Self-managed super fund rules
A self-managed super fund (SMSF) is designed for people who want more flexibility and control over their superannuation fund. That’s why many Australians choose to set up an SMSF, shares Director of SMSF Engine, Brent Jones.
However, there are some complex rules you need to follow if you want to keep your SMSF compliant with super legislation. Here we cover what those rules are and offer some tips on how you can make sure your self-managed super fund stays on track.
Is an SMSF right for you?
There is no simple answer when it comes to determining whether or not a self-managed super fund is the right retirement structure for you.
SMSFs have become an increasingly popular option for Australian investors in recent years, because they offer greater control over investments and retirement outcomes than traditional super funds. So, instead of having a super fund provider manage your retirement savings on your behalf, you have full control over investment decisions.
For example, you can choose what specific investments you put your money into based on how much risk is involved.
Beyond the benefit of being in control of your retirement savings, there can be a few other benefits of SMSFs, too. Like most super funds, SMSFs also qualify for concessional tax treatment. Investment income is only taxed at 15%, making super one of the most tax effective ways to save for retirement. If you personally fall into a higher marginal tax rate, utilising super and maximising contributions could be one way to reduce the tax you pay.
Taxation on super generally only applies during the accumulation phase (or during the retirement phase if you are under 60 years old). So, once assets move into the retirement phase, all income from them will likely be exempt, including capital gains that arose during the accumulation phase.
But while it can be great to invest in an SMSF, you’ll want to make sure it is something you can maintain, bearing in mind the extra time, risk and responsibility that is typically involved. There are strict compliance regulations that govern your investment decisions and how the fund must be administered.
According to the Australian Securities and Investments Commission (ASIC), you should consider the following before deciding to establish a SMSF:
- Do you understand what it means to set up and run a SMSF?
- Do you understand the roles and responsibilities associated with being a trustee of a SMSF?
- Do you possess the financial literacy skills required to run, or be involved in running, a SMSF?
- Do you have the necessary skills and expertise to make investment decisions for the SMSF?
- Will the fund’s investment strategy deliver the returns required to adequately fund your retirement?
Trustee roles and responsibilities
Because a SMSF is essentially a trust structure, trustees must be appointed to run and maintain the SMSF for the benefit of the members. At least one trustee is required to run the SMSF in accordance with the trust deed and super laws.
Trustees can expect to fulfil the following, among others, responsibilities:
- Exercising skill, care and diligence in managing the SMSF
- Complying with the SMSF trust deed and updating it as needed
- Acting in accordance with the sole purpose test (see discussion below)
- Documenting an investment strategy that considers all circumstances of the fund
- Regularly reviewing the investment strategy
- Staying compliant with all SMSF rules
- Maintaining proper and accurate records and complying with ATO reporting obligations
- Ensuring that the fund undergoes an annual audit.
As a member of an SMSF, you will also be one of the trustees of the fund, unless you choose to appoint a corporate trustee. Even in that case, Moneysmart notes you will still be responsible for the fund’s decisions and for ensuring it follows the applicable SMSF rules.
What is the sole purpose test?
One of the key compliance regulations for self-managed super funds (and all other superannuation funds) is that all investment decisions must be made solely for the purpose of providing retirement (or death) benefits specifically towards the fund’s members. This is known as the sole purpose test.
Should an SMSF fail to adhere to the sole purpose test, it could forfeit its compliance status, which ultimately means it won’t have access to concessional tax rate treatment and the money going into it would be subject to tax at the highest marginal rate.
According to the Australian Taxation Office (ATO), common examples of ways trustees may breach the sole purpose test include making investment decisions that benefit the members pre-retirement, or that benefit someone else to the detriment of the fund.
The ATO further suggests that to pass the sole purpose test, a super fund (including an SMSF) must meet the objective of one or more of the core purposes set out in the super legislation, or at least one core purpose and one ancillary purpose. It cannot be run purely for ancillary purposes, nor can it be run for any purpose that doesn’t fit into either category.
Examples of core purposes include providing members with:
- retirement benefits,
- benefits after reaching preservation age, and
- death benefits.
Examples of ancillary purposes include providing members with:
- termination of employment benefits,
- benefits in circumstances where a member’s ill-health has rendered them unable to work, and
- other benefits approved by the regulator (usually the ATO in the case of SMSFs).
SMSF investment property rules
Beyond satisfying the sole purpose test, SMSF regulations also impose restrictions on residential property investments.
For example, trustees of the fund are not allowed to purchase property from SMSF members or their relatives. SMSF fund members (and their associates) are also not allowed to use the investment property as their main residence or rent it out themselves. In other words, the property can only be leased on an arm’s-length basis to someone other than the fund member (or their associates).
In terms of commercial property investment rules, trustees are permitted to purchase a member’s business premises and have the business rent it out from the SMSF. However, the commercial property must primarily be used to carry out business activities, and the rent must reflect the true market value of rent for similar properties.
There are also additional investment property rules relating to borrowing money. For example, should your SMSF’s investment strategy involve borrowing money to purchase investment properties, the trustee needs to establish a limited recourse borrowing arrangement (LRBA).
According to the rules around LRBAs, the property must be held in a trust separate from the SMSF. In other words, the property must be held outside of the SMSF structure. While the income and expenses will still go through the fund’s bank account, the purpose of establishing a separate trust is to protect the other assets in the SMSF.
So, if the SMSF defaults on loan repayments, the bank or lender can’t access any other assets held by the fund to satisfy the debt.
Whether you’re considering establishing an SMSF or already have one, it’s important that the SMSF’s investment strategy considers all of these rules, and that trustees act accordingly.
Key takeaways
The decision to set up a self-managed superannuation fund is not one that should be taken lightly. It’s important to understand the risks, benefits and costs before getting started. This article has given you an overview of what SMSFs are, as well as some key rules around the responsibilities that trustees must fulfil and the restrictions that are imposed on investment decisions.
If you’re unsure about whether an SMSF will suit your needs, it may be worth seeking professional advice.
Cover image source: By aleg baranau/Shutterstock.com.
About Brent Jones
Brent is one of the directors of SMSF Engine. He works with accountants and advisers to deliver services including management of superannuation, legal documents, and general insurance, and also financial planning. Brent is also a qualified systems analyst, graduate of the AICD Company Directors course and Member of the NTAA.
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This article was reviewed by our Sub Editor Tom Letts and Sub Editor Jacqueline Belesky before it was updated, as part of our fact-checking process.