WHAT IS AN SMSF?
Like traditional retail and industry superannuation funds, self-managed super funds (SMSFs) are a way of saving for your retirement. The difference between an SMSF and other types of superannuation funds is that, generally, the members of an SMSF are also the trustees. This means the members of the SMSF run the super fund for their own benefit.
WHAT ARE THE BENEFITS OF AN SMSF?
When you set up an SMSF you are directly in charge of the investment decisions for your fund. This means you have more freedom to decide how your superannuation money should be invested and more control if you decide to make changes. This includes targeting specific investments which may provide your super fund with greater tax saving benefits. For example, investing in fully franked Australian shares can be very tax effective.
SMSF members can also have greater choice regarding the level of insurance cover they hold within their super fund and the estate planning strategies available to them (such as non-lapsing binding death benefit nominations). In certain circumstances, an SMSF can also borrow funds to assist with the purchase of assets.
WHAT IS AN LRBA?
To explain, trustees of SMSFs are actually prohibited from borrowing under the Superannuation Industry (Supervision) Act 1993 (SIS Act) with the only exception being under an LRBA.
To do this, a separate trust entity called a Bare Trust (essentially an empty trust) is set up to legally own the property on behalf of the SMSF.
This is known as the “single acquirable asset” in tax terms but keep in the mind that it can actually apply to multiple titles of land such as multiple units on one title, a stratum title where the unit and car park cannot be sold separately or a factory, warehouse or workshop built across two titles.
It’s through this structure that you’re able to borrow to invest in property. Bear in mind that you need a new bare trust if you want to invest in another property.
What are the pros of limited recourse loans?
- It can help to diversify your SMSF’s investments into other assets like commercial property.
- If you’re a business owner, you can buy business premises.
- It protects the other assets in your SMSF from “recourse” or from the lender selling those assets to recoup any losses that weren’t covered by the sale of the property you purchased.
- There can be tax benefits such as capital gains tax (CGT) concessions. The maximum CGT rate drops from 15% to 10% where a property is held for more than 12 months.
- As long as you’re not too close to retirement age, you can actually use concessional super contributions in order to pay down your loan faster. You don’t get this benefit with a standard home loan!
What are the drawbacks and risks?
Consider whether the purchase of the property will actually put you in a better position for retirement.
That means taking into account rental income and capital growth versus the mortgage interest and the cost of property maintenance and repairs.
- You’re investing so you’re still at the mercy of the property market.
- There is illiquidity risk if the property makes up a large portion of the SMSF’s total assets. If the property cannot be sold quickly in the event of default, it may impact on an SMSF’s ability to meet its obligations to members.
- Borrowing itself can affect the SMSF’s ability to meet member benefits obligations.
- SMSF and superannuation legislation changes on a regular basis and with each successive government. It can be hard to follow these rule changes and breaches can cost you thousands of dollars in fines depending on the size of your SMSF.
HOW MANY MEMBERS CAN BE IN AN SMSF AND WHO IS THE SMSF TRUSTEE?
An SMSF can have a maximum of four members (planned to be expanded to six).
The members may decide to establish a corporate entity to act as trustee for their SMSF. Under this arrangement, each member is appointed as a director of the trustee company. Alternatively, the members may prefer to act as individual trustees for their SMSF.
WHAT ARE MY OBLIGATIONS AS A TRUSTEE OF AN SMSF?
SMSF’s are regulated by the ATO. As a trustee of your SMSF, you are responsible for complying with the superannuation and tax laws and engaging with the ATO if there are any issues. You will need to be actively involved with the development of the SMSF’s investment strategy, management of the SMSF’s investments and administration. This means keeping records of investment decisions and transactions, ensuring tax returns are prepared and submitted and ensuring the fund is audited annually. You must also keep up to date with changes to superannuation laws affecting your obligations as a trustee.
If you breach the superannuation and tax laws, you can be personally fined. Therefore, it is important that you understand your obligations from the outset, and have access to professional advice, preferably an SMSF Specialist Adviser who can guide you through the complexity and help you to establish systems which will ease the administration of your fund.
WHAT CAN MY SMSF INVEST IN?
The range of assets you can invest in is guided by your SMSF’s investment strategy and is broad and wide-ranging. Your SMSF can invest in traditional assets, such as Australian and international shares, managed funds, term deposits and cash. Subject to certain conditions, your SMSF can also invest in residential and commercial property. For example, small business owners can have their SMSF purchase their business premises and lease the property back to the business. Under this strategy the SMSF receives a regular income (rental payments which may have previously been paid to a third party landlord) and it frees up capital for business growth.
All SMSF investments must be made on a commercial “arm’s length” basis. This means that the purchase price must reflect the true market value of the investment and the income earned on investments must reflect a true market rate of return. Examples of assets which are not allowed include personal holiday homes and artworks and collectables which are on display in your home.
IS AN SMSF RIGHT FOR ME?
Great question! This will depend on your personal circumstances, including the number of funds you have in super, the time you have available to manage your SMSF and your desire for greater flexibility and control over the investment of your super funds.