SMSF: do it yourself SUPER FUND!
How to create a self-managed super fund.
Before we go into the details, let’s look into the reasons for having self managed super:
• Control of your retirement funds
• Lower cost of managing your funds
• Investing in areas you’re familiar with – bricks and mortar (Australians’ first priority is property ownership), residential and commercial property
The government has encouraged the working population to increase their superannuation by salary sacrifice and concessional contribution into super. The government’s objective is to reduce the dependence on welfare for the aged and make people self-sufficient in retirement. However, their best intentions have been undermined by budget revenue shortfall.
The government has already made changes to the amount of concessional contribution (taxed in super at 15% instead of a marginal rate of up to 45% in the tax payer’s hand) for over 50 year olds, from $50,000 to $25,000. This may not be the end of such changes as elections at the end of the year may bring a new party into government, with new policies, looking to further increase their tax revenue.
The long term tax concessional savings arrangement rules are designed to ensure Super Fund assets are accumulated for the members’ retirement. Government regulations allow the transfer of funds from one super fund to another, or into a SMSF.
Although some individual situations may vary, the following largely defines the allowable structure of a Self Managed Superannuation Fund:
- must have less than five members
- it can have individuals as trustees, but generally a company is formed to act as a trustee. In the long term, it is best to have a corporate trustee to avoid later expensive changes.
- all members become directors of the trustee company.
- ATO (Australian Tax Office) allocates a TFN and an ABN to all funds that register.
- a bank a/c in the name of the trustee acting for the SMSF is established.
- roll over funds from your existing super funds under management into the SMSF.
An investment strategy is required in the trust deeds. This will specify the plan to achieve the fund’s investment objectives. It provides the trustees with guidelines for making investment decisions for member benefits in their retirement.
Once a property is identified and satisfied as an appropriate investment, a property custodian trust, PCT (Bear Trust) is established. The trustee for the PCT is a company with the members as directors. This is to prevent the SMSF borrowing investment funds directly. The custodian trust holds the property for the benefit of the SMSF members. The lender provides a limited recourse loan i.e. the lender’s rights will be limited to the property only, with no recourse to other assets of the SMSF.
The SMSF trustee, on property settlement, rents the residential property to an unrelated party. However if it is a commercial property, then the directors are able to rent it themselves
Now that I have shown you the setup for the SMSF, next time I’ll look at the use of a SMSF as wealth creation tool.
Get your money working for you!