Wealth Creation & SMSF
Wealth Creation & Self-Managed Superannuation Funds
Self-managed superannuation funds (SMSFs) are an alternative to retail or industry funds, having gained popularity due to their flexibility in allowing people to control their own super investments for their retirement.
What is an SMSF?
The difference between an SMSF and other types of funds is that the members of an SMSF are usually also the trustees. This means the members of the SMSF run it for their own benefit and are responsible for complying with superannuation and taxation laws.
An SMSF may be managed directly by the owner of the superannuation fund or through a corporate trustee. A lawyer can advise on the pros and cons of each strategy. An SMSF allows the owner of the fund to manage and control the investment strategy applied to the fund. SMSFs also provide more flexibility for investing the funds’ assets, retirement income options and estate planning.
Benefits of an SMSF
Below are some benefits of creating an SMSF:
- Control. You choose where to invest your money and decide when your benefits are paid, in other words, SMSFs allow you to control your wealth creation strategy in super.
- Gearing. This is where borrowed money from super may be used for investments, such as purchasing property which can significantly help improve wealth creation and overall fund balance by retirement.
- Consolidate superannuation funds to provide financial security for future generations. This helps create long term wealth for your family, not just for retirement.
- SMSFs may be more cost effective than a typical super fund, however, keep in mind this will be dependent on the available funds you have to invest compared to the cost of professional advice and administrative assistance to manage the SMSF.
If you have an SMSF you need to produce yearly financial and tax returns, undergo an independent audit and pay the Australian Taxation Office’s supervisory levy. You may require financial and legal advice to meet these requirements.
What to consider before setting up an SMSF
SMSFs are established for the sole purpose of providing financial benefits to their members in retirement and must strictly comply with rules regulated by the Australian Taxation Office.
Before setting up an SMSF, know that these types of funds are complex and require a lot more work than an average retail or industry fund. You will need to allow time to acquire the knowledge and skills to properly manage your fund and ensure that you avoid legally restricted investment strategies. It is vital to develop a written investment strategy, which should be reviewed regularly.
Being financially aware and having good investing experience will provide a much better chance of success. As you will be responsible for complying with super and tax laws, you should ensure you understand how these laws will apply to you.
It is recommended you seek independent financial and legal advice to ensure you have everything required to successfully manage your SMSF.
You have a choice of the following structures for your SMSF:
- individual trustees, or
- a corporate trustee.
It is important to discuss the above options with an SMSF professional.
Buying property through your SMSF
Since 2007, SMSFs have been permitted to borrow money to invest in real property, subject to strict rules and regulations which must be carefully followed.
An SMSF can only borrow funds to purchase an investment property through a limited recourse borrowing arrangement. Under this arrangement, the lender holds the subject property as security and any existing or other assets held by the SMSF cannot be used for additional security. Personal guarantees, however, may still be required by the lender.
The SMSF must establish a ‘bare trust’ which is a special purpose trust created to hold the property on trust for the SMSF. The bare trust is the registered owner of the property until the loan is repaid, after which ownership reverts to the trustee of the SMSF.
The purpose of requiring a bare trust and borrowing through a limited recourse borrowing arrangement is to protect the assets of the SMSF and to ensure that members do not lose their entire retirement fund if the property investment does not prove to be financially successful.
The subject property must also meet the sole purpose test. Essentially, this means that the property must support the SMSF’s investment strategy in building wealth for retirement. This precludes certain property choices, for example, the purchase of a holiday home to be used by members of the SMSF will not meet the sole purpose test.
Borrowing funds to purchase property through an SMSF can be a viable investment strategy however is a complex process. It is important that any proposed transaction not only meets with the fund’s financial objectives but complies with the various rules under superannuation and taxation laws. Professional advice and guidance are recommended to ensure the transaction is correctly structured and to avoid any pitfalls.
How to prepare for a wind up of an SMSF
Having an exit strategy is important in the event your SMSF ends, or winds up. SMSFs can sometimes be difficult to manage due to unexpected events such as:
- a breakdown of the trustees’ relationship;
- a trustee becomes incapacitated due to an injury or illness and is unable to perform their role as a trustee;
- one of the trustees passes away.
Having an exit strategy in place may reduce the impact of these unexpected events. The strategy should also include things such as an enduring power of attorney and specific rules in the fund’s trust deed which will be triggered by events that would otherwise lead to the fund becoming unmanageable.
Overall, an SMSF must be compliant and set up correctly so it is eligible for tax concessions, can receive contributions, and is easy to administer. We have extensive experience in all aspects of superannuation law, and can advise and assist in the establishment and operation of self-managed superannuation funds.
If you need any assistance, contact one of our lawyers at [email protected] or call 07 5495 2733 for expert legal advice.