you could have the necessary skills to open an SMSF, as you will probably be used to doing research and tracking your investments regularly.
How do SMSFs work?
In order to open and keep an SMSF, you must;
- Have a large amount of money in your fund as there are high costs
- Be the trustee or director with a high level of responsibility
- Use your money for retirement purposes
- Keep records that have to be approved by an SMSF auditor
You'll also need;
- Enough money for the yearly expenses like accounting, legal and tax costs
- A lot of time to spend on your investments and administration, or a hired advisor to do it for you
- Separate life insurance
You can open an SMSF by yourself or jointly with three other members.
Managing your SMSF investments
As previously mentioned, you will be the trustee or the director of the fund. You have to manage the fund's investments, based on the guidelines and rules established at the time of the SMSFs opening.
The investment strategy has to follow a precise plan to achieve the SMSF targets, depending on you or the trustees' investment profile such as age or risk tolerance. The investments portfolio has to be reviewed regularly to make sure it is fulfilling the SMSF plan and targets.
To set up a strategy you need to identify;
- The diversification of the asset portfolio
- The risk and likely return from investments
- The liquidity of the fund's assets (how easily they can be converted to cash)
- The ability to pay benefits at the time of retirement
- The ages of members and when they will retire
- Whether it is possible to get life insurance for one or more trustees.
However, even though you can choose the most suitable investments for your funds, there are some restrictions: you cannot buy assets from other trustees or lend money to fund members and it is forbidden to borrow money.
There are some exceptions;
- It is possible to borrow a limited amount of money.
- You can lend or lease to, or invest in, a party related to the fund no more than 5% of the fund's total assets.
Ownership and protection of assets
The SMSF funds have to be kept separately from your personal or business investments and from those of the other trustees. This means that once you allocate funds into an SMSF, you cannot use that money, excluding some exceptional cases stated above.
Your funds are also protected from creditor disputes and legal actions to prove who owns them.Back to top
Sole purpose test
The sole purpose of an SMSF is to provide retirement benefits for the members. However, the most common breaches consist of;
- Investments that offer a pre-retirement benefit to a member or trustee
- Financial help of a pre-retirement benefit to a member or trustee.
You must be aware that you could incur civil and criminal prosecution for such breaches.Back to top
Investing in collectables and personal-use assets
SMSFs are created for retirement purposes and cannot grant benefits before (excluding some exceptional cases). That's why if an SMSF invests in collectables and personal-use assets it needs to comply with strict rules. The collectable or personal-use asset;
- Cannot be leased or partially leased to a related party
- Can be used only by related parties
- Must be stored or displayed only in a private residence of a related party
- Has to be stored in a documented place for ten years and insured within seven days of its purchase
- Can eventually be transferred to a related party only in a market place determined by a qualified independent consultant
Making contributions towards your SMSF
An SMSF can accept contributions from the trustees or members if allowed by the fund rules. Normally the contributions are;
- Employer contributions
- Personal contributions
- Salary sacrifice contributions
- Super co-contributions
- Eligible spouse contributions
Any contribution has to be documented and has to be split and allocated to the fund members' account within 28 days of its receipt. The contributions can be divided into;
- Allowable contributions - These are mandated employer contributions or a super guarantee contribution from a member's employer. They can also be non-mandated contributions, which can be paid by employers over their super guarantee or award obligations, or a member contribution, which can be accepted if a member is under 65 or, under particular conditions, between 65 and 75 years old. Another condition is that it does not exceed the so-called contribution cap, that restricts the amount of contributions allowed in a financial year. You also need to follow the rules set out by the Australian Tax Office (ATO) regarding whether a contribution can be considered allowable.
- In specie contributions - Instead of money or cash, in specie contributions are made in the form of assets. You cannot buy assets from other trustees or members, except for listed shares and securities and business property (not residential property).
- Rollovers and transfers - A member is allowed to transfer the super benefits to another fund within the super system. The Super Fund Lookup can provide the current listing of regulated super funds. However, if you decide to transfer a rollover super benefit from another fund, this can be included in the assessable income of your fund only if it contains an 'untaxed element'. You must not exceed the untaxed plan cap amount, or the originating fund will withhold tax from the excess. Once the tax is paid, you can add this tax-free amount to your fund.
Documentation for your SMSF
An SMSF is complex and requires a considerable amount of work for each trustee, whose duties involve;
- Preparing accounts of the fund's assets at market value
- Appointing an approved SMSF auditor
- Preparing and presenting the SMSF annual return each year
- Presenting the rollover benefits statement (NAT 70944) if the benefits are rolled into other funds
- Notification of any change
You'll also need to keep records such as;
- Minutes outlining investment decisions, including reviews of investment strategy and investment decisions
- Transactions of the SMSF
- Reports about collectables and personal-use assets
- Annual operating statements of the SMSF
- The identification of the trustees and their declarations
- Copies of returns and information provided to members
- Income tax and deduction documentation
- Correspondence with the Australian Tax Office
Of course you can appoint professional accountants, tax or legal advisors in order to comply with the strict rules and regulations of the SMSFs, which is highly recommended. You need to adhere to these rules in order to avoid fines or penalties. You can also appoint a financial advisor who can support you in setting up and following the investment strategy according to the fund's targets.Back to top
Tax and your SMSF
If you open an SMSF you have to pay income tax, but you have a tax concession if you comply with the rules and regulations. Normally you pay approximately 15% of your taxable income, whereas if you do not comply, you pay around 45%.
Normally the types of 'complying income' for an SMSF are;
- Assessable contributions like employer, personal or other contributions (i.e. spouse or government co-contributions)
- Interest, dividends and rent
- Net capital gains, calculated as follows: total capital gain for the year minus the total capital losses or unapplied capital losses from earlier year minus the capital gains tax (CGT) discount.
CGT discounts are applied on complying SMSFs and it is equal to a third if the relevant asset has been owned for at least twelve months. Different types of SMSF income are subject to different taxation rates;
- Non-arm's length income (when you buy or sell assets at prices different from the market ones) at 45%
- Current pension income exempt from tax
- Concessional contributions above the concessional cap at 46.5%.
Expenses like supervision, consultancy or auditor fees can be deducted from the SMSF income tax, if they are intended to produce capital gain or assessable income. Life insurance premiums are also included in these deductions.
Finally, if you have a Goods and Service Tax (GST) turnover of more than $75,000, your SMSFs must register for GST. Most SMSFs do not register for GST because if they own houses or properties and rent them out and they are considered input-taxed supplies.