What is Self Managed Super?
In 1992, the Australian Government established compulsory superannuation funds which required employers to contribute to retirement accounts for their employees.
The investment funds in these compulsory accounts are managed by a team who work for the institution receiving the employer contributions although employees do have input into how their accounts are diversified.
However some people felt they could achieve greater returns for their retirement with self-management. Establishing a self-managed superannuation fund (SMSF) allow individuals to manage their own investments. These private self managed superannuation funds are regulated by the ATO and are subject to very specific rules and regulations and when managed properly result in extremely favourable concessional tax benefits.
What are the benefits of a Self-Managed Superannuation Fund?
There are several benefits for SMSFs including:
- The income earned on SMSF investments is generally taxed at 15% provided the SMSF is managed in a compliant
- There are discounts on capital gains tax if an asset has been owned for more than one year.
- There are no transaction fees or capital gains tax when you draw a pension from the fund in retirement.
- An SMSF is exempt from creditors if you go bankrupt. There are, however, legal requirements governing what a fund member must do in the circumstances of bankruptcy.
- You control how your funds are invested. By pooling your fund’s assets with other members, you have more investment options than an individual would have alone.
- Investments may include asset classes not available to institutional funds such as direct real estate, term deposits and collectibles. There are strict rules governing what are acceptable assets/investments and how they can be used.
- Administration costs may be lower depending on the number and type of investments within a SMSF. However there may be more administrative requirements to manage such as accounting and tax obligations and an independent audit.
- In addition, there are also setup fees and legal documents that must be prepared when the fund is established.
- You may also have more control over estate planning. There are tax benefits for qualifying dependents who receive proceeds from the fund upon the death of a member.
How a Self-Managed Super Fund Works
There are various rules governing how to set up and administer an SMSF:
- It must be established for the sole purpose of serving as a retirement fund for its members.
- A fund can have up to four members. All members must also be individual trustees. If a corporate trustee is used then each member must be a director of corporate trustee.
- Members account balances are managed by the trustee on behalf of the fund members.
- Members and trustees are responsible for complying with the super regulations. The trustee is also responsible for any fines or penalties filed against the fund where a breach of the regulations is identified. This is one of the reasons a corporate trustee is recommended.
- Members are also responsible for devising and implementing an investment strategy that complies with SMSF guidelines.
- Entry or exit from a SMSF must be documented in accordance with the super regulations which may incur additional costs.
- Some SMSFs can be administered by the members if they have the required expertise to comply with the super regulation. However most engage a professional, i.e. an Accountant, to assist members with the establishment of the SMSF, administration of the fund, provide tax advice, organise the annual independent audit of the fund and attend to the lodgement of the fund income tax return and other tax obligations.
- When a SMSF is established a special type of trust is created which is governed by a trust deed. This deed allows the trustee to acquire assets and invest those assets for the benefit of the super fund members.
- The SMSF trust deed outlines the rules that operate the trust in accordance with the super regulations. From time to time the SMSF trust deed may need to be updated to comply with changing regulations or legislation.
- It must also have a plan that states how the fund will be terminated.
Contributions to the Self-Managed Super Fund
As with setup, there are various rules around making contributions to an SMSF:
- Members must have a tax file number.
- You must comply with rules that govern concessional (i.e. tax deductible) and non-concessional contributions.
- As of the 2017/2018 tax year, concessional contributions are capped at $25,000 per member regardless of age.
- Non-concessional contributions are capped at $100,000. There are other rules about what kinds of contributions can be made and who can make them.
- You can roll over member account balances from other superannuation funds to a SMSF but advice should be obtained before doing so to ensure it is in the best interest of the member.
There are guidelines about how to complete a rollover, including caps on the amount and how to comply with tax rules.
A rollover benefit statement reports where the funds have been received from and what components make up the roll over amount. This is also reported on the fund’s annual return and the year end members statement.
Payment of Benefits
There are also specific rules that govern the payment of benefits to members. A condition of release must be met before a payment can be made. The most common type is the payment a pension income stream to members who have reached retirement age or preservation age.
A benefit payment paid to a member who has reached preservation age may be a lump sum payment, a pension income tream or a combination of the two.
Benefits paid to members before they reach preservation age will have taxation implications for the member whereas payments made in retirement, i.e. in pension phase, will generally be tax free.
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