Excellent! For the right people that obtain the right advice, this can be a great way to advance your retirement savings. However, this strategy is not for everyone and there are many disaster stories where people have lost their super and therefore their retirement by not understanding what they were doing and/or receiving poor advice.
This guide will first discuss what is a self managed super fund and some of the legal responsibilities you need to be comfortable taking. We will then discuss the process you would take to use your super to purchase property.
What is a SMSF?
A Self Managed Super Fund is a form of trust. Its sole purpose must be to provide an income upon retirement for its members, or as a death benefit. A SMSF has its own Tax File Number (TFN) and Australian Business Number (ABN) and is required to have its own bank account.
Number of Members
You can have up to 4 members in a SMSF. The members do not have to be related unless one member employs another member. Each member needs to be a trustee of the SMSF or a director of the corporate trustee. Each member/trustee generally has equal responsibility in the investment decisions and management of the SMSF. Take this into account if adding more members. It may be fine to start with, but consider relationship breakdowns between members.
Running a SMSF
When you run your own SMSF you must;
Accept trustee/director responsibilities
This role imposes important legal obligations on you, as SMSF trustees are ultimately responsible for the operation of their SMSF. There are a number of duties, responsibilities and obligations required of an SMSF trustee.
The SMSF trustee needs to act in accordance with the following:
- The SMSF trust deed
- The Superannuation Industry (Supervision) Act 1993
- The Superannuation Industry (Supervision) Regulations 1994
- The Income Tax Assessment Act 1997
- The Tax Administration Act 1953
- The Corporations Act 2001
- Other general rules such as those imposed under other tax and trust laws
Adhere to The Sole Purpose Test
Your SMSF needs to meet the sole purpose test to be eligible for the tax concessions normally available to super funds. This means your fund needs to be maintained for the sole purpose of providing retirement benefits to your members, or to their dependants if a member dies before retirement.
Contravening the sole purpose test is very serious. In addition to the fund losing its concessional tax treatment, trustees could face civil and criminal penalties.
It’s likely your fund will not meet the sole purpose test if you or anyone else, directly or indirectly, obtains a financial benefit when making investment decisions and arrangements (other than increasing the return to your fund).
Create and follow an investment strategy
Create an investment strategy which considers all of the SMSF’s circumstances including investment risk, likely investment returns, liquidity and cash flow requirements, diversification of investments and insurance for members.
Have financial experience
It is important that you have the financial experience and skills to make sound investment decisions and have enough time to research investments and manage the fund.
Understand the fees
Knowing all the fees associated with running your SMSF is vital. In addition to this, you must budget for the ongoing fees, which include professional accounting, tax, audit, legal and financial advice.
Keep comprehensive records
Make the records available to an approved SMSF auditor for the annual audit.
Organise insurance
This is a critical obligation of the trustee to ensure that members are not financially compromised in the event of sickness or death. The insurances include income protection and total and permanent disability cover for super fund members