Asking yourself how to set up an SMSF? Read this first.
Everyone has a superfund, but not everyone has their own superfund. Setting up a self-managed super fund (SMSF) gives you control over how your super is working for you. While you still can’t access the money before you retire, once you reach retirement, the benefits are huge. There are many restrictions on exactly how you can operate a superfund.
Here are some of the main aspects you need to know if you’re thinking about starting your own superfund.
You can only have four members
All members are trustees of the fund (unless you have a corporate trustee in which case all members need to be directors of the corporate trustee) and are responsible for the operation of the fund.
You can’t withdraw it until retirement
Like all superfunds, your money is there until you reach retirement age. It can’t be withdrawn early as emergency funds or as a cash backup for big purchases. The point of a superfund is to invest your funds and build wealth for retirement so none of the funds during the accumulation phase can be used for personal purposes. You also cannot utilise any of the assets of the fund for personal use.
The one exception to this rule is if your SMSF purchases a commercial property and rents it out to your business at a market related rental. We have experience advising clients and helping them set this up successfully. Get in touch if you’d like to know more.
You get access to discounted tax rates
SMSFs are looked at favourably when it comes to tax. All members are taxed at 15% of their net income until they reach retirement age. One third of any capital gain is also not taxable. The biggest tax advantage is when you reach retirement age. The SMSF does not pay any tax on the portion of the net income, including capital gains, funding your retirement benefit and your pension is also tax-free.
From 1 July 2017 there is a limit of $1.6m you can transfer and hold in tax-free “retirement phase accounts”. This is known as the “transfer balance cap”. The income on the excess above this will get taxed at 15%.
There are two types of contributions
Generally you can contribute to your superfund at any time (providing you meet certain conditions) and your contributions fall into one of two categories: concessional and non-concessional. Concessional contributions count towards the SMSF taxable income and are tax deductible in your personal tax return (or by your employer in the case of super guarantee on your wage), while non-concessional contributions aren’t.
Contributions have caps
Concessional contributions are capped at $25,000 per financial year for all members as of 1 July 2017. This includes the 9.5% super guarantee paid by your employer on wages. A bring forward provision has been introduced from 1 July 2018 for members whose total super balance is less than $500,000 on 30 June of the previous financial year. If you did not contribute your full $25,000 cap for a year, you can carry forward the shortfall for up to 5 years and contribute this shortfall as well as the current year cap of $25,000.
From 1 July 2017 non-concessional contributions are capped at $100,000 per financial year for members 65 years and over, but under 75 years as long as they meet the work test.
For the 2020-21 financial year onwards, you no longer need to meet the work test or work test exemption criteria if you are 65 or 66 years old. You can still make non-concessional contributions if you are 67–74 years old and meet the work test or satisfy the work test exemption criteria. For members under 65, they can contribute $100,000 per year or $300,000 over a three-year period.
Please note that once the value of your investment in super reaches your $1.6m cap, you cannot make any more non-concessional contributions into super. Concessional contributions can still be made.
But be aware: exceeding a contribution cap will result in heavy penalties from the ATO.
Purchasing property through SMSF
You can purchase property through your super as long as it is not for personal use, the exception being commercial property rented to your business at market related rates.
You can also borrow through your SMSF to fund the purchase of the property but there are very strict rules. There are only a limited number of banks who will lend money to SMSFs due to the amount of regulations they need to conform to. These loans are known as “Limited Recourse Borrowing Arrangements” (LRBAs) as the bank only has recourse against the property and not any other assets of the fund. They therefore require a higher deposit and generally the interest rate charged is also higher than on a home loan.
Should you start an SMSF?
This article touches on some of the main aspects of starting and running an SMSF. However, in reality, it is much more complicated. The ATO recommends that between all the members you have a total of at least $200,000 in super before starting a SMSF. This is due to the accounting and audit fees incurred. With that balance it starts becoming economical to have a SMSF. The larger the balance in super, the more economical it is, as the fees do not increase in proportion to the asset value.
If you’re interested in a self-managed super fund, make sure you get professional advice before embarking on this journey. You can visit the ATO’s website, or if you prefer a personal touch, contact us. At Teamwork Accounting our Accountants and Financial Planners, Partners Wealth Group, can help you set up and manage your SMSF for the best results.