Our SMSF advisers are here to help!
Do you have questions about SMSF? Our SMSF Adviser has answered some SMSF FAQs. If your answer isn’t here please feel free to contact us for more information.
Let’s start with the basics. What is superannuation, why do we have it and what is a Super Fund?
In Australia your employer must pay money into an account in your name. This money is your Superannuation. The current rate of Super is 9.5% of your ordinary employment income.
The aim of Superannuation is to have money put aside during your working life that will build up and provide you with a regular income once you retire. With the average Australian needing to account for at least 20 years of retirement, Superannuation is a necessity.
The Super Fund is the company that hold the account in your name that your employer deposits the superannuation contributions into. The Super Fund then takes these contributions and invests them to build up the value of your Super over time.
Most people can choose which super fund they’d like their super contributions paid into. Check with your employer to make sure you can choose the fund your super is paid into and see choosing a super fund for more information. Super comparison websites can help you compare super funds.
Some industrial awards specify a fund or a choice of a few funds that super must be paid into. In these cases you may have limited or no choice of fund.
When you can choose your super fund, tell your employer by filling in a standard choice form from the Australian Taxation Office (ATO) or from your employer. If you don’t (or can’t) choose your own super fund, your employer will put the money into a ‘default’ super fund, known as a MySuper account.
Insurance through super
MySuper funds have a default level of death, disability and income protection insurance that you will automatically be covered for. If you don’t want this insurance you will need to tell your super fund you want to cancel it.
Insurance through super can be cheaper than similar cover outside of super and you can usually request to increase it if the default cover is not enough to suit your needs. See insurance through super for more information
For most people, your employer must pay an amount equal to 9.5% of your salary into your super fund account. This is on top of your salary or wages. Over the course of your working life, these contributions from your employer add up, or ‘accumulate’, which is why they are known as accumulation funds. Your super money is invested by your super fund so you will earn investment returns on the money.
Employer contributions are based on your ‘ordinary time earnings’. For example, if your ordinary time earnings are $50,000 then you should be paid an additional $4,750 into super. Ordinary time earnings are what you earn for ordinary hours of work including over-award payments, bonuses, commissions, allowances and certain paid leave. See the ATO’s information on using ordinary time earnings to calculate the super guarantee.
Super contributions if you’re self-employed
If you are self-employed you are responsible for making your own super contributions, but they are tax deductible. See super for self-employed people for more information.
Personal super contributions
You can make extra contributions by:
- Salary sacrificing – Your employer can direct some of your pre-tax income into super. This will be deducted by your employer and sent to the fund with your employer contributions.
- Personal contributions from your pay – You can also ask your employer to make personal contributions from money you have paid tax on. Low income earners who do this may be entitled to government contributions.
- Bank transfer using your personal funds – You can transfer some of your savings into your super account using BPay or direct deposit. Ask your super fund for details. You can possibly claim a deduction for it from 1 July 2017 onwards even if not self employed.
- Super rollover– Transferring all or some of your super from another fund into your main super account.
Bonus contributions from the government
If you put your own after-tax money into super, you could receive a government co-contribution, depending on how much money you earn. Low income earners can receive up to an extra $500 by making personal after tax contributions.
If you earn up to $37,000 you may also get a ‘low income super tax offset’ of up to $500 from the government. You don’t need to add extra money to your super to be eligible for this payment. Both of these payments will be paid into your super automatically after you have lodged your tax return.
Money in your super fund account is invested by your super fund. Most super funds offer a variety of investment options. These usually include pre-mixed options that will contain a mix of different asset classes, and single sector options such as cash, property and shares.
Your investment returns will impact how quickly your super grows so it’s important to choose an investment option that is appropriate for your investment timeframe and tolerance for market fluctuations. See super investment options for more information.
If you have more than one super fund you can combine them to save fees and make it easier to keep track of your super. Read more about consolidating super funds.
When you retire your super can be taken as a lump sum, a regular income stream, or a combination of both. If you choose to take your super as a retirement income stream, the money that you’re not accessing continues to work for you and earn interest. See income from super for more information.
A lot of other Super Funds are more “set and forget”. You set it up initially, you may choose how you want your money invested (most people don’t bother with this).
These Super Funds have professional licenced Trustees who are responsible for the management of the fund. You receive yearly statements of how your Super is growing, any costs incurred and you don’t really need to think about it much until you retire.
With an SMSF there are up to 4 members, who run the fund and make the decisions relating to it. This means you have more control over the investment of your super and how the fund is managed.
An SMSF has its own Tax File Number (TFN), Australian Business Number (ABN) and bank account. The bank account is used to receive contributions, make investments and pay out pensions. All SMSF investments are made in the name of the fund and controlled by the trustees.
As a Trust, a SMSF requires a trustee and there are two types of trustee structures for SMSF’s.
You can choose to have a Corporate Trustee, where a company acts as the trustee and each member is a director. Alternatively, your SMSF can be run with an Individual Trustee structure Individual Trustee structure. This means that each member of the SMSF is a trustee.
No matter which structure you choose, the Trustees are responsible for the decisions and administration of their fund.
This means that even if they employ a SMSF adviser to help manage the accounting, taxation and auditing of the fund, at the end of the day, the Trustees are held accountable for the fund complying with Superannuation Laws.
There are a lot of important things you need to do as a SMSF Trustee when setting up and managing a SMSF. Some people choose to employ SMSF specialists to assist in the process and make sure everything is done right.
But if you and the other Trustees of your SMSF are confident, you can manage the fund without specialist’s assistance.
You need, however, to make sure all of the following things are taken care of:
- Decide on fund members and the trustee structure
- Establish the Fund, the Trustee and Trust Deed for the Fund
- Register your SMSF with the ATO
- Set up a Bank Account for contributions, investments and pension transactions
- Create and update your investment strategy
- Consider insurance for members annually
- Have a plan for when your SMSF will end.
- Roll over members’ existing Super
- Organising employer contributions
- Accept contributions within limits
- Make investments without breaking Super laws
- Document and maintain records for up to 10 years
- Yearly asset valuations
- Yearly preparation of accounts and financial statements
- Appoint a registered SMSF auditor
- Lodge an annual return
- Pay the SMSF levy
- Pay any Tax that is due
- Ensure minimum pension payments are met each year
- Appoint an actuary
- Withhold tax
- Give payment summaries to members as well as the ATO as necessaryDownload Our Free 10-Point SMSF Guide
The main difference between an SMSF and other Superannuation Funds is that they give you more control. They are run by the members of the SMSF, so you get to decide exactly where and how your money is being invested.
- Control your investments
- Be front of mind and hands on with your superannuation
- Plan your contributions
- Minimise your taxation and control it
- Have transparency over the fees you are being charged
- Protection of your investment assets
- Allows you to pass wealth between generations
- Save on overall costs compared to a retail fund
- Plan your retirement pension payments properly
- Access the SMSF Equity – SMSFs can borrow to invest
Yes, you can add additional members to your SMSF and they don’t need to be a member from set up. However, you need to be aware that SMSF’s can have no more than 4 members.
A super fund can invest in almost anything that you can, as long as it is within the SMSF’s investment strategy (with certain exceptions) and meets the sole purpose test.
The less traditional your investment, the more careful you should be. E.g. buying a collectible car is possible, but there would need to be sound reasons for making the investment and no personal use by the members.
Just because an investment is possible, it does not mean that should make it. We recommend our clients contact us before making investments to make sure it is allowable, in the correct trustee name, properly insured and also properly dealt with by the trustees.
The sole purpose basically means that the only reason you have chosen that investment is to provide future retirement benefits to the members of your fund. If there are any material benefits arising from the investment (e.g. using that holiday home owned by the SMSF yourselves over summer), then the ancillary benefits call into question the purpose of the investment.
It is designed to make sure trustees protect member superannuation balances and do not try to access their superannuation too early.
Yes – in commercial, industrial, residential or via syndications.
You cannot, however, transfer residential property from a member into the fund.
Determine the amount you wish to contribute after speaking with your accountant, then make the transfer from the correct entity into the SMSF bank account. This could be from the business you won that employs you, from an unrelated employer by providing them your super guarantee information or from your personal bank account.
Be careful not to contribute too much or you could be paying a lot of extra tax.
We usually tell our clients that a fund needs $150,000 between all of its members in order to be cost effective, but many have elected to commence an SMSF with far less.
This does not preclude someone with a lower amount from commencing one for reasons other than cost effectiveness.
It costs between $800 and $2,700 depending upon how you structure your fund, the trustee and the level of advice you require.
Yes, an SMSF can lease an asset of the fund – such as business equipment or machinery – to a related party of the fund at commercial rates. This is known as an in-house asset.
An in-house asset is a loan to – or an investment in – a related party of your fund or an asset subject to a lease to a related party.
A related party of your fund can include fund members, trustees, their relatives and any companies and trusts these related parties control or influence. Employers who contribute member benefits for you or another member of your super fund are also related parties.
It’s important to remember that in-house assets can’t be more than 5% of the total market value of fund assets.
If your SMSF holds an in-house asset, the value of all of your funds’ assets needs to be determined at the end of the income year. The valuation enables you to test whether the market value of the in-house assets exceed 5% of the funds’ total assets at the end of a year of income.
Certain events will affect the percentage of in-house assets and there are also some exceptions to the in-house asset rules.
Your SMSF must also ensure that the lease of business equipment or machinery complies with the sole purpose test and is made on a commercial ‘arm’s length’ basis.
Yes – collectables and personal-use assets held in an SMSF can be sold to a related party. For items acquired:
- after 1 July 2011, the sale must be made at market price as determined by a qualified, independent valuer
- before 1 July 2011 and sold before 1 July 2016, an independent valuation is not required, however, the sale must be made on an arm’s length basis.
All sales to related parties that occur on or after 1 July 2016 must be supported by an independent valuation.
You must provide requested relevant documents to your SMSF auditor within 14 days of the request being made.
If you fail to do so, you will be in breach of a statutory time period in section 35C (2) of the Superannuation Industry (Supervision) Act 1993.
Where a statutory time period is exceeded by more than 14 days, your SMSF auditor is required to report the contravention to the ATO via an Auditor Contravention Report.
Keep excellent records and this won’t be an issue.
Your preservation age is the minimum age at which you can access your preserved super benefits without meeting another condition of release. It is based on your year of birth.
Your preservation age will be 55 if you were born before 1 July 1960.
If you were born after 30 June 1960, you will have a higher preservation age of:
- 56 – if you were born between 1 July 1960 and 30 June 1961
- 57 – if you were born between 1 July 1961 and 30 June 1962
- 58 – if you were born between 1 July 1962 and 30 June 1963
- 59 – if you were born between 1 July 1963 and 30 June 1964
- 60 – if you were born after 30 June 1964.
To access your preserved super in the 2015-16 income year, you must have turned 55 before 1 July 2015.
Your preservation age is relevant to the following conditions of release:
- reaching preservation age and retired with no intention to work again in the future
- reaching preservation age and starting a transition-to-retirement income stream.
A transition-to-retirement income stream (TRIS) can be paid to a member who has reached their preservation age even if they have not retired. However, strict annual payment conditions apply. The minimum annual payment amount depends on the member’s age and the maximum annual payment amount is 10% of the member’s account balance.
If payments are outside the allowable limits, the TRIS is automatically taken to have ceased for income tax purposes from the start of the financial year in question. This means all payments made during the financial year will be treated as a lump sum and taxed at the individual’s marginal tax rate, unless the payments are unrestricted non-preserved benefits.
If the private company is widely held (meets certain related party criteria), then the investment can be made.
You cannot invest via a transfer of shares from a related party, to the fund. An SMSF is prohibited from acquiring assets from a related party. There are limited exceptions, including market listed shares, business real property or in-house assets (where the value of all in-house assets does not exceed 5% of total fund assets).
In recent communications, we have described situations where an SMSF purchases shares in a private company for the purpose of channelling franked dividends to the SMSF instead of the company’s original shareholders.
If the private company is a related party of the SMSF, the purchase would be a prohibited acquisition and a breach of section 66 of the Superannuation Industry (Supervision) Act 1993 (SISA) would occur.
The most common conditions of release for paying benefits to a member are when the member has:
- reached their preservation age and retires
- reached their preservation age and begins a transition-to-retirement income stream
- turned 65 (even if they haven’t retired)
When you meet a condition of release with no cashing restrictions, your preserved benefits become unrestricted non-preserved benefits (UNPB).
Under the rules for voluntarily cashing benefits, UNPBs may be cashed at any time.
Yes and it is usually the best way to structure your SMSF.
Under paragraph 19(3)(a) of the SISA, the trustee of the fund must be a constitutional corporation pursuant to a requirement contained in the governing rules.
This means you need to set up a company incorporated under law and obtain a certificate of registration in order to have the company act as trustee of a fund. Registering a company incurs immediate costs and there is also an annual fee depending on the purpose of the fund.
The company must be registered before the SMSF is established.
There are very limited circumstances when you can access your retirement savings early. Strict criteria must be met to do so.
A release on compassionate grounds must be applied for through the Department of Human ServicesExternal Link. In these circumstances, superannuation savings will only be released to make mortgage payments if you do not have the financial capacity to pay and your mortgagee is threatening to repossess or sell your home.
If you are voluntarily salary sacrificing into your super fund, instead of paying your mortgage, you will not qualify for compassionate grounds because you have the financial capacity to make your mortgage repayments by accessing your employment income.
You are only able to withdraw super under severe financial hardship if you have received Australian Government income support payments continuously for 26 weeks and are unable to meet reasonable and immediate living expenses. Payments from your super fund are limited to a maximum of $10,000 every 12 months.
Improper early access to your super is illegal – there are severe consequences for you and your fund if you access your super before you are legally entitled to do so. These include disqualification of trustees, the fund being made non-complying, imposition of administrative penalties, and prosecution.
Any money accessed illegally will also be assessed as income for the individual and taxed at the applicable marginal tax rate.
Regulations that came into operation on 1 July 2014 do not allow SMSFs to provide insurance for a member unless the insured event is consistent with one of the following conditions of release:
- terminal medical condition
- permanent incapacity
- temporary incapacity.
The Explanatory Memorandum associated with the amended regulations makes it clear that the proceeds of an insurance policy must be released to the member who is the insured under the policy. This means that cross-insurance arrangements where the proceeds of an insurance policy are paid to someone other than the insured under the policy are not permitted.
If you are entitled to be paid a benefit from your SMSF, then you have a superannuation interest in the SMSF. Often referred to as your “member balance”.
Every amount, benefit or entitlement which you hold in your SMSF is to be treated as one interest. However, if a super income stream has begun to be paid from the SMSF, the amount that supports the income stream is treated as a separate interest. One member, but two member accounts for that one member within the one fund.
Your accounts in different super funds, or different SMSFs, are treated as separate superannuation interests.
The way of working out the value of a superannuation interest varies depending on the purpose of the valuation.
There are three reasons why it is necessary to value a superannuation interest to:
- calculate the pre-July 1983 component of the crystallised segments of a tax-free component as at 30 June 2007.Generally, the value of the interest is the total amount of all super lump sums which could be paid to you at that time, assuming that you are eligible to retire.
- calculate the pre-July 1983 component of an interest supporting a super income stream at the time of a trigger event.Because the income stream benefit is either allocated, market linked or account-based there is an identifiable lump sum available, such as an amount available in the your account, at the valuation date. This amount is to be used as the value of the interest.A trigger event could be commutation, death, turning 60, or 1 July 2007 if you are already 60 or older.
- determine the value of your interest at the time a super benefit is to be paid (for the purposes of the proportioning rule).The value of your interest (other than the interest which is supporting a pension that has already begun) is the total of the lump sums which could be paid from the interest.
When you start an income stream benefit from your SMSF, a separate superannuation interest is created. The components of this separate interest will be in the same proportions as the components of the original interest prior to the commencement of the income stream.
When a super benefit is paid from a superannuation interest, the benefit will have both tax-free and taxable components calculated in the same proportion that these components make up the total value of the superannuation interest.
A superannuation benefit is made up of two components a:
- tax-free component, and
- taxed component.
The proportioning rule is used to calculate the tax-free and the taxed component of a superannuation interest.
If you access your super benefit before you turn 60, your benefit will have a tax-free and taxable component. You cannot split your tax-free and taxable components into different accounts in your SMSF.