Frequently Asked Questions
Using your self-managed super fund (SMSF) to buy an investment property can be a great way of growing your wealth and ensuring you can take a well-deserved holiday when you retire. There’s a reason more and more Australians are using SMSF property investments to build a comfortable retirement!
Frequently Asked Questions for SMSF Set UP & Administration
What is an SMSF or Do-It-Yourself (DIY) superannuation fund? +
DIY superannuation fund is an informal name for a Self-Managed Superannuation Fund (SMSF). Self Managed Super Fund is a superannuation fund that is regulated by the Australian Taxation Office (ATO) and all members of the fund must be trustees of the fund. There are exceptions to this rule, such as, a member who is a minor, or, one who is under legal disability. In such cases, regulatory provisions state that a member of the SMSF cannot be the trustee of the fund.
What is the definition of an SMSF Member? +
- A member is a person who has contributions made for them or who receives benefits from the fund. In retirement, a member has the option of receiving either lump-sum payment or a pension, or a combination of both.
What is the definition of an SMSF Trustee? +
- A trustee is a person or a legal entity (corporate trustee) responsible for ensuring the fund is properly managed as set out under the Superannuation Industry Supervision Act 1993 (SIS) and all other relevant laws are observed. A SMSF can also have a company as a trustee if each director of the company is a member of the fund. Note: anyone over the age of 18 can be a trustee of a superannuation fund unless they are a “disqualified person” under SISA. An individual is a “disqualified person” if: at any time, the person was convicted of an offense involving dishonesty; or at any time, the person has been subject to a civil penalty order under SISA; or the person is an insolvent under administration (e.g. an undischarged bankrupt). Please notify your service provider before you establish your fund if any applicant for the membership of the fund is a “disqualified person”!
How many different types of SMSF are there? +
- There are two types of regulated SMSFs. The most common type is usually called “More Than One Member Fund” or “Multiple Member Fund”, with a corporate or non-corporate trustee; the other being a “Single Member Fund”, again with a corporate or non-corporate trustee.
What is the definition of “More Than One Member Fund” or “Multiple Member Fund”? +
- This fund type has more than one, and up to four, members. Each individual trustee of the fund is a fund member and each member of the fund is a trustee, unless the fund has a corporate trustee and members are directors. Members of the fund cannot be employees of other members, unless they are related. Trustees of the fund cannot receive remuneration for their services as trustees.
What is the definition of “Single Member Fund”? +
- be the sole director of that company, or;
- be related to the other director of the trustee company and that they be the only two directors of that company, or;
- not be an employee of the other director of the trustee company and there are only two directors of that company.
This fund type has only one member. The member must be the trustee of the fund and the fund must have another individual or a legal entity as a second trustee. That second trustee cannot be a member of the fund. If the second trustee is an individual (rather than a company), that person must be a relative of the member, or, alternatively, can be any other person provided the member is not an employee of that person. If the second trustee is a company, the member must:
Should we have a Corporate Trustee for our SMSF? +
- Majority of financial institutions will require fund to have a Corporate Trusteeto allow limited recourse borrowing arrangements or will lend more money to SMSFs with a Corporate Trustee. Please note taht some lenders will not accept a trading company as a valid structure for an SMSF Corporate Trustee!
- SMSF with a Corporate Trusteewill not require the name change for the assets held in bank, share trading or similar accounts in case of the membership/trusteeship changes.
- SMSFs with a Corporate Trusteeonly pay one penalty to the ATO in case of SIS Act breaches, in comparison with the individual trustees SMSFs, where each individual trustee is liable for the penalty and pays the full amount. For example: SMSF with 4 individual trustees penalized by the ATO with the maximum penalty of $10,200 means that all 4 trustees will individually have to pay $10,200 amounting to in total to $40,800 for the 4 trustees. SMSFs with a Corporate Trustee, is required to pay the maximum penalty of $10,200 in total, irrespective of the number of directors in the fund.
Some of the benefits of having a Corporate Trustee for the fund are:
My wife and me are planning to start our own SMSF. Are we able to have a joint superannuation fund together?
Yes, you can have a joint superannuation fund, i.e. Multiple Member Fund.
What are the advantages of an SMSF? +
- • SMSF gives members unique control of their investments within the legal framework
• Maximum tax payable on earnings is 15 percent
• The tax is payable in the year a gain is realised
• SMSFs allow control of the timing for asset disposal, meaning that realisation of gains can be deferred until such time that assets are supporting an Account Based Pension, when the income is taxed at 0%
• SMSF is a prerequisite for an Account Based Pension
• SMSFs can invest up to 100% of the fund’s total assets in “Business Real Property”
Is establishment of a SMSF a tax-deductible expense (payable by the superannuation fund)?
No, establishment of an SMSF is an expense of a capital nature!
Is administration, including audit and tax return of an SMSF a tax-deductible expense (payable by the superannuation fund)?
Can I add members after the fund is already setup? Or do they have to be named when you setup the fund?
You can add members after the fund is setup, however, the fund must have less than five members in total.
Does an SMSF operate like a regular super fund except that I have more control?
SMSF operates exactly as any other super fund, but you have 100% control over it, i.e. you as the Trustee are responsible for how the fund operates, how the money invested, types of investments etc.
Do I have to operate a company or small business before I can setup my SMSF?
Does SMSF have to be resident in Australia?
Resident SMSF receives concessional tax treatment (maximum tax payable on earning is 15%). A non-resident fund is subject to 47% tax on the fund assets.
What can my SMSF invest in? +
- lending to members and their relatives
- acquiring assets from ‘related parties’ of the fund
- investing in ‘in-house’ assets
- all the investments need to follow the two main rules: “sole purpose test” and “arms length”
- It is the duty of the SMSFtrustees to separate the SMSF assets from their own personal assets, or assets belonging to their business
- SMSFassets cannot be used for personal or business purposes, this representing the “sole purpose test” i.e. the funds in the fund is aimed for the retirement purposes only, and cannot generally be accessed until retirement
The legislation does not state exact types of investment in which a SMSF can invest. Some investment practices are restricted, the aim being to protect the assets against overexposure to undue risk. The main purpose of the investment is to generate and grow retirement benefits for the members.
Please note restrictions on investments:
Trustees of SMSFs must keep money and other assets of the superannuation fund separate from their own personal assets. Similarly, the assets of the superannuation fund must also be kept separate from those belonging to a business (e.g. a business run by two partners who decide to setup an SMSF).
Money belonging to the fund must not, under any circumstance, be used for personal or business purposes. This money is for retirement purposes and generally cannot be accessed until retirement. The fund’s assets must not be viewed as a form of credit or emergency reserve when faced with a sudden need.
What is the “sole purpose test”? +
- The sole purpose test means that a super fund must be maintained solely for at least one of the core purposes such as:
• retirement benefits for the members, or
• death benefits for the members’ benefits or estate, or
• at least one of the core purposes and one or more approved ancillary benefits, such as resignation benefits or disability benefits.
A breach of the sole purpose test may results in the fund becoming a non-complying super fund for taxation and Superannuation Guarantee purposes and could lead to significant penalties being applied to the person who contravenes it.
What are Trustees’ Administrative Obligations? +
- Annual Income Tax Returns & Other Lodgement Requirements
- Prepare and implement an Investment Strategy for the management of investments
- Superannuation Surcharge. All SMSFs are required to report member contributions information to the ATO
- Reasonable Benefit Limits (RBL). All SMSFsare required to report payments of benefits made to members to the ATO
- Annual Audit. All SMSFsare required to have the financial accounts and statements of the fund audited each year by an approved auditor. Auditors must provide a certificate to the trustees stating that the fund has been audited
- Supervisory Levy. SMSFsmust pay the annual superannuation supervisory levy to the ATO
- Record Keeping Requirements
- Keep accurate and accessible accounting records that explain the transactions and financial position of the fund
- Prepare an annual operating statement and an annual statement of the funds financial position and keep these records
- Prepare minutes of trustee meetings and decisions, records of all changes of trustees and members and keep these records for a minimum of 10 years
- Keep copies of all annual returns lodged for a minimum of 10 years
- Keep copies of all reports given to members for a minimum of 10 years
Trustees are responsible for:
Can I start the process of establishing my super fund in this financial year, and execute my deed with the Commencement Date of the Deed in the next financial year, but transfer or rollover the money into the fund in this financial year?
If I establish my super fund in this financial year and if my fund does not have any transaction in this financial year, do I still have to organise end of year administration, including an audit and tax return?
Can my SMSF borrow and use the borrowed money to acquire investment assets?
Yes, via Limited Recourse Borrowing Arrangements.
What is Limited Recourse Borrowing Arrangement (LRBA)? +
Generally, subject to limited exceptions allowed under the Superannuation Industry (Supervision) Act 1993 (SISA) Self Managed Superannuation Funds (SMSFs) are prohibited from borrowing money. In September 2007 SISA was changed to allow SMSFs to invest in certain limited recourse borrowing arrangements via borrowing money to acquire a permitted single asset, or a collection of identical assets, having the same market value (that are together treated as a single asset), which the fund is not otherwise prohibited from acquiring .
Can I have my superannuation monies in more than one fund such as an SMSF, in some other types of a fund?Yes. You can spread your superannuation between funds of your choosing.
Can SMSF invest in share market and derivatives?
Yes, subject to certain conditions.
Can SMSF invest in real estate?
Yes, subject to certain conditions.
Can my SMSF pay an Account Based Pension?Yes.
Can SMSF buy shares on the NASDAQ in the USA or any other overseas market? If so are there any additional fees for international trading?
Yes, SMSF can buy shares on the NASDAQ in the USA or any other overseas market.
Does SMSF have to have an Investment Strategy? +
- Yes. The SIS legislation requires funds to have an investment strategy. There is no prescribed format for an investment strategy, and strategy will vary from fund to fund based on, but not limited, the following:
• The composition of the fund’s investments
• Future contributions to the fund
• Risk of investments
• Cash flow needs
• Age of members
The investment strategy must be in writing and should be reviewed at least annually, or when investment opportunities available to the fund are inconsistent to the fund’s investment strategy.
How long does it take to setup an SMSF? +
- 2-3 weeks and it might take longer to complete funds rollover.
What kind of contributions can be made to the SMSF? +
• Voluntary contributions from you
• Rollovers or transfers of your benefit from another superannuation fund
• Employer contributions made to you
• Spouse contributions
When opening a bank account for my SMSF, does it have to be with a bank ? +
- You can open an account with any Australian registered financial institution, providing you can receive/transfer payments to and from the account. Please note, that the nominated account has to be in the name of your superannuation fund.
What is salary sacrifice? +
- Salary sacrifice is when your super contribution is taken out of your salary before income tax is deducted at your marginal tax rate. This reduces your taxable income, usually resulting in lower income tax overall.
Is there any organisation that represents the interests of Self Managed Superannuation Funds? +
SMSF Owners’ Alliance Limited (SMSFOA) is a not-for-profit public company established to represent the interests of Self Managed Superannuation funds. Its membership is strictly limited to the trustees of SMSFs. The company is not aligned or associated with any commercial entities, making it unique and giving it a specialty profile. SMSFOA seeks to ensure the Government policy towards SMSFs, including taxation, does not discriminate against SMSFs but rather recognises and encourages their important role, with the emphasis on the creation of economic wealth and development of a sustainable retirement system in Australia. The SMSFOA research and advocacy is provided by its directors, and is on a pro-bono basis. This ethical approach makes an excellent platform for achieving the main goal for all Australians, in becoming self-sufficient in retirement and also assuming the full responsibility for the cost of their retirement. To find out more about the SMSFOA visit their web site: www.smsfoa.org.au.
Frequently Asked Questions for Investing In Property Through SMSF
1. Is an SMSF property purchase right for me? +
- Before you start buying property through your SMSF, you must ensure that investment properties are in line with your fund’s written investment strategy. Generally speaking, using your SMSF to invest in property can provide better results when you hold on to the property for a long time. This will also insulate you against temporary dips in the market
2. Is a property purchase through my SMSF tax effective? +
- Depending on your circumstances, purchasing property through an SMSF may be beneficial in reducing tax. Tax on an SMSF property is generally 15% for rental income and 10% for capital gains (providing the property has been owned for more than one year), which is much lower than taxes on a personally owned investment property. The best part is that once you retire and draw a pension from the fund, tax on rental income and capital gains is 0%!
3. Can I use the property? +
retirement, not for personal enjoyment. If you wish to use an investment property or rent it to someone you know, another structure such as a family trust may be better for you. The drawback to these is they typically don’t enjoy the tax benefits that SMSF properties do.
You can buy a residential property to live in for your retirement. However, you cannot use the property until you retire and you start drawing a pension from the fund. You could also be exempt from capital gains tax. Make sure you speak to an expert before signing on the dotted line though, as everyone’s situation is slightly different.
If you purchase a commercial property and you run a business, you can lease the property to your business. That said, the business must pay market rate – ‘mates rates’ are strictly forbidden.
4. Do I have enough money in my SMSF to buy an investment property? +
While you may have enough money to purchase a property, that’s not the only factor to consider. You’ll also want to think about how diverse your assets are to protect yourself from losses. As a simple rule of thumb, only buy property if your fund has enough money to buy an investment as well as hold other diverse assets.
Borrowing money to purchase an SMSF investment, however, may be beneficial to you, especially when you can take advantage of low interest rates and negative gearing.
SMSF property loans are more complex and difficult to obtain than personal property loans. Most lenders will also require higher a higher deposit, at least 20–30%. The reason is that SMSF property loans are limited recourse, which means that the rest of your fund can’t be touched if it defaults on the loan.
5. Can I use negative gearing through a SMSF? +
- Yes you can.
A SMSF can claim interest and borrowing expenses on an investment property in exactly the same way as an individual investor.
So you can use negative gearing to help offset any tax on the fund’s other income now, then benefit from any capital gains on the property in the future.
But remember, when you buy a property through your SMSF, you can only claim deductions for the fund, not for yourself.
6. How much can I borrow? +
Banks will generally lend a little less to SMSFs than they might to an individual buyer, due to the extra risk that these loans carry given that they are non-recourse in nature.
This means in the event that the SMSF defaults on the Loan the Lender can repossess or sell the Property only, but cannot repossess or sell any other SMSF asset to recoup any loan shortfall (if any).
While different banks have different limits, a typical lender might let you borrow up to 80% of the property’s value if your SMSF trustee is a company, or up to 72% if the trustee is an individual. This applies for established properties. Lower limit applies for off the plan and newly constructed properties.
SMSF Property loan is assessed based on your SMSF income, which is your Superannuation Contribution, Property Rental Income and Other Forms of Incomes that your SMSF generates.
7. How is SMSF Property Loan Assessed? +
- SMSF Property loan is assessed based on your SMSF income, which is your Superannuation Contribution, Property Rental Income and Other Forms of Incomes that your SMSF generates. In addition to serviceability requirement, you will be also required to meet liquidity requirements. This meaning will be required to leave 10-20% of funds aside for unforeseen circumstances to meet loan repayment requirements.
8. Is it more expensive to buy property through super? +
Generally speaking, it costs about the same amount to buy inside and outside super. If you don’t already have a SMSF, you will need to set one up, but that doesn’t have to be expensive.
9. Is investing in property through a SMSF tax effective? +
Depending on your situation, buying property through a SMSF could offer significant tax benefits.
Any rental income earned by your fund’s investment property is usually taxed at only 15%.
And if you commence a Pension in the Fund after age 55, tax on rental income is tax free.
More importantly if you commence a Pension in the Fund after age 55, tax on any capital gain is also tax free on the sale of the property!
Of course, tax laws are complex, so you may wish to talk to a tax adviser before you invest as in some cases it may be more beneficial to purchase the Property in your personal name.
10. Can I use my SMSF to buy a holiday house? +
No, you can’t.
All of your SMSF investments must be for the sole purpose of saving for retirement, so you can’t buy a property then use it for personal purposes.
11. Can I use my SMSF to buy my business premises? +
Yes you can.
This is a special exception, and has proved a great strategy for many business owners.
By buying a business property through your SMSF, then renting it back to your business at market rates, you can use your business rental costs to build your super.
12. Can my SMSF buy an investment property from me or my s +
No you can’t.
Your SMSF is not allowed to buy a residential property from a fund member or any person associated to a fund member such as a relative.
So if you or another fund member already own a residential property, you can’t transfer it into your SMSF.
13. Can I rent my SMSF residential property to a family member +
No, you can’t. Again, this would contravene current Super Laws.
That is you cannot rent residential property the SMSF owns to a fund member or any person associated to a fund member such as a relative.