About Self Managed Superannuation Funds
This web site is dedicated to promoting excellence in self managed superannuation practices by accountants, advisers and trustees alike.
Self Managed Superannuation Funds (SMSF), otherwise referred to as DIY funds or Family Retirement Funds, represent the most effective tax and social security investment structure available. In addition they represent both an effective form of creditor protection and a unique opportunity for estate planning by allowing the provision of tailored pensions and lump sum benefits. More recently the ability of SMSFs to borrow has created an opportunity for small business owners to acquire their own premises and Funds generally to acquire assets with borrowings that may be paid out over time with tax deductible contributions.
A self managed superannuation fund is a customised wealth creation and succession vehicle for the family. It delivers a tax effective retirement income stream and provides family succession for family members. Self Managed Super Funds are now the favoured choice for in excess of about 400,000Australian Families with collective assets in excess of any other type of superannuation fund.
All superannuation funds are controlled by trustees who have a duty to act in the best interests of the members. With a Self Managed Superannuation Fund the trustees, or the directors of the corporate trustee, are the members. This means that the members control the fund and carry the responsibility for the fund's performance and compliance.
Self managed superannuation funds allow you to hold the fund's investments in your own name as trustee. This concept is often difficult to understand as most people mistakenly believe that superannuation is an investment - It is not! A self managed superannuation is an efficient estate planning, tax and social security structure which can be wrapped around investments that could otherwise be held by you personally.
The growth in the number of self managed superannuation funds over the past few years has been spectacular mainly due to the level of control and relative flexibility of investments that can be achieved but also because of the growing awareness of the estate planning certainty of these Family Retirement Funds.
What is a self managed superannuation fund?
A self managed superannuation fund, otherwise known as a DIY or Family Retirement Fund, is a special type of Trust. It houses an investment portfolio that operates under a trust deed and is operated for the benefit of up to 4 members. All members are trustees or directors of a corporate trustee except in the case of a single member fund where there may be a second trustee who is not a member. These funds are supervised by the Australian Taxation Office (ATO). An exception is when an approved trustee is in place. Such a fund is called a small APRA fund and is under the jurisdiction of the Australian Prudential Regulatory Authority. Small APRA funds are similar to SMSFs in many ways but also contain many important differences. They will not be discussed here.
A self managed superannuation fund must have an investment objective and strategy. The legislation does not say it has to be written but, given that the fund's auditor will need to consider it each year, practical considerations dictate that it must be written. Generally, compared to institutional superannuation funds, it is only economical to establish a self-managed superannuation fund with more than $150,000 (ASIC believe the minimum amount should be $250,000) in fund assets though this may be lower depending on the issues to be addressed. This is because the minimum cost of administering a fund, including audit and Government charges, is in the order of $2,000 per annum. There may be reasons why you may wish to establish a fund with a low balance as fees are not the only consideration.
Who can establish a self managed superannuation fund?
Virtually any adult Australian including employees, self-employed individuals and retirees.
How is a self managed superannuation fund structured?
Generally, you and your family are members as well as being trustees of the fund. The maximum number of fund members is four. You may employ administrators, accountants and investment advisers to help you manage the fund. The fund can invest in a wide range of assets including both direct and managed investments.
Who can contribute to a self managed superannuation fund?
Anyone who can contribute to an institutional fund can contribute to a self managed superannuation fund subject to the fund's Trust Deed. Even the Government can contribute under the co-contribution rules. Depending on your employment situation you may be able to take a tax deduction for all or part of your contributions. These are called concessional contributions. This tax deduction may not be as significant a benefit as the advantages that flow within the fund so a popular strategy is the making of large non-concessional contributions (contributions for which you do not take a tax deduction) by individuals who are in employer funds or approaching retirement or even retired. Non-concessional contributions are limited to $150,000 per annum though this can be brought forward for individuals under the age of 65 to allow a $450,000 contribution which can then grow in the tax advantaged superannuation environment. The fund is also able to accept rollovers from other funds.
What type of benefits can a self managed superannuation fund provide?
Benefits are payable on retirement, disablement or death of the member in the form of lump sums or pensions. Lump sum benefits may be payable in cash or in specie subject to the Trust Deed.
How important is the choice of trust deed?
It is imperative that your Trust Deed is modern, current, flexible and strategic. If the Deed prohibits the fund from performing certain actions then making such an action will be a breach of the Deed even if the law states that the action is allowable. If a Deed is silent on a provision this does not necessarily mean that it is allowable.
Advantages & Disadvantages of Self Managed Superannuation Funds
ADVANTAGES
Control
You have complete control over the investments of the fund. Subject to an appropriate investment objective and strategy you are able to invest in a wide range of assets and implement a wide range of strategies. The choice is yours. The members, or a company controlled by the members, of the Fund act as the Fund Trustees and so are ultimately responsible for the fund’s activities usually with the assistance of a financial planner and an accountant or specialist administration and compliance bureau.
Customisation
The family super fund is the only vehicle that allows multi generations to aggregate their savings and investments to provide a desired income for retirement or in the event of a member's death. The fund can provide a wide range of choices for your personal income stream. Although only four people can be members of the fund at any given time, it can be customised to meet those members' needs.
Security
All the investments are held in your name as trustee or in the name of a company trustee you control. This means that only you can sign the fund’s cheques and only you can authorise investments to be made or sold.
Permanency
The fund continues unless you wish to wind it up. The fund can provide benefits to you, your spouse and even your children and grandchildren. The fund can continue indefinitely.
Social Security and Asset Retention
The fund can be used to pay a partially Assets Test exempt complying pension to you which may allow you to receive social security benefits you would otherwise not be entitled to. To enjoy this benefit your pension will need to have been established no later the 19th September 2007. Also member accounts in the pension phase pay income to members which is largely or wholly exempt under the Income Test.
Costs
The cost of managing a self managed superannuation fund is less than the charge structure of comparable institutional funds if the fund is large enough, generally over $150,000 ( ASIC believes it should be at least $200,000).
Diverse Investment Choice
One of the benefits of a family super fund is the ability for members/trustees to control their investments. The law provides broad investment powers to the trustee. Each member may have their own investment strategy and can invest in numerous assets including shares, warrants, bonds, property, managed funds, private equity, direct mortgages and fixed interest. The trustee/members formulate and implement the investment strategy, usually with the assistance of a specialist adviser. Some notable investment restrictions are loans to, or investments in, members or individuals or entities associated with members or the acquisition of certain assets from members, notably residential investment real estate. 
Investment Opportunities
As you have control and flexibility you are able to take positions in new floats and potentially enhance the fund’s performance.
Borrowing
Your Fund is able to borrow under strict rules. Used prudently this can allow you achieve a number of wealth creation outcomes. Apart from enabling your Fund to acquire an asset of a greater value than would otherwise be possible it is a useful mechanism for wealthy individuals to lend to their own Fund thus introducing their own capital in excess of the contribution caps.
Taxation
Self-funded retirees are high on the Government's list of priorities and therefore offer a number of generous tax concessions to encourage Australians to save for their retirement. Tax deductions for contributions into a superannuation fund are available. Tax of only 15% is levied for income earned by members of the fund during the accumulation stage. A low 10% tax rate applies for realised capital gains. There is no tax on income or capital gains in the fund during the pension income stream phase. Imputation credits can offset tax in the accumulation phase or be refunded to the fund in pension phase. Structured correctly all or most of the pension income stream will be tax exempt with a 15% tax rebate on any taxable pension income. Once a pensioner reaches age 60 all benefits drawn are tax free. This benefit is also available for a pension paid to a (tax) dependant beneficiary upon the death of a member.
Component Retention & Grandfathering
Within a self managed superannuation fund you may change investment managers without having to rollover your fund. This allows you to retain your fund components which can maximise your long term taxation position. It also allows you to change the underlying asset supporting a pension without rolling over the pension and losing valuable social security concessions.
Flexibility
The Fund can accept personal and multiple employer contributions. On retirement a member’s account may pay a lump sum or continue as an account based pension paying a tax effective income stream without impacting on other members in the accumulation phase.
Contributions/Withdrawals in specie
You are able to contribute listed shares, units held in managed funds, fixed term deposits and business real property directly to the fund instead of cash if you wish. Benefits may also be paid in specie as a lump sum withdrawal (pensions can only be paid in cash) with no restriction as to the type of asset.
Family Fund
Up to four (4) members can participate. If more than 4 members are required then a second self managed superannuation fund is available.
Estate Planning
The fund has an indefinite life and can be used to provide benefits from generation to generation. Looking after your family after your death is generally a major concern. With a family super fund you have the choice of allocating an income stream or a lump sum for some of your dependant family members. Topping up your fund with life insurance may enable you to fulfill your desired outcome for your family in the event of your death. Binding death benefit nominations are often used for this purpose.
Portability
The Fund is totally portable; it is not necessary for each member to reside at the same address or even in the same State. It is necessary for a majority of the members to live in Australia. If this condition cannot be satisfied the fund will need to be wound up or converted to a small APRA fund which is similar in many respects to a self managed superannuation fund but has an approved trustee in place.
Creditor Protection
Of particular interest to small business owners is the protection of fund assets on bankruptcy. Bankrupt members are even allowed to withdraw benefits and receive the same protection out of the fund.
Business Fund
Business partners may be the Trustees and Members. This can cause problems in the event of the break up of the business, particularly if this involves acrimony between partners, so it is not an arrangement that Tranzact Super encourages.
Non-Lapsing Binding Death Benefit Nominations
Subject to your Fund Deed certainty of death benefit payouts may be achieved with the proper use of non-lapsing binding death benefit nominations (Not to be confused with standard binding death benefit nominations which must be renewed every 3 years).
DISADVANTAGES
Responsibility
All decisions and responsibilities associated with managing the fund rest with you as trustee. In addition, all superannuation funds have to comply with rules and deadlines. As trustee you are responsible for making sure the fund meets all requirements on time – so you need to keep up-to-date. An experienced fund compliance and administration service, such as ours, is a must for most fund trustees.
Compliance & Administration
Because of the rapidly increasing size of this sector of the retirement savings market and the relative inexperience of the Trustees who control each fund the regulators are very concerned about the level of compliance and administration inherent in funds of this type. Compliance in a family super fund consists of three important elements
1. The Trust Deed;
2. Transaction Documentation;
3. Administration and Audit
Severe penalties exist for wilful non-compliance including up to a 46.5% penalty on the assets of the fund, a $220,000 fine and up to 5 years jail. Compliance is crucial when it comes to family super funds yet is often a misunderstood concept. For most advisers compliance is looked at in terms of preparing accounts, member statements and lodging tax returns. Tranzact Super understands that administration and compliance is more than just administration. It is meeting ALL of the compliance requirements laid down for SMSFs in the superannuation laws.
Limited ability to diversify investments
Although you are generally able to invest in a greater range of assets, you may not have sufficient money in the fund to diversify across them all. You may overcome this by investing in managed or pooled investments with the assistance of a qualified investment adviser. You are also able to borrow, within strict rules, to acquire additional assets.
Unable to gear except via Instalment Warrants
Your fund is unable to borrow except in very limited circumstances or by using Instalment Warrants.
Cannot assist members or related parties
The fund must be used for the benefit of members or their beneficiaries on retirement, disablement or death. It cannot be used to provide benefits outside of these parameters such as loans to members (even if a commercial rate of interest is charged) or holiday accommodation in a fund property (even if commercial rent is paid) for example.
A member is able to rent a commercial property held by the Fund provided that the arrangement is on an arms length basis with proper market rent being paid.
The Fund may invest in, or lend to, the member's business but these arrangements must be on a commercial basis. This type of fund investment is referred to as an in-house asset. The value of all in-house assets held in a fund cannot exceed 5% of the total value of the fund.
Overseas Residency
If the members wish to leave Australia permanently or for a long period of time (over 2 years) it may be necessary to wind up the fund. This decision will rely on a number of other considerations such as the number of members who will remain as Australian residents, the respective account balances, whether contributions will be made or pensions paid, whether there is the opportunity to appoint Powers of Attorney, etc. You will need specialist advice should this matter be a consideration.
For a more detailed explanation of the facets of a self managed superannuation fund we recommend you study our Product Disclosure Statement, Financial Services Guide and Privacy Statement.
