Superannuation is more than just about retirement planning. It’s the cornerstone of a financial plan because it touches every aspect of your financial planning. The management of your superannuation effects other investments, your insurances, tax planning, retirement planning, marriage, estate planning and your mortgage.
There are three types of super funds, retails funds, industry funds and self-managed super funds. Different circumstances will determine which fund type is suitable, and sometimes it makes sense to use more than one type in combination.
What is a Self Managed Super Fund?
A Self Managed Super Fund (SMSF) is a private superannuation fund, regulated by the Australian Taxation Office (ATO), that you manage yourself. SMSF’s can have up to four members. All members must be trustees (or directors if there is a corporate trustee) and are responsible for decisions made about the fund and for complying with relevant laws.
SMSF’s are a flexible and effective strategy for individuals to manage their retirement savings and investments. However, SMSF’s must be maintained for the sole purpose of providing retirement benefits to members. SMSF’s are growing in popularity because they are now accessible to more Australians, but they are complex and highly regulated, with onerous compliance conditions. As the trustee of a SMSF, you are responsible for ensuring that the fund complies with the requirements of income tax laws.
Before establishing a fund, here are a few things to consider.
The start-up and on-going yearly for SMSF’s are significant, into the thousands of dollars. It would rarely be worth investigating unless you hold at least around $200,000 in superannuation.
Administration and Legal Obligations
SMSF’s require a high-level of on-going administration to remain compliant and must be audited by an independent auditor registered with ASIC annually. Accurate tax and superannuation records must be kept for up to 10 years, minutes must be taken for investment decisions, and an annual return must be lodged, even if no contributions or payments are made during the financial year.
Sole Purpose Test
Your SMSF must exist for the sole purpose of funding your retirement. This means you cannot personally access the assets until retirement, which for most people is 65 and 6 months. If a residential property is part of your investment portfolio, you can’t live in it or rent it to anyone associated with you. This rule extends to all types of investments. Many SMSF’s hold collectables such as artwork, jewellery, antiques, coins, stamps, vintage cars and wine. There are stringent rules on holding these assets in your self-managed super fund.
Borrowing to Invest
It’s common to invest superannuation in real estate, but unless the amount in the fund can buy a property outright, you’ll have to borrow, and this is where the law gets tricky. SMSF loans require a personal guarantee, which can hinder you from taking out other loans in the future as your borrowing power is significantly reduced. The property is owned by the SMSF, not you, even though you personally guarantee it and you can’t receive the rent. Once retirement arrives, you can access the growth in value of the property, plus the rental income that the fund has accumulated.
The penalties for non-compliance in certain aspects of an SMSF are massive, which is why great care should be taken when handling the administrative on your own. The penalties vary from being made to undergo education, right up to severe penalties for illegal behaviour. The penalties can include fines of up to $340,000 and jail time of up to 5 years.
Superannuation is an often forgotten or misunderstood in the estate planning process – where do you want your superannuation to go when you don’t need it anymore?
A superannuation fund member cannot just sign a will and assume that their super benefits will automatically be paid in the way set out in their will. The fund trustees are not bound by the deceased member’s will, so informed estate planning is important.
The opinions in this post are intended for general information purposes only and should not be used as a substitute for professional advice. Back9 is not responsible for any direct or indirect result arising from any reliance placed on replies, including any loss, and exclude liability to the full extent.