Tel: 03 8508 7800 Fax: 03 9500 1386

SMSF – your questions answered

PSS have prepared answers to frequently asked questions received from our clients relating to SMSF's.

Note that the answers are a guide only. If you require more information please contact PSS Superannuation Services 03 8508 7800.

What is a self managed superannuation fund [SMSF]?
What is the advantage of a SMSF?
What are the tax concessions?
Who are the trustees?
Who cannot be a trustee?
What are the trustees' duties?
What is the sole purpose test?
How long do records have to be kept?
What is an investment strategy?
What investment restrictions does SIS impose?
Who can contribute to the fund?
When can benefits be received?
Who receives the benefit payable on death of the member?

What is a self managed superannuation fund [SMSF]?

A SMSF is a superannuation fund established for 1-4 people with the fund being controlled by trustees/directors who are also the member/s. The members are usually related.

What is the advantage of a SMSF?

Self managed super funds offer flexibility so that they can be structured to meet the specific investment needs of members. Self-managed funds are usually established and managed with the assistance of an accountant, stockbroker and financial adviser or specialist superannuation administration firm.

What are the tax concessions?

When members are accumulating money for retirement,

A 15% tax rate applies to income of the fund, including contributions for which the payer has claimed a tax deduction.
Realised capital gains on investments held more than 12 months are taxed at an effective rate of 10%.

If you manage your own fund, tax can be even lower through the use of franking credits and the offsetting of any capital losses.

When members are receiving an income from the fund in retirement

The fund is tax exempt on income and realised capital gains.
The member is aged 55-59, he/she receives a 15% tax offset on any taxable pension.Part of the pension can be tax exempt.
The member is aged over 60, any benefits (lump sum or pension) drawn from a taxed source is tax free and will not effect the members personal tax return.

It is important to note:

The 15% tax offset will not apply to part of the pension if the amount being used to provide the pension is in excess of the member's Reasonable Benefit Limit.

Who are the trustees?

For funds with 2-4 members, all members are required to be either trustees or directors of the trustee company. No other person can be either a trustee or a director.

For single member funds, the options are:

The member and another person (not an employer) act as the trustees of the fund, or
The member is the sole director of the trustee company, or
The member and another person (not an employer) act as the directors of the trustee company.

A member's legal personal representative can act as trustee if the member is under a legal disability, for example being under the age of 18 years, or if the representative holds an enduring power of attorney.

Who cannot be a trustee?

An individual is disqualified from being a trustee if he/she is:

convicted of an offence involving dishonesty,
subject to a civil penalty order under the SIS legislation,
disqualified by the ATO or APRA, or
an undischarged bankrupt.

A company is disqualified if:

a director, secretary or executive officer is a disqualified person,
there is application to wind up the company, or
a receiver or liquidator has been appointed

What are the trustees' duties?

The Superannuation Industry (Supervision) Act 1993 and its accompanying regulations provide the rules by which trustees must abide in order to ensure the fund retains its tax concessions.

Trustees are required to:

Act honestly in all matters concerning the fund
Exercise the degree of skill and judgement of an ordinary prudent person when handling the financial affairs of another person
Act in the interest of the members and their beneficiaries
Meet the requirements of SIS
Maintain records and discharge ATO requirements

What is the sole purpose test?

All investments held by the fund must be purchased with the intention of providing benefits in retirement for the members, or for their dependants in the case of the member's death before retirement. This limits the purchase of some investments within the fund.

How long do records have to be kept?

Non financial documents, such as minutes of meetings, are required to be kept for 10 years. Financial documents, such as accounts, have to be kept for a five year period.

What is an investment strategy?

This is a plan for the strategic investment of the fund. It is not a decision in relation to particular assets but the overall strategy of what the fund intends to achieve. The strategy should give regard to:

maximising returns to members having regard to the risk associated with each investment,
diversification across asset classes such as shares, property and fixed interest, and
the requirements to pay benefits, tax and costs of the fund.

What investment restrictions does SIS impose?

The fund cannot:

loan money to either the members or their relatives,
acquire assets from members or an associate of a member other than business real property or securities listed on an approved stock exchange,
borrow unless it is for a short term period in order to pay a benefit to a member, pay a surcharge liability or settle an investment acquisition,
have in-house assets in excess of 5% of the fund's total assets

Business real property refers to land and buildings used wholly and exclusively in a business. These do not have to be used by a business associated with a member.

An in-house asset is a loan to, an investment in or an asset subject to a lease with a related entity, such as a member's company. Minor exceptions apply to some of these investment restrictions.

# From September 2007 a SMSF can borrow via an instalment warrant to acquire an investment.

Who can contribute to the fund?

Subject to minor exceptions, the following contributions can be accepted:
For a person under the age of 65:

employer or personal contributions;
eligible spouse contributions.

For a person aged 65 - 74:

employer contributions;
personal contributions, provided the person employed, has been gainfully employed for a minimum of 40 hours in the 30 days prior to the contribution been made.

When can benefits be received?

A member cannot receive his/her preserved benefits unless one of the following criteria is met:

retirement;
death;
permanent incapacity;
permanent departure from Australia (temporary residents only);
severe financial hardship;
compassionate grounds.

A person will be considered to be retired if:

he or she has reached preservation age, ceased employment and does not intend to be gainfully employed in the future;
ceased employment after reaching age 60;
At age 65 preserved benefits become unrestricted non preserved benefits and can then be accessed at any time.

The preservation age is 55 years for members born prior to 1 July 1960. This is increased by one year for each year a member is born after this date with a maximum of 60 years applying to members born after 30 June 1964.

The exception to this rule is the commencement of a transition to retirement income stream after the member has attained preservation age.

Who receives the benefit payable on death of the member?

The trustees have the discretion to pay the benefit to either a member's dependants or to his/her estate, subject to the trust deed. A dependant can be the member's spouse, child or any other person who is financially dependent on the member.

If the member gives a binding nomination then the trustees must pay the benefit to the person(s) nominated, provided that person is a dependant or the member's legal personal representative. It is important to note that under some superannuation trust deeds a binding death nomination lapses after three years and must then be renewed.

Charter Financial Planning Limited, ABN 35 002 976 294 Australian Services Licensee License No. 234665 is not associated with this provider and is not responsible for advice provided by this provider.