Buying a property with your super? Buying into real estate is helping many investors increase their wealth base. Many people are now using a real estate portfolio to support their long term retirement strategy by establishing their own Self Managed Superannuation Fund. It gives many people the opportunity of controlling their investment returns. Creating wealth through property investment is a very popular way to secure your financial future.
SMSF's are growing exponentially (on average around 180 people are setting up a new fund every day) and demand for SMSF borrowing is keeping pace with this market phenomenon. This is a highly specialised service and the product is designed to meet with specific banking borrowing requirements. We have put together an SMSF Reference Library to highlight some basic requirements in setting up your own Self Managed Superannuation Fund. We hope you find it helpful.
Is an SMSF right for you?
The popularity of SMSFs with professionals, small business owners and those with higher super balances is due to four key reasons SMSFs can potentially be more flexible than other...
Choosing a trust structure
A super fund is a trust and the trustees are responsible for running the fund. If you start a self managed super fund, you and any other person with whom you start the fund
Life stages of an SMSF
There are four stages in the life of an SMSF. These are the set up stage, accumulation stage, the pension stage and the wind-up stage. Each stage has its own process...
What is a Self Managed Super Fund?
Almost one million Australians are members of a Self-Managed Superannuation Fund (SMSF) and SMSFs have been one of the fastest growing segments of the superannuation industry.
There are three main criteria that set SMSFs apart from other superannuation funds:
- an SMSF can have no more than four members
- each member of the SMSF must also be a trustee or if the fund has a corporate trustee, each member must also be a director of the corporate trustee
- SMSFs have simplified reporting and regulatory requirements and are regulated by the Australian Tax Office (ATO), while other super funds are regulated by the Australian Prudential Regulation Authority (APRA).
Key rules for your SMSF
- Definition of a SMSF
- A SMSF is defined as a fund that has all the following:
no more than four members for individual trustees, each individual must be a member (except in single member funds) for a corporate trustee, each director of the corporate trustee must be a member (except in single member funds) each member of the fund is a trustee, or is a director of the corporate trustee
no member of the fund is an employee of another member of the fund, unless the members are relatives.
There are special rules for funds with one member only. Refer to the section below - Single Member Funds.
The definition of a ‘member’ and a ‘relative’:
Many of the super rules, particularly things you cannot do, relate to the members’ related parties. A ‘member’ is defined to be:
a person who receives a pension from the fund, or
a person who is eligible to make contributions to the fund (in the accumulation phase).
The definition of a ‘relative’ includes:
a spouse, parent, child, grandparent, sibling, aunt, uncle, niece, nephew, as well as a spouse or former spouse of any of these people. It includes relationships based on adoption or remarriage.
a spouse includes a person who, although not legally married to the member, lives with the person on a genuine domestic basis as the de facto husband or wife of that person. This includes same-sex couples.
- An appropriate trust deed
- The Superannuation Industry (Supervision) Act (SIS Act) sets out some minimum covenants that all super funds must comply with. While a trust deed can stipulate more onerous regulations for the trustees to follow, it is not allowed to contain clauses which permit trustees to breach the SIS Act.
Some rules trustees must comply with are:
to act honestly in all matters affecting the entity
to exercise a degree of care, skill and diligence as an ordinary prudent person
to act in the best interests of the beneficiaries
to keep fund assets separate
to formulate and give effect to an investment strategy
to not do anything that would impede the proper performance and function of powers
to manage reserves responsibly
to allow beneficiaries access to certain information
to do other acts as prescribed in the SIS Act.
Trust deeds can be amended by the trustees, provided the amendment doesn’t clash with the SIS Act. For example, you can’t amend a trust deed to reduce a member’s entitlement. Trust deeds need to be reviewed regularly to make sure they remain consistent with the law.
- What’s the sole purpose test?
- The sole purpose test requires super funds to be maintained for the single purpose of providing its members with retirement benefits. The test also allows the fund to be maintained for other ‘ancillary purposes’. To satisfy the sole purpose test, the fund must be maintained for one or more ‘core purposes’, and may also be maintained for one or more ‘ancillary purposes’. The ancillary purposes are optional and are not sufficient to pass the test without a core purpose.
The core purposes are:
provide benefits for each member after their retirement
provide benefits for each member after reaching the prescribed age (currently 65)
provide benefits to the legal personal representative and/or dependants of a member following their death, provided the death occurred before the member retired or reached 65 years old
The ancillary purposes include:
provide benefits for each member on or after termination of employment
provide benefits for each member on or after they temporarily or permanently cease work due to ill-health
provide benefits to the legal personal representative and/or dependants of a member following the member’s death, where the death occurs after retirement or after reaching 65 years old
There is a strong interaction between the ‘sole purpose test’ and the leasing of assets to related parties. For example, personal use of a super fund asset, such as a holiday house, golf membership or artwork, by a related party without adequate compensation would be a breach of the ‘sole purpose’ test.
- Is your SMSF an Australian super fund?
- Your SMSF must be an Australian super fund to comply with regulations and access concessional tax treatments. The fund must be established in Australia, own an Australian asset, and the members must be residents of Australia. The SMSF must pass the following tests:
the central management and control of the fund is ordinarily in Australia; and
at least 50% of the assets of the fund relate to active members who are Australian residents.
These tests obviously impact members who temporarily or permanently leave Australia and cease to be Australian residents. It’s possible for a member who plans to live overseas for a period of time to pass the ‘central management and control’ test, provided they leave Australia with the intent to return. This is a complex area of taxation law and further guidance can be obtained from ATO Taxation Ruling TR 2008/9 or your accountant.
- Compliance with super laws
- A SMSF can lose its complying fund status when it ceases to be an Australian super fund or fails the compliance test. Essentially, a SMSF will fail the compliance test when it has breached one or more of the provisions of the SIS Act, such as the sole purpose test. The seriousness of the breach will determine whether the ATO decides to issue a notice of non-compliance to the fund.
The taxation consequences of a fund being issued a notice of non compliance can be material, with the fund subject to tax at 45% on the excess of the market value of its total assets over total undeducted contributions. In subsequent years, the fund’s income is then taxed at 45%.
Less serious breaches can attract administrative penalties (payable by the trustees), or require the trustees to accept an enforceable undertaking.
- Key investment restrictions
- There are numerous restrictions on borrowing and lending, acquiring assets from related parties, dealing on an arm’s length basis and ensuring that your fund has no more than 5% of its assets in ‘in-house assets’.
You’ll need professional advice before you set up your SMSF, during its establishment and while it’s operating. If your SMSF is not set up properly... Read More
The SMSF regime is heavily regulated by the tax office and special care must be applied to make sure that you stay within the rules of making compliant ... Read More
The ATO requires that trustees keep accurate records for prescribed periods. The following records must be kept for a minimum of five years, such as accounting ... Read More
Sound asset allocation is one of the keys to driving investment returns. In a sense, asset allocation is like making wine. you will need to... Read More
Buying into real estate is helping many investors improve their wealth base. Many people are now using a real estate portfolio to support their long ... See More
Benefits can only generally be paid when a member meets a ‘condition of release’, which includes conditions such as as ‘retirement’ or ‘attaining ... See More
Understanding how super is taxed is important in developing and implementing investment strategies that consider the after tax outcomes and ... See More
There is a general restriction on SMSF borrowing because it is intended to be a savings and investment vehicle. While there are rules ... See More
You need to be confident that your SMSF will be the foundation of your retirement needs. To gain that confidence you need to set ... See More
A key feature of an account based pension is that a minimum payment has to be made each financial year. The minimum pension depends on the ... See More
When you become an individual trustee or a director of a corporate trustee of a SMSF, you take on a number of obligations, you must comply ... See More
In the past, most people invested their Superannuation in Retail or Industry Superfunds to which their employers contributed ... See More
Discover How To Use Your Super To Invest In Property
Learn how you can use your super to invest in property safely and simply.
If you have accumulated over $150k in your superannuation fund, either individually or jointly with a partner, you may qualify to start investing your superannuation funds directly into a property.
How To Get Started
- Register for the free consultation today. We can assess your current financial situation and goals. We can then schedule a face-to-face meeting where you can work out if opening a self-managed fund and investing into a property is right for you.
- Discover the advantages of property investing inside of super and the benefits it can bring you.
- Understand why so many Australians are switching to SMSF.
- Learn the advantages of capital gains tax both before and after retirement, compared to regular property investment tax rates.
- Find out the favorable rental income tax rates in super and why investing in property can be a great strategy for your superannuation and retirement planning.
If switching to an SMSF and investing in property is the right option for you and your long term goals, the Superannuation Property Team can guide you through each step of the journey, from the establishment, tax, administration, investing and compliance, for the life of your fund.
Contact us today and find out whether using your super to invest in property can work for you.