Superannuation is highly regulated. Most Australians who have their retirement savings and investments within the superannuation system can benefit from a lower tax rate on that money, compared to savings and investments held in their own name.
Secondly, you are not the actual ‘owner’ of your superannuation while it’s being held by your fund. You are the ‘beneficiary’ of your superannuation. This means your retirement savings and investments are owned by a ‘trustee’, who manages it on your behalf. That is why your superannuation is regulated and controlled, and you can’t simply do whatever you like with it.
Most people in Australia have a super fund as their trustee, but the SIS Act also allows you to establish your own superannuation fund, appropriately named a Self-Managed Superannuation Fund (SMSF). Below is a break down of the general structure of an SMSF. Note that SMSFs can contain up to six members and not all SMSFs necessarily have a trustee company, with the members acting as trustees instead.
Setting up and managing an SMSF can be a lot of work, and there are a number of rules and restrictions on how they can legally work. Below are the main sections of the SIS Act that guide how SMSFs operate.
Section 62 – the sole purpose test
This is a legal test that outlines how retirement savings and investments must be managed to be compliant with the SIS Act and benefit from the concessional tax treatment of the superannuation environment.
Any savings or investments within superannuation need to be managed with the ‘sole objective’ to provide each member with:
- benefits for retirement (i.e. income to cover living expenses)
- benefits after death (i.e. a benefit for that member’s dependents)
The best example I give of the ‘sole purpose’ test is where an SMSF may purchase an investment property. If that property is leased to a tenant at arm’s length (i.e. the members of the SMSF do not know the tenant personally and the rent is in line with the market rate), the ‘sole purpose’ test is likely to be met. If the property is leased to a person who is related to a member of the SMSF by blood, marriage or business association, the ‘sole purpose’ test is breached, as another benefit (i.e. enjoyment of that property) is received. The SIS Act outlines that any member of an SMSF, along with anyone who is related to a member by blood, marriage or business association, is deemed to be a ‘related party’ of the SMSF.
Section 66 – Acquisitions of certain assets from members of regulated superannuation funds prohibited
An SMSF generally cannot purchase an asset that is owned by a member of the SMSF in their own name.
There are some exceptions to this rule, however. Examples of assets that can be purchased from a member of an SMSF are:
- Business real property (This is commercial or industrial property. Residential property is not permitted).
- Listed securities (This refers to any shares listed on a public share exchange, such as the Australian Stock Exchange).
- Certain in-house assets. These are assets that may include widely held unit trusts, or shares in a private company and cannot be greater than 5% of the fund’s total assets. This is quite a specialist area and is covered in subsection 71(1) of the SIS Act. It would be wise to seek professional advice when considering purchasing an in-house asset.
Key obligations when purchasing assets from a member of the SMSF are:
- The asset must be purchased at its fair market value.
- The transaction must be conducted on commercial terms.
- The transaction needs to be properly recorded.
Section 67A – Limited recourse borrowing arrangements
Prior to 2007, SMSFs could not borrow money for the purpose of purchasing assets.
SMSFs since 2007 can borrow money to purchase a ‘single acquirable asset’. A ‘single acquirable asset’ is something such as a parcel of shares (e.g.. 100 identical shares in a public listed company. The shares could not then be sold in tranches, only as a parcel of 100 shares) or a title in a single property (i.e. an SMSF cannot borrow money to own two separate properties, or to own 50% of a property as tenants-in-common with another owner).
A key aspect of SMSF borrowing is that it must be of a ‘limited recourse nature’. This means the lender of the money used to purchase the asset can only claim security over the assets that the borrowed monies were used to purchase. The lender cannot have any claim over any other assets owned by the SMSF.
All superannuation funds in Australia, including both industry and retail super funds as well as SMSFs, are governed by the Superannuation Industry (Supervision) Act.
However, Australians who are members of an SMSF can utilise aspects of the SIS Act, such as Sections 66 and 67A summarised above, to use their super in ways which are not usually available to members of industry or retail superannuation funds.
Bear in mind that managing an SMSF can be costly and time-consuming, and that there are legal and financial risks involved. This is also a fairly complex area of Australia’s super laws, meaning it could be wise to seek professional advice from a qualified adviser before you decide to set up an SMSF or make any significant investment decisions.
Compare Superannuation Funds with Canstar
If you’re comparing Superannuation funds, the comparison table below displays some of the products currently available on Canstar’s database for Australians aged 30-39 with a balance of up to $55,000, sorted by Star Rating (highest to lowest), followed by company name (alphabetical). Use Canstar’s superannuation comparison selector to view a wider range of super funds.
Fee, performance and asset allocation information shown in the table above have been determined according to the investment profile in the Canstar Superannuation Star Ratings methodology that matches the age group you selected.
About Andrew Zbik
Andrew Zbik is Director and Senior Financial Adviser at CreationWealth. He has a Bachelor of Business Administration and Bachelor of Laws from Macquarie University, a Diploma of Financial Services, SMSF Specialist Advisor Accreditation and is a Registered Tax Adviser. Andrew has been a wealth coach for over 14 years.
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