Self Managed Superannuation Funds - Are they for you?
This is a general discussion about Self Managed
Super Funds see also:
What is Super?
Super
is a method of saving and investing money during your working life.
This caters for your retirement.
A Super Fund is set up by a Trust Deed.
The Trust Deed contains the rules of the Fund.
A trustee, who holds and invests the trust property on behalf of
the members, administers it.
What is a SMSF?
A SMSF is a Self Managed
Superannuation Fund. You run
it yourself. You and your
Advisers get to decide where and when to invest your funds.
You get to take an active role in setting and implementing the
investment strategy for the Fund.
How does a SMSF work?
For a start, you need four or less members.
Members of the fund also have to be trustees of the fund. Trustees of the
fund have to be members of the fund. Each member is forced to participate
in the decision making process of your fund. To protect all members of
your fund, no member can be the employee of another member. The only
exception is members who are “related”.
Yes! But you have to have either: (1) a
private company as a Trustee (known as a Corporate Trustee) or (2) a
second Trustee (a natural person).
Which one do you want a Corporate Trustee or
a Natural Person?
Corporate Trustees are expensive and
complicated to run. Consult your Accountant and Adviser about the cost.
So, you don’t want a Corporate Trustee?
Your fund must then have another individual
as trustee. That person must be a “relative” of yours
or a any person who
is not your employer.
Single member funds
It
is possible to have a SMSF with only one member.
If the single member fund has a corporate trustee (eg Pty Ltd), the
member must:
- be the sole
director of the trustee company; or
- you can have a
2nd Director (provided that the Director is not your boss) and there
are only the two of you as Directors of that company; or
- your 2nd
Director can be your boss provided that your 2nd Director is
"related" to you and you two are the only directors of that
company.
If the single member fund does not have a corporate trustee, the fund
must have two individuals as trustees. You, as the member, must be
trustee with:
- any person that
isn't your boss (you can't have your employer); or
- you can have
your boss as the 2nd Trustee - but your boss has to be related to you.
If Mum and Dad are members of the Fund, who are the
Trustees?
The answer is simple: Mum and Dad. The
members of SMSF are the trustees and the trustees are the members. If you
and your spouse are already the sole trustees and are the sole members
then, on the face of it, your SMSF complies with
SIS regulations already. Well done.
Stop reading now and go and have
a glass of red wine.
If you have further questions, read on.
My Lotto Syndicate wants to begin a SMSF. Can we do
it?
The question is how many people in your
Lotto Syndicate want to join your SMSF?
You can’t have any more than four persons
wanting to join. Four is the maximum number of members you can have in a
SMSF. Also, there is a rule that if your boss is involved in your Lotto
Syndicate, she cannot participate in your SMSF. Employees and employers
cannot be involved in the same SMSF (unless they are "related").
What is an “employee”?
The definition of "employee" is very wide
ranging. Consult your Adviser, Accountant or Tax Lawyer
for a precise definition. In short, the aim of the rule against employee
and employers (unless they are related) participating in the same fund is
to make sure that all members of your fund are in a position to adequately
look after their own interests.
Who is related to you?
Mum, Dad, son, daughter,
Grandmother, Grandfather, brother, sister, Aunt, Uncle, great-aunt,
great-uncle, niece, nephew, first or second cousin of you or your spouse.
Includes the above relationships by adoption or remarriage. Your
‘spouse’ includes your defacto spouse (living in sin, so to speak).
WHO ISN’T RELATED TO YOU?
Your lover, boyfriend, girlfriend,
mistress, barber, Adviser, Accountant and Tax Lawyer for a start.
Your eyes are beginning to glaze over.
Don’t despair. Your Accountant, Adviser or Tax Lawyer have the jargon
down pat. Give her a call to discuss your questions!!
My boyfriend is 17. I want him in my SMSF. Can he
join?
Persons under 18 are considered legally
disabled. This is fair enough when one considers that they weren’t
allowed to vote for the government that introduced these changes. How
disadvantaged can one get? For the purposes of Superannuation, persons
legally disabled cannot be trustees of Superannuation funds. Your toy boy
is under a “legal disadvantage” because he is under 18 years of age. He is a
minor. If your toy boy has a “legal personal representative” then that
person can be trustee.
Who is a “legal personal
representative”?
An example of a legal personal
representative is your toy boy’s wife. But, if he is not married, his
legal personal representative is his Mum and Dad. If his Mum and Dad are
dead, then his guardian can act as Trustee on his behalf.
According to the Australian Tax Office, a
personal legal representative can also be a person who holds a Mutual
Power of Attorney, a Cascading Power of Attorney or an Enduring Power of
Attorney on behalf of another person.
Screen starting to go blurry again?
Don’t worry. Your Accountant, Adviser or
Tax Lawyer understand these terms and are waiting for you to ask. Don’t
be shy.
So in answer to your question, get the
consent of his guardian or personal legal representative and the boy is
in!! Of course, waiting until the boy (person concerned) becomes of age is
one way around this. If you are dumped for a younger person, it may prove
cheaper too!!
You are a member of SMSF and you die. What happens?
Well, chances are you will not need the
proceeds of the SMSF anymore.
Do the surviving members of the SMSF take
all your super?
No. Your personal legal representative is
allowed to be a Trustee in your place until your Estate is paid out. So,
unfortunately, for the surviving members of the SMSF, this does not mean
that the survivors take all.
What about Directors of Corporate Trustees?
The same applies. If you are a deceased
Director of a Corporate Trustee, your personal legal representative can
act for you.
Example One: Lotto Luck
Four friends have been in a Lotto Syndicate
for a number of years. One of them, Beryl read an article on the Internet
about the advantages of investing in a SMSF. As all of them are rampant
greenies they like the idea of being able to control the direction of
their combined Superannuation funds. Are they eligible to have a SMSF?
Yes. Provided that all members of the SMSF
are also trustees of the SMSF. But if one of the four employs another of
the four then they cannot be members of the same SMSF. That is, there can
be no Employee/ Employer relationships in SMSF.
Beryl’s lover Julie is jealous of
Beryl’s involvement in the management of the fund. Julie wants to come
on board. Can
she?
No. SMSF are only for up to four members.
The fund will cease to be a SMSF if the number of members increases to
more than four.
Tamara (another member of the SMSF) overdoses on the good life and dies.
Does this mean the fund is at an end?
No. Tamara’s legal personal representative
can act as trustee until death benefits are distributed from the fund. The
membership of the fund has now been reduced to three people. Julie can now
join the fund, if she still wants to.
John is Beryl’s brother. He is also
Beryl’s employee. Can he be a member of the fund?
Yes, as long as the total number of members
is four or less. As he is a relative of Beryl’s it does not matter that
he is also her employer. The fund still meets the definition of SMSF.
Example Two: Accounting for relationships
John and Julian are partners in an
Accounting House. Through a service trust, John employs Julian. Can they
be members of the same SMSF?
No. As John employs Julian, unless they are
related, they cannot be members of the same SMSF.
Julian decides to start his own SMSF. His
problem is he needs another Trustee. Can he employ someone to help him
administer his SMSF?
No trustee is entitled to be paid for any
services they perform other than be reimbursed for out of pocket expenses.
This fits in with the government’s aim of keeping SMSF in the control of
the individuals who are the members of the fund. Julian has to find a
Trustee that does not expect payment.
Summary
You may not have to update your SMSF Deed.
It may be OK if it complies with this:
-
With 2 - 4 members:
-
All members are trustees (or directors of
the trustee company). There are no other trustees (or directors);
and
-
No member can be an arms length employee of
another member. This includes an entity (like a Unit Trust or
company) in which another member has a specific interest.
-
With 1 member:
Note: Regulations ensure that unrelated
directors of the employer-sponsor of a small fund are not deemed to be
employees of one another.
Who can have a SMSF?
Anyone
can have their own SMSF.
Is a SMSF for you?
Yes, if you prefer to
maintain control over your investments rather than leave it in the hands
of the institutions. Your
Adviser and Accountant can help you.
A Self Managed Super Fund provides you with:
With SMSFs you can BIND
the trustee. Most Super Funds don't give you this power. With most Super
Funds you merely "suggest" to the Trustee of your Super Fund who
the Super when you die.
·
Control, Flexibility and Choice
You get to decide where
and when you invest the assets of your Fund – within reason and subject
to the relevant legislation and your Trust Deed.
You may get timelier and accurate information on the investments
your Fund holds. SMSF gives
you the flexibility to structure the Fund to suit your personal
circumstances, e.g. paying a pension.
·
Tax Effective Savings
Assets you might otherwise
hold in your name can be held tax effectively as income and capital gains
from a complying superannuation fund.
Generally, this income and capital gain is taxed at a maximum rate
of 15%, which compares favourably with the alternative of being taxed at
the top marginal rate plus the Medicare levy (48.5%).
·
Ongoing and Portable
Whether you’re employed
or self-employed, a self-managed superannuation fund is fully portable
& can move from job to job with you.
Brett Davies Lawyers’ SMSFs operate not only during your lifetime
but also that of your spouse and children.
Who
pays the tax on my Super when I die?
Cost Savings
Ongoing
fees may be lower than those for a commercial superannuation fund.
Many of the costs are fixed and do not fluctuate with the size of
the Fund.
What are the disadvantages?
There are three main roles
fulfilled by the trustee of a Super Fund.
You should consult your advisers on these areas:
·
Compliance and Reporting: Like most other trusts, the
Super Fund needs to have annual financial statements prepared.
Super Funds have additional reporting requirements under
Superannuation legislation. Your
Accountant can prepare these.
·
Investment Advice: Decisions are made on the
investment mix of the Superannuation Fund so that it generates an
appropriate rate of return for the members.
This advice can be obtained from your Adviser.
Fund Managers are trained to invest your money. Have you got hours to
spend each day looking at hedge funds and derivatives?
·
Legal Advice: When taking advantage of the tax
planning flexibility of a Superannuation Fund, care must be taken to
ensure that the Fund does not step outside the limits imposed on a Self
Managed Super Fund. If a SMSF
loses its status the Fund may lose its tax concessions.
Your
professional advisers can help maintain your Fund. Many Accountants work with superannuation legislation and can
fulfill the reporting requirements of your Fund. Alternatively, a number of firms have been established solely
to administer self-managed funds. Your
Adviser can keep you informed with the latest investment opportunities.
A Lawyer practicing in the area of taxation and superannuation law
can offer advice on structuring proposed investments and tax planning
issues.
What does a SMSF cost?
Talk to your professional
advisers about the costs involved in managing your own superannuation.
Often
you need to have about $150,000 in Super and be prepared to spend $5,000 a
year to make them work – however your Adviser is the person to help you
in this area.
How do I set up my own SMSF?
We are available to answer
legal superannuation questions from you and your Adviser. Consultations are available at $440 per hour.
We can help you make the most of your Self-Managed Super Fund.
Please phone our Practice
Manager on 9325 9777 to make an appointment. Your Accountant,
Adviser or Lawyer will need to refer you to us.
Alternatively, your
Accountant, Adviser or Lawyer can
order a
Brett Davies Lawyers SMSF Deed via the
Internet.
Remember this only sets up the Deed.
We only prepare the SMSF Deed via the instructions of your
professional advisers.
Who drafts your SM Super
Fund is important. Ask these questions:
-
Are you a tax lawyer
working in the area of Superannuation?
-
Does your SMSF allow
for both binding and non-binding nominations? Does
it cater for bankruptcy?
-
Are allocated pensions
allowed?
-
Have I got maximum
flexibility so that my adviser and accountant and do what they want to
do?
I want to update my SM Super Fund and I
want Binding Nominations. What do I do?
Your next port of call should be your
Adviser, Accountant or Tax Lawyer for advice that is specific to your
needs. You can
update
your old SMSF for
Binding
Nominations over the web - right now.
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