Self Managed Super Funds

Transcription

1 Self Managed Super Funds

2 BRISBANE 10/ 8 Metroplex Ave Murarrie QLD 4172 PO Box 518 Cannon Hill QLD 4170 P F BILOELA 54 Callide Street Biloela QLD 4715 PO Box 98 Biloela QLD 4715 P F ROCKHAMPTON 75 High Street North Rockhampton QLD 4701 PO Box 5161 Red Hill Rockhampton Qld 4701 P F MONTO 3 Newton Street Monto QLD 4630 PO Box 69 Monto QLD 4630 P F

3 CONTENTS Self Managed Super Funds 3 IS A SELF MANAGED SUPER FUND RIGHT FOR ME? 4 WHAT IS THE COST OF AN SMSF? 5 WHAT ARE THE RISKS? 5 CAN I ACCESS MY SUPER EARLY WITH AN SMSF? 6 THE NUTS AND BOLTS OF SETTING UP AN SMSF 7 INVESTMENT, INVESTMENT, INVESTMENT 8 CONTRIBUTIONS AND ROLLOVERS 9 SMSF HOUSEKEEPING 11 ACCESSING YOUR SUPER 12 TAX AND SMSF S 13 WINDING UP AN SMSF 14 HOW TO BE A GOOD TRUSTEE 15 LAST WORD 16 CONTACT US 17 AUTHOR 18 DISCLAIMER 18 2

4 Self Managed Super Funds A Self Managed Super Fund (SMSF) gives you more control of your super An SMSF is like any other super fund - it is a way for you to save money for your retirement. However, the key difference with SMSF s is that the members are, generally, also the fund s trustees and make their own investment decisions. This is in contrast to the vast majority of people who put their superannuation savings into an industry or retail superannuation fund where it s pooled with other members super and professionally managed by the trustees of the fund. However, if you establish an SMSF, you are the boss. While there are many positives to managing your own super, it is also a big responsibility. There are strict rules that govern what you can do with your SMSF, how you can invest the fund s money and when you can access it. By establishing an SMSF, you are also responsible for maintaining records and reporting regularly to the ATO. 3

5 Is an SMSF right for me? By setting up an SMSF you are taking direct responsibility for your future; for your retirement and so it is critical that you get it right. When you set up an SMSF you should consider: Your age and time before you intend to retire? What level of risk will you will be comfortable with? What will be your specific objectives for the fund? When it comes to SMSF s, you need to have enough money, time and skills to: Make the best investment decisions. Meet all your trustee obligations for the fund. Attend to the required administration. As trustee of an SMSF, your main responsibility is to ensure the fund s money is invested appropriately: Are you a confident and knowledgeable investor? Will an SMSF do as well as or better than other super funds after you pay all the costs? If you re not confident that your management of an SMSF can produce a better result for your retirement than say an industry or retail superannuation fund then you may be better off staying in a large super fund and leaving the work to more skilled professionals. The decision to create an SMSF depends a lot on your personal situation and so it is important to discuss your options with a specialist SMSF advisor. They can help you understand what s involved and work with you to determine the best superannuation structure for you. 4

6 What is the cost of an SMSF? To establish a viable SMSF you ll need to have a minimum of about $200,000 in superannuation Your ongoing costs will start from $1,200 a year but ultimately the level of costs will depend on the amount of work required from your professional advisors. There can be a big variation in the cost of setting up and running a SMSF depending on the cost of the professional accounting and administration services you use and the cost of tax, audit and legal advice you obtain to run the fund. The overall level of fees will depend on the types of investments your SMSF makes, the number of transactions, the amount of contributions made and benefits withdrawn and the quality of the records you have maintained. In addition, when you set up an SMSF it is important that you consider having life insurance and you ll need to consider what level of life insurance is appropriate. You need to be aware that life insurance can be more expensive to you as an individual compared to the cost when purchased via large superannuation funds. Large superannuation funds are able buy group policies that enable them to offer life insurance benefits at a relatively low cost. What ARE THE RISKS? Do Not Put All Your Eggs into One Bas ket Avoid risking all your retirement savings in one or a few investments. By spreading your investments, you can help control the risk of your investment portfolio. The investment returns you achieve from an SMSF depends entirely on the investment decisions that you make for your fund. Don t Be a Rule Breaker SMSF s receive significant tax concessions as a savings incentive, but you need to follow the law to receive these concessions. Breaking the law can result in substantial penalties being imposed on the fund and trustees. The Buck Stops with You Even if you receive professional advice to run your SMSF, you will always be legally responsible for all the decisions made. 5

7 Can I Access My Super Early with an SMSF? If you do decide to set up an SMSF, make sure it s only to save for your retirement Though it may sound nice, setting up an SMSF is not a way to get early access to your super. One thing to always remember is that schemes to obtain early access to super are usually illegal and fraudulent and can result in going to jail. 6

8 The Nuts & Bolts of Setting Up An SMSF Your SMSF must be set up correctly to be eligible for tax concessions, to pay retirement benefits and to be as easy as possible to administer. Steps for setting up an SMSF: Arrange an SMSF specialist advisor to help you set up and advise on your fund. Decide on the structure of your fund. Make sure the members are eligible to be trustees. Check the residency of your fund. Establish your fund, trust deed, and execute all documentation. Appoint the trustees. Record each member s tax file number. Open a bank account for your fund. Register the fund with the ATO; obtain an ABN and TFN from the ATO. Prepare an investment strategy with help from a licensed investment advisor. Make contributions to the fund within the contributions caps. Rollover benefits from your existing superannuation accounts. Invest these funds in accordance with the investment strategy. Maintain good documentation and complete records. It s good to note that while the ATO administers laws for SMSF s and will work with you to ensure you meet your obligations, it will not provide financial or investment advice. 7

9 Contributions and Rollovers Contributions A contribution is a payment made to your fund or a transfer of an asset other than money (called an in specie contribution to the fund). Generally, your SMSF can accept: Employer contributions Personal contributions Salary sacrifice contributions Government super co-contributions Eligible spouse contributions You need to document contributions and rollovers received and allocate them to member accounts. Allowable Contributions There are minimum standards for accepting contributions to make sure contributions are only made for retirement purposes. Whether a contribution is allowable will depend on: The type of contributions compulsory superannuation guarantee contributions can be accepted at any time. The age of the member generally you can t accept contributions from members aged 75 or over. If the member has quoted their TFN Whether the member has exceeded the annual-capped contributions limits Your fund trust deed may have additional rules about accepting contributions. In Specie Contributions In specie contributions are contributions to your fund in a form other than money. Generally, you can t intentionally acquire any assets from related parties of your fund. Some exceptions to this rule are listed securities, shares in widely held companies and unit trusts, and business real property, acquired at market value. Rollovers and Transfers A rollover is when a member transfers some, or all of, their existing super to their SMSF. 8

10 Investment, Investment, Investment One of your key responsibilities as a trustee of an SMSF is managing the fund s investments. The investment decisions should be designed to protect and increase the members benefits for retirement. Investments that are suitable for your SMSF include cash, term deposits, bonds, listed shares, managed funds and property. Property can include commercial, residential and primary production land. Collectables, bullion and financial derivatives can also be purchased by and SMSF if they fit within the fund s investment strategy. The Sole Purpose Test Remember: the fund s investments are for the sole purpose of providing retirement benefits to members. There cannot be any pre-retirement benefits for members or related parties (this includes letting members use an investment asset). If your fund does not meet the sole purpose test it will not be eligible for tax concessions. If you or any party, directly or indirectly, obtain a financial benefit when making investment decisions it s likely the fund will not meet the sole purpose test. If the fund invests in collectables such as art or wine, you need to make sure that SMSF members don t have use of, or access to, the assets of the SMSF and that the assets are stored securely and properly insured. Breaches Of The Sole Purpose Test Include: Investments that offer a pre-retirement benefit to a member or associate. Providing financial help or a pre-retirement benefit to the financial detriment of your fund. Investment Strategy Investments must be made according to the written investment strategy. The investment strategy sets out the investment objectives and how they will be achieved. It takes into account the personal circumstances of the fund members, including their age and risk tolerance. The investment strategy will help maintain the right mix of investments for the fund and 9

11 members. Restrictions on Investments While a trustee of an SMSF has the flexibility to choose the investments for the fund, there are restrictions on what you can invest in. The investments should be made on a commercial, arm s length basis and you cannot buy assets from, or lend money to fund members (or other related parties). Generally, your fund can t borrow money. There are certain exceptions to this rule and you should consult an SMSF specialist advisor should you consider borrowing might be a suitable strategy for your Fund. The purchase and sale price of fund assets must always reflect the market value for the asset, and the income from assets must reflect the market rate of return. Trustees generally should not: Provide financial assistance to members and their relatives. Acquire assets from related parties of the fund, such as fund members and their associates, or the fund s employer-sponsors and their associates. Borrow money on the fund s behalf (unless instalment warrant arrangements are allowed; these will require a separate trust structure so you should seek expert advice). Lend to, invest in or lease to related parties of the fund more than 5% of the fund s total assets (these are called in-house assets ). The investment restrictions are some of the most important rules you need to comply with under the superannuation laws. You should speak to an SMSF specialist advisor to make sure all your investments comply with the law. Ownership and Protection of Assets You need to manage your fund s investments separately from any other assets and ensure that the fund has clear ownership of its investment assets. Appropriate insurance cover should be taken out to protect the funds assets. 10

12 SMSF Housekeeping As a trustee of your SMSF you need to: Appoint an approved auditor to audit your SMSF each year. Lodge your SMSF annual return with the ATO each year by the due date and pay the ATO supervisory levy. Arrange preparation of annual financial statements and other documentation required for compliance with superannuation legislation. Keep comprehensive records for 10 years. Records to be maintained include: Trust deed and any amending deeds. Trustees minutes documenting how and why investment decisions were made. Annual operating statements of the SMSF s financial position. Who the trustees of the SMSF are and their consent to act as trustees. Copies of annual returns and information provided to members. Required income tax deduction documentation (including any actuary certificates). Notifications to the Tax Office of any change in details for the SMSF (for example, a change in trustee or members). Investment strategy documents. Keeping your records in an orderly fashion may help you save money on audit and fund administration and accounting costs. It will make it easier for you and your SMSF advisor. It is good practice to keep the fund s permanent records separate from the records of a specific financial year. In your permanent file you should keep: The fund s trust deed. The fund s investment strategy. Reasons for decisions on the storage of collectables and personal use assets Minutes of trustee meetings All signed trustee declarations Records of trustees consenting to their appointment as a fund trustee Records of all changes in fund members and trustees. If your fund regularly holds trustee meetings, you should establish a separate folder for them, sorting them in date order. Keeping good records is a legal requirement. 11

13 Accessing Your Super The superannuation benefits in an SMSF generally can t be accessed until the member reaches retirement. Preserved and Non-Preserved Benefits Most of the super held in the fund will be preserved benefits and must be preserved in the fund until the law allows them to be paid. Preservation Age Preservation age is the age that a person can access their super benefits. It ranges from 55 to 65 years of age, depending on what year you were born. After age 65, no super benefits are preserved. Conditions of Release Voluntary cashing of preserved benefits generally depends on the member reaching their preservation age and meeting a condition of release. Compulsory cashing of benefits is required only if a member dies. The member s benefits must be paid out as soon as possible after a member s death. Early Access to Benefits There are a few conditions of release that permit early access to super benefits, but these occur only in limited circumstances, such as terminal illness, permanent incapacity and severe financial hardship. Benefit Payments Benefits from a super fund will generally be paid as a lump sum or an income stream, provided the member has satisfied a condition of release. When paying benefits, there are administrative obligations such as withholding tax or obtaining an actuary s certificate. Income Streams Income streams generally can only be accountbased if they are paid from an SMSF. Account-based income streams have the following general characteristics: They require a minimum annual payment to be made and sometimes a maximum annual amount stipulated. They can only be commuted to a lump sum in particular circumstances. They can t have a residual capital value. They can t be paid to a non-dependent beneficiary. They may be paid for life or for a fixed term or years. A transition to retirement income stream can commence from age 55 and must meet the standards of an ordinary account-based income stream. This has a maximum annual payment limit of 10% of the account balance and a minimum amount, which increases with age. Commutations of these pensions can t be taken in cash except in limited circumstances. Before starting to pay any income stream, seek the advice of a specialist SMSF advisor. 12

14 Tax and SMSF s SMSF s are subject to income tax but receive concessional treatment if they are a complying fund. A complying SMSF s assessable income is taxed at a rate of 15%, while for a noncomplying fund the rate is 45%. Capital Gains A net capital gain is: The total capital gain for the year, less, total capital losses for that year less capital losses outstanding from prior years. However, an SMSF account paying a pension or income stream is exempt from tax subject to the application of certain concessions. Complying SMSF s are entitled to a CGT discount of one-third, if the asset was owned for at least 12 months. If capital losses are greater than capital gains in an income year, they can be carried forward to be offset against future capital gains. Certain SMSF income is taxed at different rates: Non-arm s length income is called special income and is taxed at 45%. An amount of ordinary income is special income of a complying SMSF if: It is derived from a scheme or investment in which the parties weren t dealing with each other at arm s length, and That amount is more than the SMSF might have been expected to derive if those parties had been dealing with each other at arm s length, or The income is derived by an SMSF as abeneficiary of a discretionary trust. Pension Income Income that a complying SMSF earns from assets providing for income stream benefits is exempt from income tax. This is called exempt current pension income (ECPI). ECPI does not include assessable contributions or non-arm s length income. You can claim the tax exemption once your SMSF begins paying income stream benefits to an eligible member. To claim the exemption in the SMSF, ensure that all of the SMSF s assets are re-valued to their current market value. The fund may also need to obtain an Actuarial report. A complying SMSF is entitled to deductions for any losses or outgoings that are: Incurred in gaining or producing assessable income. Necessarily incurred for the purpose of gaining or producing such income. Expenses that a complying SMSF can deduct include: Supervisory levy. Insurance premiums for death benefits (insurance premiums may not be entirely deductible if the benefit is for a disability benefit). Auditor fees. Investment expenses. Administration costs. Interest a complying SMSF is generally prohibited from borrowing money, but interest incurred in gaining or producing assessable income would be deductible. SMSF s must register for GST if they operate an enterprise and have a turnover greater than $75,000. You may choose to register your fund for GST. Special rules apply regarding the amount 13

15 Winding Up An SMSF Eventually you may need to wind up your SMSF. This can happen if all the members and trustees leave the SMSF or all the benefits have been paid out of the fund. To wind up your SMSF you need to: Notify the ATO within 28 days. Deal with all the assets of the fund so that the fund has no assets left. Arrange a final audit of your fund. Complete your reporting responsibilities including lodging a final SMSF annual return with the ATO. Document the trustees decision to wind up the fund. of an Australian Superannuation Fund because the trustees have moved overseas permanently. You have found that you re not ready for the complexity of the law surrounding SMSF s and the time and costs it takes to manage an SMSF. The fund has insufficient assets to remain viable. In some cases, you ll pay benefits to members when you wind up your SMSF. In other cases, you ll need to roll the member benefits over to another super fund. Once the fund is wound up, it can t be reactivated. The reasons why you might need to wind up your SMSF: The fund may no longer meet the definition 14

16 How to be a good Trustee Beware Of Promoters Offering Early Access to Super Various plans offer access to your superannuation before you retire. The promoters of these plans tell you that they can help you access your super savings for reasons such as paying off debts, buying a house or car, or even going on holiday. These schemes are illegal and heavy penalties apply if you decide to participate in these schemes. Never Act On a Sales Pitch at a Seminar This is just an illustration by way of an example. Mark and Jane attended a seminar where they were told that their fund could enter into a joint venture. Mark and Jane decided this would be a good investment for the fund and proceeded with establishing a related trust. The SMSF provided all the capital for property development. The SMSF was to receive a small portion of the rent and a portion of the proceeds on the sale of the property. The SMSF had no expenses in relation to the land or responsibility for management of the venture. The fund also had no ownership interest in the property. The SMSF had invested in a related trust in contravention of the in-house asset rules. As a result, Mark and Jane had to enter into an enforceable undertaking to dispose of the investment in the venture. Seek the advice of an SMSF specialist adviser before making any major decisions. Work With the ATO and Make a Genuine Effort to Comply Making a fund non-complying is something the ATO never takes lightly as the fund can suffer serious tax consequences if an SMSF is deemed non-complying. The fund s total assets are subject to tax at the highest marginal rate of 46.5%. In addition, the income for the fund is taxed at 46.5%. The following example illustrates the effect of a fund being made non-complying. Nathan used money from his fund to build a residence for the members to live in, breaching the sole purpose test. Nathan and the other trustees built the residence on land not owned by the fund. In addition, the trustees assisted a related company when that company was in financial hardship. The trustees didn t make sure the loan was made or maintained on an arm s length basis. According to the super laws, a loan of up to 5% of the assets of the fund is allowed, however, the loan exceeded 60% of the fund s assets. There was no documentation and the loan was not on commercial terms. The trustees entered into an enforceable undertaking with the ATO to rectify the contraventions and to ensure the fund was compensated for the loss of income for the period the money was not in the fund. If the SMSF makes an enforceable undertaking, which is then breached, the ATO are likely to make the fund non-complying. Avoid Access ing Your Super Early Superannuation is meant for your retirement so accessing your superannuation before meeting a condition of release is against the law. In a recent court case, the trustees of an SMSF incurred civil penalties and costs of $62,500 after accessing their super to pay off their personal debts. The judge in the case observed that the persons were taking advantage of the existence of SMSF s. 15

17 Last Word An SMSF can be a very effective vehicle to provide for your retirement but it requires that you adhere to all legislative requirements. Always seek advice from a specialist SMSF adviser before proceeding. It will be the best decision you can make for your retirement. 16

18 contact us Interested in finding out more? Either make an appointment at our Brisbane office, or at a location that suits you. Our advisors regularly make trips to regional centres. Wherever you are, we ll do all that we can to make sure you have the right answers for your self managed super fund. charles@powersmsf.com.au BRISBANE 10/ 8 Metroplex Ave Murarrie QLD 4172 PO Box 518 Cannon Hill QLD 4170 P F BILOELA 54 Callide Street Biloela QLD 4715 PO Box 98 Biloela QLD 4715 P F ROCKHAMPTON 75 High Street North Rockhampton QLD 4701 PO Box 5161 Red Hill Rockhampton Qld 4701 P F MONTO 3 Newton Street Monto QLD 4630 PO Box 69 Monto QLD 4630 P F

19 Charles Page DipSM, DipFS (Fin Planning), SSA DIRECTOR OF SUPERANNUATION SERVICES Author Charles has worked for 20 years on Self Managed Superannuation Funds and is a SMSF Specialist Advisor. He has a detailed knowledge on all aspects of self-managed superannuation and knows how to establish the right structure for your fund. He holds a diploma of Superannuation Management and is a Proper Authority holder with a Financial Services Licensee. This guide has been prepared by Powers Superannuation Services. Disclaimer This guide should not be seen as a substitute for financial advice. It is providing general advice only and may not be suitable for your personal and financial circumstances. You should seek specific advice about superannuation and SMSF s from a qualified advisor before taking any action on the material in this guide. 18

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