Self Managed Super Funds

You must have a trust deed in place to establish a SMSF.

A trust deed is commonly referred to as ‘the governing rules of the fund’. A trust deed is a legal document drafted by a lawyer that establishes the existence of the fund and rules regarding its operation when it is properly executed.

The trustees of the SMSF must document a written Investment Strategy for the fund which provides a framework or parameters for investment decisions of the fund. It must be in writing so that you have evidence that your investment decisions comply with the Superannuation Act. An investment strategy can be structured and reviewed by your financial adviser. Ask your financial adviser how to do this efficiently.

Failure to comply with all the necessary regulatory measures can result in fines, loss of concessional tax treatment and even criminal charges. In order to discharge the obligations of a trustee diligently, you may need to employ skilled professionals such as solicitors, insurance or risk advisers, auditors, accountants and investment advisers. Please note employing these service providers still does not absolve the trustee of their ultimate responsibilities.

Definition

A SMSF is defined as follows:

• No more than six members

• All members are trustees and all trustees are members except for single member funds

• If the trustee is a company, all members must be directors of the trustee company

• No member is allowed to be an employee of another member unless they are related

• Trustees cannot receive any remuneration for their services as the trustees of the fund

Establishing a Self Managed Superannuation Fund

You need to set up a trust, and a trust deed which outlines the rules of operation of the fund. For example, you will need to address:

• Appointment of the trustee or trustees of the fund, whether individual or corporate

• Admission of members to the fund

• Appointment of professional advisers such as administrator and auditor

• Establishment of trustee meetings, voting guidelines, minutes and how the meetings are to be run

• Setting an investment objective and written investment strategy

• Assessing the insurance needs of members

• Establishment of member accounts

• Establishment of reserves

• Establish a routine for regular reviews

Investment Strategy for the Fund

The trustees of SMSF’s are required to formulate and implement a written investment strategy that sets out the fund’s objectives and investment parameters for the fund. In doing so, the trustees must have regard to:

• Appropriate diversification of the fund’s assets

• The risk and return characteristics of the investments

• The fund’s cash flow requirements including paying out benefits to the members as they fall due and any liabilities or meet fund expenses

• Whether the fund holds personal insurance for members

• Members' needs and circumstances

There should be an active review program for the investment strategy, and it should be updated as needed to reflect the needs of members. Ask your financial adviser how to do this efficiently.

Insurance Strategy for Members

The trustees must consider whether personal insurance cover is appropriate for the fund's members, taking into account each member's personal circumstances. Consideration should be given to the type and amount of cover required as part of the overall investment strategy of the fund.

Sole Purpose Test

SMSF’s must be established for one of the following purposes:

• Provision of benefits for members upon retirement

• Provision of death or ancillary benefits to the dependants upon the death of the member prior to retirement

This is known as the ‘sole purpose test’. It is important that trustees understand that the assets of a SMSF can only be used for these purposes.

Related Party Transactions

There are restrictions on the type of investments SMSF’s are allowed to purchase from the members or an associate of a member. SMSF’s can only purchase the following investments from a member:

• Listed securities

• Units in a widely held unit trust

• Business real property that is used to conduct business

There are other investment restrictions such as lending to members or relatives, borrowing to invest, in house assets limit (5% of current fund’s assets) and arm’s length transactions.

‘In Specie’ Transfers

Where an in specie transfer is made from personal ownership to a superannuation fund, it is subject to the current concessional and non concessional contribution caps and must comply with Superannuation (SIS) Act s66 which prohibits the purchase of an asset from a related party, some exemptions apply.

Conditions associated with In Specie Transfers:

• Asset values are at market value and market valuations must be performed by qualified valuers based on reasonably objective and supportive data

• In specie transfers must not breach SISA s66 as outlined above

• They must be in accordance with the fund’s investment strategy, including the fund’s trust deed

• Residential properties are not allowed as ‘in specie’ transfers into superannuation

• Some smaller property syndicates are not included and you should check with your managed fund if applicable

Individual to SMSF Transfer

Trustees are generally prohibited from intentionally acquiring assets from related parties of the fund. However, there are exceptions to this rule including:

• All securities such as shares, warrants etc listed on an approved exchange such as ASX at market value

• Business real property, which must be acquired at arm’s length and at market value

• Units in widely held unit trusts like managed funds at market value

• Term and other deposits with an approved deposit institution such as a bank

• Assets classed as "in house assets" which would not result in the level of in house assets exceeding 5% of the fund’s asset value

You need to consider that you cannot personally borrow against the asset any more or use it for a personal guarantee. Only the superannuation fund can use it for superannuation purposes and in accordance with the trust deed and Superannuation (SIS) Act.

Gearing (Borrowing to Invest) within Self Managed Superannuation Funds

SMSF’s can borrow money under a Limited Recourse Borrowing Arrangement (LRBA) to invest in eligible assets such as Australian direct property residential or commercial or listed shares or Exchange Traded Funds, provided the fund follows certain rules:

• The SMSF retains beneficial ownership of the asset

• The asset is an asset the SMSF could otherwise legally acquire if it had the funds

• The investment is held in a third party trust which retains legal ownership of the investment until the loan is fully repaid

• The borrowing is limited recourse, meaning the lender can only acquire the security or the asset purchased with this borrowed money and cannot claim other assets of the fund in the event of a default

Gearing provides the benefits of possible further wealth accumulation for retirement, concessional tax on the investment income, capital gains of the asset, tax deductibility for the interest expenses and the ability to invest in assets the SMSF previously could not access due to lack of funds.

Ownership of Assets in a Limited Recourse Borrowing Arrangement

As the SMSF has the beneficial ownership of the investment, it is entitled to receive income such as rent and dividends. The ownership will be transferred to the SMSF when the last loan repayment and any related outstanding costs are paid. The structure of the loan must be such that the lender’s security is limited to the investment purchased only.

Important Considerations

The Trustees of the SMSF must consider the following before implementing gearing:

• Whether the trust deed allows borrowing to invest

• Whether the fund has sufficient cash flow to service the loan and related costs

• Whether the investment supports the sole purpose test of SMSF

• Whether the loan complies with the Superannuation Industry Supervision Act 1993 and ATO requirements

• Whether the contribution caps are exceeded

• Whether the insurance needs of members need adjustment due to increased risk

• Whether the investment can be signed off by the SMSF auditor

• Taxation issues such as capital gains tax and stamp duty

• Costs associated with advice such as legal and establishment fees

• Restrictions on acquiring assets from related parties and in house assets

• Restrictions on the use of investment property assets

• Members cannot reside in SMSF owned property until retirement and withdrawal

• Lending conditions including higher interest rates and possible guarantees

• Default risk where lender may repossess the asset

• Compliance risks if conditions are not met

• Equity cannot be drawn down for further purchases without selling

Steps to Implement the Strategy

You need to consider the following steps to implement the strategy:

• Speak with a solicitor to ensure appropriate trust structure

• Arrange the trust structure and seek legal advice

• Review SMSF Trust Deed for borrowing provisions

• Review and update investment strategy

• Document trustee decisions

• Set up declaration of trust

• Maintain the sole purpose test

• Arrange a limited recourse borrowing arrangement with a lender

• Ensure proper documentation and legal advice

Publications for SMSF trustees and members

• Introduction for SMSF trustees: running a self managed super fund (NAT 11032)

• Paying benefits from a self managed super fund (NAT 74124)

• Introduction for SMSF trustees: Winding up a self managed super fund (NAT 8107)

In addition, the ATO has a step by step guide for every stage of an SMSF in information videos: https://www.ato.gov.au/Super/Self-managed-super-funds/

Factual Information Disclaimer

This information has been provided as factual information only. We have not considered your personal financial circumstances, needs or objectives.

Whilst all care has been taken in the preparation of this material, it is based on our understanding of current regulatory requirements and laws at the publication date. As these laws are subject to change you should speak with an authorised adviser or relevant professional for the most up-to-date information. Any case studies, graphs or examples are for illustrative purposes only and are based on specific assumptions and calculations. Past performance is not an indication of future performance.

Download the Self Managed Super Funds Factsheet