Self Managed Super Funds are growing in popularity. There are now about 500,000 small funds in Australia. Is a self managed super fund right for you?
The ATO, who regulates small self-managed super funds (SMSF), has just updated their website with an easy to read guide. This guide gives you an understanding of what is involved in an SMSF and how they work.
The guide points out that an SMSF is not right for everyone. It is more suitable for those who like to control their own investments and have the time to do it. Due to the costs you need to have a minimum amount to make it cost effective. It is generally thought that you need about $200,000 in the fund. If you have more than that then a SMSF could also start to save you money.
The guide points out that you also need to have the skills to manage the investments your fund makes. A super fund is better suited to direct investments such as shares or property, rather than managed funds.
If you are investing in shares then if you do not have the skills you can seek the advice and engage a stock broker to have a sound portfolio.
I find many business owners have an inclination to property and often buy their business premises through their super fund.
As a general rule super funds cannot borrow and so this does make the task a little more difficult than it used to be. To overcome this there are a number of options.
• You can either use another property as security for the debt, however this will restrict future borrowing.
• If you own 50% or less of the property and the other owners are not related to you, there can be debt over the property.
• If you wish to own more than 50% than you can do so through a limited recourse borrowing arrangement. If you are going to do this you need to give yourself plenty of time and plan well ahead.
Your SMSF cannot buy assets from you or people related to you, apart from the exception mentioned above with business real property or listed shares.
SMSF’s are governed by a series of rules. One of the most important is the sole purpose test. This test makes it clear the only purpose for a super fund is to provide for your retirement. You cannot receive any personal benefit from the fund until that time. This means for example you cannot buy a holiday unit that you will use. It also means you cannot use the SMSF to buy a business that you will receive any remuneration or any indirect benefits from.
The other important rule is the in-house asset rule, which restricts your SMSF from lending, investing in, or leasing more than 5% of the fund’s assets to a related party.
The ATO is making a significant increase in audit activity and enforcement of the laws. However if you engage with professionals and consult with when you make major decisions you will ensure you fund complies.
Superannuation is a low taxed and secure way to hold assets. Used wisely a self managed super fund can add to that flexibility and control.