A Self Managed Superannuation Fund (SMSF) is a vehicle that allows you to manage your own superannuation savings – without the need for a professional trustee. This gives you greater flexibility and control in relation to taxation, investments, estate planning, insurance and general administration.
A SMSF is a fund that has fewer than five members.
Each member must be a trustee (or director of a corporate trustee) and each trustee must be a member.
The main benefits of a SMSF are:
- Unlimited investment choice, including direct property (subject to legislation and regulations)
- Choice of any insurance company when applying for insurance within super (i.e. you are not limited to the insurance provider associated with a retail or industry fund)
- Greater control and flexibility over how benefits are paid upon death of a member
- Ability to manage your tax position better
- Timlier transactions
However, to gain access to all of these benefits, there are many responsibilities involved in running a SMSF. Keep in mind that if you are unable to manage your superannuation benefits adequately, the government will need to assist with funding your retirement, which is something they want to avoid. Therefore, there are strict requirements you need to adhere to when establishing and maintaining a SMSF. Failure to do so can result in costly penalties.
SMSF Trust Deed
Like any trust, a SMSF is established with a trust deed. A trust deed sets out the rules of the fund having regard to legislation and regulations.
As far as the trustee goes, you can either be individual trustees or have a company as trustee, with each member as a director of the trustee company. If you are looking at establishing a single member SMSF, you are required to have a corporate trustee (a company). Why? Well, because a SMSF is a trust and by law there is not considered to be trust with only one person.
Borrowing within a SMSF
SMSF’s have become popular since the introduction of the borrowing rules. The borrowing rules are most commonly used for purchasing direct property. This is done by using funds in the SMSF (member balances) to purchase part of a property and using borrowings to purchase the remainder. There are certain measures that need to be put in place to ensure that the borrowing arrangement is compliant with the borrowing rules.
Very basically, a ‘bare trust’ is established, which will be the legal owner of the property with the SMSF as the beneficial owner. All rental income is paid into the SMSF cash account and all loan repayments are paid from the SMSF cash account. Once the debt has been repaid, the property becomes an asset of the SMSF, with no further need for the bare trust. If multiple properties are purchased, a separate trust needs to be establsihed for each property.
SMSF Investment Strategy
Every SMSF is required to have an Investment Strategy. This details how the Fund will manage it’s investments in relation to diversification, liquidity, cash flow requirements and expected returns.