Self-managed super fund (SMSF)

Some people want the hands-on control that comes with a self-managed super fund (SMSF). Of course, with added control comes added responsibility and workload.

SMSFs can be suitable for people with a lot of super and extensive skills in financial and legal matters. You must be prepared to research and track your super investments regularly if you want to manage them yourself. Super is your investment for your retirement, so don't rush in.

• How SMSFs work
• Advantages of SMSF's
• SMSFs and investing in property
• Reporting and administration obligations

How SMSFs work

You can set up your own private super fund and manage it yourself, but only under strict rules regulated by the Australian Taxation Office (ATO).

An SMSF can have between one to four members. Each member is a trustee (or director if there is a corporate trustee). Running your own fund is complex.

If you're running an SMSF you will typically need:

• A large amount of money in the fund to make set up and yearly running costs worthwhile
• To budget for ongoing expenses such as professional accounting, tax, audit, legal and financial advice
• Plenty of time to manage the fund
• Financial experience and skills so you are more likely to make sound investment decisions
• Separate life insurance, including income protection and total and permanent disability cover
• You can pay an adviser a fee to do the administration or help with the investment decisions for your SMSF. However, be sure you understand what your adviser is doing because you cannot pass on the responsibility of being a trustee or director.

The Advantages of SMSFs

Self Managed Super Funds have many advantages for investors compared to using a traditional institutionally managed superannuation fund. These include:

• Self managed super funds provide you with the opportunity to reduce income tax on investment income and capital gains; Self managed super funds increase the flexibility of investment choices and the asset selection
• Self managed super funds provide control over your total investment portfolio, with the ability to take account of the risk profile of all your assets, including those held outside superannuation
• Self managed super funds have between 1- 4 members in the fund and allow the pooling of resources of others with similar financial objectives (for example, a family unit)
• Self managed super funds provide maximum flexibility in relation to the use of pension income streams such as Account Based Pensions inclusive of Transition to Retirement Income Streams
• Self managed super funds provide increased flexibility to use the advantages that superannuation offers, for those people trying to access Centrelink benefits such as the age pension
• Self managed super funds give you the ability to transfer personally owned shares and other listed securities directly into superannuation
• Self managed super funds also give you the ability to own your business' real property (but not operating assets) in the superannuation fund, assisting funding and cashflow problems for many businesses
• Self managed super funds have the opportunity to borrow or gear an investment, via limited recourse borrowing arrangements (LRBAs), provided the asset is allowed under the rules of the SISA Act.

SMSFs and investing in property

Amendments to superannuation legislation in September 2007 provided trustees of SMSFs with the opportunity to borrow for the purpose of acquiring a single asset.

Trustees of SMSFs are now in a position to buy a commercial or residential property through their SMSF.

Providing the SMSF has a deposit that meets the lenders loan valuation ration (LVR) requirements the lender will provide the balance of the purchase price. Banks may require a minimal deposit but trustees should be aware that negative gearing in a super fund is not tax effective due to the reduced tax rate applicable to super funds.

Legislation requires that the loan must be a Limited Recourse Borrowing Arrangement (LRBA). This facility allows the lender to hold the property as security however any existing or other assets held by the SMSF cannot be used for additional security. Subsequently the lender may insist that the members provide personal guarantees.

Trustees can either borrow from a financial institution e.g. a bank or from a related party e.g. the members or an entity controlled by the members.

For further information about purchasing an Investment Property in your SMSFs, please contact us.

SMSF Reporting & Administration Obligation

All SMSFs need to lodge an SMSF annual return with the ATO each year to:

• report income tax
• report super regulatory information
• report member contributions
• pay the supervisory levy

All SMSFs are required to have the financial accounts and statements audited by an SMSF auditor. You cannot lodge the SMSF annual return until the audit of your SMSF is finalised.