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What exactly is an SMSF – Self Managed Super Fund?

A self-managed superannuation fund (SMSF) is a super fund where you’re in control. You’re not only a member, but also a trustee. You choose the investment strategy and manage the investments and have 100% responsibility for keeping it compliant.

An SMSF is flexible enough to allow you to invest in different assets direct residential & commercial property directly or through unlisted trusts, direct shares, high interest cash accounts, term deposits, hybrid income investments, unlisted assets, international shares either direct or through investment vehicles such as Wholesale Managed Fund or Exchange Traded Funds (ETF).

An SMSF can have up to four members. You have the access of pooling your funds to build up the balance that can provide your SMSF more investment options to consider compares to running your own fund.

Investment Strategies

One of the main advantages of a SMSF is the ability to leverage or borrow within the fund which effectively allows you to have more funds invested compared with a retail or industry fund.

Borrowing within a fund can be arranged through a Related Party Loan (RPL) or through a commercial lender, which both have advantages & disadvantages and financial advice should be sort.

Additional risks can include higher costs, lack of diversification and potential cash flow issues.

Borrowing within the Fund

An SMSF is prohibited from borrowing except for some limited circumstances. The purpose of this rule is to ensure there is enough money to provide benefits to members when required under the superannuation law.

Borrowing for investment purposes can only be done through the use of a limited recourse borrowing arrangement (LRBA). This means that the loan is only secured against a specific asset and there is no recourse against any of the other assets in the SMSF.

The requirements for borrowing and lenders available does frequently change and we often recommend seeking prep approval from an experienced lending professional before considering the asset to purchase.

Tax Strategies

Like all super funds, SMSFs benefit from concessional tax rates. In the accumulation phase, tax on investment income is capped at 15 per cent; in the pension phase there is no tax payable, not even capital gains tax (CGT).

One of the main benefits of a SMSF is being able to invest in direct property and delay the sale of the asset until your funds are in pension phase, which ensures no CGT is payable.

Acquiring assets from a related party

As a general rule, a trustee of an SMSF is prohibited from acquiring an asset from a related party of the fund, however, there are some very limited exceptions. Related parties include members and their relatives as defined above and any company or trust they control or significantly influence, either individually or as a group.

One of the main reasons an SMSF is prohibited from acquiring assets from a related party prevents it could lead to personal assets being sold to the fund at inflated prices which could have the effect of allowing money to be withdrawn from the fund earlier than the time permitted by the superannuation law.

The limited exceptions allow an SMSF to acquire certain assets from a related party. These include:

  • Listed securities, such as shares, units in unit trusts or bonds and debentures that are listed on an approved stock exchange.
  • Business real property that has been acquired at market value.
  • In-house assets where the value of the fund’s in-house assets after the acquisition do not exceed 5% of the total value of the fund’s assets at market value.

Fixed Cost

SMSF trustees must lodge an annual tax return and audit, pay ATO and ASIC fees which are based on a fixed fee. Generally Retail & Industry Super funds are based on a percentage of funds invested, which are not capped and therefore increase as dollar amount in correlation with your account balance.

As your SMSF account balance grows, the more cost-effective it becomes, but the total cost of running an SMSF will depend on the related investments such as property rental fees, direct share brokerage costs and Managed Fund or Exchange Traded Fund ongoing management fees.

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