MPR Superannuation Insights
Why self managed super?
Self managed super has become one of the most effective forms of wealth creation available. Its popularity has exploded as a result of legislative changes that have made super much more tax effective, particularly for those over the age of 60.
According to ATO statistics there are presently over 360,000 self managed super funds (SMSFs) in existence, managing over $312 billion in retirement savings. During the 2006/2007 financial year over 43,000 SMSFs were setup, an increase of around 70% compared to the previous year.
So what is the attraction of self managed super funds?
While they’re not for everyone, if you have $200,000 or more in savings, SMFSs are a flexible and dynamic investment structure, particularly for families and small business owners, which offer a number of important benefits:
Tax Concessions
Complying SMSFs in the accumulation stage are taxed at a maximum rate of 15 percent. For funds that pay pensions, no tax is payable on the income or capital gains on assets used to fund pension payments. From 1st July 2007, lump sum or pension withdrawals made by members over the age of 60 are tax free. No other investment structure offers these types of concessions.
Investment Control
Unlike retail, industry or employer funds, in a SMSF, members set the investment strategy and manage the investments of the fund. As a result they can create an investment portfolio that meets their exact needs.
Investment Choice
The trustees have sole investment choice. The current rules allow the trustee of a SMSF to invest in shares, residential property, farms, installment warrants, bonds, managed funds and the like. A business owner can also acquire business real property in their fund and then lease it back to their business. With recent changes announced, super funds can, subject to certain restrictions, now borrow to invest. (see article Super funds can borrow).
Creditor Protection
One of the key problems of running a small business is the potential liabilities that a business owner must constantly face. However, should the owner of a small business face bankruptcy, monies inside a SMSF are generally protected from the member’s creditors
Generational Wealth and Estate Planning
The SMSF can be used as a flexible and highly tax effective estate planning tool, enabling wealth to be transferred between family members and generations in a tax effective manner.
Whilst there are a number of attractive benefits, there are also important responsibilities and challenges as well as costs that you need to consider. If you would like additional information about establishing and running a SMSF, the ATO have published a number of useful fact sheets. To download them click on the fact sheet title.
If you think setting up a self managed fund is right for you, click here to download our SMSF Service Guide or contact
Marc Peskett or Archie Para on 03 9869 5900.
Super funds can borrow
Yes it’s true, Super funds can now borrow!
Under amendments to laws that became effective on the 24th September 2007, super funds can now borrow using
“Instalment Warrant” type arrangements.
To qualify as an allowable borrowing under the new laws the following key conditions must be satisfied:
- The SMSF would not be prohibited from investing in that asset directly (ie must not be an in-house asset or assets acquired from members of the SMSF apart from business real property or listed shares)
- The asset is held in a special security trust so that the SMSF acquires a beneficial interest in the asset.
- The SMSF has a right to acquire, but is not obligated to acquire legal ownership of the asset by making one or more future payments.
- The loan is limited recourse which means that the lenders rights for default on borrowing and any interest owing are limited to the underlying asset only.
Subject to meeting those conditions, super funds can now borrow to acquire assets such as residential or commercial property and shares. Any interest paid will be tax deductible to the fund. This will open up a whole new range of geared investment opportunities for SMSFs. Of course any leveraged investment strategy must comply with the funds written investment strategy. It also must not breach the underlying sole purpose of the fund, to provide retirement benefits to its members and their dependents.
Due to the limited recourse nature of the borrowings it’s likely that the lending to value ratio (LVRs) will be lower than normal borrowings and the interest rates will be slightly higher. All the major lenders and institutions are currently working on lending products for SMSFs whilst some boutique lenders already have loan products on the market.
If you would like to find out more about how your SMSF can legally borrow and the tax benefits of doing so, please contact Marc Peskett or Archie Para at MPR Group.
SMSF trustee declaration
As of 1 July 2007, all new trustees as well as directors of corporate trustees, of a Self Managed Superannuation Fund (SMSF) are required to sign a trustee declaration. The declaration, in the approved form, must be signed within 21 days of becoming a trustee or a director of the corporate trustee and should be retained by the fund’s trustees.
The declaration has been introduced to ensure new trustees and directors of corporate trustees, understand their obligations and responsibilities under the superannuation laws. The declaration is part of the Government’s plan to simplify and streamline superannuation and improve the regulation of SMSFs.
The declaration contains key information for managing a SMSF including:
- general trustee duties
- investment restrictions
- the sole purpose test, and
- record-keeping, reporting and lodgement obligations.
To help you understand these requirements further, the ATO have produced the following publications, available from the ATO website or by clicking on the links below:
Source: ATO
SMSF FAQs
Who cannot act as a trustee of an SMSF?
A disqualified person under S. 120 of the SIS Act defined as follows:
- as either an individual who is an undischarged bankrupt or has been convicted of an offence involving dishonest conduct or has had a civil penalty order under the SIS Act made against them.
- Or as a company if either a director, secretary or executive officer of the company is a disqualified person, the company is being wound up, or the company has a receiver and/or manager appointed.
Can a single director company be the trustee of an SMSF?
Yes. Under S. 17A(2) of the SIS Act, a single director company can be the trustee of an SMSF provided that there is only one member who is also the director of the trustee company.
Can an individual be a sole trustee of an SMSF?
No. Under S. 17A(2) of the SIS Act, a single member fund can only be an SMSF if the fund either has a trustee company or two individual trustees (one of which must be the sole member and the other a relative of the member)
How often should an SMSF trust deed be reviewed?
In general it is recommended that an SMSF trust deed should be reviewed and updated every 2 to 3 years.
For funds established prior to the May 2006 budget superannuation reforms, it is recommended that their trust deeds be subject to a review even though less than 2 to 3 years since the fund was set up.
How do we know an SMSF continues to be a complying fund?
In the year a fund is initially established it receives a notice from the ATO stating that the fund is a complying superannuation fund. It is then assumed that the fund is a complying fund until such time as the ATO notifies them that the fund is no longer a complying fund (Ref S. 40 and 41of the SIS Act).
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