Topic 8 - Self Managed Superannuation Funds

Question 1

The types of superannuation funds

• Industry funds
• Standard employer-sponsored funds
• Public sector funds
• Retail funds
• Small superannuation funds (small APRA funds and self managed superannuation funds)
• Retirement savings account
• an account held by a bank and other approved organisations

Answer 1

The types of superannuation funds

• Industry funds
• Standard employer-sponsored funds
• Public sector funds
• Retail funds
• Small superannuation funds (small APRA funds and self managed superannuation funds)
• Retirement savings account
• an account held by a bank and other approved organisations

Question 2

Self Managed Superannuation Fund (SMSF) – do-it-yourself (DYF) fund

• An SMSF is a DYF superannuation fund that has up to ____members and is managed and controlled by its members who also act as trustees
• The trustees are responsible for ensuring that the fund complies with the law and can be penalised if a breach occurs
• For example, trusties can be penalised for breaching the sole purpose test
• the sole purpose test prohibits the fund members and other related parties to have access or use of the fund’s assets - for example, any collectibles and personal use assets owned by the fund cannot be used/leased by a member or any other related party, or stored in premises owned by a member or any other related party

Answer 2

Self Managed Superannuation Fund (SMSF) – do-it-yourself (DYF) fund

• An SMSF is a DYF superannuation fund that has up to 4 members and is managed and controlled by its members who also act as trustees
• The trustees are responsible for ensuring that the fund complies with the law and can be penalised if a breach occurs
• For example, trusties can be penalised for breaching the sole purpose test
• the sole purpose test prohibits the fund members and other related parties to have access or use of the fund’s assets - for example, any collectibles and personal use assets owned by the fund cannot be used/leased by a member or any other related party, or stored in premises owned by a member or any other related party

Question 3

Advantages of using an SMSF

• An SMSF allows members to:
• _______ investments tailored to their needs
• ________ funds to purchase real property (only under a limited recourse borrowing arrangement)
• _____ own business real property (the small business application rule)
• ________ control over the total investment portfolio

Answer 3

Advantages of using an SMSF

• An SMSF allows members to:
• select investments tailored to their needs
• borrow funds to purchase real property (only under a limited recourse borrowing arrangement)
• fund own business real property (the small business application rule)
• maintain control over the total investment portfolio

Question 4

Disadvantages of using an SMSF

• Administering an SMSF can be costly e.g. __________, such as __________, ________ (including annual audit), ATO supervisory levy and lodgement
• Do-it-yourself investing can be _________ and requires _________
• Changes to the regulations governing the SMSF can be __________ and the compliance can be costly
• No access to the Superannuation Complaints Tribunal and APRA’s fraud fund
• Please note: the average operating expense ratio for SMSFs is _____% for the fund balance of $_____ million (based on figures recorded in the ATO report).*

Answer 4

Disadvantages of using an SMSF

• Administering an SMSF can be costly e.g. running costs, such as administration, reporting (including annual audit), ATO supervisory levy and lodgement
• Do-it-yourself investing can be time consuming and requires financial knowledge
• Changes to the regulations governing the SMSF can be overwhelming and the compliance can be costly
• No access to the Superannuation Complaints Tribunal and APRA’s fraud fund
• Please note: the average operating expense ratio for SMSFs is 1.10% for the fund balance of $1,12 million (based on figures recorded in the ATO report).*

Question 5

SMSF and transactions between its members, relatives and other related parties

• An SMSF is prohibited from __________assets from its members or other related parties, except for acquiring:
• listed securities (e.g. shares, units)
• business real property (e.g. workshop, motel, farm)
• All purchases must be made on ________________
• __________________ but not residential, can be leased back at market rates to related parties e.g. members of the fund

Answer 5

SMSF and transactions between its members, relatives and other related parties

• An SMSF is prohibited from buying assets from its members or other related parties, except for acquiring:
• listed securities (e.g. shares, units)
• business real property (e.g. workshop, motel, farm)
• All purchases must be made on an arm’s length basis
• Business/commercial property, but not residential, can be leased back at market rates to related parties e.g. members of the fund

Question 6

Limits on fund borrowing

• Borrowing is not permitted except for warrants, limited recourse borrowing arrangements (LRBA), and small amounts for transactional purposes up to ____ days only
• To _________ for the purpose of an instalment warrant and a property, the investment is required to be held in a separate trust - holding trust
• Any financial assistance to ________________\_ (including the provision of loans) is not permitted

Answer 6

Limits on fund borrowing

• Borrowing is not permitted except for warrants, limited recourse borrowing arrangements (LRBA), and small amounts for transactional purposes up to 90 days only
• To borrow for the purpose of an instalment warrant and a property, the investment is required to be held in a separate trust - holding trust
• Any financial assistance to members and their relatives (including the provision of loans) is not permitted

Question 7

Borrowing to purchase a residential or commercial property by an SMSF

• The type of borrowing to purchase the property within the fund must be a limited recourse borrowing arrangement (LRBA)
• a separate trust needs to be created to ______ a legal ownership over a property
• all financial dealings will be directly with the SMSF

Answer 7

Borrowing to purchase a residential or commercial property by an SMSF

• The type of borrowing to purchase the property within the fund must be a limited recourse borrowing arrangement (LRBA)
• a separate trust needs to be created to have a legal ownership over a property
• all financial dealings will be directly with the SMSF

Question 8

Benefits of investing in property via an SMSF

• Commercial properties (but not residential) can be leased back (at market rates) to related parties
• Rental income from property in an SMSF will be taxed at ___% or ___% if a member draws a pension (subject to the $____million General Transfer Balance cap)
• pensions drawn under the transition to retirement income streams (TRIS) do not qualify for ____% tax concession
• Capital gains earned on the property are taxed at a rate of ___% or ____% for assets held for ____months or longer, and with the exception of TRIS, no CGT is payable by a member who draws a pension providing the $_____ million General Transfer Balance cap has not been reached

Answer 8

Benefits of investing in property via an SMSF

• Commercial properties (but not residential) can be leased back (at market rates) to related parties
• Rental income from property in an SMSF will be taxed at 15% or 0% if a member draws a pension (subject to the $1.6 million General Transfer Balance cap)

pensions drawn under the transition to retirement income streams (TRIS) do not qualify for 0% tax concession

• Capital gains earned on the property are taxed at a rate of 15% or 10% for assets held for 12 months or longer, and with the exception of TRIS, no CGT is payable by a member who draws a pension providing the $1.6 million General Transfer Balance cap has not been reached

Question 9

Disadvantages of investing in property via an SMSF

• Banks will generally only lend around ___% of the purchase price and usually charge a higher rate of interest
• The tax benefits are smaller due to the lower tax rate inside super
• Borrowings can be used to ______the property, but not to ‘________’ it in any way
• The breach of the ‘sole purpose test’ and borrowing rules can result in non-compliance and can have very serious consequences for the members/trustees
• Please note: though the existing funds (not a loan) can be used to improve the property, care needs to be taken that such improvements are not so comprehensive that a new asset is created which is substantially different from the original (e.g. the building of a house on a vacant plot of land).*

http://www.switzer.com.au/the-experts/john-mcgrath-property-expert/pros-and-cons-of-buying-property-through-smsfs

Answer 9

Disadvantages of investing in property via an SMSF

• Banks will generally only lend around 70% of the purchase price and usually charge a higher rate of interest
• The tax benefits are smaller due to the lower tax rate inside super
• Borrowings can be used to maintain the property, but not to ‘improve’ it in any way
• The breach of the ‘sole purpose test’ and borrowing rules can result in non-compliance and can have very serious consequences for the members/trustees
• Please note: though the existing funds (not a loan) can be used to improve the property, care needs to be taken that such improvements are not so comprehensive that a new asset is created which is substantially different from the original (e.g. the building of a house on a vacant plot of land).*