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Why SMSF’s are gaining popularity

There is a lot to talk about when it comes to SMSF”s, so let’s start from the beginning.

 

A SMSF is a superannuation fund with less than five members that is managed by its members. The members, or a company owned and controlled by the members, act as the trustees. The trustees control the investments and are generally responsible for the SMSF’s administration and its compliance with the law. A SMSF is controlled by a deed. The deed sets out the rules the SMSF has to follow. It also sets out the obligations and responsibilities of the people connected to the SMSF, ie the members and the trustees. The rules for paying contributions on retirement or death, investing assets, holding meetings, appointing trustees, paying benefits to members and the other matters affecting the SMSF are also found in the deed.

A SMSF is a special type of trust. It is special because the trust assets are held and managed by a trustee for the purpose of providing retirement income and other benefits to members. This means it qualifies for special income tax concessions under the tax law.

The three essential parts of a trust are present in a SMSF. These are;

The trust deed must have special rules if the SMSF is to be a complying superannuation fund and be eligible for tax concessions. However, it is the trustee’s year-to-year conduct that ultimately determines the SMSF’s eligibility for tax concessions.

The auditor must certify to the Regulator that the SMSF complied with the superannuation law in the relevant year. The Regulator then accepts the SMSF is a complying fund and it is taxed on the concessional basis set out in the Income Tax Assessment Act 1936 (“the Tax Act”). If the auditor does not certify that the SMSF complied with the superannuation law, the tax concessions can be withdrawn by the Regulator and the value of the SMSF’s assets, less any undeducted contributions, are taxed at 47%.

 

What Other Laws are Relevant?
Trustees are subject to a wide range of laws. These include the general law, the special body of law developed over centuries that applies to trustees, the Superannuation Industry (Supervision) Act and six related pieces of legislation (“the SISA”) and the Tax Act. These laws must be complied with if the SMSF is to be eligible for tax concessions and the trustees are to avoid penalties under the SISA. The SISA is enforced by the Australian Tax Office.

Advantages of SMSF's

Investment control

The primary motivation for people to set up such a fund is control. You decide on the mix & timing of investments in equities, property, managed funds, farms, artwork, fixed interest and cash. A SMSF may also acquire business real property from members and lease such property back. The only restriction is that the SMSF cannot borrow and the lease must be market based. For small business owners, the ability to convert tax deductible super contributions into the purchase price of a property to be leased to a business can translate into a significant benefit. As a by-product of investment choice, creditor protection is enhanced through shielding a wide range of investments (some of which may be business assets) within the SMSF from the member's creditors. Although the trustee must establish an investment strategy, this strategy can be designed to more accurately reflect the objectives/needs of the member.

Tax free death benefits

There is no forfeiture of capital upon death, if you decide to invest in a complying lifetime pension - any remaining capital balance is paid to the fund's reserve and dealt with as the trust deed directs i.e. effectively goes to remaining member(s) such as a spouse.

Asset protection

SMSF assets are generally protected from bankruptcy. This means the trustee in bankruptcy cannot access the benefits and the benefits are held for the member. Benefits paid out during a bankruptcy, say, on the member reaching a specified age, or before bankruptcy may not be protected.

Capital gains tax efficiencies

Most people know that most SMSF income is taxed at 15% and capital gains are taxed at no more than 10%. Few are aware SMSF income is taxed at nil % if used to pay an allocated pension or a complying pension, and capital gains only face tax in the year the gain is realised, not in the year the gain accrues. SMSFs allow you to control the timing of asset disposals. This means the realisation of gains can be deferred to a year when the SMSF pays nil tax, ie when the members are being paid pensions from the SMSF.

Estate Planning

SMSF's can provide you with more options for estate planning purposes. It is possible to design tax effective estate planning strategies through the payment of a variety of pensions to beneficiaries. In addition, SMSFs also allow you to structure the features of any pensions in line with your personal objectives. Generally, SMSFs are the preferred vehicle for clients wishing to invest in a complying annuity for tax efficiency reasons. By running a complying pension via a SMSF, investors can retain control over the underlying investment strategy and nonetheless qualify for the higher pension RBL (subject to a ''50% test''). Furthermore, assets backing a complying SMSF pension may form part of the fund reserve if surplus assets exist upon the death of the primary income recipient. This means surplus assets can be retained within the fund upon death, rather than having those assets surrendered (which could be the case had the person invested with an annuity provider).

Retirement planning for children

SMSFs can be used to obtain retirement benefits for spouses, children and even grandchildren. SMSFs are a sophisticated method of cross-generational wealth transmission.

Tax deductible life insurance premiums

Life insurance premiums paid through a SMSF can be tax deductible. This can halve the cost of cover and is the cheapest way to arrange life insurance.

Roll-over of taxable capital gains

Small businesses, including businesses run through companies and trusts, can roll over taxable capital gains on the sale of their businesses into their SMSF. This special rule acknowledges that businesses are often the main retirement asset for many people. This concession is limited to $500,000.

RBL Management

A person's RBL is the maximum retirement and termination of employment benefits that he or she can receive at concessional (ie. reduced) tax rates. A SMSF provides the ability to maximise this entitlement as best as possible for each member of the fund.

Disadvantages of SMSF's

Compliance with the Superannuation Industry (Supervision) Act requires the following administration duties that can result in unexpected costs to the SMSF:

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