A self-managed superannuation fund (SMSF) can be a useful vehicle to invest in property and other assets to build wealth for your retirement. Despite typically higher borrowing costs within a SMSF, they are known to provide investors (the trustee) with greater control and purchasing power when it comes to real estate, and can produce considerable tax, business and liquidity benefits at retirement. Most importantly, a SMSF can allow you to access your super for the purposes of investing in high growth investments such as property, that you would ordinarily not be able to within a retail or industry super fund. See our article How to Invest in Property using the SMSF for more information on that topic.
Before setting it up…keep in mind
One of the first ports of call is accumulating a large enough super balance to justify the setup and annual administrative costs associated with a SMSF. The required super balance to justify a SMSF is a hot topic, with many suggesting anywhere from as little as $100,000 up to $500,000. Given it will normally cost $1-2k to establish the SMSF, and then $1-2k pa to cover the compliance costs, we would normally suggest you require at least $200,000 in super to support the upfront and ongoing costs. It’s also important recognised that an SMSF is “self-managed”, so by definition you need to spend some time on this, and ideally have some knowledge of investment strategies, funds management, trustee responsibilities, compliance requirements, etc, or at least have a good advisor to cover these things.
If ready, how is the SMSF setup?
As one of the biggest asset classes in Australia, SMSF’s are regulated by APRA and the ATO and can have up to four members (trustees) responsible for decisions made about the fund and its legal compliance. Establishing a trust, is normally the first step in the SMSF setting up and deciding on the trustees, usually family members and/or business partners.
The next step is to obtain the trust deed. Generally, this involves a qualified legal practitioner that specialises in superannuation law drafting a trust deed to set out the SMSF rules and conditions, objectives, and determine how and when each member’s earnings and benefits will be calculated and paid, including pensions and reserve fund accounts. Other things it sets out are how trustees are appointed and removed, and procedures for winding up a fund, amongst other important governance matters.
A SMSF trustee must now sign a declaration form stating their understanding of the duties, obligations and responsibilities. The form must be held available for the ATO for 10 years. Some trustee SMSF obligations pertain to the accessibility of information, managing reserves, implementing investment strategies, not impeding other member’s functions, keeping assets separate to personal assets, and acting prudently in all aspects of fund managing.
Lodging an election is the penultimate step in setting up an SMSF. It’s lodged within 60 days of the SMSF being established, giving the ATO the info that the trust is associated with a complying SMSF and can then be taxed at 15% concessional rather than higher marginal tax rates. Some of the process includes applying for an ABN and TFN for the SMSF. Your accountant should be able to manage most of this for you.
Finally, set up the SMSF cash account to get the SMSF up and running. It’s the last step as the account is needed for a few reasons. It holds the cash to accrue interest; accepts contributions and rollovers from members; and exists to pay expenses incurred by the fund such as annual supervisory levy, accounting and audit fees, tax liabilities, plus pay member benefits.
Once you SMSF is set up and you have rolled over your super balance from your retail or industry fund, make sure you advise your employer of the new fund details for future super contribution payments. You are then ready to start exploring property investments using the SMSF funds, and even borrowing fund within the SMSF to provide additional leverage to make an investment.
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