Self Managed Super Fund - SMSF

About SMSF (Self-Managed Super Fund)

SMSF stands for Self-Managed Super Fund and is designed for investors to plan their retirement on their own terms. The investments in the SMSF are self-managed; that is, the investor in the fund solely manages the investment strategy and complies with all the taxation laws. The SMSF differs in characteristics from the other superannuation options as one is required to set up an SMSF Trust, which is generally concluded through the counsel of a legal professional. The applicant is also required to register with the ATO (Australian Taxation Office), frame an SMSF investment strategy, and maintain a periodic file along with the paperwork.

What is an SMSF?

The Self-Managed Super Fund is a kind of fund where the onus to design a trust structure and draft a trust deed is on the trustee. The trustees of the SMSFs have to comply with various tax implications while operating the fund with the assistance of tax and legal consultants. The individual inclined to establish an SMSF setup is required to conclude the following steps:

• Determine the fund members and trustees 
• Draft a trust deed 
• Establish a Bank Account 
• Register with ATO 
• Frame an investment strategy 
• Form an exit plan for when the SMSF concludes

Trustees are also required to adhere to the following factors to keep the fund operational:

• Rollover existing SMSF setup
• Sett up an employer contribution fund 
• Accept contributions within the limit determined 
• Facilitate investment by adhering to the laws 
• Methodical analysis of investment strategy 
• Log and maintain records for the tenure of the fund 
• Valuation of Assets 
• Draft account and financial statements 
• Appoint an SMSF Auditor
• Annual Returns 
• Pay the accrued levy for SMSF and taxes

At the point of conclusion of the SMSF, trustees are required to perform the following steps:

• Perform a final audit of the SMSF 
• Lodge final annual returns 
• Pay outstanding taxes (if any) 
• Payout or roll over all the assets

Eligibility Criteria for SMSF

The inception point to determine the eligibility of an SMSF setup is by determining whether the fund is an SMSF. The following factors can be accounted for to establish whether the fund is an SMSF.

• The SMSF should be a superannuation fund. 
• The fund should have less than five members.  
• Each trust member should either be an individual trustee or a director of a corporate trustee. Only 30% of the total SMSF features corporate trustees. 
• The trust members cannot be each other’s employees unless they are related.

In case the SMSF fails to meet the requirements mentioned above, the fund would be transferred back to being a ‘standard’ superannuation fund.

Interest Rate SMSF

Interest rates on an SMSF loan vary based on the assets the borrower is inclined to invest in from the allocated funds. As per the ATO guidelines -

• Interest rates on Real Estate Property are 5.35% per annum. 
• Interest rates on listed shares are 7.35% per annum.

What are the Benefits of an SMSF

An investor can avail the following benefits when they manage their own SMSF: 

Investment Choice 

The SMSF allows the trustees to allocate their funds to several investment avenues. Trustees of the fund can choose from various investment options such as direct shares, cash accounts, term deposits, direct property, international market, unlisted assets, and international markets.

Tax Strategy 

Investors in the fund can leverage the concessional tax rates. The taxes on investment income are set at 15% in the accumulation phase. No taxes will be levied in the pension phase, including capital gains tax. A well-thought-out tax strategy can stimulate the trustees' retirement corpus.

Flexibility 

An SMSF allows the participants to operate a blend of accumulation and pension accounts. Trustees of the fund can select the composition of the investment at their discretion. Adjustments can be made concerning market conditions and super rules.

Cost 

Trustees with the fund must lodge an annual tax return and pay the fees to the Australian Tax Office (ATO). As the size of the fund expands, so does its cost-effectiveness. However, trustees must account for various costs related to running an SMSF, such as engaging with professional support.

How does SMSF Affect your Finances?

The Investor should assess various factors while establishing an SMSF. Trustees should have a grasp on the various factors and risks associated with investing through an SMSF. They should account for all the costs, responsibilities, insurance cover, and tariffs of the professional counsel to ultimately evaluate whether the investment in the fund would turn out to be lucrative for investors.

Compare SMSF with other Super Funds in Australia 

The following points identify how an SMSF differs from other superfunds in Australia.

• The members of an SMSF are legally liable to comply with superannuation and tax laws. In simpler words, the members are the trustees of their own fund. On the other hand, public superfunds are generally regulated by professional and licensed trustees.
• The maximum number of members in an SMSF is six. Generally, the fund is operated by only one or two trustees owing to the autonomy it offers. No such limitations are set on other super funds.
• The onus of devising an investment strategy and making decisions for SMSFs is on the fund's trustees. Public superfunds do not offer this flexibility to trustees as there are certain avenues where they are prohibited from investing.

• The SMSF is operated under the guidelines of ATO. In contrast, public superfunds are regulated by the Australian Prudential Regulation Authority (APRA).

How to Apply for SMSF

An applicant can establish an SMSF that is required to implement the following steps: 

Establish a Trust

Trustees are required to register their SMSF with the ATO. A trust should entail the following:

• Trustees 
• Identifiable Beneficiaries 
• Intention to create trust 
• Assets

Trust Deed  

The trust deed predetermines the rules and regulations under which the SMSF will operate, which makes drafting the deed an extremely important steep. The trustees should take the assistance of legal professionals and deed providers who have a grasp over the superannuation law and draft it with the intention to provide the trustees with control and flexibility. The trust deed should be drafted under state laws.

• Mention the rules and regulations to be adhered by the trustees in the fund. The deed should not have any clauses that breach the Superannuation Industry Act 1993. 
• The objectives of the SMSF should be drafted in the deed. 
• The trust deed should mention the composition of the amount credited to each member’s account during the accumulation period.

Provisions to be Included in the Trust Deed

• Trustees of the SMSF 
• Members of the SMSF 
• Trustees’ Rights 
• Investment choice availablity for members 
• The procedure through which the benefits would be paid 
• Kinds of income stream 
• Nomination of a beneficiary in case of the untimely death of a member 
• Rules regarding the functionality of the fund reserve account

Sign a Declaration 

The Trustees must sign a declaration form validating that they are attuned to the established rules and regulations and will perform all the necessary responsibilities to keep the trust operational. The declaration must be furnished with the Approved Form, which can be found at the ATO office, and can be concluded within 21 days.

Responsibility or Obligations of a Trustee in SMSF entails:

• Performing the responsibilities with honesty and integrity. 
• Acting in the best interest of the members of the SMSF. 
• Framing an investment strategy that ensures lucrative returns.
• Making certain information accessible to the members.

Lodge an Election with Regulator

The trustees must lodge an election that is to be regulated by the ATO within 60 days of establishing the trust. The election would ensure that the SMSF is adhering to the superannuation legislation that would make the fund eligible for the concessional tax treatment of 15%. It is to be noted that the SMSF would not be identified as a complying fund in case the election notice is not lodged within the time frame. 

Establish a Cash Account  

The SMSF trustees are required to set up a cash account to facilitate transactions such as contributions, rollovers and investment earnings. The account will also be utilised to pay expenses such as the annual supervisory levy, taxation liability, accounting fees, and member benefits. 

Documents Required for SMSF

The ATO refers to the following parameters to conclude their assessment of the Self-Managed Superannuation Fund (SMSF).

• Asset Acquisition 
• In-House Assets 
• Business Real Property

Asset Acquisition

The applicant must produce the following documents under asset acquisition:

• Documents that authenticate the legal ownership of an asset. 
• Details of the party that owns the applicant's assets and SMSF. 
• Assemble documents regarding the assets acquired or in the process of being acquired. 

• Listed Shares
• Business Real Property
• Assets under Subsection 66 (2A) of SISA

• Outline of how the procurement of the assets would take place, including the value of an asset.

Business Real Property 

The property must meet the definition of ‘Business Real property’ in the guidelines framed by SISA (Superannuation Industry Supervision Act).

• The relationship between the party property owner and the members about to acquire the property.
• Documents authenticating the legal ownership of the interest in a property.

• Outline of the transaction the trustees are set to perform citing the market value of the asset to be obtained.

• Documenting provide a detailed description of the business activities yet to occur on the property and its location. 

In-House Assets 

The following documents shall be furnished to validate the ‘in-house assets’ for SISA purposes.

• Outline of details and documents regarding a specific transaction. That will include investment, loan and lease documents.
• Details regarding the investment, loan, and lease arrangement summarising the relationship between all the parties.
• Outline of the market value of the assets and its computation.
• Valuation of the SMSF assets in the year the transaction materialised or is set to occur.