Integra Wealth, Tax & Accounting. Your Guide to Buying Property with your SMSF Money

Transcription

1 Integra Wealth, Tax & Accounting Your Guide to Buying Property with your SMSF Money

2 Contents Page What is a SMSF... Page 3 How is a SMSF set up... Page 4 What does a SMSF look like... Page 6 Who should set up a SMSF... Page 7 How much do I need to start a SMSF... Page 7 What are the benefits of a SMSF... Page 9 Property or Shares? What is best?... Page 9 The 6 Most costly mistakes... Page 9 Can I do it now? When s the best time... Page 10 Page 2

3 YOUR GUIDE TO BUYING PROPERTY WITH YOUR SMSF MONEY $$$ How to set up your super that gives you control over your own money What is a SMSF? A Self Managed Superannuation Fund (SMSF) is a trust fund that holds money for the purpose of saving for retirement. A SMSF is a small fund run and controlled by its members. Compared to a non SMSF which can have many members and is controlled usually by a board of directors, a SMSF must have 4 or less members and all members must be trustees (or a director of the corporate trustee). This means that the members are responsible for all the investment and operational decisions of the fund and for following the rules under the SIS legislation and their own trust deed. A SMSF fund that complies with the legislation is called a Complying Superannuation Fund. A Complying fund is eligible for concessional tax treatment under the Tax Act. A non-complying fund can lose half its assets in penalty taxes. The members of a SMSF must also not be employees of each other (unless they are related) nor receive any remuneration for being a trustee of the fund. That is you can t pay yourself for looking after your own money. All Superannuation Funds must follow the rules of the Superannuation Industry (Supervision) legislation which comprise of 7 acts. The Australian Prudential Regulation Authority (APRA) is the prudential regulator for superannuation funds and has the responsibility for administering the SIS Act and the SIS regulations. SMSFs however are regulated by the Australian Taxation Office (ATO). SMSF are not subject to prudential regulation since all its members of the fund are trustees and are able to protect their own interests However the SIS act and regulations still apply in all other respects. SMSFs are exempt from some of the SIS legislation. This includes not requiring to have an Australian Financial Services Licence under the Corporations Act 2001, the need to report members transactions in the member reports and not requiring disclosing information on significant events or dispute resolution procedures. SMSFs are allowed to purchase Business Real Property and rent it back to their business. They are also exempt from the compliance/culpability test which other superannuation funds must comply with. (Ie. the trustee must have been involved in the breach knowingly - indirectly or directly) Page 3

4 How is a SMSF set up? A SMSF is established by a trust deed. An Accountant or Lawyer can help you here. The trust deed outlines: Who is / are the Trustee(s), = who is responsible for the operation of the Trust Who are the initial members = who are putting money in the Fund What are the trust rules (including following the SIS Act) The purpose of the trust fund = the sole purpose test which is to provide for retirement pensions. The Trustee can be a company (with one or more shareholders) or 2 or more individuals. A member must be a Director of the Trustee company OR a Trustee individual. The Trustees are required to undertake the following steps: 1. Be appointed as trustees of the Fund; 2. Execute the fund s trust deed (sign it) 3 Provide information to new or existing members of the Fund to assist them in understanding their benefits, rights and entitlements in the Fund; 4. Accept members into the Fund upon their being eligible and providing consent to become a director of the trustee of the fund; 5. Apply to become a regulated superannuation fund; 6. Apply for an Australian Business Number and a Tax File Number for the Fund; 7. Establish a bank account for the Fund; 8. Formulate and implement an investment strategy for the Fund in accordance with section 52(2)(f) of the Superannuation (Industry) Supervision Act 1993 ( SIS Act ) as soon as practicable; 9. Appoint an administrator to the Fund. The administrator s role is to provide information and reports as required under any administration agreement between the trustee and the administrator (usually the person doing the books); 10. Appoint an auditor to the Fund. The superannuation laws provide that an approved auditor must be appointed on a yearly basis to provide an assessment of the Fund s compliance with the superannuation laws. The appointment must be in writing where required by the SIS Act; and 11. Appoint a self managed superannuation fund (SMSF) specialist and any other professional - including an investment manager, valuer or actuary - to assist the trustee in their duties and responsibilities as trustee and at the same time being able to advise the members of the Fund on their benefits and entitlements in the Fund. Any such appointment must be made pursuant to the SIS Act and/or to the Corporations Act To comply with the deemed covenants which include: to act in the best interests of the members ( beneficiaries), to keep fund assets separate, to act honestly and exercise a degree of care, skill and diligence, responsibly manage reserves and allow members access to certain information. Page 4

5 Who can t be a Trustee? Not all people can be Trustees of a SMSF. A Trustee cannot be a disqualified person. Under the SIS legislation a person is disqualified if they: a) Have ever been convicted of an offence involving dishonest conduct b) Have been subject to a civil penalty imposed under the SIS legislation c) Are insolvent under administration ( undischarged bankrupt) d) Have been disqualified by the regulator This also extends to being a director of a Trustee company. Therefore a company cannot be a Trustee of a SMSF if: a) A responsible officer (director, secretary or executive officer) of the company is a disqualified person b) A receiver, official manager or provisional liquidator has be appointed or c) The company is being wound up A person can apply to the regulator ATO for the waiver of their status but only if the offence did not involve a serious dishonest conduct Page 5

6 So what does a SMSF structure look like? SMSF with a Company Trustee = Company SMSF Members COMPANY SMSF MEMBERS SMSF with Individual Trustees = Individuals SMSF Members Individual Individual SMSF INDIVIDUAL MEMBERS Page 6

7 Who should set up a SMSF? People that would best suit a SMSF would have the following characteristics: Have sufficient investments within super to achieve cost efficiencies of running the fund Have sufficient financial comprehension to understand the legal obligations and regulations that must be followed That wish a more hands on approach to their investing and control over their retirement savings That have Business Real Property which they want to put into their SF. That wish to maximise tax effectiveness, death benefit streaming and centrelink planning outcomes using superannuation as a vehicle People that a SMSF would not be suitable are those who: Have small account balances ( say under $200,000)** - see below*** Do not have the time, inclination or understanding to manage the fund within its legal and regulatory guidelines Do not have any wish to manage their funds other than the offerings that larger retail funds already provide. (e.g. managed funds in an accumulation or pension mode or just cash.) Have simple objectives with no issues with death benefits, centrelink planning or unusual investments such as collectibles etc How much do I need to start a SMSF? There is no SIS, ATO, or Trust Deed requirement that the fund have a minimum or maximum amount invested or held within the fund. The minimum is purely a calculation based on the following reasoning: A) Industry and retail superannuation funds generally charge as a percentage of the Funds under Management (FUM). These fees are often known as an Administration charge, a trail and / or a Management Expense Ratio (MER). B) A SMSF usually has mainly fixed costs like Bookkeeping, Accounting and Auditor fees which need to be paid regardless of the FUM size. C) Therefore, in order to compare a SMSF with a more traditional fund, you need to convert both into whole dollars based on your circumstances E.G. $100,000 of FUM Industry / Retail Superannuation Fund Admin fee $ 80 / yr MER 2% of FUM = $2000/yr Total fee $2080 Page 7

8 SMSF Accounting fee $ 2000/yr Audit fee $ 450/yr Actuarial Fee* $ 280/ yr (* needed if pension & accumulation mode both within the same fund like a TTR) TOTAL FEE $ 2730/YR SAVE $650/year in a traditional fund Compare that to a FUM of $300,000 Industry / Retail Superannuation Fund Admin fee $ 80 / yr MER 2% of FUM = $6000/yr Total fee $ 6080 SMSF Accounting fee $ 3000/yr Audit fee $ 650/yr Actuarial Fee $ 280/ yr (Needed if pension & accumulation mode both within the same fund like a TTR) TOTAL FEE $ 3930/YR SAVE $ 2150/year with a SMSF Of course this is a simplistic example and doesn t cover all the benefits and risks associated with a Do It Yourself solution but it does demonstrate why a minimum FUM is important to consider. I must also point out that there are a lot of differences between the costings. Not only between retail superannuation funds fees, but also what professionals charge for SMSF services. This is general advice only. It is important that that your personal circumstances be taken into account before making a decision. A qualified Financial Planner can assist you with making these important decisions. *** In the last few years the rules have changed that allow SMSF to effectively borrow. That is a SMSF is unable to borrow money to invest however they can have an agreement with a Bare Trust (or Property Trust) that borrows the money on its behalf. This effectively increases the potential asset base of the fund such that now lower Fund balances such as $80000 may be effective to commence a SMSF. If you like investing in direct property (i.e. a rental or investment property) then this structure may allow you to use you Superannuation savings to commence an investment into your first or maybe next rental property. Page 8

9 What are the benefits of a SMSF? Control The apparent benefit of commencing a SMSF is the control that the members have over their own superannuation monies. They make their own investment decisions or investment strategy and usually feel they can make better decisions based on their own circumstances compared to a faceless organisation managing their money for the mass result. Cost There is also the perception (right or wrong) that a SMSF is cheaper than a managed Superannuation Fund. This would depend on the funds under management and the cost of the administration of the fund (accounting, audit and investment advice fees) Capital Gains Tax Tax effectiveness is a benefit of a SMSF as decisions on selling investments which have imbedded CGT (Capital gain that you know you will have to pay tax on) can be delayed until the fund is in pension mode, thus avoiding the CGT payable. Flexibility The ability to structure the investment style to minimise tax is a huge benefit of a SMSF. You can invest in higher yield investments once in pension mode compared with accumulation mode. You can choose investments which prefer more capital growth with franking credits. The choice is yours. The fund can also be transferred from accumulation mode to pension mode easily. Estate planning SMSF members also have more perceived control over the distribution of death benefits to their beneficiaries and the way they are paid (pension s v s lump sum). The trust deed can be amended to accommodate this flexibility of payments. So Property or Shares? What is best? That depends on you. The 6 most costly mistakes that could rob you of your retirement money 1- Non compliance 2- Fees 3- Insurance 4- Poor investment decision making 5- Centrelink policies 6- Documentation incorrect Page 9

10 Can I do it now? When s the best time Page 10